Banco Bilbao Vizcaya Argentaria SA (BBVA) 2016 Q4 法說會逐字稿

Good morning, everyone, and welcome to the fourth quarter 2016 result presentation of BBVA. I am Gloria Couceiro, 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 usual, Carlos will begin with a presentation of results, a few words on the successful deployment of our strategy and some highlights by business areas.

We will move straight to the Q&A after that. Let me take the opportunity to remind you that, as it was the case in the last quarter results presentation, we will be conducting a live Q&A. We would appreciate all the participants to try to make the calls from landlines and avoid using the speakerphones so we can hear you as better as possible. Now I will hand over the call to Carlos. Good morning, Carlos.

Good morning, Gloria, and thank you. Good morning, everyone, and welcome to BBVA's fourth quarter and full-year 2016 audio webcast. I can say that we have had a good set of results in the quarter and in the year. Bottom line in the quarter of EUR678 million impacted, as you know, by the provisions we had to make for the mortgage floors claims. Excluding this item, the results in the quarter would have come out at EUR1.1 billion almost, EUR1,082 million.

As you can see, during the year we have maintained a strong upward trend over the quarters. We started off low, you might remember, in the first quarter because of the impact of the oil price and seasonal effects. Then we had extraordinary second quarter with some items like the VISA disposal there and finished off very strongly in the third and this fourth quarter, save again for the impact of the mortgage floor clauses provision.

For the entire year, the bottom line came up to EUR3,475 million; again, good results, despite the fact that it was a tough environment in 2016 again, because of the lower rates and softening growth in some of the geographies where we're present, as well as some unusual provisioning.

Excluding the corporate operations that we also had last year and the impact of the mortgage floors, we grew slightly in the year from EUR3,857 million to EUR3,879 million, which is very good news, because it means that we have been able to absorb a significant impact of the FX depreciation, which was in fact EUR415 million net impact coming from that, net of hedges I mean.

The highlights for the results in the year are the positive performance of the net interest income, which grew by 7% in constant euros versus 2015. Secondly, the effective cost control efforts that we have put in place, we have been commenting during the whole year how important this is as a priority and we're satisfied with the results so far. We have positive operating jaws, efficiency rate over the year has improved by 51 basis points to 51.9%.

Third, the asset quality indicators are also improving; cost of risk year-to-date of 0.84%, 22 bps down from last year, NPL ratio 4.9% coming down by 48 basis points. Finally, we have strong capital generation in 2016, 58 basis points to a solid 10.9%, core equity tier 1 fully-loaded ratio at the end of the year thanks to the strategic focus that we have also put during 2016 on capital optimization, which is also bearing fruit.

The yearly numbers you can see in this page. I already mentioned EUR3,475 million net profit; that represents a growth of 31.5% versus a year ago, in current euros; but that was, of course, affected by the negative impact we had in 2015 of corporate operations, mainly the additional stake we took in Garanti and the associated loss that we took then.

If we consider Garanti on a like-for-like basis and we exclude the FX impacts, results in the Group have grown by 3.6% versus prior year, also taking out that extraordinary effect of the corporate operations in 2015.

As you can see, we have good trends in both revenues, which grow at 7.7% versus a year ago, and in costs as well, which grow at 6.6% resulting in a pre-provision profit of EUR11.9 billion, growing at 8.9%, again with Garanti like-for-like and in constant euros. The impact of the floor mortgage clauses provision has been partially offset by lower impairments and by lower restructuring costs in Spain. And, as I already mentioned, excluding the mortgage floors the bottom line grows significantly; in fact, in constant euros it grows at 15.6% again with Garanti like-for-like.

I would also like to highlight, before we go down into the details of the profit and loss account, the shareholder remuneration policy. As you have seen, we have the intention to implement the shareholder remuneration policy that we already announced in October 2013, which is to move to a 100% cash dividend.

The last scrip dividend would then be paid in April of this year with the intention of paying EUR0.13 per share with the scrip dividend, which would be our last, and then we would be moving to a 100% cash dividend with the intention of maintaining that payout in cash that we announced of 35 to 40% of the results obtained in each financial year.

We also will be moving to two payments per year. Tentatively, those will be in October and April instead of the current four ones. With all of this we align our dividend with our results in a clear, sustainable and predictable way so that the dividends will grow as our earnings grow. We also avoid further dilution with scrips that no longer enjoy the tax benefits that they have had for retail shareholders.

The quarter -- back to results, the fourth quarter itself consolidates the trend that we were seeing in prior quarters. First of all, the net interest income grows at 7.4% in constant terms versus the same quarter of 2015, and we have here better performance in all of the countries, all of the geographies, in fact, the NIM improves in the quarter and all of the geographies without exception.

Secondly, efficiency improves with positive operating jaws. They were flattish in the third quarter, so gross income growth grows at 7.7% while costs at 6.6% and a quarter ago those were 7.0% and 7.2% respectively. So, good opening of the jaws. Asset quality indicators show sound risk profile with quarterly cost of risk decreasing 35 bps versus a year ago, to lower impairments.

Finally, the capital ratios I already mentioned remain strong, 10.9% fully-loaded ratio, 12.18% phased-in, which is a requirement and the terms at which we have the requirement set, and a leverage ratio of 6.49%. This strength in capital ratios is despite quite heavy market-related impacts in the fourth quarter. Now, I already mentioned that prioritizing return on capital is one of our key focus areas and for the coming year we maintain our target of 11% core equity tier 1 ratio.

The fourth quarter numbers in more detail. Profit of 678% (sic - see slide 8 "EUR678 million"), an 18% drop versus a year ago in constant terms, impacted by the mortgage floors. If we net out the provision, then the result would be EUR1,082 million with a growth rate of 15% in current euros, 29.5% in constant euros.

I would highlight from this page the growth rates of gross income. You can see 9.7% in constant terms versus the growth rate of the operating expenses 4.9%, it's very visual here how the jaws are widening in the quarter.

If we look a bit more detail into the revenues, the gross income that has the highest net interest income of the last few quarters of the series, EUR4.479 billion growing at 7.4% versus a year ago, and you can see it's quite a remarkable trend over the year.

Net fees and commissions growing by 2.5%, even though fees in the quarter are down 1.4% due to lower market-related fees in our corporate and investment bank. Those are not very good numbers here, it's really an area of focus, especially in our Spanish business to improve our fees, and we expect to do that in 2017. It's critical, given also the low interest rate, or negative interest rate, environment in the Eurozone.

Net trading income was also strong, EUR413 million, going back to more normalized levels. We had positive one-offs in the second quarter, the VISA disposal, CNCB in the third quarter. In this quarter the net trading income is impacted negatively in fact, due to reclassification between NTI and other income and expenses in Venezuela, related to a change in an accounting criteria of how we value the US dollar portfolio that our Bank in Venezuela owns. So instead of going through the bolivar and then back to euros we go straight and, therefore, we have less net trading income and also less corresponding negative effect on the other income and expenses -- positive effect on other income and expenses, netting that out. The total for that in net trading income in the quarter is EUR99 million.

Then in terms of gross income, it's solidly growing at 9.7% versus a year ago. In the entire year, the growth of our revenues, as I already mentioned, is 7.7%.

Moving on to cost, I already explained in our presentation a quarter ago that I have put costs as a clear management priority for all of our businesses and all of our areas, management areas. We are focused on improving efficiency everywhere, it's not only about cost reduction, but it's also about gaining operating efficiencies in processes in our distribution model, really embracing automation, etc.

The good news is that I am very satisfied with the results. We've already mentioned the evolution of expenses in the year is good, positive operating jaws in the quarter, costs increasing below earnings, efficiency improving to 51.9%, coming down 51 basis points, significantly below the peer group average at 66.2%.

We have some examples here of the ongoing efficiency initiatives. I would highlight in Spain that we have brought forward, as announced, the cost synergies associated with the Catalonia Caixa integration; those have started to materialize already in the fourth quarter and they will be fully materialized in 2017. We not only have been closing branches and reducing headcount, but also optimizing our corporate structure, reducing legal corporate expenses, incorporating also Uno-e and Depositary Bank, etc.

I would also highlight big cost reduction efforts in the US. We have been reducing our staff in our corporate and investment banking business, we have also been optimizing our branches, reducing positions through attrition in the retail network and exiting some markets in the commercial business in the US. Closing down some LPOs, some loan production offices in places out of market, in Seattle, in San Diego and Columbus. Really also as a result of our increased focus on profitable growth, but that has allowed to reduce costs as well.

Then in Mexico, in Mexico of course we have invested heavily in years past in the Ulysses program, (spoken in Spanish) unica, in our branches; now we see a lot of the competitors are following behind maybe what we did three, four, five years ago, but now in Mexico we're reaping the fruit. We are also taking additional measures to reduce cost and increase our efficiency, both in the network also by promoting the use of digital channels, do-it-yourself, which is taking a big part of the load, of the increased transaction load, and other initiatives in the corporate center.

Reducing staff levels there, optimizing cash management movement and many other initiatives, as you can see in the other regions, which I will not comment on right now, but would be happy to take your questions.

With that evolution of revenue and costs, the operating income reached over EUR3 billion in the quarter, grew by 15.5% versus a year ago, supported, as you can see on the right, by solid growth rate in Mexico, 22.8%. Also in Spain 17.2%. Double-digit growth in the US 11.9%. A bit lower in Turkey, 6.2%, we had in Turkey lower net trading incomes and we were impacted by the lira depreciation on expenses, they are denominated in US dollar, and we had a slight drop in South America, a 3.2% drop, also the impact of high inflation in the costs was noticeable in the quarter in this region.

Moving on to the asset quality, very good news in general, positive trends in the global risk metrics throughout the year. Impairments EUR993 million, lower than the prior quarters, you can see it's the lowest in the time series, decreasing 8.1% versus the same quarter last year.

The cost of risk, you can see that comes down in the quarter to 0.8% due to better evolution pretty much everywhere. In Spain, although there has been a reallocation from loan loss provisions in the banking activity to increase provisions in the real estate foreclosed assets in order to better reflect the risk profile of the two portfolios, no material impact of that reallocation at the Group level.

That's what also explains partially the drop in the cost of risk. If you see the cost of risk including the real estate impairments, which is the dark blue line in the chart, the improvement trend is maintained but it's smoother, down to 0.9%.

NPLs decreased by EUR2.4 billion in the year to EUR23.6 billion and the NPL ratio decreases as well to 4.9%. Coverage is down to 70%, affected mainly by that reallocation of provisions to real estate foreclosed assets that I just mentioned and out of the credit NPLs. Overall, as I say, strong key asset quality indicators.

On capital and looking at the evolution of the fully-loaded ratio, we have been able to grow our fully-loaded ratio by 58 basis points since December of last year, reaching that 10.9% at year-end. In the quarter, it has come down by 10 basis points. We had contribution of 19 basis points of net earnings impacted, of course, by the floors; dividends take out 7 basis points and then we have others of 22. That has a lot to do with the evolution of markets, on the one hand, the steepening of the yield curve and the rising rates since September and, on the other hand, the appreciation of the US dollar since September.

Both of these effects, though, are positive for our business and they're positive for our P&L going forward, but they do have a negative impact on the core equity tier 1 fully-loaded ratio because of the higher value of our exposure to US dollar risk-weighted assets and because of the mark to market of the available-for-sale sovereign portfolios.

It's also worth mentioning that this quarter we achieved the regulatory equivalence in Turkey that added 115 basis points. That allowed us to compensate the negative impact of the mortgage clauses, the mortgage floors clauses, which are as a matter of fact it's partly included in the net earnings, as I just mentioned, but also that provision has increased our capital consumption associated with operational risk and that's in the others bucket.

Going forward, I already mentioned that we maintain our 11% target for 2017 and, as always, I would like again to highlight the high quality of our capital. We remain as the bank with the highest risk-weighted asset density, 53%, and the highest fully-loaded leverage ratio, 6.5%, of our European peer group.

In addition to the good results, it's also good news on the transformation strategy, on our progress, on our journey. Quickly, as in prior quarters, we have grown our digital customer base, our digital sales and we are delivering on the customer experience front in this quarter. Digital customer growth base is up to 18.4 million customers, growing 20%, with a 38% penetration on our total customers. Mobile customers grew even more by 38% and are up to 12.4 million customers, 25% penetration.

Digital sales remarkable progress everywhere, every quarter pretty much doubling the numbers we had a year ago; like in Spain 17% versus 8%; Turkey 26%; South America 15%; Mexico 11.9%, we only had 6.2% a year ago; or in the US 19.9% versus 9.3%.

We also like very much the results of our Net Promoter Score surveys that we do every six months in the open market, asking customers and non-customers whether they recommend the Bank. So, we measure the Net Promoter Score and we're happy to say that again we are number one in 7 of our 11 markets.

We want to be, though, number 1 in all of them and we're working hard to do that. This is the improvement and the fact that we reached that level is very related to our digital efforts, I think Spain is a very good example, that's why we're zooming in some metrics of the Spanish NPS survey.

If we look by channel, for example, we are number 1 versus our peer group in the four main channels through which our customers interact and I would like to highlight the mobile app. It's really all about being mobile first and there we've made a great effort in 2016. Not only are we number one with a 63% Net Promoter Score, but we have improved that score by 20 points in the year, so going up from 43% to 63% in just one year.

We have done that by introducing improvements every quarter. We have been talking about working in agile]and having improvements in customer experience, new products, new functionalities to improve that experience every quarter. Let me share a few of these in different geographies.

In Spain, for example, this last quarter we were the first bank to launch a digital onboarding process. Fully digital on the mobile, it only takes less than five minutes to digitally become a BBVA customer fully onboard with a working account that you can immediately fund, thanks to advanced biometrics techniques. It's an easy process, fast, completely do it yourself and it's a good example of those quarterly improvements that I'm talking about. So, this was launched this past November.

Another good example is in Mexico, our digital auto credit. So, in Bancomer you can simulate auto credit from your mobile phone, you can make the application from the mobile phone and this is open both for our Bancomer customers as well as non-customers, non-clients that can do the simulations and actually buy that credit loan from their mobile phone.

Another good example, in Turkey we have implemented a new mobile platform to empower our salesforce. We launched what we call STEP, which really takes our customer relationship platform and makes it 100% mobile. So, our staff can literally take the Bank with them, the workplace, but beyond the workplace the Bank in the tablet or in the mobile phone, so they can serve their customers independently of location, independently of time. They have a complete view of their daily to dos, they can run their schedule without having to come to the branch and really improving efficiency.

We have gone from almost 200 screens in a traditional banking platform that we had at the branch, to basically 15 tabs in the STEP customer profile that are enough to do anything that you might want to do with a customer. Effective customer service, saving time, supporting additional sales where the customer wants to be really.

These are just three examples but, as you can see on this page, we have delivered many more. These are just the ones that we launched in the fourth quarter. These are really the small things, the revolution of the small things for our customers, really focused on helping our customers interact with the Bank in an easy way and helping them make the best financial decisions they can make in their life or in their business. This is really what's behind the Net Promoter Scores, being able to launch such improvements.

So, as you can see, beyond the good financial results, we have great progress in our transformation journey. You might recall that we have defined, more than a year ago, six strategic priorities that, really, I want to make our purpose to bring the age of opportunity, bring it to life. Really, it's supporting people, supporting businesses in their financial decision making, creating opportunities for people and those six priorities have been the focus of our work this year in 2016.

Quickly going one-by-one, new standard in customer experience. I already just mentioned how we deliver new products, new functionalities every quarter, improving customer experience and how we measure that with NPS.

Digital sales, we're growing our digital and our mobile customer base and our digital sales rates as well.

New business models, we own Simple, as you know, Simple is growing very well, acquiring customers now more than 30,000 per month with very low cost of acquisition, with rising NPS, almost -- over -- it's 54% their NPS. Atom is well above plan, the mobile-only bank launched this past year in 2016 in the UK, where we have almost a 30% stake.

We acquired Holvi in the year. We acquired OpenPay recently in Mexico, a leading online in-app payments platform. We're developing and growing internal ventures of different types, our open platform initiative, etc. So as a result of those new business models we will have strong new revenue streams.

Four is capital allocation. I have insisted quite a lot in our quarterly calls, so you know how important this is, to ensure that we assign capital where there is return and this has helped generate those 58 basis points and we are on track to achieve our goal of maintaining that 11% in 2017.

Unrivaled efficiency, I have already mentioned the ongoing cost control efforts throughout the footprint and the culture that we have of monitoring costs and reinventing how we do things; also, leveraging technology, automation, robotics to do that, transforming our distribution model, our operations with our new operating system and, as a result, we have seen those positive jaws in 2016.

Finally, our talent pool, our people, our first-class workforce. We are creating a purpose-driven agile organization, we're working in a different way, project based, much more dynamic, much more collaborative, people from different departments working together much more results oriented. Also happy with the progress there.

Moving onto the business areas. In Spain, banking activity, net profit in the quarter were negative EUR24 million impacted by the mortgage floor clauses provisions. Excluding that effect, we have strong growth of 19.9%. Also in the year 21.2% due to the lower impairments and restructuring costs.

The trends in the P&L continue, we have pressure on revenue, pressure on car revenue, we have a decline in net interest income of 2.9% versus a year ago. This is in line with the guidance that we shared in October and it has to do with the negative rates with the lower activity and the decreasing spreads due to the Euribor and also the lower contribution of our securities portfolio.

Fees are down by 6.5%, affected by, as I already mentioned, by the corporate and investment bank. Market-related fees, our commissions here do not include, however, the ones associated with insurance that our competitors do include in this line and we actually report them in the other income and expenses. If we were to include them, as our competitors do, the decrease would be of 2.9%. Still not good numbers and, as I already said, we will be working on that.

Overall, it's a challenging top line in Spain. Good on the cost control efforts, expenses decreasing quarter-by-quarter by 2.4% and the growth in the year of 4.4% has to do entirely with Catalonia Caixa integration. Otherwise they would be actually coming slightly down.

Impairments are lower, partly because of the reallocation of provisions that I mentioned earlier, which show in higher provisions, but overall the trend in the impairments is positive. I already mentioned the mortgage floor affecting the bottom line, which for the entire year came out at EUR912 million.

Activity. Lending continues to drop 2.9%, driven mainly by the public sector and residential mortgages. Consumer portfolio, however, you can see is growing nicely, although it has a low weight in the total portfolio, it's growing at 15.5%. Customer funds, good performance, good growth of demand deposits with a good change in mix. Also, growth in mutual funds and pension funds, which is a change from other quarters.

Key ratios in Spain, good focus on price but the environment is difficult so our spreads have actually come down to 1.8%, 3 basis points down, mainly and entirely due to the Euribor repricing that more than offset the good spread management that we have had. Risk indicators are good. NPL continues to improve, 5.8% reduction of NPLs of more than EUR2 billion in the year to 11.8%.

Cost of risk improves significantly, in fact, is zero in the quarter due to the reallocation of the loan loss provisions that I mentioned; but, as I already mentioned also, it's good underlying trend as well in impairments, even excluding that reallocation of provisions. The coverage decreases mainly as a consequence of this reallocation of provisions already mentioned, it decreases to 53%.

Then in terms of costs, I mentioned very good news in the quarter, down 2.4%, changing the prior trend. We started to materialize the synergies from Catalonia Caixa after the integration in September and we will fully achieve those in 2017. Remember those were EUR200 million and costs will continue to be an area of focus in Spain in 2017 as everywhere else.

Real estate activity. We have increased impairments due to the other side of the reallocation that I mentioned before, mainly in the land portfolio, which is the portfolio we have provisioned further. These are very liquid assets with very limited market references to estimate fair value. Now the coverage in the land portfolio has increased from 67% to 74% and the total coverage for real estate assets increased from 59% to 63%.

Due to the increased provisioning levels, the losses in real estate activity have been higher, EUR595 million. Without the reallocation, they would have been EUR459 million versus the EUR496 million that we lost in 2015. We have decreased our exposure, net exposure went down to EUR10.3 billion, it was down by 16.8% in the year and we continue to see better dynamics in the market with demand and price both behaving well and increasing.

Here we're working on reshaping our sales strategy, trying to be more proactive in reducing the exposure to go faster, reduce it as soon as possible using all available channels, providing also that we achieve the right price so as to maintain economic value of the assets. We will try to go faster.

Overall, in Spain, net attributable profit was EUR304 million loss in the quarter, affected by the mortgage floor clause provision and also by the fact that this quarter we have the contribution to the Deposit Guarantee Fund, which we don't have in other quarters. In the year, the overall in Spain profit was EUR316 million including the mortgage floor provision. Excluding that, it would have been EUR720 million, 22.2% growth.

Moving on to the US, quarterly results EUR157 million, up 29.3%. Upward quarter-on-quarter trend, sound recovery from the very weak first quarter because of the oil and gas. Strong performance of recurring income in the quarter and in the year. In terms of NII, mainly due to asset repricing and focus on profitable segments. We had some raises in interest rates and commissions supported by the CIB business.

Costs also very well down 0.6% in the quarter. Positive evolution of impairments. Best quarter of the year reflecting better performance of the oil and gas portfolio on the back of higher oil prices and overall net profit EUR459 million, down 11.5%, basically due to higher provisioning mainly in the first quarter.

Activity. Slightly decreasing activity, 1.7% down in loans, mainly mortgages. Also, we're searching for profitability and not growth, that's our key strategy, we really want to invest in maximizing the return of our capital. Customer funds grew by 1.7%.

Key ratios. Spreads consistently going up quarter-by-quarter over the year from 3.1% to 3.3%; here we're being successful in repricing and taking advantage of the rising interest rates. Good outlook in the year, as our balance sheet has a very positive sensitivity, as you know, to interest rates going up.

Risk indicators very good this quarter, risk profile improving. NPL ratio down to 1.5%, lower NPL entries. We had some sales of portfolio, we had some recoveries in the quarter as well, mainly in oil and gas and basic materials and that leads to higher coverage level, 94%. As you can see cost of risk very low, 0.1% in the quarter and overall, in the year, 0.4%, better than we expected.

In terms of costs and efficiency, still a way to go, it's not where we like it but the cost efforts during the quarter made the expenses behave well and they came down by 0.6% versus a year ago, and clearly efficiency with be a management priority in the US. There's room here to improve from the levels where we're at.

In Turkey, an outstanding quarter and an outstanding year of our Turkish franchise of Garanti. Despite the very complex environment we had a net profit of EUR144 million attributable profit to BBVA in the quarter, growing 26.4%. Improving also quarter-by-quarter 4.2% growth versus the third quarter.

Good evolution of NII, 15.5% in the quarter, 10.6% in the year. We actually had a higher growth, but we had a change in the way we account for the swap costs. Before, we used to account for them in the net trading income and now in NII, so on a comparable basis the NII growth would be 28% in the quarter and 21% in the entire year.

Commissions are down, they are down 12.6%, very much impacted by commissions that we have to pay in US dollars this quarter. Expenses growing in line with inflation, 7.8% since a year ago -- in the entire year and maintaining positive jaws, but, we were impacted in the quarter by the depreciation of the lira on some dollar-denominated costs. Good evolution of impairments and excellent bottom line as I mentioned.

Activity, solid growth, 17.2% growth in loans. Depreciation also has an impact on this but the underlying growth in lira loans is also very strong and, as you can see, in deposits as well, 15.1%.

Key ratios. Customer spread 13 bps up in the quarter, excellent price management offsetting the increase in the cost of deposits. Solid risk indicators, sound asset quality, NPL 2.7%, cost of risk coming down to 0.3%. Here we have had a reallocation of provisions from retail to unfunded wholesale commitments, which are not included in the cost of risk that you see. The year-to-date cost of risk, including the unfunded, would be around 1%, so even better than expected.

Coverage remains stable at 124%. As for efficiency, we finished the year with 40.8%, so it's a good cost evolution trend with a growth rate of 7.8% very much in line with inflation of costs, despite the higher growth and wide operating jaws and that's why we were able to reduce our efficiency from 45.9% to 40.8%. Clearly better than it appears as well in Turkey.

Moving on to Mexico. An excellent quarter again and an excellent year in Mexico. EUR556 net profit, growing 9.9%. NII growing 11%, other income and expenses impacted by a positive one-off of EUR93 million in the insurance business because of some regulatory changes on technical reserves, but excluding this positive one-off, the gross income would grow double-digits as well, 10.6% in the quarter.

Costs are under control, I already mentioned widening jaws, 5.4% growth of expenses in the quarter. In Mexico, as we have mentioned in the past, the main headwind is really the FX. The peso has depreciated very significantly in the year, 17%. Also since the Trump election in the US we have a negative FX impact in current euros, but I remind you that we have good coverage levels in the peso. Our 2017 P&L is covered 50%.

Activity. Activity grew at high levels, double digits in line with our expectations, despite some slowdown in the macro. 13.3% growth in loans, 8.4% in customer funds, mainly in demand deposits, so maintaining a good mix.

Key ratios. Spreads, good evolution plus 28 bps to 10.94%, quite impressive. The rate hikes are starting to translate to higher yields. Stable risk indicators, NPLs 2.3%, year-to-date cost of risk better than expected, 3.4%; good coverage, 127%. Gaining efficiency, even though it's the best in the Group, 35% versus 56% of the Mexican banking system excluding Bancomer. Wide open jaws in 2016, remember they were flat a year ago.

No doubt Bancomer is the leader in Mexico, best profitability, ROE, ROA, NIMs, outstanding efficiency, improving even gaining distance to the peers and we are confident that Bancomer will continue to deliver solid growth going forward, despite the environment.

Finally, South America, EUR188 million net profit in the quarter, down 3.6%, impacted by high operating expenses due to the exposure to inflationary economies. EUR771 million net profit in the year, which is up 1.1% in constant terms. Good evolution of the core revenues. NII growing a double-digit, supported mainly by Argentina, Venezuela and Peru. Fees up 3.5%.

I already mentioned the change in accounting criteria in Venezuela, which affects net trading income and other income and expenses in opposite ways. Cost growth was impacted by what I mentioned, the inflation. And in terms of activity, you can see that growth is decelerating, but still strong, 7% in loans, 14% in customer funds.

Spreads evolved nicely in the year, up 23 bps to 6.50%. We had recovering Argentina and lower costs of deposits in Colombia and to a lesser extent in Peru. Risk indicators, with a slight drop -- or deterioration, sorry, in the NPLs to 2.9%. Coverage 103%, due to the macro environment. And year-to-date cost of risk has been better than the guidance we provided, 1.1% in the year, positively impacted by the one-offs in Chile, Colombia and Peru.

And finally, efficiency. Good efficiency levels, affected by the inflation, but 46.7%, also impacted by dollar-denominated expenses, as a consequence of the depreciation of the local currencies.

And just finalizing -- and sorry, I've taken a bit more time than I wanted -- it's a (technical difficulty) a good year -- a good 2016, in financial results, despite the challenging environment. And as I say, significant progress on deploying the strategy. Let me give a bit of color on how we see 2017. We expect resilient results, despite macro uncertainties that we certainly have around the world.

In Spain, the main drivers of our P&L will be the reduction of provisioning and the cost control efforts. Again, we will be achieving fully the synergies coming from Catalunya Caixa, and on top of that we have additional measures -- efficiency measures we're working on.

In the US, NII growth thanks to our positive interest rate sensitivity and the likelihood of rising rates. Very important, our focus on profitable growth, very important as well to improve efficiency. You know we have a new CEO in the US, Onur Genc. He is very clear on the priorities there.

Mexico and Turkey, despite challenges, clearly, these are franchises that will deliver solid growth in the local currency. We have significant hedges in place. In Mexico, I already mentioned, 50% of the expected results, in Turkey 70%. Regarding capital, the 10% depreciation of each of those currencies will impact our core equity tier one fully-loaded ratio by 2 bps each -- negative, of course.

South America. We will -- we hope to see macro recovering in our footprint, and that should be supportive of loan growth. And overall, our diversification remains, we believe, a source of strength, competitive advantage in this uncertain world.

We will maintain a solid balance sheet, 11% fully-loaded target for the capital ratio. Strong risk indicators, once again.

And then we are going to be continuing to progress on our transformation, stepping up customer experience efforts through quarterly improvements, quarterly new functionalities. Digital sales also to non-customers, leveraging data to support our customers in their lives, in their business, in their decision-making. Launching and growing disruptive models, and adopting a Lean operating model. Overall, these levers will help us improve along the six priorities, also in 2017.

And no more from me. Thank you very much. I give the floor back to Gloria. Gloria.

Thank you, Carlos. We are now ready to move into the live Q&A session. For the sake of time, I would like to ask all of you to limit yourself to one question per caller, so that we can attend as many participants as possible. So, first question, please.

(Operator Instructions). The first question comes from Jose Abad from Goldman Sachs. Please go ahead.

Hello. Good morning. Thank you very much. Congratulations on your numbers. Only one question then, which has to do -- obviously, in light of the potential changes actually in the trade and migration policies with the new US government, how is the Bank thinking of the potential impact of these changes on the -- on two of the key areas that you operate? One, being Mexico, where we've seen already an increase of around 10 basis points in Q4. We've seen also some slowdown in loan growth in competitors particularly Santander Mexico and Banorte?

And the other region being the US given that actually you have a relatively high market in the remittances business so therefore any impact on immigrants here could impact your business there. So, I would appreciate any guidance that you could give us in terms of actually loan growth, cost of risk and revenues in these two geographies. Thank you very much.

Okay, thank you, Jose. Thank you for the congratulations as well. No doubt that the situation in the US associated with the election and the messages coming from the new administration have already had an impact on Mexico, through the depreciation of the peso, as I already mentioned, mostly. And we have already indicated in past meetings that the economy was decelerating. We just saw the numbers of the quarter yesterday, 2.2% growth. 2% for the year 2016.

Going forward, we are seeing lower growth in Mexico, around 1%, but then we expect the economy, which is young, vibrant to continue to grow afterwards. It is uncertain what the policies will do to Mexico. Of course, they're talking about NAFTA maybe being renegotiated. They're talking maybe about tariffs at the border. They're talking about things that will have an impact on trade, potentially, or they could have an impact on foreign direct investment.

Given all of that, which are things that I think the market is factoring in, it is also true that the US and Mexico are very linked economies and they have a trade among them of more than $500 billion, and such linkage will not be stopped, going forward, no matter what -- or we believe. So that, to the extent that prospects for the US economy are also more positive, given the stimulus that the new administration seems keen to introduce around the fiscal policy of various types, it is true that if the US economy goes well, we believe Mexico will be doing well, as well. They're just so linked.

In terms of our prospects and our guidance for the year, again, loan growth will be lower, but decelerating to high single digits, we believe, with NII growing in line with that. Fees and commissions around mid-single digits. We will continue to improve our jaws, so expenses will grow less than revenue in 2017 for Bancomer. We will -- we're looking at asset quality that will be relatively stable -- around the 350 basis points. And all of that would give a bottom line which is high single digit growth. And then the FX -- as you know, we have coverage hedge of around 50% of the P&L for 2017. So those will be the numbers for Mexico.

The US would be the other side of the coin. Things are looking in the US more positive, with the rising rates and with pickup in volumes. So for us that would mean slight loan growth. We would continue to focus on profitability over capital. So focusing on the more profitable segments. We would be changing our mix more towards retail, consumer loans and secured loans. And with all of that, NII would be growing around high single digit.

We, as you know, have very high sensitivity to rising interest rates and the cost of risk would be around 50 basis points, so a slight uptick. But explained by the changing mix, primarily.

Thank you, Jose. Next question please.

The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.

Hi. Can I just clarify a question on revenues in Spain? In -- can you just talk about why the fees were so weak in Q4 and explain why?

And also, the guidance for NII in 2017 and medium term, given the shape of the curve?

And the other, just one clarification on what you just said around -- can you repeat the guidance for Mexico provisions, please? I didn't understand it. Thank you.

Jaime, do you want to answer the first one?

Sure. On -- first of all, on fees, it's true that quarter on quarter fees went down by 3.2%. the main reason being the capital markets business. Quarter on quarter they're down by EUR18 million. That in itself explains fully the reduction because the rest of the fees and commissions have behaved well. Mutual funds and pension plans fees have gone up by almost 6% during the quarter.

On the NII line, we are expecting similar behavior as we've seen in this quarter. We're expecting a flat NII, going forward, for 2017. We're expecting a similar trend in volumes, still reduction in public sector portfolio and a slight reduction also in mortgages, but strong increases, both in consumer and in the commercial side. We are guiding for flat spreads during 2017.

The ALCO portfolio will continue to decrease its contribution, as you've seen in the quarter. The size of the portfolio has decreased significantly in the year, around 24%, but NII will be impacted positively by both a reduction in wholesale costs, funding cost, as well as the impact of the TLTRO.

And on Mexico, sorry that I maybe explained it wrong, but it's very simple. Cost of risk we expect to be 3.5%.

Thank you, Alvaro. Next question please.

The next question comes from Francisco Riquel from Alantra Equities. Please go ahead.

Yes, hello. Thank you for taking my question. I wanted to ask about the guidance in terms of capital. I understand the volatile nature of the AFS portfolio and the coverances, but if we leave that aside, if you can please clarify a bit more on the guidance in terms of the organic capital generation that -- do you expect any regulatory headwinds they impact that may come, IFRS 9, etc.? And also, if you are leaving yourself some room for M&A opportunities so that you maintain the flat capital ratio. Thank you.

Thank you. Our guidance on capital is very simple. It's the same one we have been giving for more than a year, which is to maintain an 11% core equity tier one, which was our target for 2017 and we have been hovering around those levels for the last two or three quarters.

We have volatility. You've seen that over the quarters, given how market moves and affects our AFS and our FX. We do have a hedging policy that covers most of the excess over the natural protection, so the impact of FX it's reduced. I already mentioned in the call that it's a 2-basis point sensitivity to 10% depreciation of the lira, and similarly with the peso.

And beyond that, we do have regulatory developments that are under way, IFRS 9 and Basel IV in particular. Basel IV was delayed. The meeting that was the head of supervision and governor meeting that was set for January, as you all know. So it's uncertain when that will be clarified. You know that BBVA has a strong position versus other banks in most of the things that are being discussed.

And regarding IFRS 9, it's too early to know what impact would be on capital. As you know, IFRS 9 would not be, over the cycle, having a meaningful impact, although it would be a way to recognize losses faster when the cycle goes down. And then free up provisions faster when the cycle goes up. But overall, it shouldn't change things. And then it's not clear either how that will impact capital, if there is need for more or less provisioning associated with that. We are also well-prepared in the sense that we are well-provisioned versus the incurred losses right now.

I don't know if I'm missing anything. Jaime, maybe you want to add?

No, I think that if you take the yearly perspective we've increased our core tier 1 ratio by [458] basis points, as you said in the call, in 2016. Out of that, almost 90 basis points come from net earnings. We have paid 32 basis points in dividends.

And the other bucket, which as you said, changes every quarter, on a yearly basis, it's only a positive of 1 basis point. So with some volatility, as you said, if you take a one-year perspective, I think what it clearly shows is the focus that we have on capital, on profitability and the recurring nature of our growth rate.

I think that would be the most important thing to highlight. And we have mentioned this repeatedly as well. It's -- return on capital is one of the key priorities, one of the key areas of focus in the way we manage the Bank in the whole cycle, from planning and budgeting to really then executing, including the admissions of operations that should have prices that are reflective of the right returns on capital.

And by doing that -- by focusing in that way, we have been able also to be more conservative in our expansion of risk-weighted assets, and we will continue to manage in that way. We are not planning excesses of capital to then be used to M&A. So we are not doing that. We are not planning that. That's not in the cards at all.

Thank you, Paco. Next question, please.

The next question comes from Carlos Cobo from Societe Generale. Please go ahead.

Hello. Thank you very much for the presentation. Sticking to only one question, then I will ask on mortgage floors. You've disclosed some worst-case scenario of around EUR1.2 billion total impact of the mortgage floor rate activity, but you are providing for around half of that, pre-tax. How confident are you that we won't have a new top-up of that reserve? And could you elaborate a little bit on the risks that you are covering? Are you providing as well for the mortgage loans that have matured already? Or this is not covered? Thank you very much.

Thank you, Carlos, for your question. What -- as we always do, we think we're taking a very conservative approach to accounting for this risk. As always, also, we have an independent opinion from a third party that has analyzed the experience in many other instances, in which clients have asked for similar things with the bank, and it's based on that experience that the independent auditor has suggested.

As to provision, EUR577 million, we feel very confident and comfortable that that is the right provision to account as of the end of the year, and we will not be expecting any further adjustments. The details of the calculation are very complex, as they are -- a lot of assumptions have been made, and I don't think it's worth it to get too much into detail.

Thank you, Carlos. Next question please.

The next question comes from Andrea Unzueta from Credit Suisse. Please go ahead.

Hi. Good morning. I wanted to go back to Mexico. I understand the visibility here is limited, for you as for anybody, but if you could comment a bit on the worst case or more negative scenarios that you, I'm sure, are contemplating as a possibility, and the impact that that would have both on volumes and provisions.

And really quickly, in the US, if you could comment on your expectations for cost of risk going forward, given that the [credit] was so low.

Thank you. Thank you for the question. It's hard to comment on the worst-case scenarios, because then one sends maybe the wrong signal. I would reiterate what I said. There are uncertainties, but there is also bright lights ahead, given the size of the economy, the youth of the economy and how vibrant it is and how competitive it is. We believe that there are also automatic correctors -- including the currency that has depreciated so much that right now Mexico is even more competitive to export to the US than it was just a couple of months ago. And that dynamic is hard to stop, so that acts really as quite as a protection, in a sense, for the activity there.

Cost of risk -- for us, it's much more associated with the revolving and given the domestic -- the strength of the domestic economy, one could consider that that could go higher, yes. But on the wholesale front, though, things are, we believe, more stable in the sense that the Mexican book, it's limited in its exposure to the foreign currency. It's, what, 15% or less in our case. And the companies that take such loans have natural protection. And have behaved very well. So we don't see much risk there.

So overall, as I said, we expect Mexico to slow down to 1% growth -- around 1% growth in 2017 -- the economy. That would have an impact on our loan growth, decelerating to high single digit. But we do see the costs of risk will continue to be around 3.5%.

Yes, I think, Carlos, that the biggest buffer that we have in Mexico against any potential change in the macro expectation is the very significant customer spread that we enjoyed in the franchise. We have our customer spread of 11% and that offers a huge buffer to any potential asset quality deterioration that we currently are not expecting.

There was another question I think on the US cost of risk. 50 basis points.

Thank you, Andrea. Next question please.

The next question comes from Stefan Nedialkov from Citigroup. Please go ahead.

Hi guys. Good morning. If I may ask two half-questions for a total of one question -- the first half-question I'd say, what's the hedging benefit that you saw in 4Q in millions of euros?

And my second question, just looking at the Q-on-Q loan growth in Mexico, in your returns, I must say, corporate loan growth was very strong. But could you give us some color? Was it mostly multinationals or through the domestic corporates? And how does that corporate loan growth break down into FX lending versus SO lending? Was FX lending growing a lot more or a lot less? And any additional color would be greatly appreciated. Thank you.

Okay, the hedging gains from the depreciation of the currencies, as you know, are accounted at the corporate center. It is true that we had a very good quarter in terms of net trading income in -- at the corporate center, and part of it had to do with the trading gains.

We do not disclose the actual number, okay, but just to give you some sense, in this line, we've also included [EUR70 million] coming from the sale of 0.22% of CNCB, as opposed to the EUR75 million that we made in the third quarter. So that gives you, I think, a good idea on more or less the size of the FX gains that we've accounted in the fourth quarter.

Regarding the volume growth in the quarter, we've seen a very strong quarter-on-quarter growth in Mexico. It has reached around 4% and it's mainly driven by two factors. A very strong performance of the credit card business. It has grown in the quarter alone by 4%, and also on the commercial segment that has grown around 5%. Those have been the most significant drivers of volume growth in the quarter. The year-on-year rate, as you know, is almost 13%.

Thank you, Stefan. Next question please.

The next question comes from Rohith Chandra-Rajan from Barclays. Please go ahead.

Hi. Good morning. I'm going to stick with Mexico and Turkey, if that's okay. Just back on the hedging, actually, thank you for the update in terms of how much of the 2017 P&L is hedged for both. And for Mexico it sounds like the hedging has increased from -- I think it was previously 40%, now it's 50%. It would be really helpful if you could tell us -- or give us some indication of the FX levels which those hedges have been taken out, to help us get some understanding of how that impacts the 2017 P&L.

And for Turkey, are you able to give us some similar earnings outlook expectations in the same way that you gave us for Mexico, please?

Jaime, do you want to comment on the FX levels?

We do not disclose. We've never had, and I don't think we will, the hedging levels under which we hedge our exposure. As you rightly pointed out, our P&L coverage right now stands at 50% for Mexico. In the case of Turkey, it's a little bit higher. It's around 64%. And as Carlos said during the call -- the presentation, sorry -- the impact on core capital is -- remains at more or less the same levels as at the end of September, around 70% in both those sections. A little bit higher in the case of Turkey -- something around 84%, 85%, and around the 70% mark in the case of Mexico.

And regarding the outlook for Turkey, I would defer mostly to what our CEO there, Fuat Erbil, mentioned yesterday in their announcement, which is that -- certainly, we do have an environment, which is more uncertain, given things that are going on in the country, both domestically and in the surrounding region. And that has had an impact, of course, in the FX depreciation that Jaime was commenting on.

But regarding loan growth, we continue to see around double-digit growth, decelerating from the very strong 17% in 2016, but still around high single digits or double digit growth in loans, with NIMs flat.

And in terms of cost of risk, with a risk of deterioration, but we're seeing around 100 basis points for 2017, versus around 90 bps, or 87 bps in 2016. But as I say, given the environment, there might be a risk of additional deterioration in that number, but that's what we're planning for.

Thank you, Rohith. Next question please.

The next question comes from Daragh Quinn from KBW. Please go ahead.

Hi, good morning. Thanks for taking my question. The question on the outlook for Spanish loan growth, you highlighted you expected loan growth to be flat in 2017, with a recovery in corporate or commercial lending. Just curious how, given the further decline in loan growth we've seen through the year in your numbers, and at a sector level, the ongoing decline in new business lending, particularly in corporate loans, and just if you could provide some color around your outlook for loan growth.

And just a very comment on provisions in the Spanish real estate division, when do you expect that to go to zero? Thanks.

Okay, thanks. Thanks for the question. I think we commented already on the Spanish loan growth. And we think we're going to see a 2017 which is going to be very similar to what we have seen in 2016. So flat volumes, so they're there, but just flat, performing loans overall. And similar trends by segment. Jaime commented that the leveraging continues in mortgages despite the high growth in new production. But still not reaching the levels of the amortizing book. And deleveraging as well, in the public sector, and that will be compensated with growth in the rest of the portfolios in consumer and in commercial.

Regarding the real estate, the -- I mentioned in the call that here it's really a trade-off in a sense, on how fast we want to run it off. Right now, the business as usual would be a run-off of the real estate portfolio, excluding our land holdings. That would happen in a period of around three years' time. And that run-off would be done with positive results in the sale of assets that we have seen in the last couple of years already. We've been making in excess of EUR100 million profit in the sales of the portfolio on a running basis.

Now, this could be faster than those three years, if we increase wholesale sales. A good example is this last fourth quarter. You've seen that apart from the reallocation of provisions to the real estate portfolio to the land that I mentioned, we also have in the fourth quarter numbers, some one-off charges that are associated with wholesale transactions that in fact are still in the making.

But one of them, for example, is in the news today, Testa -- Testa Residencial. We are contributing quite a significant portfolio of holdings and there's a slight loss there that's already recorded in the fourth quarter. And we have others that have similarly been booked in the fourth quarter, but have not yet been executed.

If we accelerate that there could be a faster period in which we reach zero, as you were questioning, and we think that by doing that, in fact we could minimize the total loss. But that would -- might imply that we have higher losses in 2017 than with a more gradual approach.

Thank you, Daragh. Next question please.

The next question comes from Sofie Peterzens from JP Morgan. Please go ahead.

Yes, hi. Here is Sofie from JP Morgan. A quick question. Could you remind us what the 100 basis points increase in rates across all the regions, what impact it has on BBVA? And also give specifically for each country what it means? Thank you.

Okay. 100 basis points increase will have a positive impact of around -- a little below 10% in the euro balance sheet. This is significantly down from the numbers that we shared with the markets at the end of the third quarter. We are changing certain assumptions on the evolution -- on the stickiness on checking account and time deposits, taking into account the huge movements that we're seeing between both lines.

In the case of the US, sensitivity is down to 6%, okay, for every 100 basis points increase NII will go up by 6%. After the increase in rates that we've experienced the last few quarters, we are closing a little bit this sensitivity. And the situation in Mexico and Latin America remains more or less the same. For every 100 basis points increase, we a positive sensitivity in Mexico of around 2% and along those similar lines in South America.

The only country, the only business, as always, where we have negative sensitivity is in Turkey. And for every 100 basis points increase our NII will go down by between 5% and 5.5%.

Thank you, Sofie. Next question please.

The next question comes from Mario Ropero from Fidentiis. Please go ahead.

Hello. Good morning. My question is on the net interest income of Spain. Did it include any income coming from the TLTRO cost savings? If not, when are you expecting to include these? And what should be the income from that? Thank you.

Mario, we have not included any revenue coming from the TLTRO. We are expecting to start accruing during 2017 and probably in the first quarter. But no numbers whatsoever in 2016 figures.

Thank you, Mario. Next question please.

The next question comes from Mario Lodos from Banco Sabadell. Please go ahead.

Hi. Good morning. Thank you for taking my questions. I'm sorry to come again from -- to the NII on Spain, and yes, this consequence question on my colleague Mario. It's -- I don't understand so much the performance of the NII in the fourth quarter, taking into account that the customer spread fell, quarter on quarter, but the net interest income grew in the quarter. How is that possible, taking into account that the ALCO portfolio has been reduced by more than 20% of the year?

And the other question, if I may, is about the net interest income in US. Again, just quite a difference between the net interest margin increase quarter on- uarter, against the margin, because some of the margin increased. Can you just explain a little bit more how come the net interest margin is increasing by nearly 15 basis points, with almost no changes in the balance sheet compositions? Thank you.

Thank you, Mario, for your questions. Yes, you're right, in the case of Spain, there's one missing piece and the missing piece is the reduction in wholesale funding cost that we've been experiencing. This was also the case in the third quarter and remains the case in the fourth quarter that had the very positive delta. And then, always in the fourth quarter, we tend to have an increase in NPL recoveries and that always affects positively the NII line.

In the case of the US, you're also right with the question. Customer spreads increase by five basis points in the quarter alone, 20 basis points year-on-year. It is true that NIM is positive and remains maintaining the positive trend. In the case of the US, the ALCO portfolio has grown by around EUR1.5 billion, more or less, during the years, so we have a slight increased contribution from the ALCO portfolio. But we've had a one-off impact as of the fourth quarter, and we've had a reclassification of EUR18 million of other income of -- to the NII line, and these are interest rates received from our reserves in the Fed.

Thank you, Mario. Next question please.

The next question comes from Carlo Di Grandi from HSBC. Please go ahead.

Yes, good morning. I would like to go to slide 25, where you have the real estate activity. I understand the way the impairment reallocation has been happening, but the question is more, can you give us an idea about the dynamics of the net attributable loss to the real estate activity?

It looks like the more you reduce foreclose on the exposure, the more losses you have. Probably in reality this is not the case, and maybe, given the fact that you have reallocated provision, the trend should reverse. How do I square the circle here? Can you give us an idea to understand what is going to happen over the next few years, as long as you continue to reduce net exposure? Thank you.

Well, I think I commented earlier, so let me try to do it again. We have -- in a sense we have a running activity of selling property, more on a granular basis that is generating actually profits, as we sell it. And that would take about three years to run off.

Now, if we accelerate sales by selling the more liquid assets, or we do it on a wholesale basis, even -- like we have done or are doing -- we have done in 2016 with [Metro Afesa], and we're doing now with Testa Residencial. Those are two good examples. Those are operations that do have some loss when we do them. It's around EUR27 million, I think, in the Testa Residencial case --

Yes.

-- for several hundred million euro of portfolio value. If we do more of those, we would be cleaning up the book in the sense getting rid of an exposure that is not a core business. It's not something we want, but something we inherited as we foreclosed. We would be getting rid of that portfolio faster. So that is really the main dynamic and that is the main trade-off -- speed versus recording the loss, or taking a longer time and doing it in a more granular basis.

You have to understand also that there's assets in that portfolio that are not so liquid. They don't have a clear market to know what the market price is. And that happens more as you tend to look at assets that are less developed, assets that would be sold through wholesale counterparties, like the examples I'm giving.

Thank you, Carlo. Next question please.

The next question comes from Adrian Cighi from RBC. Please go ahead.

Hi there. This is Adrian Cighi. Thank you. I have a follow-up question please. I might have missed this, but can you provide your view on the outlook for the cost of risk in Spain? Thank you.

Yes. I don't think you missed it. It's going to be -- we believe less than 40 basis points, excluding the real estate, which I just commented on. So it's a slight uptick from the 32 bps we had in 2016, which, of course, were affected by the reallocation of provisions, the 2016 numbers. So quite stable, 40 basis points.

Thank you, Adrian. Next question please.

The next question comes from Ignacio Cerezo from UBS. Please go ahead.

Yes, good morning. I have a question on Mexico. If I look at the loan spread of the country, it has been coming down quite steadily as rates have been rising, so the customer spread is up, but the lending is pretty much really down significantly. If you could give us some color in terms of how much of that decline is attributed to competition? Thank you.

Okay, I don't know if we have the same numbers, but what we've discussed in previous calls is that although we do have that positive sensitivity, not that much, 2%, as I mentioned before, to increase in rates, it tends to be negative at the beginning, okay, and we need at least four months for that positive sensitivity to kick in.

As rates have been continuously going up during the year, it has taken us a little bit longer to benefit from that positive increase in rates, and we started to see that in a more significant fashion in the third and in the fourth quarter, where loan deals increase 13 basis points, and 35 basis points, more or less, respectively. So we've seen a significant increase in loan yields in the last two quarters.

What remains impressive is that even if rates have increased by over 250 basis points, the stickiness and the high quality of our funding sources in Bancomer has allowed us to increase only our funding costs by 9 bps and that's what explains the significant increase in customer spreads during the quarter.

Thank you, Ignacio. We have time for one additional question. Next question, please.

The last question comes from Juan Tuesta from JB Capital. Please go ahead.

Hi, yes. Thank you very much for taking my question. My first question would be on the wholesale funding side. If you could share with us what are going to be your wholesale funding issues expectations for the coming years in regards to the upcoming MREL regulatory requirements? Should we expect to see BBVA using tier three or senior non-prefer instrument, for the purpose of fulfilling the buckets?

And also, if you could give us your expectations on general terms on wholesale funding cost evolution in the coming years? Thank you.

Okay, we do not have yet sufficient clarity on what our MREL requirements are going to be. We expect to have that feedback from the SRB during the first half of 2017. But of course, we do expect some convergence between MREL requirements and TLAC, so I think we are starting to have a better idea on both the amounts and the eligibility of instruments, where we've seen significant progress the last few months.

I think that clearly, to do a senior non-prefer as a qualifying MREL debt is an option. We are studying the -- that possibility. As you know, we also have the tier three possibility open. But we would like to issue an instrument that is as harmonized as possible with the rest of our European counterparts, and clearly, the senior non-prefer will hopefully be the way forward.

Wholesale prices. I think the dynamic still is for maturities to be more expensive than new transactions. We have a significant amount of maturities in the next three years, at over EUR20 billion. A good portion of those concentrated during 2017, so even if we have a pick-up in cost from MREL eligible debt, I do still believe that the wholesale funding cost will continue to drive the NII, going forward.

Thank you, Juan. We are now running out of time, so as you know, the IR team will remain available to answer any questions you may have. So thank you, Carlos, thank you, Jaime, and thank you, everybody, for participating in this call.

Thank you.

Thank you.