Banco Bilbao Vizcaya Argentaria SA (BBVA) 2017 Q3 法說會逐字稿

Good morning everyone and welcome to the Third Quarter 2017 Results Presentation of BBVA.

I'm Gloria Couceiro, Head of Investor Relations and here with me today is Carlos Torres Vila, Chief Executive Officer of the Group; and Jaime Saenz de Tejada, BBVA Group CFO.

As usual, Carlos will begin with the presentation of group results and then Jaime will review business areas.

We will move straight to the live Q&A session after that.

As always, we would appreciate all the participants to try to make the calls from the landlines and avoid using the speaker phone.

And now, I'll hand over the call to Carlos.

Thank you, Gloria.

Good morning, everyone.

Welcome to BBVA's third quarter 2017 audio webcast.

Once more, we have another strong quarter, continuing the good trends of previous quarters with net attributable profit above EUR 1.1 billion like the last 2 quarters.

Very high quality results with strong recurring revenues, cost controls, low NTIs and no significant extraordinary gains.

Capital remains solid with fully loaded core equity Tier 1 ratio of 11.2%, which is a 30 bps increase year-to-date.

The highlights of the quarter, I was saying strong core revenue growth, NII plus fees growing almost double-digit 9.7% versus the same quarter of last year.

Cost, excellent evolution growing 1.8% year-to-date and maintaining quite a distance with the evolution of the gross income, which is growing 7.2%.

So here clearly our cost reduction efforts and our transformation plans are bearing fruit.

We maintain a very stable risk profile with cost of risk at 93 basis point.

Continue to generate capital strongly with fully loaded ratio as I said, 11.2% generating 10 bps In the quarter, generating recurring results and allocating capital more efficiently.

It's one of our priorities.

Delivering on our transformation as well.

We're working hard on progressing on the 6 priorities, not just efficiency and capital allocation, but also digital sales and customer experience.

We have continued delivery of products, functionalities in the hands of our customers and that is showing in metrics like the percentage of digital sales across the footprint.

We are here seeing an exponential trend.

We already have more than 25% of our units sold through digital in the first 9 months.

And also digital and mobile customers are increasing quarter-by-quarter.

We have nearly 16 million mobile active customers across our footprint.

Finally, our tangible book value per share is up EUR 0.06 year-to-date and adding the EUR 0.30 of dividends that we have paid, that is a 4.8% increase year-to-date.

Of course, this quarter we were very negatively impacted regarding tangible book value by the depreciation of 3 currencies in particular, the U.S. dollar, the Mexican peso and the lira in Turkey against the euro.

So the depreciation of 3%, 4% in each one of these currencies in the quarter affects negatively the net book value of our holdings in those countries.

Moving on to a bit more detail, the profit and loss.

As I said, quarterly net attributable profit of EUR 1,143 million, that's a growth of 18.5% versus the same period of last year and in terms of constant euros that would be a 24.4% growth.

Excellent trends, strong recurring earnings, core revenue is growing above 9% with NII almost 10% and fees at 9.5%, gross income 6.2%.

Despite the fact that we have much lower net trading income, as you can see, minus 36% net trading income.

Remarkable that the growth of expenses is limited to 1.3% and that leads to 11.5% increase in operating income.

We have had a slight increase in impairments in the quarter, plus 2.4% because of the impact of provisions for the hurricanes Harvey, Irma in the U.S. About EUR 54 million were booked in the third quarter for provisioning for those events.

And finally, we have a decrease overall in provisioning due to the significant restructuring costs that we had in the third quarter of 2016.

For the 9 months accumulated, similarly strong set of numbers with the net profit of EUR 3,449 million with growth rates of 23.3% or 28.7% in constant euros.

Excellent trends in core revenues with our NIM growing in all geographies, NII growing, fees growing, cost contained at [1.8%] and also lower impairment and provisions as the drivers of the earnings growth.

Looking at that in a bit more detail, quarter-on-quarter, the NII continues to grow versus last year double digits, reaching EUR 4.5 billion in the third quarter and it's also up quarter-on-quarter by 2.4%.

Net fees, commissions, very good trend here growing close to double digit and significant growth also versus the second quarter, plus 5%.

Trading income, as I said, low numbers this quarter below the second quarter due to low ALCO sales and we have had here some positive impact of some capital gains related to the final sale of our holding in CNCB, which we completely sold in the quarter and that represented a gain of [EUR 24 million], but even with that we have as I say low trading income and the total revenue with that grew 6.2% versus the same quarter of last year despite this lower NTI, but with core revenues strong and growing very well, that's why the accumulated 9 month revenues are growing at 7.2%.

The operating expenses improved, they improved the good trend of the second quarter, growth 1.8% versus the 9 months of 2016 as well below that 7.2% growth of revenues and it's also below the 9.3% growth of revenues, if we exclude the net trading incomes on an more recurring operating basis, that's a pretty wide jaw.

All countries are really working hard on containing costs below inflation, below the growth in revenue.

Spain, in particular has reduced the costs as you can see by 5.5%, but also we have cost containment in the U.S. growing at 1.6% and growth rates in the emerging markets that are in all cases below the inflation including Turkey and the main countries in Latin America and indeed in Latin America, we exclude the high inflation countries.

The operating expense grew -- actually has been flat year-to-date and of course, because there is the efficiency of the group improves in the year by 2.5 percentage points to 49.6%.

Clearly very, very far from our peers.

In summary, the transformation here is leading to efficiency gains and this continues to be, as I say every quarter, a key strategic priority.

With that, operating income is growing at double digits reaching EUR 3.2 billion in the quarter, up 13% in the first 9 months.

High growth rates in all markets, except in Spain, where we were impacted by lower NTI.

Remember last year we had the VISA capital gains and also this year we have had lower sales of our core portfolio versus last year, but excluding NTI, the operating income is up 9.1% in Spain.

We had particularly good growth in operating income in the U.S., which is up 22% and also in the rest of the emerging markets.

Remarkable also that South America is growing by 15% in the 9 months, when this was 9% in the first half.

So quite a speed up of growth.

Moving down to the risk indicators, very solid set a numbers.

Loan loss provisioning and real estate impairments were EUR 1 billion, flat versus the same quarter last year.

Even when we are now including the EUR 54 million regarding that expected impact of the hurricanes in the U.S. Cost of risk remains flat in the quarter showing that excellent risk profile and big drop in NPLs, EUR 1.5 billion down in the quarter, EUR 3.4 billion down versus one year ago.

Of course the reduction -- accelerated reduction of our exposure to non-core real estate has had an impact here [in] some of the wholesale transactions that we have carried out.

This has all led to a reduction in our NPL ratio from 4.8%, which was a quarter ago to 4.5% now.

And this is really levels that we haven't seen since 2012 before we had integrated Catalunya, Caixa, and Unnim and we are increasing our coverage to 72% . So overall, as I say, excellent asset quality indicators.

Moving on to capital, the fully loaded core equity Tier 1 ratio, as I said, 11.2% and bps increase in the quarter, of course because of the good results, 31 bps minus the dividend accrual of 12 bps and then we have other effects that detract 9 bps (technical difficulty) this quarter.

This is a set of a small effects included here, including some of the growth in risk weighted assets in emerging markets, FX impacts, [81] coupons and other several items, both positive and negative.

The fully loaded ratio continues to be, as you can see slightly above our 11% target and this is also a capital of high quality, we remain as the bank with the highest density in terms of risk weighted assets at 53% and the highest fully loaded leverage ratio, 6.7% of our European Peer Group.

So overall we're well prepared to face future requirements.

Worth mentioning that we successfully issued in August, our inaugural senior non-preferred in the amount of EUR 1.5 billion, which is eligible for MREL and paying the lower coupon so far 0.75% by a European bank in this type of instrument in euros with this tenure of 5 years.

Now in addition to the strong set of numbers and the good quarterly results, we have also progressed very well and are accelerating our transformation strategy, delivering results around the 6 priorities as I mentioned at the beginning.

Once again, we have introduced relevant improvements to customer experience in the third quarter.

Some examples, this quarter among the many that I could showcase here is the Bconomy tool in Spain.

This is a new tool on our app and on our website that provides customers an index of their financial health.

Also provides personalized plans to improve this index, measuring income and expenses, level of savings, comparisons of costs with peers.

It includes interestingly a prediction tool of future transactions, future balances and helps customers with their financial planning in many ways, budgeting, cash flow, forecasting, goals, et cetera.

The app in Spain has also been updated with a new powerful design with extraordinary impact.

Another good example in the quarter is in Colombia that we have now a micro insurance product offering against theft for customers that withdraw money in ATMs.

It's just for a few hours and we have sold in the 3 months of this quarter almost 1 million such micro insurance products.

In the U.S., we have launched in the quarter, Tuyyo, a new online app based service to send money internationally from a cell phone in a simple convenient way but what's interesting is that the app enables the sender to send not just money but actually a little love with images or text messaging.

So adding the emotional side to the money transfer.

The initial phase focusing services in remittances from U.S. to Mexico, which as you know, it's one of the largest corridors with [27 billion] per year.

Finally, in Turkey, we are now using voice biometrics to authenticate customers as they are naturally speaking with our bankers and many more improvements that as I say, I won't go over.

We continue to grow our digital customer base 24% versus one year ago to 21 million clients, 40% penetration.

We now have almost 16 million mobile active customers across the footprint, that's up 43%.

So the transformation strategy progressing successfully.

Also the levels of interaction with the bank via mobile are accelerating as more and more services become available.

We have achieved significant milestones this quarter, we have reached the tipping point of more than 50% penetration in digital customers in 5 countries, Turkey, the U.S., Argentina, Venezuela and Chile and many others are really close to the stepping point, which we will reach in coming quarters.

Similarly in digital sales, digital sales are increasing in all geographies to very significant levels as we make more of our products available DIY.

We expect to achieve nearly 90% DIY product availability by the end of the year.

At Group level 25.4% of all units sold in the 9 months of 2017 were sold digitally.

In the third quarter alone, more than 3.5 million units were sold digitally and the trends continue to be exponential almost in all countries.

Let me give you a bit more color on how this is happening.

For example in Spain, we have originated almost EUR 1.4 billion of consumer loans through digital in the first 9 months, growing this volume by 64% versus one year ago and this has led to a 4 percentage points gain in market share since December 2015.

Also in Spain, you will recall that in July, our app was ranked as the best in the world by Forrester, but to make it even better, we redesigned it in September, mid-September making it easier to find the amazing functionality and this redesign has resulted in just a matter of weeks a significant lift to usage and what is even more remarkable and impactful to significant lift in mobile sales, you can see [80% more credit card sales, 60% more pension plans, 50% more investment funds, 20%] more accounts.

By the end of the year we expect to have in Spain 92% of products available through the app for purchase and this would extend these results further.

And without much, I now turn it over to Jaime to give you an overview of the areas.

Thank you, Carlos and good morning.

Let's start with Spain.

According to BBVA research, Spain will grow at around 3% in 2017 thanks to positive employment data, increasing investment and higher exports.

This growth rate is 1% higher than the EU average.

This has translated into a net attributable profit that grows around 13% and this is despite lower NTIs.

The main drivers behind this growth are a reduction of operating expenses, over minus 5% that further improved in the third quarter and lower impairments.

We had a good quarter in core revenues, NII was flat versus Q2 and this is despite the summer seasonality thanks to the contribution of the global markets area.

Important to point out that excluding CIB, year-to-date NII in Spain would have increased by over 1%.

Additionally, the good trend in net fees and commission remains.

Quarter-on-quarter growth in credit card was 16% and account management fees increased by 24%.

These numbers puts us on track to achieve our mid single digit growth rate for the year.

Loan evolution continues to be impacted by the deleveraging of the residential mortgage portfolio and the public sector book that more than offsets the excellent performance of both consumer loans and SMEs.

Year-to-date loans are still down by 1.6%.

In customer funds, we continue to improve the mix with demand deposit accounts growing by 22% year-on-year and representing now 63% of total deposits versus just at 46%, 2 years ago.

We had another very good quarter in mutual and pension funds growing at 10% year-on-year.

Customer spread remains flat in the quarter, as it has been the case during the year, absorbing the negative EURIBOR trend thanks to our focus on profitable growth and lower funding costs.

As you know, our balance sheet is well positioned to benefit from future rate increases.

NII should go up by around 15% in the following 12 months in the case of a parallel increase of 100 basis points in the curve.

Expenses keep going down, this time by 2% versus Q2 as a result of Catalunya Caixa synergies and the ongoing efficiency measures, which is consistent with our 2017 guidance of a mid single digit decrease in costs.

Asset quality indicators also continue to improve.

NPLs are down by 6% year-on-year and the NPL ratio decreases one more quarter.

Cost of risk reached 28 basis points in Q3, reaching 32 basis points year-to-date.

As we've already mentioned, the year-end guidance of below 40 basis point should be improved.

Let's move now to real estate.

The real estate market dynamics in Spain continues solid.

Household demand in the [year to July went up by 14%] year-on-year and real estate prices increased on average by over 5% and this data as of June and according to the national statistical office.

Leveraging on this strong market recovery, we are delivering on our strategic goal to speed up the run-off of this portfolio.

Year-to-date, we have reduced the net exposure by over 23%, that is almost EUR 2.5 billion.

In Q3, as in Q2 wholesale transactions have also generated positive results.

Let's move to the U.S. We continue to expect 2017 GDP to grow above the U.S. average, [2.8%] versus 2.1% for the U.S. as a whole.

For 2018, Sunbelt growth could reach 3.2%, this is 1 full percentage point above the U.S. Earnings momentum is maintained with net attributable profits increasing by 42% in constant terms driven by NII growing at double digits.

This is 14% year-on-year, supported by the continued increase in the customer spread and expenses growing below inflation and remaining flat in the quarter.

Impairments increased in Q3 after the provisions made to cover potential credit losses arising from the impact of the 2 hurricanes.

This is EUR 54 million partially offset by provision releases in the oil and gas portfolios.

In year-to-date terms, total provisions decreased as 2016 included higher provisions for the oil and gas and basic material portfolios.

In terms of activity, in the quarter, loan volumes improved showing a slight increase versus Q2 0.6%, especially supported by the consumer portfolio, in line with our strategic focus.

The deposit mix continues to improve and consumers' spreads keep on growing benefiting from recent interest rate hikes and our focus on profitable growth.

Our NII will continue to benefit from further interest rate increases as the balance sheet is asset sensitive.

NII should go up by around 6% for every parallel increase of 100 basis points in the curve.

Efficiency in the U.S. continues to improve, widening the positive jaws.

On asset quality, NPL balances continue to go down, 12% quarter-on-quarter as well as the NPL ratio thanks to the good evolution of recoveries mainly in the oil and gas portfolios.

Year-to-date cost of risk reached 45 basis points remaining better than our year-end guidance of around 50 basis points and this is even after the provisions for Harvey and Irma.

The higher provisions and the decrease in NPL balances allows coverage to improve in the quarter by 14% to 119%.

Now Mexico, BBVA Research revised upwards a few weeks ago its GDP growth forecast for 2017 from 1.6% to 2.2% on the back of a stronger than expected first half growth.

They expected 2% growth for 2018.

September numbers in Bancomer continued to show sustained growth in all P&L lines.

NII keeps on growing in the high single digits range 9.5%, in line with our year-end guidance driven by loan volumes and further improvement in customer spreads.

Fees are also growing, in line with our year-end guidance of also high single digit growth.

The main drivers continue to be a larger volume of credit card transactions and higher mutual funds and investment banking fees.

Operating jaws continue to be positive year-to-date and impairments are growing in line with activity.

Net attributable profit increased by over 15% year-to-date.

It will remain growing at double digit rates by year-end, above our initial expectations, once again Bancomer surprising positively.

Loans continue to grow as expected almost 9% year-on-year driven by the commercial portfolio growing close to 14%.

In Mexico, we have a very profitable funding mix and improving even further.

DDAs representing [over 80%] of our total deposits.

The customer spread continues to improve by 6 basis points in the quarter.

Rate hikes are translating into higher deals especially in the commercial segments, more than offsetting the increase in the cost of deposits.

Expenses grow below inflation maintaining positive jaws and a best-in-class cost-to-income ratio.

Risk indicators remains solid and stable in the quarter.

Year-to-date cost of risk reached 336 basis points.

Considering this evolution, we could end the year slightly below our 350 basis points guidance.

Moving on to Turkey, Turkey experienced a robust economic recovery in the third quarter.

Leading indicators point to a GDP growth rate of around [88%] year-on-year.

Thus BBVA Research has revised upwards its growth forecast for the year to 6% from 5% before.

Garanti continues to show outstanding growth rates and improving in Q3 with net income in the first 9 months increasing by 25%, despite a significant decrease in NTIs.

As Carlo mentioned in the second quarter of 2016, we included both in Spain and Turkey, the gains from the sale of VISA.

The main drivers behind this growth are a strong net interest income growing by over 16% year-on-year, mainly explained by a significant [yield] loan growth, a successful customer spread management over 40 basis points year-on-year and a higher contribution from the CPI linkers.

Last May, if you remember, we increased the CPI reference rate to calculate the NII contribution, was increased from 7% to 9%.

We now expect the contribution of the linkers to increase further in Q4 as the inflation for the year will likely be around 11%.

This impact will be fully registered in Q4.

Net fees and commissions also behaved well, up by over 13% year-to-date with a good performance of most of the banking fees.

Positive jaws are widening and impairments performing better than expected.

Solid loan growth continues over 18% year-on-year and this is despite the slowdown in loans granted under the Credit Guarantee Fund facility as Garanti is close to reaching its allocated limit.

U.S. denominated loans continue to go down year-on-year by minus 11%.

For the year, we expect double digit loan growth rates to remain.

In a high interest rate environment, we have continued to increase our demand deposits and diversify our funding sources.

Year-to-date we've issued Tier 2 [access the Eurobond market and issue over EUR 230 million in cover] bonds.

In the third quarter, pressure on the TL customer spread has remained as a consequence of the increase in the cost of deposits.

The cost to income ratio continues to improve to 37.7% with costs growing by 8.8% and below inflation.

Asset quality indicators remain stable in the quarter and better than expected.

Year-to-date cost of risk at 83 basis points.

With these numbers, we could end the year with a cost of risk below 100 basis points, below the 110 basis points previously expected.

And finally, South America.

For 2017, GDP is expected to grow by 2.2%, accelerating versus 2016 levels driven mainly by Argentina.

For 2018, BBVA Research expects further recovery in most countries.

September's results show improving trends versus previous quarters.

Year-to-date net attributable profit grows above 5% year-on-year versus what it was an minus 3% decrease as of June.

The main growth drivers behind this good numbers are a very good evolution of core revenues showing double digit growth rates.

NII is growing close to 13% while fees and commissions are growing at 16% as of September.

Jaws are positive in the region with costs also growing below inflation.

Impairments remained stable in the quarter.

The year-on-year growth is in line with expectations and mainly explained by Colombia and Peru.

Loan growth accelerated in the quarter, growing at 9.5% year-on-year mainly explained by Argentina and to a lesser extent to Peru.

After this strong quarter, we expect the loan portfolio to grow at high single digits in 2017 versus our previous guidance of mid single digit growth.

Customer funds are growing slightly below 11%.

Customer spreads increased in Colombia thanks to an excellent price management.

In the rest of the countries, lower rates and in the case of Chile also a negative inflation reading in Q3 explained the quarter-on-quarter evolution.

In Q3, all countries in the footprint have achieved positive jaws.

Expenses in the first 9 months are also growing below inflation in the region.

Risk indicators remained stable in the quarter with the NPL ratio at 3.5%, coverage at 94% and the year-to-date cost of risk at 151 basis points, very much in line with our expectations.

And in general, they continue to compare well with peers in almost every country.

In 2017, we expect the area cost of risk to remain around current levels.

And now back to Carlos for some final remarks.

Thank you, Jaime.

Just to conclude with the key takeaways from the quarter.

As you can see excellent set of results, strengthening the trends that we were showing already in the first couple of quarters of the year.

Earnings growth supported by core revenues, the transformation leading to efficiency gains, good evolution of our cost of risk that could end the year better than our initial expectations, strong capital generation.

We're progressing in our transformation with tangible results increasing our digital and mobile customer base, growing our digital sales as we deliver better products, better solutions for our customers and our clients and with all working hard to create value for the shareholder.

Thank you very much.

I'll give it back to Gloria for the Q&A.

Thank you, Carlos We are ready to move into the live Q&A session.

As always I would like to ask you to limit yourself to 2 questions per caller so that we can attend as many participants as possible.

So first question please.

We have a question on the line from Alvaro Serrano from Morgan Stanley.

2 questions, first one on cost, again, you've posted a very good -- can you give us a sense of what to expect medium-term, in line with your strategy of digitalization, seems like it's feeding through into the cost line because it does seem, for example, if I take Spain you've reiterated the mid single digit reduction in costs but the year-to-date progression suggests you are going to beat that.

So can you maybe comment on Spain, but also more generically on the group what to expect in terms of cost trends medium-term?

And the second question is around partly related to Catalunya, any comment you can do there but specifically on the press has reported the EUR 4 billion disposal -- the portfolio up to EUR 4 billion and even interest on more disposals.

Is this program initiative of portfolio disposals affected by the situation in Catalunya.

What should we expect there and should we expect more bigger deals and sooner and what kind of P&L impact could they have because you mentioned Q2 and Q3 the portfolio sales have had a positive impact, should we expect that's the large deals?

Thank you.

Thank you, Alvaro.

Now regarding the first question, I think you're right that clearly efficiency has been one of the 6 real priorities, continues to be and a lot of the things we're doing to change how we operate -- really our operating system, leveraging technology, leveraging also new ways of working is having an impact in our cost containment.

Going forward, we will be providing more precise guidance as we finalize our budget.

So you will have to wait for that for next quarter's results, but overall the trend will continue to be that we will continue to put focus on this, absolutely in all countries and of course in Spain where we don't have many levers to drive performance given the lackluster growth in terms of loans, I mean, overall because of certain segments.

So we do have some good growth in consumer, good growth in SME.

That will continue next year, but rates will continue to be low as we saw also with the ECB statement yesterday.

So absolutely we have to drive volumes through digital and we have to contain costs.

We'll continue to work hard on that.

I think some of the things we're doing have to do with how we really allocate resources, so how we allocate people to problems instead of the static way and I think I've shared this with you in some of the meetings we've had with the analysts in general, how we reprioritize every 3 months, what things get done by our people and similarly how we deploy the CapEx to projects, review that every 3 months.

I think that re-prioritizing every 3 months with an agile way of working with what we call the SDA, the Single Development Agenda helps tremendously in this regard.

Regarding the other question, if I understood correctly, you're referring to the relevant event that we announced negotiations with Cerberus regarding a disposal of real estate assets that I cannot comment further than what was said in the relevant event.

We have had positive results of wholesale transactions, you're right, but I should not be commenting on that particular deal beyond what we have communicated through the relevant event.

Do you think the events in Catalunya is going to make it more difficult, maybe delay because it's not only the relevant effect (inaudible) there was also press reports about interest from Blackstone and other buyers.

So it did seem like you were accelerating those disposals.

I just wanted to hear your thoughts given the [month in October in] Catalunya, can that slowdown things?

Just a general comment.

We continue to see strength in the economy.

So clearly uncertainty is not good.

We hope this uncertainty goes away quickly and we have good resolution within the law, but again, if you look at all the set of macro numbers, I think Jaime also mentioned it in the presentation, we're seeing strong growth 3% plus this year and continue to -- what 2.5% next year plus minus depending on how fast that uncertainty is resolved.

So I think the background is very strong including in Catalunya we have very strong unemployment numbers at levels that we had not seen basically since the crisis started 2008-2009 with a [16%] unemployment rate that came out yesterday.

So we are quite positive on the Spanish macro and that feeds through to the real estate market.

We are seeing good price evolution, good demand evolution and good interest from many parties that want to buy our assets.

So I don't think what's happening should have a meaningful impact on our accelerated plans to disposal.

Next question please.

Our next question comes from the line of Sofie Peterzens from JPMorgan.

I was wondering if you could give an update on BBVA Chile, how the negotiations are going, what the timeline is and what you potentially are planning to do with any capital gains that you might see from selling your retail operations in Chile potentially.

And second question is just a follow-up on the previous question, in terms of the real estate division, your division results have been quite impressive.

Now you have real estate exposure of under EUR 18 billion.

How should we think about the losses in the real estate division going forward.

This year you will have around or just under EUR 400 million of losses.

When should we expect these losses to fully disappear from your P&L.

And just a quick follow-up as well if you could give an update on IFRS 9 and the impact?

Thank you.

Well, starting with the last one, IFRS 9 we're not going to provide an impact just yet.

I think you will have to wait for that for the year-end when we'll have more final numbers of what that impact could be, but as we shared already last quarter, it should not be a material impact.

In terms of the Chile operation, again on operations where we have made announcements, I have to stick with what we have said in those public announcements.

So the negotiation continues with potential buyer that showed interest and we will have to see whether those negotiations reach or don't reach an agreement and then what the impact of that would be.

Of course, it's been a part of our franchises for a long time and the driver as we have shared has a lot to do with perceived value of how much we can extract from that franchise versus the price on the table.

So that's really the driver, it's not really strategic shift of any kind.

We are very committed to Latin America and we would be very committed to Chile if the numbers were different.

So I think that's relevant macro.

In terms of the real estate, we also shared in past quarters that we will be seeing diminishing losses and that we always say, we have what couple of years, 3 years max to clean this up, but that we are following an accelerated strategy and given that we are negotiating a very large operation to download substantially all of our foreclosed asset holdings, then that would completely change that picture and bringing forward the exit substantially to this year or beginning of next depending on how we close that deal and if we do close it, which is not a given either.

Next question please.

Our next question on the line comes from Ignacio Ulargui from Deutsche Bank.

Yes, 2 questions for you, one on capital given the performance that you in CET1 ratio, just could you update us on your capital targets and on the dividend outlook.

And secondly on Mexico.

We have seen some [present consolidation in the merger with Banorte and Interactiones].

Do you see that these changes anything that competition landscape -- the competitive landscape and could potentially improve your loan growth targets?

Thanks.

On capital targets, very simple, we continue to believe that 11% is the right number for us and we've been hovering around that number with some ups and downs depending also on how markets behave.

As you know, we do have some exposure through our available for sale and FX impacts, 2 things that do change on a quarter-by-quarter basis are capital, that's included into why we have the target that we have, but we are very comfortable with the number of capital that we have right now and with the target that we've set at 11%.

Now, regarding dividends, I think it is pretty clear what our payout ratio right now is 35% to 40% of our earnings on a fully cash basis.

We paid less than that payout in the interim dividend and we'll pay a final dividend when we close the results for 2017 and it will be a payout within that range.

And regarding Mexico, yes, we have seen that announcement.

It really doesn't change things much.

We have seen for the last few years quite strong performance of the Mexican economy and in particular of BBVA in that market and as you see, we're growing at what 15% the bottom line so far this year and with this, if anything, the background might get better, but I don't think it will be very meaningful for us in terms of the impact it might have.

Thank you, Ignacio.

Next question please.

Our next question on the line comes from Marta Sanchez Romero from Bank of America Merrill Lynch.

I've got 2 questions, one on NII and one on capital.

Well NII in Spain, do you still reiterate your guidance of the second half being more or less in line with the first half?

And here related to your ALCO portfolio we've seen it is increased by EUR 1 billion in the quarter.

Do you think there is scope for keeping increasing it?

Only about a year ago you were at [EUR 35 billion], so I guess there is room.

And the second question is on capital, could you give us some sensitivity to your NAV from movements in the peso and the Turkish lira and also for movements in the Spanish credit spread?

Thank you.

Okay, Jaime, do you want to take the 2 questions?

Sure.

In the case of the NII in Spain, we do maintain the guidance that we gave before the summer.

We expect the second half of the year to be more or less similar to the first half of 2017.

On the second question regarding ALCO is true that we've increased by volume the ALCO portfolio to something around EUR 26.5 billion.

As I said before the summer, I think [25] it's the minimum range that we need to maintain in order to manage our liquidity ratios and I think we do have a range between [25 and 30] in which we could move.

And regarding capital sensitivity, we currently have a more or less 80% coverage for movements on the peso and the lira.

So sensitivities to a 10% depreciation are fairly small, around 3 basis points for Mexico and 2 basis points for Turkey and the rest of the Latin American countries.

Thank you, Marta.

Next question please.

Next question comes from the line of Jose Abad from Goldman Sachs.

First question is regarding Mexico.

So there are 2 important effects that are ahead of us over the coming 9 months, one being actually NAFTA negotiations, the other being actually Presidential elections in mid-2018.

This may have an impact on the local market, but also on the peso.

You've already mentioned actually your hedging policy with regard to the peso.

What are your overall views on actually how negative outcomes in those 2 events may impact actually the Mexican macro and whether you have any contingency plans for them.

And related to these, my second question, which is actually diversification.

You've actually updated us on the status of the Chilean transaction, but my question is whether this is -- we should take this is as a one-off or actually your willingness to reopen (inaudible) on your strategy by which you would be open to allocating capital or more capital outside emerging markets?

Thank you very much.

So taking that last one.

I think our way of looking at the portfolio, it's quite clear and it has been quite consistent for some time that we take into account strategic considerations regarding the attractiveness of the market, how it fits in our portfolio, our ability to add value and then we look at the numbers.

So financial considerations in terms of return, whether it makes sense or it doesn't for shareholder value and we look at those 3 things.

So there has been no strategic shift in this case.

So this does not signal any strategic shift of any kind.

What it does show is just that the numbers are the driver of why we are having the discussions.

In this particular case, it seems someone else can extract more value than we can holding the asset and managing it and given also the context of how the market there is concentrated in larger players, we are mid-to-small player et cetera and that has an impact on how much profitability you can extract.

So in similar situations, we would act similarly, but that's not a change in strategy, it's just that the numbers matter and they matter very much in judging whether something should be or not in our portfolio.

And regarding Mexico, we are very positive in general.

I think Jaime shared that in his comments in the presentation.

We have revised our growth estimates upwards a couple of times over the year and it's going to be finishing clearly above 2% growth.

This year we maintain 2% growth forecast for next year.

There are those 2 major risks that you mentioned, the potential NAFTA going sour or continuing uncertainty.

I think there is growing voices within also the American administration around what should be done there and it's not even within the Republican Party, a common voice.

So still very uncertain what could happen.

What's very clear though is that NAFTA is very good for the U.S. I think that there is lots of evidence around that and that's why we don't believe that NAFTA break up is the likely possibility because the party that would be most damaged in our view would be the U.S. Given that really the trade deficit among the 2 countries.

I mean, the level of commerce between the 2 countries is [almost 0.5 trillion -- it is 0.5 trillion and really the trade deficit is what EUR 60 billion, EUR 63 billion] I think it was last year and all of it has to do -- all of that deficit has to do with the auto industry.

So that is the driver of that deficit, but really more than about half of the value add of the exports from Mexico to the U.S. are really U.S. origin because the 2 -- the value chain is really integrated.

So Mexico is really strength for the U.S. manufacturing productivity in particular in the auto industry and it really makes 0 sense to break that.

So we're confident that eventually everyone on the U.S. side will realize that this is really a great tool.

In the end even if NAFTA was to be repealed, which again we don't think it's the more likely outcome, Mexico is very strong even in the alternative scenario.

So maybe the higher uncertainty comes from the elections where it's very early times and of course we will look at the polls and we'll see who's ahead, but also many of the parties including the PRI still have to choose their candidates.

So we have to see how things evolve and again, it's very early, but in any event I think the takeaway is that we are confident that we will continue to have strong economy in Mexico in 2018.

Next question please.

Our next question comes from the line of [Carlos Cobo Catena] from Societe Generale.

A couple of questions from me.

One, sorry touching again on the real estate division and if you could give us more color on those costs that they are charging there.

Assuming for a moment that you don't make a big divestment of the rest of subsidiary if you do the run-off organically, should we expect the costs to disappear from the group or just to be reallocated to other subsidiaries, ones [that task of running off the portfolio] disappear and the second one is on consumer credit, you've been expanding into the U.S. and Mexico, if you could actually if you have done the type of lending you are doing, but it's primarily credit cards or also what's your proportion of how to lending in both countries and if it's purely originated in the branch network or you are using any sort of external channels of sale?

Thank you.

I'll cover the real estate and then pass it over to Jaime for the second question.

Real estate, well it's really the losses that we have, which include costs associated with maintaining the properties, cost of the internal structure as well as the P&L of the assets themselves.

So the impairments but then we are getting positive results in the sale of the assets.

So that's basically how that losses comes through.

If we don't sell the bulk of the exposure in the transaction that we're negotiating then as we indicated in the past, we would have another 3 years, of course the quarters go by, so we said 3 years a couple of quarters ago, so maybe 2.5 years but 2 years to 3 years of further losses at a similar clip.

They will be coming down, but still be significant or in terms of what are their magnitude of what we are having now.

So if you add all that up what we could have [another billion loss] expected coming from that, if we were just running that down but these are very gross numbers and it's not a precise estimate just to give you a sense of what would be pending, but then that's a non-core division, we will be closing it down and the costs would not be then maintained because we will not need to operate really a large real estate operation like we are operating now.

And regarding the consumer credit, I'll turn it over to Jaime but I would mention the digital plays a big role here.

Clearly, we have a big opportunity in all markets including the U.S. where there's a huge opportunity for our bank there to expand and they're working on that hard and really have now a great offering for the open market, meaning the [non-customers] of Compass which are the majority because we have a low market share to extend our consumer credit there in the open market with the digital product, but Jaime, do you want to comment?

Yes, I think you mentioned that you want some info on both Spain, U.S. and Mexico.

Okay, let me start with the U.S. In the U.S., this is the portfolio that behaved the best as I mentioned in my speech.

It grew quarter-on-quarter by 1.5%.

It was more or less stable in the indirect auto loans segment and it grew by over 3% in the rest of the consumer portfolio.

As Carlos said, digital is key.

We want to grow with very convenient processes and low cost to serve models such as the express personal loan that we have very recently launched in the U.S. And yes we used also third parties in the country to increase our sales.

In the case of Mexico, we saw a slight decrease in the rate of growth in the consumer portfolio versus previous quarters.

In the second quarter, you know we have Easter holidays and Mother's Day, which are very important events in Bancomer.

Still, total consumers and credit cards portfolio grew at around 1.5%.

In the case of Spain, growth is still very high and the consumer portfolio in Spain grew by over 10% quarter-on-quarter.

Very strong dynamics also digital as Carlos mentioned in his presentation having a very significant role, being the one-click loan the biggest source of new production.

Thank you, Carlos.

Next question please.

Our next question comes from the line of Francisco Riquel from Alantra.

Wanted to ask about Mexico, you increased your guidance for earnings from high single digit to double digit.

So you can elaborate a bit more on what is surprising you here, you previously guided for high single digit in loan growth and NII.

Just if you can elaborate on trends here and if you believe that's still the case.

And cost of risk I guess that is surprising positively, you can elaborate on the guidance in cost of risk in Mexico.

And then, second question, in follow-up on Catalunya, you have a relevant presence in that region, if you can comment about what you are seeing during October in terms of your deposits, loans I mean anything on your franchise that you can comment here?

Thank you.

Thank you, Francisco.

On Catalunya, of course, there's been lots of uncertainty during the month with many events that you have seen in the press.

Beyond that in terms of our activity, we did see some movements of deposits during a few days, but really nothing material and things have really normalized after that.

So there were some days where the clients were with the uncertainty more nervous and that's what showed.

In terms of Mexico, I think Jaime explained it well, we have basically -- the guidance for the year, is that we have 3/4 done and we're growing at 15%.

So it just flows through that, it's going to be, when it is going to be.

Why?

Well, because we have had stronger macro.

I think that's the basic answer and the performance of Bancomer has really good in revenue, but in costs in particular, we have put a lot of focus and we over-delivered in that respect versus what even we had planned.

So those will be the key elements and in terms of guidance I think Jaime covered, but maybe Jaime I don't know if you want to comment further?

No, I think it's perfect.

Next question please.

Our next question on the line is from Stefan Nedialkov from Citigroup.

Most of the questions have been asked, but just a couple of smaller ones I guess.

In terms of the NPL ratio at the group level, am I missing something.

It looks like it's down 30 bps Q-on-Q, but for most countries, it's either flat or maybe down 10 bps.

So, are we missing something because the group reduction is a lot larger than what the individual reductions would suggest?

Secondly on the U.S., generally you're keeping [around 6 billion to 7 billion] of cash on the U.S. balance sheets, talking about the segment.

This quarter, it went up to [around 13 billion].

So just wondering what is causing you to hoard cash, is it something temporary, is that going away because it's impacting the calculated margin that we use to project your earnings going forward?

So some color on that would be quite useful.

Thanks to you.

So, on the NPL, no, you're not missing anything, it's the real estate disposals that have really driven down the non-performing loan exposure at the group level.

So we're having stability in most markets as you indicated and really a big drop in the real estate exposure and that's why it goes from [4 .8 to 4.5] at the group level.

And for the second question, do you want to take that one, Jaime?

Yes, we are sure that we have larger [punctual] balance in central banks.

We had an increase in deposits, loan to deposit ratios are [slow] in the U.S. with access their wholesale markets to beef up liquidity and we've been able to increase our LCR during this year.

It will revert to previous numbers in future quarters.

So the take away is that the, in the case of the U.S., the improvement in the customer margin will start showing through the NIM as well going forward?

NIMs have been up year-on-year in every single geography in the group, including the U.S. Customer spreads have behaved well,.

The ALCO portfolio has remained more or less stable.

It's true that increasing interest rates do affect the deal, but we've had very strong NIMS growing by over 36 basis points year-on-year in 2017.

So I think this is a positive trend that will be maintained going forward.

Thank you, Stefan.

Next question please.

Our next question on the line comes from Carlos Garcia from Kepler.

2 questions.

Firstly, on litigation, after hundreds of decisions on courts -- on the Spanish courts and the first decision on the specialized courts on mortgage setup costs, I wanted to ask you, what's your view on this potential risk and also whether there is any difference between BBVA and competitors in the way to deal with this risk or do you think your portfolio is different, your plans are different et cetera?

Second and more strategic and is a question for the CEO, I would like to have your view on Bitcoin after the comments from Jamie Dimon on it.

To me those comments sounded like the comments of a taxi driver on Uber and given that BBVA is quite advanced on technology, how do you see this as a threat, as an opportunity and how are you positioning on this new technology?

Okay, so 2 extreme questions.

On litigation, regarding the mortgage costs, as you know, there's been some confusion there regarding what the courts were saying.

It's very clear in the Spanish regulation that the tax, which is the statutory tax, which is the bigger part of the mortgage setup costs are paid -- should be paid and it is extremely clear in the regulation by the customers, but there was some confusion about that earlier on.

And what we're doing now is of course, sharing the costs -- the rest of the setup costs with the customers.

I think most competitors are doing the same thing and regarding the back book, we are -- I think not expecting a significant amount of additional claims that should lead to a significant additional provisioning needs.

So I think we can manage without significant additional provisioning needs what might come from that litigation.

In terms of Bitcoin, it's really very uncertain what could happen, it is a very interesting technology, of course, I think there is wide consensus on the value of blockchain for many applications and we are one of the banks that is I think -- I would say leading maybe, but maybe not leading, but at least surely very actively participating in many projects around using blockchain for many purposes, not just payments, but all types of really keeping account, really as a distributed ledger technology.

Bitcoin itself, well, it is really very hard to know what will happen with its value.

It could drop down to 0 or it could really grow to be a currency that has high value.

It is very hard to predict where it will end up because it's really depending on the confidence that in the future people might have on this asset as being a scarce asset that will store value like gold has achieved, right.

So this is really I think a good parallel with that.

So if the expectation that this is something that will continue to hold value holds, then it could keep increasing because the scarcity is there, but it might completely dissolve and that expectation that it will hold value disappears, then it will be worthless, but those are I think the 2 extremes and one can assign probably to one or the other I have through my own views, but I will not share publicly.

Okay, thank you, Carlos.

We need to be a bit quicker because there are still some people waiting now on the list.

So, next question please.

Our next question comes from the line of Daragh Quinn from KBW.

Just had 2 quick questions.

Firstly, on Catalunya just and in context with your outlook for loan growth next year for Spain, if you could just give us an outlook how you see loan growth progressing next year and how much of an impact could turn to themselves and then secondly on capital, I appreciate there is a couple of regulatory uncertainties that will impact in the short-term, but just given that you're above your targets as you continue to generate capital, do you see this strengthening the potential for dividend payouts or do you see areas where you could grow faster and deploy capital into stronger or just the same stronger risk-weighted asset growth?

Thanks.

Thank you, Daragh.

Spain activity, I think we will see similar trends next year maybe with some improvements versus '17 with strong growth maintained in consumer and SMEs and Catalunya, it really depends how long the uncertainty continues.

So hopefully, it goes away quickly for many reasons including providing support to the economy or at least not derailing the good trend and the very strong trend in which we are right now.

Regarding capital, again, we're very comfortable with the number we have.

It's where it should be and we are well prepared to manage what might come from all the regulatory changes that are pending.

If we have at some point excess capital, meaning that we don't have opportunities to deploy it profitably above the cost of capital, we'll return it back.

Thank you, Daragh.

Next question please.

Our next question comes from the line of Carlos Peixoto from CaixaBank.

2 questions.

So to start with -- sorry to pick up again on IFRS 9, but basically my question here would be, what are the main levels of uncertainty regarding the final impact.

My question here is, because basically most of your peers have already been conveying some sort of guidance regarding the impacts.

I just would like to know what are the points where you think that there are still doubts on what the final impact would be.

So basically where are the points of uncertainty there?

Then secondly, if you could share with us some color on your views on the expectations of the evolution of cost of risk in both in Spain and in Turkey, it will be useful.

Thank you.

Okay, as I said, IFRS 9, we are very comfortable with what might be the impact, manageable for us especially considering what I just said regarding our solid capital position, but as you might understand, it is quite a complex exercise to calibrate all the portfolios across the footprint and really the transfer rules among the different stages and calculating the expected loss for the entire life of the loan for all of those portfolios, that's not an exercise that is straight forward and that's why there is still work to be done to finalize those numbers.

And regarding the cost of risk, do you want to comment quickly, Jaime?

Well I'm afraid that we don't give guidance beyond 2017, but as we expect stable macro in both countries, I think dynamics should not be too dissimilar from what we've seen in 2017.

Thank you, Carlos.

Next question please.

Our next question comes from the line of Javier Echanove from Santander.

Thanks very much for taking my questions.

I have 2, one in Spain, another one in the U.S. On Spain, my question is whether recent concentration in the sector is do you think it is leading to more rational pricing policies, particularly on the asset side or do you expect it to lead to more rational pricing policies ahead.

And the second one on the U.S., I think cost of deposits have been coming down over the past year in the U.S. I guess that a factor of the change in mix in the deposits from time to demand deposits and what I'd like to know is, where do you think this -- what do you think -- the reason is to think that trend could become less positive in coming quarters?

Thank you.

In terms of pricing in Spain and behavior in the market, we did have some distortions in the past that I think are going away.

So we should be trending, maybe also because of the concentration, but in general to pricing that is rational versus some of the distortions that we have seen.

And in terms of cost of deposit in the U.S., Jaime?

Yes, I think clearly this is one of the best examples of discipline in the footprint the way that the cost of deposits have moved in the U.S. even after all the different rate hikes that we had in the last year.

It's a trend that is going to be very difficult to maintain going forward.

Actually in the third quarter, the cost of deposits increased by 3 basis points, still it's a very small number, but I think we should see slight increases in the cost of deposits.

Thank you, Javier.

Next question please.

Our next question comes from the line Britta Schmidt from Autonomous Research.

Just following on from the previous question on pricing in Spain.

Loan growth is still fairly weak and all the banks are building up more cash positions due to issuance, selling assets for example.

Do you think that scrambling for loans might have eventually an impact on pricing in Spain and then secondly, can you just update us on your own issuance targets and maturities for senior as well as subordinated debt for this year and next year?

Thank you.

On the first part, actually, Jaime, do you want to take both?

I think dynamics in the front book deals are very positive.

The only portfolio that had a lower decrease -- that had the lower deals in the quarter is the institutional book.

The rest of the portfolios remained stable or are positive.

I think the discipline that we've been having for now a number of years in setting prices have been there and that has allow us to offset the very negative EURIBOR trends that we have experienced.

So the fact that TLTRO targets are going to be reached by all players, it was a question mark that we had in the first half of the year that has gone away.

So I would definitely expect disciplined price setting going forward.

On issuance targets, as we have mentioned in the past, we are going to focus in the next few years on issuing MREL eligible debt after the law was issued before the [summer] in Spain, we went to the market with the first senior non-prefer and our expectations is to roll over all maturities in the next 3 years, both in senior and in covered bonds into senior non-prefer.

What we've shared with the market is that we were expecting to issue between [EUR 1.5 billion and EUR 2 billion this year and between EUR 2.5 billion and EUR 3.5 billion] in 2018.

Thanks, Britta.

Next question please.

Our next question comes from the line of Andrea Filtri from Mediobanca.

Could you expand please around the other gains line of EUR 44 million in Q3.

What is this composed of in terms of negatives and positives and we've heard you very clearly Carlos on capital and the link to payout and growth, but can you elaborate a bit more in a more explicit way, what is the level that you will consider expressing excess capital for you?

Thank you.

It is -- the target of 11% that we have repeatedly put forward, that's the level of capital we're comfortable and of course if you are 10 bps, 20 bps, 30 bps up or down, that's part of the normal oscillation that we should have in that ratio given also the type of holdings that we have.

So I kind of provide more precision than that.

And the other question, Jaime?

Yes, I understand Andrea.

This is a very volatile line, here we include the capital gains and losses generated by the sale of foreclosed assets coming from residential mortgages.

This is a recurring component of this line, but we also include capital gains and losses generated from the sale of other non-financial assets.

We've had positive gains -- we've had capital gains in several countries both Turkey, Mexico, South America and Spain, which is what explains the positive number in the quarter.

Thank you, Andrea.

Next question please.

Our next question comes from the line of Mario Ropero from Fidentiis.

Just have one specific question on ALCO maturities in Spain in 2018 and if you can also give the average yield of these maturities?

Thank you.

Jaime?

We don't disclose the maturities of any given year.

What I can share with you is that our average duration remains at 3.7 years as it was in the previous quarter and the internal rate of return, it's around 2.1%.

Thank you, Mario.

I think there is one last question.

Next question please.

Our final question today comes from the line of Santiago Lopez from Exane.

The tangible equity per share of the company declined this quarter and this is the second consecutive quarter in which the tangible equity declines.

Over the past 3 years, the tangible equity per share of BBVA plus cash dividends has declined by 3% in spite of EUR 10 billion of reported profits.

Are you concerned about it?

And what are your plans to do in the future to address this issue, which is critical for the share price?

Thank you.

Thank you for your questions, Santi.

You're right that tangible book value has declined as I indicated in the presentation as well.

The reason for that as you I'm sure know well has to do with the depreciation of the currencies in which we have significant holdings in particular the holding of our bank in the U.S., which is in excess of [EUR 6 billion of tangible book value.

Bancomer of course in Mexico with around EUR 9 billion and Garanti in Turkey with nearly EUR 5 billion].

Those will be the 3 biggest among [roughly EUR 25 billion] holdings that we have in our subsidiaries outside of Spain.

So as the currencies fluctuate that has an impact through other comprehensive income in our tangible book value that eats up tangible book when currencies go down.

So we had in [several] quarter in that regard with the depreciations of 3% to 4% in the dollar, the lira and the Mexican peso.

We are absolutely concerned about it and that is why this is a metric that we are looking at continuously and what we're doing about it is starting to generate consistent returns that exceed the cost of equity including the risk of this depreciation in every market.

We're not there yet in every market, but as we increase revenues and leverage digital to do that and reduce costs to maintain the jaws, we are driving returns up in each one and every one of our markets and as we do that consistently, we will be then over compensate the potential depreciations that are surely going to be coming given the interest rate differentials, but we squarely have it in our management as one of the areas of focus.

So thank you.

Thank you, Santi and thank you to everyone for joining this call.

As you know, the entire IR team will remain available to answer any questions you may have.

Thank you very much.