Banco Bilbao Vizcaya Argentaria SA (BBVA) 2015 Q2 法說會逐字稿

Good morning everyone and welcome to the second quarter result presentation of BBVA. I'm Luisa Gomez Bravo, Head of Investor Relations, and joining me today are Carlos Torres, President and COO of the Group; and Jaime Saenz de Tejada, our CFO.

As in the past, Carlos will begin with the presentation of results and we will be moving straight on to the Q&A after that. As you know, we will try to answer as many questions as possible during this presentation and the IR team will remain available throughout the day to answer any pending questions.

Without further ado, Carlos please.

Thank you, Luisa, and hello to everyone. Thank you for joining us this morning. Before I start with the second quarter results, I like to briefly comment on the Garanti deal that closed last Monday. Through the acquisition of the additional 14.89% stake in the bank, we now reach a 40% ownership stake, maintain our partnership with Dogus, who remains with a 10% of the bank, gaining through the acquisition more exposure to the Turkish market that has a huge potential.

Briefly reviewing the rational for the deal; Turkey is a large market with positive dynamics, strong growth potential. It's one of the countries that would lead the economic growth in the next decade. It's large with a population of more than 75 million and over half of whom are less than 30 years old.

The bank, Garanti, itself is the best in Turkey clearly; 12% market share, serving more than 13 million customers, about EUR90 billion in assets equivalent, more than 1,000 -- or 1,100 branches, 4,400 ATMs. The bank is a pioneer in digital banking. It's a leader in technology and that's part of its competitive edge with world-class developments, in-house developments and personalized customer solutions.

So through this transaction, we also gain the majority of the board while maintaining, as I said, the partnership with our partner Dogus. And our strategy now will build on the strengths of Garanti, including the world-class management team that has lead it and will continue to lead it but now under the leadership of the new CEO of Garanti, Fuat Erbil.

And we will now build on those strengths and focus on delivering on the synergy potential that we identified over the last few years of close cooperation.

In terms of the impact for BBVA, the stake will add profits of approximately EUR240 million in next year, in 2016, as per market consensus. In terms of capital, the acquisition will imply an estimated reduction of approximately 50 basis points in common equity Tier I fully-loaded ratio and we will start consolidating through global consolidation.

This change in accounting method from the equity method will result in a non-cash P&L charge of EUR1.8 billion. Most of this amount was already being deducted from our shareholders' equity, so a limited impact on the capital ratio.

Apart from this transaction, we have also closed in the quarter the sale of a part of our stake in CNCB and the acquisition of Catalunya Caixa the past 24th of April and expect the divesture of CIFH in the -- to close in the third quarter.

Okay, before moving on to the quarterly results themselves, let me also touch briefly upon the Bank's transformational process and its implications given that now it's the first time that I present to you after the organizational changes and my new role. The world is changing very quickly. Technology is having a profound impact on customer. The customer expectation is fostering new customer behaviors, opening up ways of delivering new value propositions.

And under this new environment, we need to continue to adapt our strategy towards what's critical to success, which is really a positive impact on our customers' lives and our clients' lives. And in light of that, we have aligned six priorities for the Group.

Firstly and very connected to that objective, to set a new standard in customer experience, it's the core really of the transformation which is all about leveraging technology and data and design to provide better solutions to customer needs to better solve those. It's not just greater convenience and personalized solutions, but it's really more deeply helping people, helping businesses, supporting them in their decision making around money, around their financial lives.

Secondly, we want to drive digital sales. This represents a huge opportunity. Our customers are demanding interaction through digital in an exponential way, especially through the mobile, which is proving to be a very effective selling channel as well.

Thirdly, we are developing new business models both through in-house efforts and accessing external fintech innovation, partnering, et cetera. Fourth, very important, further optimizing capital allocation. Capital is expensive. It's a scare resource especially after the recent crisis and the increased regulation, which has multiplied requirements. And our asset allocation process is crucial to continue to optimally assign capital based on return, taking into account those increased requirements.

Unrivaled efficiency; we need to adapt our model, our processes, our structures, leveraging technology again to simplify them straight through processing, evolving our distribution models in order to achieve greater efficiency and build a competitive advantage that will ensure our long-term competitiveness.

And finally, very importantly, we need to develop, inspire, retain a first-class workforce, talent which is so critical in the whole process.

So these parameters will be influencing how we run the Bank from our KPIs to our key processes like budgeting, the capital allocation or our strategy planning, and we are working now hard to develop each of those.

A clear example of the changing environment that I alluded to is how fast our customers are shifting their behavior and are becoming increasingly digital. We now all interact digitally whenever we want through the device we decide and we expect things to be real-time and be there when we want them, convenient, personalized, transparent, with very little tolerance for failure through those channels.

And we are moving to those channels. We see that at BBVA. As of June of this year, digital customers reached 13.5 million, including Garanti. That's about 30% of our active customer base in the aggregate and this represents an increase of 21% since June of last year, continuing the exponential growth that we had witnessed in prior years. It's really a similar growth rate since 2011.

Mobile is even more impressive. The mobile customers are 7 million, also including Garanti Bank. It's about 16% of our customer base with a 59% growth since June of last year and the number has been more than doubling every year over the last four years.

In contrast to that exponential growth of digital, activity through traditional channels is decreasing year on year. In Spain, for example, branch activity continued to decrease by 36% since 2009, continued to decrease in the last 12 months through June of 2015.

Also digital customers are more engaged than non-digital customers. The average annual transactions performed by a digital customer is 11 times that of a traditional non-digital customer and they are more profitable, they promote -- they reduce the cost of servicing.

For example, we have seen that a customer reduces by 18% their visits to a branch after their first web wire transfer and they demand more products and services. There's seven times as many engaged customers at BBVA among our digital customer pool versus the least digital customer pool. So these are illustrations of those trends.

A final illustration is the exponential growth of digital sales and we have -- we are showing here the penetration of digital in consumer loan sales reaching 18% or most of the total loans that we sold in all of Spain to consumers as of June and that compares with 9% only in January of this year.

We are also progressing in the development of the new competencies. When we announced a reorganization in May, we emphasized the need to build new capabilities and competencies which would complement our traditional strengths and would immediately in the short run boost growth and give us greater efficiency, meaning accelerated earnings growth, and in the longer term would ensure the sustainable competitive advantage that we need to be successful in this new environment versus new entrants.

The core competencies that we talked about are here in the slide together with some illustrative examples of the progress we've made in building them; for example, incorporating design and user experience capabilities through the acquisition of Spring Studio or the acquisition of Madiva for the big data group; and similarly in engineering or in marketing and digital sales, new digital businesses or talent and culture.

Okay, now moving on to our second-quarter 2015 results presentation, the quarter is strong. We continue to see upward trend that we reported last quarter; very good activity in P&L dynamics, strong activity growth in all geographies leading to double-digit recurring income growth, operating income with 17% increase in current terms, achieving a total net attributable profit of EUR1.2 billion in the quarter.

Risk indicators also continue to improve; NPL ratio at 6.1%, coverage 72%. And excluding Catalunya Caixa, the NPL ratio came down 88 basis points to 5.5% and coverage ratio increased by 3 percentage points up to 65% versus second quarter of last year.

In terms of capital, the Group ended the quarter with a ratio of 12.3% phased-in, 10.4% fully-loaded and those include the impact of the closing of Catalunya Caixa, which was 45 basis points of negative impact.

Leverage; our fully-loaded leverage ratio is 5.9%, which compares very well with those of our peers. So this is in general very solid capital ratios. We remain comfortable with the capital levels that we have.

And lastly, we had some corporate operations in the quarter with a total P&L impact of EUR144 million, mainly explained by the sale of an additional 0.8% of CNCB -- the stake in CNCB. And we closed -- and we fully integrated Catalunya Caixa into the Group in April and since April we are reflecting Catalunya Caixa in our numbers with a non-material impact on the bottom line as expected.

Before going through the detailed numbers on the P&L account, a reminder that, as we did last quarter and only for comparison purposes in explaining our income statement, the numbers do not include Venezuela because the impact on the P&L after adopting the SIMADI exchange rate in the first quarter of this year would make it difficult to follow the main trends. But it does include, as I just said, Catalunya Caixa since April.

Revenues, as you can see on the slide, net interest income performance is excellent, double-digit growth, 18.8% in current terms, 12.4% in constant terms, so underlying excellent performance despite the low interest rate environment and very supportive FX, as you can see. And that growth pattern of net interest income growth is common across all franchises.

Gross income was up 10% with excellent performance in all lines. Net interest income and fees grew above 5% compared to last quarter with quality and recurrence of the revenue streams shown by that, especially good trends in fees in the quarter in Spain. Good contribution also of the trading income taking advantage of our market opportunities and we also had the Telefonica dividend payment, bringing the total revenue to EUR5.9 billion in the quarter.

On costs, we delivered on our expectations of maintaining positive jaws even as costs were impacted by one-offs in the quarter. But excluding those, underlying trend is 3% increase in the semester, in line with the Group average inflation, whereas gross income was up 9% excluding Catalunya Caixa. This good performance of income and costs also contributed to significant improvement in the efficiency ratio, which came down 160 basis points to 49.7%.

As a result, pre-provision profit continues to grow as in previous quarters, reaching EUR2.971 billion in the quarter, highest level in the last 10 quarters, growing at 11.7% versus last year and 7.2% quarter on quarter, so a very strong performance.

In terms of cost of risk, provisioning was in line with the quarterly average of last year. But here the main trend would be to highlight the change in geographical mix. Lower contributions of Spain due to the macro recovery and increases associated with the growth in activity in the rest of the Group. Risk premium is slightly lower, coming down 6 bps, providing evidence of good risk quality dynamics in all of our banks.

In summary, it's a very good quarterly result. You can see in the P&L account, all income lines are above 10% growth. Net attributable profit amounting to EUR1.2 billion, growing at a 73% rate in current euros and 58% if we exclude Venezuela and corporate operations.

The semester attributable profit for the Group, again EUR2.759 billion including Venezuela. And excluding the corporate operations and Venezuela, earnings are up 61%. So we are on track to deliver growth in earnings -- recurrent earnings as our franchise continues to show good trends.

Main growth drivers, excellent performance of all income lines, boosted by recurring income, controlling costs with outstanding pre-provision profit performance up 20%, with the jaws widening. Loan loss and real-estate assets provisions falling significantly in Spain and bottom line growth in all of our banks.

In terms of non-recurring results, a positive impact of the corporate operations of EUR727 million in the semester, mainly explained by the sale of CNCB in the first quarter. Again, the Group results show excellent performance and recurrence and good perspectives for the year.

Asset quality, without Catalunya Caixa, positive trends again as seen in previous quarters and have continued. In fact, risk indicators show that NPLs were down EUR2.5 billion over the last 12 months mainly because of the drop of NPLs in Spain. The ratio of NPLs fell, as I just said, 88 basis points to 5.5% versus the second quarter of last year excluding Catalunya Caixa. And the coverage ratio 65%, 3 percentage points higher than in June of last year.

Turning to capital; strong capital ratios. We ended the quarter with 12.3% phased-in ratio and 10.4% fully-loaded, including the 45 basis points that we had of impact because of the Catalunya Caixa integration. And if we include the impact of the announced corporate operations, Garanti deal closing and the CIFH sale, pro forma in June the ratio would be 10%.

Also the quality of our capital is strong. I like to remind you that we do not include in our core capital ratios the unrealized gains on the available for sale sovereign portfolio and also that we do not benefit from the Danish compromise and that we have very high -- the highest risk-weighted asset density and leverage ratios of our European peer group, at 51% density and 5.9% leverage respectively.

And moving on to the business areas, I like to share with you the main highlights of the quarter in each one of the geographies. First of all, I like to emphasize remarkable bottom line performance across them all during the first half of the year, especially in Spain and the US.

In Spain, the recovery of the Spanish market clearly underway, picking up speed during the second quarter, better growth perspectives for the economy, supported by both domestic demand and exports and benefiting from the euro depreciation.

Unemployment rates in Spain will remain high for some time, but we do expect significant job creation this year and next. And activity; as in previous quarters, origination of new credit operations continues to grow significantly versus the same period of last year. New mortgage loan production, very robust growth of 50% in the quarter versus the same quarter last year.

Consumer lending growing at 39%, SME loans at 37%. So strong new loan production. Stock, however, remains flat quarter on quarter, confirming the anticipated end of the deleveraging process. And as we see that, origination is now translating to flattening out the stock.

Core revenues, that is net interest income and fees, grew by 3% as compared to the second quarter of last year and excluding Catalunya Caixa, driven mainly by fees, pension and mutual funds trend, which fees displayed robust growth during the period.

Trading income, very strong performance which was reflected in significant gross income growth. Costs, favorable evolution supported also by -- which also supported, sorry, in the income growth -- operating income growth, which rose 23% as compared to the second quarter of last year and was more than EUR1.1 billion. We are committed to continue to reduce costs and expect further costs containment following the ongoing transformation of our business.

With regards to risk, indicators continue to show positive trends. NPL ratio and coverage ratio continue their positive evolution, excluding Catalunya Caixa, on the back of a decline in the non-performing loans. Costs of risk below 1% in the second quarter and we expect it to continue to decline throughout the year as a result of an improvement in asset quality.

So net attributable profit for the semester grew at an outstanding 33% compared to the first semester of last year. Positive evolution of fees ex-Catalunya Caixa and trading income and remarkable growth of other income.

On costs, I just said, we continue to work hard. They are flat as compared to the last semester. Excluding Catalunya Caixa, personnel costs during the first semester came down by 4% versus the first semester of last year.

And key takeaways in the business, therefore, in Spain loan production growth on the back of good macro perspectives, diversifying revenue sources, meaning that we are increasing our core revenues and interest income and fees with a focus especially on fees and the Catalunya Caixa integration, which continues to be our short-term management priority.

In real estate activity, in Spain we continue to see improved outlook for the market. Demand continues to grow in nearly all regions. Household inventories continue to go down by 20% since December of 2013. Housing prices have stabilized in many markets and mortgage loan originations, as I said, continues to grow on the back of the stronger economy and the stronger job creation numbers.

Our sales continued to grow. Our management focus in this outlook -- in this positive market outlook is to continue to maximize the value and the sales, and that's what we have been doing. We continue to sell above net book value. Capital gains have increased significantly during the year, amounting to EUR53 million in the first half and our net exposure to real estate steadied reduction of the portfolio. In the second quarter, the net exposure was EUR13.1 billion including Catalunya Caixa. And excluding it, it came down 13% compared to the second quarter of last year.

As a result of the reduction of loan loss provisions and the asset impairments, capital gains on sales decreased our losses in the area by 35% to a negative EUR300 million in the first semester.

In our aggregate Spain numbers, the positive evolution of the banking activity and the real estate activity translates to every line of the P&L and the net number -- and the net attributable profit for the semester in Spain amounted to EUR509 million, increasing by EUR366 million with respect to the first semester of 2014.

Moving on to the US, we see a favorable macro outlook in the US, sustained by strong domestic demand and private consumption, declining oil prices and the stable unemployment rate. Our US bank continues to show good growth in activity, around 13% in lending up to June compared to June of last year and growth of 9% in customer funds. New loan production growing at 19% and all lending portfolios and customer funds are growing significantly as well.

In terms of results, net interest income continues to improve despite the low interest rates and the pressure is on the spreads. We also had an increase in the contribution of trading income during the quarter, which is reflected in the positive evolution of the gross revenues -- the gross income.

Costs continues to be a focus in the US. Cost control, one of the areas in which we have positive evolution of expenses, which only grew 1% versus the second quarter of last year, and that allowed for double-digit growth of operating income in the quarter.

Risk; US business asset quality and risk indicators continue to be among the best in the Group. NPL in the second quarter 0.9%, in line with the previous quarter and confirming stable trend, and as you can see, outstanding cost of risk metrics in the US.

In year-to-date view, business activity maintains positive evolution in both lending and customer funds, as I mentioned. As you know, we have positive sensitivity to interest rate hikes that might come. Costs continue to show positive dynamics. Operating income growth, therefore, at 13% in the semester. Loan loss provisioning normalized levels and overall the US franchise generated net attributable profit of EUR286 million, up 18.8% compared to the first half of last year.

Key takeaways, it's the dynamism in activity backed by the macro, excellent NPL dynamics and the opportunity we have in the US to develop our digital banking capabilities.

Moving on to Mexico, once again excellent performance of Bancomer under a slower than expected macro environment. The main challenge in Mexico -- for the country is to achieve its growth potential on the back of the reform agenda that was approved last year. BBVA Bancomer activity during the second quarter grew at double-digits in lending and in customer funds. We are witnessing -- we were witnessing in the first quarter primarily a change in mix in the lending portfolio with a stronger growth on the commercial side, which is growing at above 20%.

Core revenues grew by 9%, mainly driven by net interest income with 12% growth and costs growing at 7%, in line with what we had in our investment plans in the region. So slightly positive jaws in Mexico.

Operating income in the second quarter EUR1.1 billion, growing nearly 8% compared to the second quarter of 2014. Asset quality and risk management indicators in Mexico continue also with a positive trend, reflecting healthy underlying asset quality that compare favorably with our competitors as a result of anticipation and early exit from riskier investments. Coverage ratio at a stable 116%, NPLs 2.8%, in line with the last quarter. And the cost of risk is lower, which also compares very well with our peers.

So on aggregate for the semester, the P&L net interest income is growing at a strong 9%, partly affected by the change in mix I just mentioned. Cost growing at 6.5% in the first half as a result of the investment plan. Loan loss provision is lower during the semester and that was reflected in the bottom line. So BBVA Bancomer generated a net profit during the first six months in excess of EUR1 billion, up 9% compared to the first half of 2014.

Mexico continues with robust activity levels, double-digit business activity growth, the shift in the mix. Asset quality and risk management indicators reflect BBVA Bancomer's healthier underlying asset quality and we continue to reinforce our leadership in the Mexican financial system, gaining market share in lending and maintaining it in customer funds and being the leader in efficiency, profitability and with a very strong capital adequacy ratio.

South America; well, first of all, just a reminder that as I said at the beginning, the numbers do not include Venezuela because of the impact of the change in exchange rates, but you can find in the annex the details on Venezuela's P&L. But the region, South America, continues to be a very relevant contributor to the Group results.

Business activity remains strong and dynamic, evolving towards more sustainable levels too, but with very positive activity figures that are reflected also in the P&L account, driving net interest income in the second quarter by 10% compared to the second quarter of 2014.

Commissions and trading income also displayed outstanding performance during the second quarter and cost growth, which is explained by the investment plans in the region that we announced two years ago, and the high inflation rates in some countries like Argentina.

Risk; the coverage ratio in the second quarter 120%, in line with the prior one. NPLs continued a stable trend at 2.3% and cost of risk remained stable at similar levels to the ones in the first quarter.

First half P&L for the region, strong business dynamics across all lines, net interest income, gross income, while the growth in costs was explained by the investment plan in the region. And overall, the South America reported net attributable profit of EUR465 million, up 8%.

Turkey; GDP growing at 3% in 2015, supported by private consumption, with however some potential risks, export weakness, high depreciation in the lira, which would affect -- is affecting domestic demand, pressures on inflation and to a lesser extent political uncertainty.

As for Garanti and its figures, active management of the spread -- the customer spread together with activity growth explains favorable trend in net interest income. Fee income continues to grow due to the diversifying revenue strategy even with the regulatory pressures on certain portfolios. Gross income reached EUR510 million, rising nearly 12% and offsetting negative trading income due to inflation linked bonds and market movements.

Operating income was also up by 9%, impacted by the increasing costs due to the negative impact of the lira depreciation versus the dollar mainly in IT costs and some specific contingencies. And all in, net attributable profit EUR174 million for the six months, 9% growth over last year.

So we invested in the best bank of the country. As I said at the beginning, no doubt it is not only the best business franchise, but also a leader in technology, which is one of its competitive advantages.

So wrapping up, let me summarize the main messages, takeaways for the semester; very good P&L dynamics, strong activity growth in all markets, supported by recurring income, excellent performance of pre-provision profit, total attributable profits of EUR2.7 billion, which is all a confirmation that the earnings growth cycle continues.

We are also moving on and closing the corporate deals that we announced last year, and as I said at the beginning, we are working on the priorities that will be the foundations of our competitive advantage and success in the future.

Now, I'll give the floor back to Luisa so we can begin the Q&A.

Thank you, Carlos. We are going to move straight away to the Q&A, as mentioned. First of all, let's start with strategy. Raoul Leonard from Deutsche Bank and Britta Schmidt from Autonomous ask about further acquisitions in Spain, do you need to digest Catalunya Bank before you make further acquisitions in Spain? What is your view on domestic consolidation opportunities?

Well, we are -- we have been very successful through the crisis in really taking advantage of opportunities and we have grown our market share in Spain organically as well as through the acquisitions of Unnim and Catalunya Caixa, all of which has led to a market share above 15%.

Going forward, as always, it's hard to plan for M&A. We are mostly focused on gaining market share organically and the transformation efforts that I described and improving quality of service, improving customer experience and gaining market share through that with a more efficient model. That should provide us an opportunity to gain more clients. And of course if opportunities come, we will look at them, but we are not planning for them. Luisa?

On global topics, Francisco Raquel from Enemasuno says can you comment on your FX hedging strategy and the impact on capital and P&L of the currency devaluation across the main LATAM countries where you operate.

Thank you, [Paco], for the question. I think that first of all our hedging policy has not changed. As you know, we tend to cover between 30% and 50% of our earnings a year ahead, of course depending on both the cost of hedging and the internal view on the evolution of each currency. And on capital, we try to reduce as much as we can the volatility of the core capital ratio. So we tend to hedge between 40% and 50% of what it is not naturally covered by the ratio. So that policy has not changed.

The impact for the year -- for these first six months of the currencies has been positive, EUR98 million. And if we do the numbers without Venezuela, it has been EUR139 million.

Going forward and if LATAM currencies stay as they are, our expectation is that the positive year-on-year impact will start to reduce. The impact on capital of the FX has been minus 4 basis points in the quarter.

Okay, we will move on to capital now. Raoul Leonard from Deutsche Bank and Francisco Raquel from Enemasuno ask what is the current AFS, available-for-sale, sovereign gains mark to market in basis points, provide that as of June and 31st of July.

Okay. As you know, we don't compute in capital the AFS gains coming from the sovereign portfolio. But if we did it, we would have a positive impact as of the 30th of June of 35 basis points. The fact that country risk premium has been going down during the month of July means that we've gained an extra 10 basis points during the month had we applied AFS, the available-for-sale capital gains on our capital.

Okay. And following up on that, Francisco Raquel also from Enemasuno asks can you detail the impact of non-sovereign AFS gains in fully-loaded capital ratios during the second quarter.

Okay, that's a very detail question. In the quarter, it went down by 2 basis points, Paco, and the overall capital gain in capital coming from non-sovereign portfolio was EUR500 million.

Okay. Britta Schmidt from Autonomous asks also on AFS, what is the current status of the AFS reserve and how much capital and basis points was clawed back from an improvement here, mainly higher deferred tax liabilities.

Right. Again, as I just said, the capital gains coming from the sovereign portfolio do not affect the capital in BBVA as we take the sovereign filter. It is true that as capital gains have been lower this first quarter, this has had an impact on deferred tax liabilities, which went down in BBVA. But they were partially compensated by increases in DTLs coming from the PPA of Catalunya Caixa. So the impact has been very minor. In any case, the net it's very small and is well below thresholds. So in our case, it did not have any impact whatsoever on capital.

Okay. Raoul Leonard from Deutsche Bank asks with respect to draft proposals for Basel IV, whilst potentially the impact is a few years away, are you able to give any update on what level of RWA inflation you might see from changes in approach to credit risk, operational risk, markets risk?

Well, the main goal of the ECB under the SSM is really to ensure that the CRD IV framework is applied in a consistent way across countries so that we can have comparability among banks from different member states. It might take some time, but progressively we are moving in that direction and we are very confident given that we are quite conservative in the way we calculate our capital both core and the RWAs. We are quite confident that there will be no big surprises from this end for us. We have one of the highest density ratios in terms of risk-weighted assets to total assets on the industry, 51%. I think the average of our peers is around 30%-32%.

And as Jaime just said, we do not include some elements on the numerator on the core equity Tier 1. We do not include the unrealized capital gains on the available-for-sale sovereign portfolio, and that would have that 35 basis points positive impact in the comparability analysis versus other banks that do include that end of June. We also, as I mentioned in the presentation, have no downside from the Danish compromise if that was to be removed, et cetera.

So again, in summary no surprises expected. We are in a very strong shape on a comparable basis to all banks.

Thank you. Raoul also -- Raoul Leonard from Deutsche asks about DTAs, deferred tax assets. Please can you update us on monetizeable DTAs, deferred tax credits post Catalunya Bank and what is the benefit to your fully-loaded capital ratio as of the second quarter of 2015?

Okay. We have a total guaranteed DTAs of EUR9 billion at the end of the quarter. Out of that, EUR5 billion come from BBVA and have not changed during the quarter. What has changed a little bit from the previous quarter are the ones coming from Catalunya Caixa, which have increased to EUR4 billion. Okay, so we have a total of EUR8.9 billion of guaranteed DTAs as of the end of the quarter.

This will represent 160 basis points in capital and this calculation takes into consideration full consolidation of Granati. As you know, during the phase-in period we will be able thanks to our very strong revenue generation capacity to be able to reduce this 160 basis points in a very significant fashion.

Okay. Raoul Leonard from Deutsche also asks if we see any potential read-across from the Bank of Portugal's potential removal of Notice 3/95 to the way DTCs are recognized in Spain. He says that in Portugal removal of the notice may change the recognition of loan losses related to DTAs -- loan loss related DTAs and therefore it could negatively impact recognition of DTCs.

No, we don't see any read-across of that to the Spain situation, which we believe is -- we are very comfortable with the DTA -- guaranteed DTAs in Spain. So no read-across from that.

Okay. And Raoul also adds -- Raoul Leonard from Deutsche, dividend strategy and outlook. Given your P&L will be negatively impacted by Garanti completion in the third quarter, can you please repeat your dividend strategy for the full-year 2015 and 2016, et cetera?

Yes, it's really a confirmation of the dividend policy that we announced a couple of years ago, which is really wanting to move as soon as possible when the results are normalized and provided that we have no regulatory limitations to a full cash dividend policy with a payout ratio between 35% and 40% of the recurring net profit. But we will be transitioning to that situation over the next -- this year and next.

So for this year, as you know, the intention is to have two scrip dividends and two cash dividends and we could be phasing out some of the scrip dividends to reach that normalized situation. There will be no impact coming from the one-off P&L associated with the closing of the Garanti transaction.

Thank you. Johan De Mulder from Bernstein asks what are the main drivers behind the trading income increase in the second quarter.

It's true that trading income has been fairly strong and this has been true in the first quarter and also in the second quarter. In the year-on-year comparison, clearly Venezuela has contributed positively after the very strong devaluation that took place in the first quarter taking into account our long dollar position there. Spain has behaved very well year on year. We are generating EUR32 million more than the year before.

I think the first -- in the second quarter, global markets have performed extremely well and they have taken advantage of the volatility that took place during the quarter. And again the corporate center, it's providing very solid returns in one-off transactions but also in some recurrent trading gains.

The only business that is lagging behind in capital gains is Turkey and in the year we have minus EUR50 million there and that's mainly, as was said yesterday in the call by the CFO, by Murat, is mainly driven by losses on swap funding.

Thank you. Britta Schmidt from Autonomous asks also regarding overall the Group. Gross NPL, non-performing loan additions, remain high at above EUR2 billion. What is driving this? What would be a normalized run rate for the Group?

So as I said in the explanation during the presentation, we are seeing stable NPL but with a change in the mix as we see Spain coming down and we will see more of that going forward. And then that's compensated by growth in other businesses that are growing. So it's really driven more by the activity growth and the impact that has more on the less specific charges and provisioning.

Okay, so now moving to the business areas. Let's start by the US. Carlos Peixoto from BPI asks if we have any exposure to Puerto Rico and expectations on NII evolution.

We don't have any exposure to Puerto Rico and we are not present in Puerto Rico. So nothing there, Carlos.

Stefan Nedialkov from Citigroup asks what is a long-term cost-income ratio for the US.

As you know, today we have a fairly high cost-income ratio, around 70%. Our long-term plan is to aggressively move this cost to income down to levels closer to 55%. In order to do that, we should obtain a little bit of NII pick up from an increase in interest rates as you can imagine.

Carlos Peixoto also asks about the NII evolution expected for the US.

The NII performed strongly in the quarter. Quarter-on-quarter increase was 1%, confirming the trends that we've been showing in the previous quarter. Activity growth is significant; loans are growing above 13%, customer funds are also growing around 9%-10%. So volume growth in general remains strong.

Regarding customer spread, which has been going down for many quarters, we have good info to share. It only went down by 2 basis points during the quarter. They are managing -- we are managing prices in Compass much better than before. So we remain committed to maintaining the type of NII growth that we've been seeing in the previous quarters.

Okay. Also for the US, Carlo Digrandi from HSBC asks for how long do you think the US will continue to enjoy such a positive cost of risk.

Well, this -- we hope for a long time. It has to do with the growth cycle and in the US we are seeing that the macro is supportive. We had bad numbers on the first quarter on the macro, but then those are being revised and then second quarter growth rates published -- I think it was yesterday -- were pretty good. So as long as the economy continues to go this way, we will continue to see good measures in the cost of risk. Of course they might edge up a little bit given that they are now extremely low. But we expect the low cost of risk to continue for some quarters as we see the economy continuing to grow.

Okay. Carlo Digrandi from HSBC asks where do we see NIM going in the US. Will pressure increase over the next few quarters?

I think, as I just said, we are managing prices I think in a much better fashion. It's true that deals on the asset side continue to go down, but less than in previous quarters. And we are being able to manage customer deposit cost better than before. So we remain confident that NIM should be stable going forward.

Okay. Robert Noble from RBC asks if we have seen any impact from lower commodity prices in the US business or elsewhere.

Well, clearly the lower growth rate expectations in China is impacting commodity prices and that's maybe one of the reasons why GDP growth expectations in some emerging countries, especially in Latin America, are being reduced. Still I think our footprint enjoys a very strong growth prospect. It might go down a little bit this year, but still will be around 3% -- between 2.7% and 3% -- and will remain strong in 2016. And that's especially true for Peru, Chile and Colombia.

In the case of Mexico, we revised downwards our GDP growth estimates for 2015 to 2.5% taking into account -- for 2015, taking into account the lower oil prices. But we remain very confident that a 3% level can be achieved in 2016. So I think in general very limited impact.

Okay, moving on to South America, Robert Noble from RBC will ask what should we expect for loan growth in South America ex-Venezuela?

I think we are showing very strong numbers also in the second quarter. Loan growth is above -- is well above 10%, and I think those are the numbers that we should be expecting going forward. Clearly, they are lower than the ones that we used to achieve in the years past, around 20%. But something between 10% and 14% are much more sustainable going forward with these GDP numbers that I've just talked about.

Okay. Also broadly on LATAM, Robert Noble from RBC asks why did your LATAM tax rate drop so much in the second quarter. Do you maintain your bottom line guidance for Latin American division given the rising cost of risk here?

It's true that in many countries in the region we had changes in the tax rates in 2015, so we are seeing a lot of volatility in the effective tax rate in many countries -- and in some cases, in different directions with what we were expecting in 2015. It's clear that we are seeing an increase in the tax rate in Chile because of the fiscal reform. In Colombia, despite of the tax reform due to the fact that some trading revenues are exempted, our tax rate in the quarter went down. And in the case of Peru, even if tax rates were lower, the effective tax rate is stable in this first half of the year versus some other years.

Regarding the guidance, we maintain our guidance even if we are seeing this slight increase in cost of risk because, as you remember, that increase in cost of risk was expected and we were guiding for an increase of around 20 basis points for the year and which is exactly what we are getting. The year-to-date cost of risk is 134 in the region, a little over the 119 that we had at the end of 2014, so within the ranges that we were expecting.

Okay. Mario Ropero from Fidentiis asks about please clarify the NII evolution of Colombia and the asset quality and provisions in Peru and what should we expect going forward. I don't know about Peru and Colombia. But anyway let's talk a little bit about Colombia and then we can talk a little bit about Peru.

All right. I think Colombia is showing a very good performance. Volume growth, it's being very strong and that is true for loans and for liabilities. We are talking loans are increasing by 14% and customer funds by over 8%. Spreads are down a little, I'm talking 16 basis points customer spreads quarter on quarter. And that explains why NII is growing year on year at a 10% rate.

Regarding --

Asset quality in Peru.

Asset quality in Peru. We had an increase in provisions in the SME portfolio in Peru during this quarter, but we don't expect that to be recurring going forward. Still we are seeing very good growth in Peru. After a slow start of the year, second quarter numbers were much better and I think that clearly was reflected in the top line in the second quarter of the year.

Thank you. And now Carlos Peixoto from BPI asks about Chile. Could you elaborate on the impacts from low inflation and NII? What is the size of the inflation benchmark loan book?

Okay. I think we need to go back to the first quarter results presentation, where we explained that we show very low inflation readings in the first quarter of the year in Chile and that affected the UF, the Unidades de Fomento, and explained a very significant decrease in NII. That clearly was something that was not going to be sustainable for the year and we saw a very significant recovery of NII in Chile during the quarter.

Quarter-on-quarter NII in Chile increased by 16% precisely because of the fact that the UF recovered significantly. It's going to be difficult as some other competitor said yesterday to have a good idea on how that is going to impact NII going forward as the volatility of inflation readings could impact quarter-on-quarter NII in a significant fashion.

Okay, well, let's move on to Mexico. Britta Schmidt from Autonomous, Carlos Peixoto from BPI, Alfredo Alonso from Kepler Cheuvreux and Sofie Peterzens from JP Morgan asks if we still guide to above 10% loan growth in Mexico. Is a pickup in consumer lending still likely for the second half of the year.

Yes, our guidance doesn't change here. We were talking about double-digit growth and we continue to see that coming. Consumer lending based on a growing macro would likely grow for the second half, as was asked, and pickup, even though that would not change our mix towards consumers because we are seeing a strong growth on the commercial side as well. So not much change in guidance in Mexico's growth.

Thank you. And Mario Ropero from Fidentiis asks if we can please clarify the quarterly weak evolution of other income and other charges.

Yes, everything is justified by higher contributions to the deposit guarantee scheme in Mexico higher than what we were expecting. We are experiencing very strong growth rates in customer funds and that increases the contributions to the deposit guarantee scheme.

Okay. Britta Schmidt from Autonomous asks if we can explain the cost increase in Mexico.

Well, the cost increase in Mexico is where we expected it to be. So we are still seeing positive jaws in the semester and in the quarter because revenue growth was around 4% with cost growing 3% quarter to quarter. And it has to do -- the growth has to do mostly with the investment plans undergoing in the country and as well as the growth in inflation.

But we see that we will have positive jaws going forward as well and that will allow us to maintain the very highly efficient cost to income ratio that we have in Mexico, around the 37% that we've been seeing.

Okay, thank you. And Stefan Nedialkov from Citigroup precisely on the cost to income ratio asks if we have any target on the cost to income ratio after the investments.

Well, I just mentioned that we see that -- given that we are going to be growing our income at a faster clip than the costs, we will continue to see good ratios in the 36%-37% ranges.

Okay. And Carlos Peixoto from BPI asks about the expected cost of risk evolution and NPL trend in Mexico.

We are seeing stability in the past-due ratio number. It remains around 2.8% in Mexico, compares very favorably to other competitors. And cost of risk numbers are also stable, around the 350 mark that we've been guiding the market that we will be obtaining in 2015. And this could only potentially change if the asset mix changes -- something that we don't foresee today. But if it does change going forward, that could potentially lower our cost of risk numbers.

Okay. Stefan -- thank you, Jamie. Stefan Nedialkov from Citigroup, Carlos Peixoto from BPI, Arturo de Frias from Santander, Sofie Peterzens from JP Morgan ask about guidance on NII, NIM, cost, provisions, loan growth for 2015, 2016 specifically in the context of ongoing macro weakness in Mexico. Do you feel confident that we can meet our guidance for 2015 and what are your impressions for 2016?

And also on guidance, (inaudible) asks the analysis of Mexico's second quarter versus first quarter shows a slowdown in volumes and activity. Do you think that we need to reduce the contribution growth outlook for 2015? So a bunch of questions on guidance, Carlos.

Guidance for Mexico. Okay, well, on the macro, it's a softer macro, but with growth of 2.5% we are seeing for the year given the lower oil prices and some of the delays in implementing the energy reforms and some weakness on the internal demand -- but growing at that rate.

We are also expecting interest rate hike in September in synchrony with whatever the Fed might do. And in terms of volumes, I already talked about double-digit growth -- we continue to see that. Interest margins and net interest income growing also at a double-digit. Costs, I talked about -- they will continue to grow above inflation but with positive jaws. So lower growth than our revenues as long as global market revenues also have a positive development in the second half of the year.

Stability in the cost of risks, around 350 basis points -- could be lower than that depending on how the mix evolves. And if we continue to have stronger growth in commercial, that might be coming down, which will all lead to a double-digit growth in our net profit. So we are very positive still in the outlook for Mexico.

Thank you, Carlos. We are moving now to Spain. Let's start with the banking business. Britta Schmidt from Autonomous, Carlos Peixoto from BPI, Arturo de Frias from Santander ask about loan growth. What volumes growth do you think is achievable in Spain this year?

I think here, again, our guidance has not changed. We expect low single-digit growth in loans, something between 0% and 2% could be obtained. And probably the only caveat in that guidance is if the public sector portfolio behaves the way that we are expecting, which is a deleverage of around 6% year on year.

I think second quarter numbers clearly allow us to feel confident about this guidance. Quarter-on-quarter loans are flat. A significant increase in the commercial portfolio, 1.8% quarter on quarter, so growing faster than what we were expecting for the year, around 5%. So this is behaving better.

And new production on the retail segment is behaving very well, increasing quarter on quarter in a very significant fashion and also year on year at rates above -- between 35% and 40%. So the deleveraging of the mortgage portfolio is slower than what we were expecting and the behavior of the consumer and the very small companies is showing positive numbers for the first time.

So positive on being able to deliver on the guidance that we gave for the year.

Thank you, Jaime. Mario Ropero from Fidentiis, Alfredo Alonso from Kepler, Sofie Peterzens from JP Morgan, Arturo de Frias from Santander, Laura Hernandez from Caixa and Andrea Filtri from Mediobanca are asking about loan spreads, specifically how important is pressure from competition and margins and if we can give some detail on spreads in new productions, stock in the main portfolios.

Okay. So competition is certainly there given the liquidity situation, which is affecting behavior in the short-term, and there is competition for the new production that is growing -- is growing -- like we just heard, is growing well, but there is competition there.

We do see however that the market should be behaving in a very rational way going forward versus what was the past in Spain, because structurally we have now a much more rational industry in terms of fewer players and less fragmentation and also more rational players given all the changes that have taken place consolidation wise and governance wise in the industry.

But shorter term, yes, we continue to see some pressures on pricing on the asset side. On the liability side, we are being able to maintain our cost of resources in a good pattern.

I don't know, Jamie, if you want to give some detail on the spreads and new production and the stock in the main portfolios.

Can I just put in a little bit of a chip in there because we have little time available. So if we can a little bit maybe speed up and any other details we can give from IR afterwards.

Okay, I'll try to be very short and to the point. Yes, asset deals went down in the quarter by 12 basis points, but customer funds went down further, 15 basis points, and the customer spread increased in the quarter 3 basis, taking into account only BBVA. If we include Catalunya Caixa, which has a much lower customer spread than BBVA, the overall customer spreads down by 188. In general front book prices are going down slightly, but we are still maintaining very strong spreads in all portfolios.

Mario Ropero from Fidentiis, Carlos Peixoto from BPI, Alfredo Alonso from Kepler, Sofie Peterzens from JP Morgan, Arturo de Frias from Santander and Andrea Filtri from Mediobanca on deposit cost, can we provide the cost of the back and the front book of time deposits and if we can give our expectations on demand deposit costs given the 123 accounts and similar aggressive moves -- and how much room for improvement is there in the funding costs.

Okay, so far the 123 account has not affected us. Flows to Santander are exactly the same as they were before the account was launched. So happy to report that. On demand deposits, the cost of new production remains stable as it was true in the first quarter of the year, around 30 basis points. And this is much lower than the back book in time deposit. It was 127 at the end of last year, 112 at the end of March and is down to 93 basis points at the end of June.

So although front book does not have too much room to lower its cost, clearly the back book will continue to be positively impacted.

Okay, thank you. Stefan Nedialkov from Citigroup, Mario Ropero from Fidentiis, Francisco Raquel from Enemasuno, Britta Schmidt from Autonomous, Stefan Nedialkov from Citigroup, Carlos Peixoto from BPI, Alvaro Serrano from Morgan Stanley, Sofie Peterzens from JP Morgan and Arturo de Frias from Santander ask about net interest income in the quarter and specifically guidance going forward. Do we still maintain the NII guidance in Spain of low single-digit growth in the year excluding Caixa Catalunya since most of the Spanish banks are guiding to lower NII than early this year? What is the driver?

Yes, we keep maintaining our guidance of low single-digit growth in NII. Year-on-year's number is 3.1% right now and we should be able to obtain something between 0% and 1% for 2015.

Thank you. Sofie Peterzens from JP Morgan asks about trading income. What drove the strong trading income? Did you realize gains in your fixed income portfolio? What impact on NII will it have going forward?

I think I answered partially that question before. But, yes, we had capital gains from the ALCO portfolio, EUR178 million in the quarter. But I think it's more significant the very good performance that the global markets unit had during the quarter. Impact on NII is exactly as expected and the overall ALCO contribution will go down around 10% year on year.

Mario Ropero from Fidentiis asks about the contribution to the deposit guarantee fund that we expect in the last quarter of 2015?

We expect EUR245 million coming from BBVA and around EUR50 million from Catalunya Caixa, for an overall EUR300 million. Of course these are guesstimates.

Mario Ropero from Fidentiis and Sofie Peterzens from JP Morgan say Carlos said that he expects further cost savings in Spain following the transformation of the business. Could you please offer quantitative guidance on this?

Well, my comment was more of a long-term comment rather than one meant to change any of the guidance. We remain committed to reducing our expenses in Spain -- in our banking activity in Spain. We have a target which is challenging of 3% reduction in 2015, but we remain committed to that ex of course Catalunya Caixa. So the guidance does not include that cost base nor the restructuring costs that will come from Catalunya Caixa that we are estimating at EUR50 million after tax for 2015.

There's also some movement and there will continue to be some movement of costs between the corporate center and the Spanish banking activity division as we have reorganized earlier in the year and transferred some of the activities that were in the corporate center. But we are fully dedicated to Spain and that has had some impact on the numbers in the quarter.

But overall, the idea is to continue to control our costs in Spain. We have had a very positive quarter in terms of personnel expenses with a reduction of 4% and we will continue to work hard at that. And then in the medium and long-term as we leverage technology to have linear processes and more efficient distribution including the growth of digital sales and digital servicing, we will surely be moving towards a more efficient business model.

Okay. Thank you, Carlos. Caxia Catalunya -- Francisco Raquel from Enemasuno and Alfredo Alonso from Kepler Cheuvreux ask if we can detail the main P&L headlines of Catalunya Bank in the second quarter and the expected contribution in 2015.

I think their numbers haven't changed. We are expecting total NII contribution for the year EUR200 million, none at net attributable level except for the fact that we booked a EUR22 million badwill in the PPA, which is what is going to be the positive contribution of Catalunya Caixa for the year.

Thank you. Britta Schmidt from Autonomous asks what restructuring cost did you book for Caxia Catalunya and where.

As you know, the overall restructuring costs that we are expecting in Caixa Catalunya was EUR450 million. We were able to record around EUR250 million in the PPA and the remainder will be booked in the next three years. For 2015, we are expecting something around EUR50 million to be booked, EUR16 million has already been booked in the second quarter in Spain and further EUR5 million at corporate center.

Thank you. On BBVA Spain's asset quality Britta Schmidt from Autonomous, Carlos Peixoto from BPI and Sofie Peterzens from JP Morgan ask a little bit about the guidance on cost of risk. Given a better second quarter, what cost of risk do you expect in Spain for 2015 and 2016. What is a normalized cost of risk level in Spain and when do you expect to achieve this level. Do you think there is upside that you will deliver cost of risk below this level?

We continue to expect cost of risk to go down in Spain, including real estate. Our guidance is around 80-85 basis points for this year and that will be coming down in our expectation in 2016. Another 20 bps and maybe 10 more in 2017 to 50 basis points, which will be a normalized level.

Thank you. Carlos Peixoto from BPI and Laura Hernandez from Caixa ask if we can give feedback on the increase of non-performing loans in Spain. What was the amount of NPLs from Caixa Catalunya, expected trends?

Okay, ex-Catalunya Caixa NPLs were down in the quarter by EUR550 million in BBVA, so you can do the math. A very good performance in real estate, minus EUR450 million, and minus EUR100 million in the mortgage portfolio.

Okay. On real estate -- thank you, Jaime. On real estate Johan De Mulder from Bernstein asks why real estate provisions and losses were higher than in the first quarter.

They are in-line with what we were expecting. There's an accounting change in the real estate business coming from certain companies that Unnim and Catalunya Caixa were shareholders of. So we have to change from the equity method to full consolidation in the quarter and that justifies EUR28 million of increase. But it was, as you can imagine, all taken into consideration in the due-diligence.

Thank you. Sofie Peterzens from JP Morgan asks how should we think about the real estate losses going forward.

Well, we expect the losses to be coming down already in 2015 -- as we are seeing that's already happening in the first half -- and then to have a very reduced impact in 2016 and immaterial in 2017.

Thank you, Carlos. Benjie Creelan-Sandford from Macquarie asks what was the impact on loans from foreclosed assets in the real estate division from the Caixa Catalunya consolidation.

As you know, Caixa Catalunya sold the majority of its real estate portfolio to [Seraph], so it comes clean of real estate assets. It only brings in about a billion, mainly loans below 250,000 and foreclosed assets smaller than 100,000.

Thank you. Carlos Peixoto from BPI and Carlo Digrandi from HSBC asks if we can update on real estate asset sales during the quarter?

Okay. Real estate sales in the quarter EUR478 million and we have a capital gain of EUR37 million.

Thank you. On the corporate center, Robert Noble from RBC asks corporate center costs increased this quarter against end of year guidance, declined 3%-4%. Do you maintain that guidance and given positive offsets to cost in the corporate center, what should we expect the bottom line contribution from the corporate center to be going forward.

Okay, I think that that guidance is from Spain banking activities. We haven't given any guidance on expenses at the corporate center. It's clear that results at the corporate center are behaving much better than what the guidance for the year was. As you know, corporate transactions we are expecting quarterly losses of between EUR300 million and EUR350 million and as of June we are losing less than EUR500 million. So clearly at corporate center we are much better than what our initial guidance was.

Well, so in general in costs we had some one-off effects in the quarter that affect negatively some of the evolution growth rates that you might be seeing, apart from Catalunya Caixa in the comparison versus last year when in the second quarter we had some free up of some provisions associated with variable compensation, which we have not had this year and that has a sizeable impact on the rate of growth of the costs.

Thank you. We just have time -- the mic was off. We just have time for some liquidity and ALCO portfolio questions. Mario Ropero from Fidentiis, Raoul Leonard from Deutsche, Francisco Raquel from Enemasuno, Robert Noble from RBC, Carlos Peixoto from BPI and Alvaro Serrano from Morgan Stanley all ask about the ALCO size yield and duration.

The ALCO size remained stable from March, EUR36.7 billion, from EUR36.3 billion as of March; duration from 3.3 years to 3.5, so a very small increase; and the yield remains stable around 2.7%.

Thank you. Raoul Leonard from Deutsche Bank asks if our ALCO portfolio strategy has changed in any way after the sovereign spread widening in the second quarter.

The ALCO portfolio is a hedging portfolio. We don't use it to speculate. And the structure of balance sheet hasn't change, so our strategy in the portfolio hasn't either.

And lastly, Carlos Peixoto from BPI asks if we can please update on current ECB exposure.

I imagine that you are referring to the TLTRO. We drew EUR4 billion in June, so the overall is EUR12 billion.

Well, thank you very much. I'm afraid we don't have time for more. I know there were just a few more questions there coming in. We will answer these from the Investor Relations team. Thank you all very much.