Banco Bilbao Vizcaya Argentaria SA (BBVA) 2015 Q4 法說會逐字稿

Good morning everyone and welcome to the fourth quarter result presentation of BBVA. I am Luisa Gomez Bravo, Global Head of Investor Relations; and here with me today are Carlos Torres, Chief Executive Officer of the Group; and Jaime Saenz de Tejada, our Chief Financial Officer.

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

Thank you. Thank you Luisa. Good morning everyone. It's a real pleasure to be with you today for our 2015 presentation of the fourth quarter results. But before I start with the numbers themselves, I'd like to briefly review the macro outlook that we're in given all that's going on in the world. Quite challenging times around it.

Starting with Spain, with the political uncertainties that we're facing here ourselves, and then moving on to the impact that the lower oil prices is having in different directions and different parts of the world. Definitely in the US and in Texas in particular it's a negative impact, but it's positive in other areas like in Turkey where we have a very complex geopolitical situation. And then various headwinds globally and in South America. South America impacted by the Fed hiking policy if it continues; China and all that's going on there, the commodity prices coming down, difficult challenging times as I say.

But even with that we are seeing 2016 growth quite resilient throughout the footprint. Our prospect is of growth of 2.7% in Spain, which compares well with the 3.2% we had in 2015 which was a fantastic year, but it continues to grow at high rates because of continued low interest rates, low oil prices, and the continued positive impact of the reforms.

In the US, very similar year to 2015. We think it's going to be 2.5% sustained on domestic demand supported by some tailwinds, the oil price itself can help, disposable incomes and consumer demand also supported by the strong employment numbers. And all of that might offset the negative effect of the appreciated dollar.

Mexico will be very much linked to the US; will continue to be aligned and we see growth of 2.2% after 2.5% in 2015. South America, while troubled region contracted in 2015 and probably will do the same in 2016, but in our footprint the countries we're in without -- excluding Venezuela growth is forecasted at 1.8% and even higher, 2.4% in the Andean countries; Chile, Colombia, Peru. So it's slightly lower than 2015, but still solid growth.

And finally Turkey, even with all that's going on, high growth and resilience to that environment. We forecast almost 4%, 3.9%. That's up from 3.6% in 2015. Turkey is uncorrelated with some of the global concerns -- concern factors like China or the oil price. It's actually correlated in the -- inversely correlated to that, so it's quite a boon, the lower oil price. We've seen also some policy changes like the raise in the minimum wage that should be supporting demand short term, and the continued monetary policy decisions.

So overall it's a difficult world we live in, but we see resilience across the footprint with forecasted growth of GDP between 2% to 4% depending on the country in 2016.

The quarterly results are very strong. Net attributable profit was EUR940 million for the Group. That's a growth of 36.5% versus last quarter of 2014, or 51% in constant FX terms. If we control for the change in the stake in Garanti, we exclude that and we exclude Venezuela, then the net attributable profit was EUR898 million with a growth rate of 38.4% or 44.3% in constant terms.

We will later on be explaining the net attributable profit without corporate operations, that's a minor impact, in this quarter it's just EUR4 million. So the net profit is EUR894 million.

It's important to note that the quarter has been impacted by the contributions that the Bank has made to the deposit guarantee fund and the European resolution fund. That has been -- that was a total of EUR291 million in the quarter in 2015 and this has been a difference in accounting versus 2014 because in 2014 we accrued that amount on a quarterly basis, whereas in 2015 it's registered entirely in the last quarter and that distorts the comparisons. So keep that in mind.

For the year, the results are also very strong, net attributable profit of EUR2.6 billion or EUR2.566 billion without Venezuela and the additional stake in Garanti. And here we had a significant negative impact of corporate operations of negative EUR1.1 billion as you know that we registered in prior quarters. Without that amount, net attributable profit was EUR3.675 billion with a growth rate of 49.7% or 45.4% in constant terms.

And as we will see, this growth is supported by recurring income and also by lower impairments. The return -- return on tangible equity for the year was 6.6%. This should clearly be going up as we have made return on capital one of our six strategic priorities that I shared with you in prior presentations. So we will be working hard to increase our return on equity.

In synthesis, the year has been a year of growth. Clearly in net interest income, good performance in all of the countries, growing at overall 8.7% or 21.5% in constant terms. We see positive jaws excluding CatalunyaCaixa with growth in revenue of EUR14.1 million in constant terms, while costs growing at EUR12.1 million. And going forward, CatalunyaCaixa should bring future synergies.

Cost of risk coming down from 1.3% to 1.1% and also positive news in the real estate business here in Spain with lower impairments, lower provisions. So all of that combined has been the source of that net income growth of 43.3% that we were talking about. Also we ended the year with very strong solvency and liquidity positions, solid ratios in general and throughout; core capital phased in 12.1%, fully loaded ratio 10.3%, leverage ratio 6% fully loaded and leverage liquidity coverage in excess of 100%.

Now beyond the numbers, 2015 has been also a very positive year in terms of driving our digital sales. Our customer-base grew -- digital customer-base grew by 19% to 14.8 million. It's almost the goal we had set ourselves of 15 million, and mobile customers really continues to grow at a fast pace, 45% growth to 8.5 million, well above the target of 8 million.

As you can see, the mobile penetration remarkably increased from 13% to 19%. And also remarkable how we have grown our digital sales in general, but especially in consumer loans that grew significantly in Spain for example from 9.3% of -- the number of loans sold digitally over the total consumer loans that we have sold in the year went from 9.3% to 19.2% in December, in Mexico from 2.4% to 29.6%, and in South America from 5.4% to 20.3%. So these trends are really telling us something.

They are very promising and we believe they are very significant evidence of where clients want to bank with us. And that is why driving digital sales is also one of our six strategic priorities. And it's also why at BBVA we're placing such importance on our transformation, leveraging digital, but really focused on our customers because that's ultimately what we want, we want to be a better bank for them.

We want to better address their needs, better solve their concerns. We really want to bring to everyone the age we live in -- the age of opportunity that we live in -- we're living in and that's our purpose.

And as we do that, our customers will increasingly recommend BBVA, they will be increasingly happy with us, and we have already seen a lot of progress in 2015 in the Net Promoter Score, which we believe is a key metric that measures well how much our customers love us. We're now leading our peers in most of the countries as you can see in the chart and in the retail -- this is retail NPS. And going forward, this will of course be a clear focus area.

This is paramount among our six strategic priorities, customer experience. This is really the core of our transformation, and some highlights of progress in that transformation of being a better bank for our customers, we have been working in our relationship models, we have expanded for example the remote banker model that it's really a model that's working well, customers are very satisfied with it, and really increased recommendation when they start using the remote bankers.

We have a new distribution model in Spain, the Center for Clients -- [Banking Client Centers], we call them CBC 2.0. We have invested significantly in our renewal -- the renewal of our branches in Mexico with the [Ulysses] plan. We have worked in (inaudible) ensuring that we have standardized interactions between our employees and -- or the bank and our customers at the branch and also the other channels.

We have also worked hard and made progress in digital sales and digital products, digital onboarding which is the first step really to have a streamlined onboarding to really welcome customers through online and mobile. We have developed one-click products that are behind the sales metrics I was sharing in the prior slide.

We have launched entirely digital businesses like Wibe, the insurance business in Mexico or very successful products like FrancesGo in Argentina, which is a mobile app to really drive discounts and drive activity in credit card or the Wallet, so successful in already five of the countries. Started in Spain, but now we have over 2.6 million downloads in Spain, US, Mexico, Chile, and recently in Turkey where really the bonus flash application, the Wallet application has skyrocketed in downloads in just a few weeks with very good ratings.

And finally, improved functionality; really this is small things that in and of themselves might not matter much, but combined they really amount to a small revolution, the revolution of the small things. Things like switching on the cards from the mobile phone on and off whenever you want, or reaching your banker from the app being already authenticated because you have put in your logon -- login credentials. Or signing digitally or signing on a deferred basis, or mobile cash, et cetera. All of that is really small things.

Every three months, we're adding new functionality of this type and this is having a measurable impact in our client's recommendation. And all of this work we have done, building at the same time the foundations that are needed to really deliver a better experience, we talk a lot about design, we are investing in design, we continue to invest in design. Big data clearly is a source of value going forward, and we have a growing team.

And then engineering, both software engineering as well as process engineering. As you know, also we have a strategic priority to build new digital businesses, it's also one of the six. We want to do that primarily leveraging and accessing external innovation, and the year has been a good one in that respect as well. We have invested in some new ventures and we have purchased SpringStudio, the design firm.

We have invested in Atom, 29.5% stake in this UK's first mobile-only bank, licensed already. We also established partnerships with companies like DWOLLA, or PROSPER, OnDeck, or we are participating in blockchain initiatives.

So overall we have made, as I was saying, good progress internally. We have made good progress externally as well. And most importantly, and what I'm most proud of is that we've made great progress with our customers and with their recommendation of the bank which is really what we're after.

Now moving on to the quarterly results themselves, I will be through the course of the presentation highlighting the trends excluding Venezuela for the better comparison and also without the impact of the additional stake in Garanti, although you will be seeing the total numbers -- total Group numbers in the slides as well.

So in the quarter, in the quarter net interest income grew at 5.6%. That would be 8.4% in constant FX terms. In the year, the comparable growth are 13.1% and 10.9%, and we really have seen strong underlying top line net interest income growth throughout the countries, offsetting in many cases downward pressures on spreads, and supported by dynamism in activities, strong -- high growth rates as you will be seeing.

Gross income has also grown, but by much less, 0.7% in the quarter, 2.9% in constant terms. This is because of the impact of the contributions to the deposit guarantee fund that I was referring to earlier. In the year, that's an -- that does not impact in the year-to-year comparison in the accumulated amounts. Growth is 10.2% or 7.9% in constant FX with total revenue of EUR23.68 billion for the 12 months of 2015. Strong performance also in the absence of dividends from CNCB.

In terms of costs, operating expenses grew in the year at 15.8%. This is of course very much affected by CatalunyaCaixa, but there were other effects like growth in costs in Mexico because of the renewal I was referring to earlier, and other effects in Mexico and Turkey, high inflation and impact of depreciation among other things. But the good news is that we have positive jaws excluding CatalunyaCaixa, our costs grew at 12.1% while our revenue grew at 14.1%.

Efficiency 52%, compares well with peers, but still we need to continue to work hard at improving our efficiency. It's also one of our six strategic priorities.

In terms of operating income, we have a negative trend in the quarter, negative 9% because of the contributions to the deposit guarantee fund and the resolution funds, but for the year, it's growth of 8.5%, 7% excluding FX, for a total pre-provision profit of EUR11.36 billion.

Moving now to cost of risk, we -- loan loss provisions and real estate impairments continued to come down, EUR1.1 billion in the quarter. Spain in particular has really come down. The weight in the quarter is 30%. And cost of risk, cost of risk was coming down already in prior quarters and it comes down again 1.1% in the last one.

Risk indicators continued to improve. NPLs are down from EUR23.6 billion to EUR21.1 billion excluding CatalunyaCaixa, Garanti in Venezuela, and the NPL ratio decreases from 5.6% in September to 5.4% with a coverage ratio which stays -- is slightly up, but stays near 74% which is what we had in September or 78% excluding real estate.

Now moving on to capital, our capital position is strong at year-end with 10.33% fully loaded ratio, compares with 9.76% we had at the end of September. In the quarter we added 11 basis points of capital through return earnings, net of dividends. We deducted 3 basis points because of the growth in risk-weighted assets. We had positive impacts of market-related and other impacts adding up to 18 basis points, and all of that combined would have taken us to 10.02% year-end.

But at year-end we have also removed the sovereign filter which added 31 basis points net of these three effects or thresholds. This is in line with the amounts we have been telling you regarding the sovereign gains we had in our portfolio -- the gains we had in the sovereign portfolio, sorry, and in terms of the removal of the filter is very much aligned with peers and with the ECB guidelines.

Overall in the year, we have organic capital generation in excess of 40 basis points and I like to remind you of the high quality of our capital. As you see, the density of risk-weighted assets over total assets is quite high, 53%, number one among our peer group that has an average of 33%, and similarly a leverage ratio of 6% which is tops among our peer group which has 4.5%.

The capital position is also well above the ECB 2016 minimum requirements. We have a 12.1% -- 12.09%, sorry, core equity tier I phased in ratio versus a requirement of 9.75% that includes the pillar 1, pillar 2, including the conservation buffer and the G-Sib buffer as well. So that's a gap or a buffer of 234 basis points above the requirement.

Moving on to the business areas, performance has been strong in Spain, growth of 21.9% in the banking activity to more than EUR1 billion net profit. Also in Mexico and South America with growth rates nearly -- near 9%, US 5%. And we have a drop in Eurasia, but that's impacted by the lack of dividends from CNCB. We also have an improvement in real estate in Spain, losses are reduced by 45% versus last year and also a drop in the Corporate Center losses by 37%.

Reviewing one by one, Spain banking activity has seen growth, but due to the CatalunyaCaixa integration, 13% lendings, almost 18% in funds, if we take out CatalunyaCaixa lending volumes -- balances at year-end have come down by 0.2% despite strong growth in production and new volumes. For example mortgages went up 38%, production of mortgages, but despite all of that the mortgage balances are still coming down in the year.

We also saw a strong production growth in consumer, more than 40% or around 40% and businesses more than 25%. Customer funds growing at 3% without CatalunyaCaixa which is good news, and in terms of revenue, net interest income and fees are impacted by the drops in spreads and also in fees in CIB. Gross income comes down affected by the contributions to the guarantee fund, the deposit guarantee fund.

Without that effect, the gross income revenues would have gone up in Spain 2% from the third quarter. Similarly, operating income comes down because of the same effect. If we strip it out, growth is 7.8% in operating income versus the third quarter.

Risk indicators in Spain, positive trends, NPLs coming down to 5.8% without CatalunyaCaixa, 6.6% if we include it. Cost of risk coming down in the year as you can see low numbers 0.5% without CatalunyaCaixa, 0.6% including it. And NPLs are down from EUR14.1 billion to EUR13.8 billion. Overall income statement in Spain, net attributable profit of EUR1,046 million, a growth of 21.9% driven mostly by lower impairments.

Okay, real estate activity, I already mentioned that net losses improve. We reduced losses by 45% to EUR492 million with capital gains of EUR117 million in the year, that's more than EUR100 million increase versus 2014 in capital gains on sales, and reduction of our net exposure by 9.6% from EUR12.5 billion to EUR11.3 billion with CatalunyaCaixa. Total income statement in Spain, aggregate net profit of EUR554 million, almost EUR600 million more than a year ago.

In the US, robust -- activity levels are robust. Lending growing at 9.4%, growing well in retail. Customer funds, 7.7% above the competition, above the market, and that's all driving net interest income growth even in the low rate environment we're in. Fees however were down. So the recurring revenue is flattish, minus 0.2%, EUR606 million total net interest income plus fees. Gross income growing at 2.8% because of good net trading income driven by portfolio sales and operating income -- and thanks to cost control grows at 4%.

Risk indicators in the US remain healthy. NPLs stay put at 0.9%. High coverage ratios. That's all despite -- despite that, we have seen in the quarter though an increase in provisions. As you can see cost of risk goes up from 0.2% to 0.4%. That's because of not so much NPLs, but rating downgrades in oil and gas.

All in all, the net profit in the US is EUR537 million growing 5.2% driven by, as I said, net interest income growing at 4.9%. Commission is not so good, minus 6.9%. Good trading income and good cost control, operating expenses growing at 1%.

In Turkey -- in Turkey, we have high growth around 20% in -- 18.8% in lending, 21% in customer funds, net interest income plus fees for -- excluding the additional 14.9% stake that we own in Garanti, came to EUR277 million for the quarter, growing at 7.8%, even with the negative effect of the CPI linkers. Total revenue gross income grew at 12.9%, 12.9% versus the third quarter, and operating income 6.4% to EUR150 million.

Risk indicators are good in Turkey, but the NPL ratio increased because of specific sectors impacted by the macro environment. Despite that, the cost of risk is stable in Turkey at 1.4%. Bottom line, contribution of Turkey to the Group, EUR371 million. If we take out the additional stake, the year-to-year evolution would be minus 1.1%.

And then in Mexico business activity remains strong, lending growing at 10.7%, good growth in wholesale portfolios in particular. Customer funds at 12.2%, [core] revenues good growth, 9.6% very strong both because of that net interest income even with the worse mix, as well as commissions, commission is growing at double-digit, so 9.6% growth, 6% more than the third quarter.

Gross income also total revenue growing double-digit 10.2% versus a year ago, 6.9% versus the prior quarter, and operating income at 10.2% or 9.3% versus the third quarter.

Asset quality in Mexico continues positive trend, NPLs at 2.6% with high coverage and the cost of risk is trending down significantly, 3%. That's very much affected by the mix change that I described as we have more wholesale portfolio growth than retail and that will be gradually corrected as we grow retail next year. So we might see a trend upwards in that cost of risk in 2016.

Overall, income statement, very impressive EUR2.090 billion. Net profit in Mexico, almost 9% growth in the bottom line, 8.8%, driven by good revenue and then driving -- good operating income and we'd really expect this growth to be maintained, this positive performance, strong performance in Mexico, very happy with how the team is working there and the results we're seeing from Mexico.

South America, without Venezuela growing at almost 16% lending, 17% customer funds. Strong activity growth translates into net interest income, also good fee numbers. Core revenues growing at 6.9% in the quarter versus last year. Gross income at 12.3% with good net trading income as well in the region and operating income 11.7%.

Risk indicators are positive also in South America, 2.3% NPLs with good coverage, but we see cost of risk increases because of the macro conditions 1.5%. That compares favorably to peers and also it's in line with the expectations we had for cost of risk over the year. Overall, the income statement of South America without Venezuela net attributable profit of EUR905 million, growth of 8.7% driven by the top line primarily.

So to conclude, as I said at the beginning we are in a difficult world, persistent macro uncertainties, but even with that our business has performed. We see strong growth, positive trends, and we think 2016 will continue in that trajectory with positive growth prospects going forward in general in the countries where we're present. We see resilience therefore despite this macro uncertainty with good activity levels. We will continue to work in controlling our cost and we are very aware of the need to improve our efficiency.

We see decreasing provisions in Spain, both in the banking activity, as well as the real estate impairments which should be trending down. And finally we will be very focused in 2016 in execution of our transformation journey. Very much focused on the costs, and we're very much trying to get those NPS scores to continue to rise and that will be the best indication that really we are delivering on our purpose.

And nothing more. I will turn it over to Luisa for all of your questions. Thank you for your attention. Luisa.

Thank you Carlos. We will start with questions on global topics. Jose Abad from Goldman Sachs, Fabio Mostacci from Mirabaud, Alfredo Alonso from Kepler Cheuvreux ask about basically commodity prices for oil and gas, specifically how negative will be current oil prices for the Mexican economic dynamics and therefore for your activity there? Do you think macro backdrop of Chile, Peru and Colombia to further weaken as a result of the weakness of commodity prices? Do you anticipate any slow-down here for 2016? Carlos?

Thank you. Thank you for the questions. I mentioned briefly in my talk just now that Mexico is very linked to the US -- Mexico is a bit different than other emerging economies. In fact all emerging economies are a bit different in their own way.

Mexico is also a very different Mexico than a decade ago in terms of its dependence on the oil price that has really come down, and it's not a country that is dependent on commodities, but rather on exports to the US. And that's why we see a little bit of softening in the economy versus the 2.5% growth we saw last year, but in 2016 as I said, we're looking at a 2.2% projection.

On the back of the resilient US economy that -- yes, we're seeing a little bit less activity in the manufacturing sector, but holding up overall and that's why we believe Mexico will continue to have that kind of growth.

Regarding the Andean countries; Chile, Colombia, Peru, again I already mentioned that we see definitely higher growth than in the whole of South America, but lower than in 2015. 2015 number is around 2.4% and in 2016 -- sorry, it was 2.6% and 2016 it will be coming down in our projection to 2.4%.

Thank you. Also regarding exposure to oil and gas, how much exposure does the Group have to oil sector? Could you give some detail per country?

Good morning Luisa, and good morning to all, this is Jaime. Our overall exposure to the oil sector, it's EUR15 billion. That's a little over 3% of our total loan exposure in BBVA. The highest weightings are in the US and Mexico. In both countries oil exposure represents around 6%. And in the rest of the geography the -- geographies, the percentage is much lower, around 2.5% in Spain, 2.5% in South America, and below 2% in Turkey.

Thank you. On the Group, Francisco Riquel from N+1 asks, gross NPL entries went up sharply in the fourth quarter 2015; can you explain the trends this quarter for the main business areas and the outlook for 2016?

I think that the fourth quarter in NPLs has two different buckets, clearly Spain where NPLs went down again by EUR700 million in the quarter and Mexico also having a very well -- a very good behavior. On the other side, we saw increases in Turkey, especially due through the reclassification of certain large corporates mainly in the shipping sector which were on the watch-list for quite a long time, we classify them as NPLs. And we also saw increases as expected though in South America and in the US, mainly related to the reduction in the internal rating of certain energy-related companies.

Still year-on-year evolution of NPLs have been very good as Carlos has said during the presentation and overall it went down from 5.8% to 5.4%. We saw reductions year on year in Spain, stability in Turkey around 2.8%; reductions in Mexico as I said from 2.9% to 2.6%, a slight increase in South America from 2.1% to 2.3% and stability overall at 0.9% in the US.

In terms of cost of risk, and I finish the answer with this, I think we had a very good quarter, cost of risk went down from 1.01% in the third quarter to 0.95% with very good showing in Spain where cost of risk was below 50 basis points in the quarter and also in Mexico where cost of risk went below 300 basis points. And slight increases for the reasons that I've already mentioned in Turkey to 1.35% in South America and in the US.

I think overall year on year the cost of risk in BBVA has performed very well, even better than expected and has gone down from 1.25% to 1.06%. So I think this is clearly one of the positive news of the year.

Thank you. Rohit Chandra-Rajan from Barclays Capital, Vanessa Guy from J.P. Morgan, and [Martha Sanchez] from Bank of America Merrill Lynch ask about FX. How should we think about FX impacts on earnings in 2016? Can you update us on hedging policy? Currencies are down 9% year on year. How is the bank positioned for 2016?

Our hedging policy has not changed since the last quarter. We aim to hedge between 30% and 50% of the earnings with 12 months forward-looking view. That's what happens in 2015.

The average hedging of 2016 earnings has been 46%, so clearly within this guidance. For 2016, we hope to stay within the brackets that I just shared.

In the case of a [stock roll] position and as we mentioned at the end of the third quarter with increase our coverage ratio, before the third quarter we only cover 50% of what was not naturally covered by the ratio because our objective as you know is to minimize impact at core capital level. And we increase that coverage from 50% to 70%.

Actual number is 68% at the end of the year, so clearly very close to the guidance that -- the policy that we stated.

The behavior of third quarter -- of fourth quarter currencies have been in general very good. Only Argentina, Venezuela, and to a lesser extent Peru had depreciated during the quarter. The rest have had a positive effect on BBVA numbers.

Overall, we've had a positive impact in 2015 of EUR101 million, if you don't take into account Venezuela, and if you do take into account Venezuela, the negative impact in 2015 versus 2014 has been EUR22 million. So in general, I think a very minor impact.

Going forward, it is true that ex-Venezuela and Argentina and if you include them both, we expect negative impacts coming from FX during 2016 mainly concentrated in the first half of the year.

Thank you. Moving onto capital, regarding some questions on the issue of the sovereign filter, Johan De Mulder from Bernstein, Francisco Riquel from N+1, Fabio Mostacci from Mirabaud, Alfredo Alonso from Kepler Cheuvreux ask the removal of the sovereign filter made for the extra 40 basis points increase in CET1 above the 10%. Can you give more color on this? Please could you explain the decision to include the available for sale reserve in the quarter, why?

Okay. I think this has been something that many of you and many investors have asked BBVA to do. In order to make the capital number comparable with peers, which already include all capital gains from the different available-for-sale portfolios in their capital numbers, so clearly the first reason is to make the fully loaded number fully comparable with peers.

The second reason, and also very significant, is that as you know the ECB has very recently put forward for public consultation the new guidelines to harmonize national discretions within the EU. And the removal of this so-called sovereign filter is included as one of the items to be harmonized. We expect approval of these guidelines within the next six months.

So we are pretty certain that in the next few quarters, we would haave to remove this filter whatsoever. And that's why we decided to do it ahead of time.

The impact as you said in the question is positive 40 basis points. Capital gains at the end of the fourth quarter were EUR1.6 billion net, the same as they were at the end of the third quarter, so the positive impact on core was the 40 basis points that was mentioned. As part of the capital gains are in the insurance company, the net book value of the insurance company has increased.

And so we are exceeding the Basel III threshold and that technical reason has not allow us to fully benefit from the 40 basis points. This is something that partially will be recovered during 2016 as the insurance business in Spain will pay dividends during the next few months and so we will reduce the book value and so the excess in the threshold.

Okay, thank you. Capital evolution in the quarter Britta Schmidt from Autonomous Research asks to please break-down the 18 basis points from market impacts and others in the fourth quarter. And also she asks what dividend amount is included in capital in the fourth quarter 2015?

Okay. The main components of the plus 18 basis points had to do with first the partial recovered of the negative market headwinds that we had in the third quarter as we shared in the result presentations that we did at the end of October and then different additional components. Just to give a sense, treasury stock gave us 4 basis points.

We had additional pick-up from the available-for-sale portfolios. Increase in our hedging has been able to -- FX hedging has reduced our risk-weighted assets and so has given us an additional 5 basis points there. And we've calculated prudent valuation also at the end of the year and that has give us an additional 5 basis.

As you know, we've also revalued the fixed assets in Garanti. That has had a pretty significant impact in Garanti's core capital numbers in this fourth quarter and has also benefited BBVA's numbers slightly, and also the principle reasons.

In the case of the question about -- regarding dividends, this January dividend was paid in cash and the total number is around EUR500 million which is what is included in the -- as a negative in the core capital.

Okay. Also regarding capital, a few questions on the capital strategy, specifically what -- Marta Sanchez from Merrill Lynch asks what's the bank's fully loaded core tier I ratio target? Andrea Unzueta asks what are we planning to do on the capital front since the market is affecting us for the solvency position?

And also on capital generation, Francisco Riquel from N+1, Rohit Chandra-Rajan from Barclays Capital, Britta Schmidt from Autonomous Research and Vanessa Guy from J.P. Morgan asks what will be the level of capital generation in 2016, what can we expect from the organic capital generation to be in the year?

Okay, thank you. Thank you Luisa. I'll start with this last one and then take a little bit of view on our targets on the solvency ratios and the fully loaded core equity tier I. Capital generation we believe in 2016 will be at levels organically and that we have seen in 2015. So that's a rate of about 10 bps per quarter or 40 bps in aggregate.

And we believe that we have now a strong solvency position as I covered over in the presentation with the buffer that we have versus requirement. We are now going to a target, an 11% fully loaded core equity tier I ratio to be achieved sometime in 2017 considering the environment we're in. And we believe that having a management buffer versus the requirements of 10% of 100 basis points make sense in that environment.

Okay, regarding the second part of the questions, what are our market intentions in general for the year, we will be accessing the wholesale markets more in 2016. I think this is something that we already shared in the last quarter presentation. We expect to issue around EUR10 billion this year.

We will take advantage of the private placement market as we've done the last two years fairly actively. So that's on the funding both secure and unsecure is probably what we will do.

On the -- on capital instruments, we will continue to hopefully follow similar tracks from what we've done in previous years. So we expect to do an additional 81 deal as we've done since 2013. So we may from time to time discuss possible offerings with investors in order to get their feedback. With that last transaction we will hopefully fill completely the 1.5% 80 bucket -- 81 buckets, sorry.

In the case of the tier II bucket, it's already well above 2%. But as you know, we -- this is a dynamic number and we might especially (inaudible) is finalized at the end of the year, we might start also working on that.

Thank you. Fabio Mostacci from Mirabaud asks do you have any preliminary estimate of the MREL requirements and how do they compare to TLAC which no longer applies to BBVA?

I think it's too soon to give a final number of that -- on that. As I think you all know, the [SRB] will probably give us our MREL requirement during the course of probably the third quarter of 2016. And we still are waiting to receive the final technical details on what is going to be -- what type of instruments are going to be qualifying as MREL.

What I think is important for us is that we have around EUR20 billion of maturities both in the secure and unsecure markets before 2019. And so our intention, whatever the requirement is, is to renew these maturities in MREL-compliant instruments as they mature. So I think anyhow very simple and so without any particular challenges.

Thank you. Martha Sanchez from Merrill Lynch asks about expected RWA growth for the Group in 2016?

As you know, we don't give guidance for risk-weighted asset growth. Clearly, we will -- we are expecting to see deceleration in loan growth in some geographies. That is true in Turkey, in South America. We're also seeing slower growth in the US. And we expect similar trends as we saw in 2015 in Spain and in Mexico.

Thank you. Regarding dividend policy, Britta Schmidt from Autonomous Research, Martha Sanchez from Merrill Lynch ask what dividend policy do you foresee for 2016? What is the cash versus scrip split anticipated? And can you discuss the dividend pending for the 2015 results?

Okay. We will maintain -- or our intention is to maintain the policy that we have shared priorly to move as soon as possible provided that we are in normalized environment to a full cash dividend, and with the cash payout ratio between 35% and 40% of our recurring earnings. And we would be complementing cash with scrip until that happens.

For 2016, however our intention, and subject of course to Board approval is to combine two and two, so two cash dividends with two scrip dividends in line with what we did in 2015 and in line also with the increased target from 10% to 11% on the fully-loaded ratio that I just referred to.

So I think this is both compatible with achieving that 11% sometime in 2017, while at the same time maintaining an attractive recurrent remuneration to our shareholders.

Thank you. Also on capital, [Alexander Podolsky] from Kames Capital asks on the 81 have you had a final guidance from the regulator on the MDA buffer, i.e., whether the shortfall on 81 and tier II buckets have to be deducted from CET1, thereby reducing the headroom to MDA coupon restrictions?

Our understanding based on all of the interactions with our supervisors and all of their recommendations is that the only current binding requirement is on a CET1 basis. So our CET1 phase-in at the end of 2015 is 12.09% versus our SREP requirement of 9.75% -- the 9.5% is SREP requirement plus the 0.25% SIFI buffer meaning that we have a distance to MDA of 234 basis points.

Okay. Moving on to strategy, Francisco Riquel from N+1 asks if we can update on our capital allocation strategy and what shall we expect for the next 12 to 18 months? And in this regard also Johan De Mulder from Bernstein specifically on Spain says with further pressure on lending rates in Spain, will BBVA take an active role in any further consolidation of the Spanish banking sector, any M&A deals?

Thank you. Capital allocation, so if you refer by that to M&A, which by the following question seems to be the case, I believe we are in the right footprint and we're happy with that. Don't see major changes to that. We -- and again, we never comment specifically, but we will continue to look at attractive opportunities within that footprint.

But we -- as we have been in the past very clear that we want to have attractive returns in all potential acquisitions. But again, no change envisioned in our footprint and we'll just look at opportunities as they come. And that includes Spain, and there's a lot of talk of consolidation.

We have been already ourselves quite active in the market with the acquisitions of Unnim and CatalunyaCaixa, and we have the experience of what drives returns when we do such type of deals. So if there are opportunities in Spain we will definitely look at them with those eyes.

Now, maybe the most important aspect of the strategy -- strategic question though on capital allocation is not so much on the M&A front, but rather how we're going to be driving our capital allocation decisions in the organic business, in the way we grow our business in each of the countries where we're present.

And there I already mentioned that actually having the right allocation based on return on capital and based on return on regulatory capital will be the driver of our decisions, so that we will not grow just based on general attractiveness or growth opportunity in each of the markets, but very much focused on driving return on capital. Luisa.

Thank you Carlos. On digital banking specifically, Britta Schmidt from Autonomous Research asks what is the return on investment that you expect from your fintech digital investments?

Okay. Fintech specifically, as you have seen also in my presentation, we are doing different things. We are investing in venture capital and we have set up a venture capital vehicle very much following the lines of what venture capitalists do. It's not a large amount of money that we are devoting to that, but we believe it's important given all the changes that are going on. And in that activity our target returns are 20%, in line with what that industry has as target returns.

Beyond that we are doing M&A like the investment in Atom. That's a different type of activity. It's highly risky of course, it's a small venture. It's also correspondingly low amounts of money given the size of what we have. But we believe it's important that we also invest in such ventures to develop different business models that are gaining a foothold in the market given that really our customers want to bank through the mobile phone. I think we have plenty of evidence of that.

So the returns there will be harder to determine upfront. It's really an investment in a venture that could potentially radically change the way banking is done in a market that we believe it's an attractive banking market. It's a different way to enter that market. And that's the way we're looking at it. It's more strategic investment in a venture that can really grow very significantly and let us play in that attractive market.

And then of course we have the investments in digital that we have to do more of a ongoing basis internally, but I don't think the question was related to that, because that's really part of doing banking these days you have to do those investments.

Thank you. We're actually quite tight in terms of time, so I'll try and move as quickly as possible and also on the answers. Regarding liquidity and ALCO portfolio Francisco Riquel from N+1, Mario Ropero from Fidentiis, and Martha Sanchez from Bank of America Merrill Lynch ask about the funding plans for 2016, but I think Jaime already answered that. And also specifically on ALCO can you update us on the ALCO bond portfolio in Spain, contribution to NII, average yield, duration?

The overall size went down in the fourth quarter from EUR36.6 billion to EUR35.3 billion. As you all know, 90% of that is mainly sovereign debt. The average duration is up a little bit from 3.4 to 3.5 and overall contribution in the quarter in NII went down by roughly 5%.

Thank you. Moving on to Spain on the banking business, NII, Luis Pena from Fidentiis, Francisco Riquel from Enemasuno, Rohit Chandra-Rajan from Barclays, Mario Ropero from Fidentiis, Jose Abad from Goldman Sachs, Fabio Mostacci from Mirabaud, Britta Schmidt from Autonomous Research, Vanessa Guy from J.P. Morgan, Martha Sanchez from Bank of America Merrill Lynch, Andrea Unzueta from Credit Suisse, Isabel Cameron from Goldman Sachs and Carlos Peixoto from BPI, ask about the net interest income quarter-on-quarter dynamics.

Specifically, was there any non-recurring NII in Spain in the fourth quarter? Regarding the quarter-on-quarter dynamics break-down between Caixa Catalunya and BBVA, volumes, loan yields, cost of funding, front-book, back-book, cost of time deposits, are we seeing asset spread pressure on the SME side and other sectors or is this just the matter of Euribor re-pricing.

And in the second half, there has been a sharp deterioration in new loans to corporates at the system level with the Bank of Spain data. How is this impacting your business? Do you think this is something temporary or do we expect the slow-down in loan originations overall for 2016?

Well, I don't know if I can answer in a short format the many questions included in this very long questions. Okay, overall I think the key points; first one, activity in the fourth quarter in Spain perform extremely well. We've clearly recovered all the negatives from the third quarter and so we are happy to say that year on year has been flattish to minus 0.2%, so clearly within the guidance.

On the customer side, on the funding side, also very good behavior in the fourth quarter growing our funding sources especially in the most profitable segments, mainly demand deposits accounts which behave extremely well. Clearly BBVA's behavior is better than Caixa's. Especially on the asset side, Caixa has deleveraged slightly during the last six months, but on the funding side they've grown quarter on quarter and they are behaving extremely -- CatalunyaCaixa, sorry, they behaved extremely well.

On -- regarding prices, we saw deals coming down in the quarter by 10 basis points, so a similar trend from what we've seen in the previous quarter, and regarding deposit cost, they went down by only 4 basis points and it's true that partially affected by certain one-offs in the CIB business. Front-books in general on the lending side are affected by the lower Euribor rates which justify roughly 50% of the 10 basis points decrease and the other 5 basis points mainly related to increased competition.

I think on the funding side, we still have headroom to improve going forward. Time deposit cost went down by 15 basis points in the quarter. Similar trends from what we've seen during the year and the focus that we're having on the demand deposit side gives us good comfort that we could -- that we can maintain going forward the stability in customer spreads.

Okay. On the outlook, when do you see the quarterly bottom for NII in Spain? Do you think NII in the fourth quarter can be extrapolated as a run-rate for 2016 or there will be more pressure due to lower interest rates? NII, NIM outlook for the year, sensitivity to lower Euribor, and loan volume outlook overall and in the various parts of the loan book. Please comment on your expectations regarding your book of public administrations in Spain and linked to this your expectations of loan growth in Spain in 2016?

Thank you. I'll keep it short in terms of overall guidance for Spain for 2016. Overall credit balances we see flattish in end of year balances and on net interest income, slight growth, low digit 1%-2% growth with stable spreads. We see -- we foresee good growth in commissions, double-digit growth in Spain. That's our outlook.

Thank you. Specifically on fees that Carlos just mentioned, Francisco Riquel from N+1, Mario Ropero from Fidentiis, and Alvaro Serrano from Morgan Stanley asks if we can explain the reasons for the weak fee income in Spain in the fourth quarter and what we expect in 2016?

The reduction versus the third quarter is fully explained by lower activity in the corporate and CIB segments. The rest of the fees behave pretty much the same way as they behaved in the third quarter of last year.

Vanessa Guy from J.P. Morgan asks on trading gains, what do we expect on a normalized trading gains level in 2016?

We've already shared that trading gains should converge to what we believe are structural revenues. This year we've been clearly helped by a very good global market capital gains and also by the very good behavior that we've seen in industrial and financial portfolios that we manage, but overall the ALCO contribution has gone down significantly by roughly EUR250 million year on year. I think that's a trend that we should continue to see going forward.

Thank you. On expenses, Mario Ropero from Fidentiis, Andrea Unzueta from Credit Suisse, Martha Sanchez from Bank of America Merrill Lynch, cost-cutting; excluding trading gains your cost to income in Spain seems circa 60%. What is your target here? Please provide a time-frame if possible and how much of the improvement should come from costs?

Okay, our costs in Spain in 2016 are going to grow because we're going to include four additional months of CatalunyaCaixa and also because of the restructuring cost of CatalunyaCaixa which will be in 2016 around EUR100 million versus about half of that in 2015. So we are seeing reduction in cost without those effects in 2016.

Thank you. And Luis Pena from Fidentiis, asks how much Caixa Catalunya restructuring costs are pending to be recorded in 2016? And Francisco Riquel from N+1 asks you have accounted circa EUR500 million in transformation charges in Spain in 2015, any new plans for 2016?

Yes, what we expect to charge in 2016 for CatalunyaCaixa restructuring is EUR100 million, what we guided for when we announced the transaction. On the restructuring charges we are compliant with guideline. We said at the beginning of the year that we're expecting roughly EUR120 million per quarter and this is what we've had, EUR477 million which is roughly the EUR480 million that we were expecting at beginning of the year.

Thank you. Moving to asset quality in Spain, Francisco Riquel from N+1, Mario Ropero from Fidentiis, Britta Schmidt from Autonomous, and Carlos Peixoto f6rom BPI ask about the cost of risk in Spain. The cost of risk is at 0.6% on a quarterly cost of risk banking activities ex-Caixa Catalunya. In the fourth quarter it has fallen already from our previous guidance from 2016. Can you update guidance for 2016-2017?

Okay. It's quite similar actually. We're probably going to see a fall in NPLs in Spain and maintaining cost of risk below the 60 bps including real estate lending.

Thank you. Also a question regarding coverage; your coverage is 59% in the banking activity. Do you intend to maintain this level in 2016?

Yes.

Okay. Britta Schmidt from Autonomous Research asks what impact do you expect from the new provisioning rules of the Bank of Spain? How closely aligned is it with IFRS 9?

We don't expect any significant impacts in 2016. Their intention is not necessarily to align to IFRS 9 although they introduce certain changes that do make things somehow similar to other jurisdictions, like for example, eliminating the substandard category and redefining the special watch-list, but those are also similar to [IIS 39].

Okay. Moving on to real estate, Luis Pena from Fidentiis, and Andrea Unzueta from Credit Suisse ask regarding NII, why is the NII of the real estate division positive EUR40 million for two sequential quarters?

The reality is that behind that exposure, we are starting to have much better loan exposure. There are clearly very good loans in a real estate portfolio. And that is having a positive impact on NII performance and the other main impact is the fact that Euribor rates have been going down during the year and that has helped also the reduced funding cost of the [area].

Johan De Mulder from Bernstein says good results in Spain real estate. What time horizon do you have on liquidation of the real estate stock?

Our intention is to have any material exposure by the end of 2018.

Isabel Cameron from Goldman Sachs, Daragh Quinn from KBW, Martha Sanchez from Bank of America Merrill Lynch, Carlos Peixoto from BPI asks about guidance for NPA real estate asset disposals in 2016. Do you expect to see an acceleration in sales? What trends are you seeing in pricing? Could results in this division turn positive at some stage? And in general what are the losses expected in this division for the years to come?

I think fourth quarter numbers clearly reflect what are our intentions going forward. NPLs were down significantly, over EUR500 million. Assets disposals increase significantly from any other quarter. We increase the number of unit sols by 6% to almost 7,500. And in terms of prices, we increase by 13% year on year in the fourth quarter alone. So clearly record numbers.

Those are our intentions. To keep that pace is our intention going forward. And in the fourth quarter, we also saw a significant capital gain coming from these asset disposals. We made a profit of EUR45 million in these disposals, clearly improving the trend that we've seen during the last quarter. So the overall capital gains on these sales for the year has been EUR117 million, roughly a EUR100 million more than what we've got in the previous -- in 2014 clearly giving us a lot of comfort regarding the coverage levels that we have.

Okay. Finishing on Spain with a macro general environment question, Johan De Mulder from Bernstein asks how do you assess the likelihood of Catalunya splitting off? Does BBVA have any contingency plans for such an event? What would be the impact on the Group?

This is hard to speculate. What we are is clearly very happy with what we have today in our activity in Spain and Catalunya is a big part of that and will continue to be. And what we view is that the ongoing process is really a negative for everyone, the uncertainties around what might happen there and that's as much as I can say really.

Okay. We're going to move now to Mexico NII. Britta Schmidt from Autonomous Research and Carlos Peixoto from BPI asks about loan growth. What loan growth do you expect in Mexico in 2016? Do you see any improvement in cards or consumer loans retail lending in general?

Yes, we will -- we expect to see double-digit growth in loans in general and as we saw a rebalancing towards more wholesale portfolios for commercial business in 2015, we might see the complimentary trend in 2016 so that the retail might be growing at a faster rate.

Thank you. On fees, Benjie Creelan-Sandford from Nomura asks what proportion of the fee increase in this quarter would you consider sustainable?

Clearly, the fourth quarter is always a very expansionary quarter in Mexico and it has been so also in 2015 allowing us to improve versus our initial guidance year on year fees went up by 5% versus the initial guidance of only following inflation. Going forward, we will expect to grow at inflation.

On the expenses, Britta Schmidt from Autonomous Research asks why did costs accelerate in Mexico in the fourth quarter seasonal investment plans, what is the cost growth in jaws outlook here?

I think our objective is to have positive jaws in 2016, and we've been subject to certain headwinds this year. Clearly, the first is the depreciation of the peso. 10% of our expenses in Mexico are foreign currency denominated and has affected expenses.

As you know, in Mexico, we continue to develop our transformation plan, which is 70% done already, but that has also affected our expenses in Mexico. And as you also know, we've just finished our new head office. So during 2015, we have the duplication of certain office space that will disappear in 2016. We have, as you know, one of -- a very good efficiency ratio, the best in the system at 43.6%.

Okay. On asset quality, Alfredo Alonso from Kepler Cheuvreux, Francisco Riquel from N+1, Britta Schmidt from Autonomous Research, Martha Sanchez from Bank of America, Merrill Lynch and Carlos Peixoto from BPI say that the cost of risk has fallen to 3%, 3.0% in the fourth quarter. How sustainable is this level for 2016?

Well, we think that the cost of risk will be -- I already mentioned, I think, in my talk that it will be coming back up. We're again seeing around 350 basis points because of the reversal of the trend in changing mix that we saw in '15, as I just said. As retail portfolios grow more, the cost of risk should also be going up in Mexico.

Okay. And specifically do we expect any asset quality issues or concerns regarding the economic development in oil prices in Mexico?

No, not significant impacts. As I just said, that's included in the guidance that I just talked about.

Okay. And closing up overall on guidance, do we expect similar trends in the fourth quarter for 2016?

Well, if I recap a little bit what our view of Mexico is, I already said that we see slower growth than in 2015, so it's 2.2% overall macro growth and that will be still driving very healthy growth rates double-digit in our activity in our net interest income as well; commissions in line with inflation like Jaime just discussed, and our cost will be growing, but it will be growing less than revenue. So we'll be maintaining positive jaws as we say in 2016. Cost of risk around 350 basis points and with all of that we are seeing a high single-digit growth in the bottom line in the net profit.

Okay. Thank you. And moving on to the US, NII, Mario Ropero from Fidentiis, Martha Sanchez from Bank of America Merrill Lynch, Johan De Mulder from Bernstein ask in light of the recent increase in interest rates, could you give us an update on your expectations on NII in 2016, volume growth expected for 2016? Are they cutting back on new production?

How do you explain a flat NII plus fees in the US despite good customer loan growth? Is it increasing pressures on NIM? What is the outlook for NIM margin?

Clearly, volumes loan growth has been going down in the US as the year has progressed and quarter-on-quarter growth it's true has only been 1%. Year-on-year growth is now down to 9%. I think one of the key characteristics of Compass this year has been the very well-defended customer spread that has moved around 3.10% during the whole of 2015. It is true that fees and commission have been affected due -- because of the lower origination especially on the commercial side in the last quarter. We expect NII to grow during 2016 thanks to improvements in the customer spreads and also continue loan expansion.

Moving on to credit quality in the US, Britta Schmidt from Autonomous research, Daragh Quinn from KBW, Rohit Chandra-Rajan from Barclays Capital, Fabio Mostacci from Mirabaud and Stefan Stoev from Redburn ask -- or state there was a small up-tick in provisions in the US. Which part of the loan book does this relate to? Was it the exposure to oil and gas and commodities here now? What is the NPL ratio and what is the coverage?

I think I pretty much answered this in the first question. Yes, there's been an up-tick in cost of risk during the quarter to 37 basis points. The year on year -- the accumulated number is [0.25], which is a little over the 16 basis points that we had in 2014, and clearly within the guidance that we provided at the beginning of the year of a deterioration between 10 basis points and 15 basis points, actually on the lower end of those numbers.

As I said, the reason behind that increase in the quarter has mainly to do with the fact that we've reduced the internal rating of some customers, especially in the energy segment that required additional provisions. Our NPL number has been flat year on year and stands around 0.9%, so clearly very good numbers.

We are focusing a lot on the energy portfolio. 90% of it has already been review by the share national credit plus our internal credit quality reviews that we do periodically, so it's completely up-to-date, but we could expect additional deteriorations in part of the portfolio as 2016 progresses, and that's why we are guiding for an increasing cost of risk of around 20 basis points. The overall NPL number of the energy portfolio in the US is 2.41%.

Okay. I think we just answered the following question, which is what is the outlook for cost of risk in the US in 2016, what is the outlook for 2016 for the oil and gas loans. I think the overall cost of risks that Jamie just mentioned includes our views on the oil and the gas portfolio as well.

Moving on to South America, Mario Ropero from Fidentiis and Vanessa Guy from J.P. Morgan ask about Argentina. In Argentina, did you book any write-down on Argentina due to the big depreciation of the peso? What is your book value invested there, and what are the expectations for Argentina given devaluation, and do we expect any capital impacts from this?

Yes, the book value in the quarter went down. We had a little over EUR900 million of book value in Argentina at the end of the third quarter and went down to EUR723 million at the end of the fourth quarter after devaluation of the peso from the roughly MXN10 that we had at the end of the third quarter to roughly MXN13 at the end of the fourth.

Thank you. Robert Noble from RBC and Martha Sanchez from Bank of America Merrill Lynch ask about asset quality in the region. What is the asset quality and cost of risk outlook in South America for 2016? Which countries are you most concerned about?

I think that essentially we've already answered that question at the beginning. Clearly during 2015, they were two countries that saw more deterioration than others in terms of cost of risk, which were Colombia and Peru. But clearly those are the two that still have very good growth prospects as Carlos has said during the call, so no significant deterioration can be expected apart from the general guidance of between 15 basis points and 20 basis points overall for the continent.

Okay. And Carlos Peixoto from BPI ask why was Venezuela's NII negative in the fourth quarter alone? What should we expect going forward in Venezuela?

What we've done in Venezuela is to try to minimize the -- its contribution to BBVA's consolidated numbers, so the way we've done it is by using a new exchange rate. You know that at the beginning of the year we decided to use the SIMADI, which was roughly around VEF225 per dollar, but that exchange rate did not change since May.

So clearly it became an exchange rate that did not reflect what was happening in the country, so we decided to move to a new exchange rate which is VEF469 and that has forced us to correct the P&L and book value, as you can imagine of Venezuela, in BBVA's numbers. What we can say is that the book value is completely material and the contribution, which is only EUR128 million on BBVA's balance sheet and the overall contribution of Venezuela to -- on the earnings statement is just EUR1 million.

Okay. Going on to Turkey, Johan De Mulder from Bernstein regarding asset quality; can you please comment on the evolution of cost of risk in Turkey, in particular in the light of high proportion of FX-denominated loans?

Yes, well, we are monitoring the situation of course, but we're happy with the way Garanti's management is addressing the concerns that there might be in certain sectors because of macro conditions, and some of the affected by the FX exchange rate as was mentioned in the question. We will probably be seeing NPLs inching up in 2016 because of that, but with a limited impact on the P&L.

Okay. And just finishing up, a couple of questions that came in on the Group level; Johan De Mulder from Bernstein says how do you see the impact of IFRS 9 forward-looking provisioning on capital?

I think it's still too soon to really have a good idea on what the impact is going to be. We still need some technical clarification on how loans will move from stage 1 to stage 2, which is where the big jump takes place. Our expectations is that eventually whatever requirement should be charged against reserves, but that will probably have a phasing period, but is something that we do not know as of yet.

Okay. Alex Koagne from Natixis asks, the management is talking about increasing the ROE, but numbers show that large universal banks struggle to reach a return above 10%. What is your view on the link between diversification, capital generation, and profitability?

Thank you. Yes, we have seen over the last few years definitely that universal banks were not making the returns that they should have been making, and now we should not extrapolate that. However, we are in a business where the asset is quite mobile. It's really loan portfolios that we can direct to the areas where we see the return coming, and that's I think an important consideration. That's why I believe when we think about capital allocation, we think about devoting the capital we have to those segments of the business that do generate a cost -- a return above the cost of capital.

So in that light, as we have seen also in past decades, we will be earning a return above the cost of capital and above that 10% number. Diversification aids in sustaining bad times, we have seen, and I think the global financial crisis is a good example of how diversification helps withstand big blows. The crises are uncorrelated to a large extent, even to underlying drivers like the commodity prices, the oil price that we're seeing these days or the China -- dependence on China exports.

So we have in our footprint some countries that definitely have that exposure, others that don't, so that helps withstand those blows and keep a very stable -- more stable return to our investors. And I think another important consideration, think about the returns of the industry going forward is that it's really what's going on in terms of changes.

The business models are changing. Our customers are moving their relationship to a less physical and much more digital and remote, and we -- as we work hard to do that and also employ more efficient technologies which really change the paradigm, the cloud, the big data, machine learning, all of that will help us be much more efficient as an industry.

Definitely the players like BBVA who are taking this very seriously, we foresee a business model in the medium term in which the cost to serve is really coming down, in which we can serve an exponential number of customers versus what we're doing today. So all of that is the basis for a return that will be increasing.

Thank you Carlos. I think we're out of time. Thank you very much Carlos, thank you very much Jamie, and thanks to you all for attending the call. As of right now, the Investor Relations team remains available throughout the day for any remaining questions that you all may have. Thank you very much all.