Banco Bilbao Vizcaya Argentaria, S.A. (NYSE:BBVA)
Q2 2013 Earnings Call
July 31, 2013 3:30 am ET
Angel Cano Fernandez - President, Chief Operating Officer, Director, Member of Executive Committee and Member of Global Asset Allocation Committee
Tomas Blasco Sánchez
Manuel González Cid - Chief Financial Officer and Head of Finance Division
Okay. Good morning to everyone. Welcome to this webcast presenting the results of the BBVA Group for the second quarter of 2013. The presentation will be given, as always, by Ángel Cano, the President and COO of the Group. And then we'll have a Q&A immediately after the presentation. And then we'll be with Manuel González Cid as well, our CFO. Any questions that are not answered during the webcast for lack of time will be answered during the rest of the day by the Investor Relations team. Ángel?
Angel Cano Fernandez
Good morning, everyone. Welcome to this presentation of the results for the second quarter of 2013 for the BBVA Group. The main characteristics of these earnings is that they're very resilient. And above all, they're in line with the messages that we've been putting out to you over the last few quarters.
We can still see that the world is growing at two quite different speeds. First of all, we've got the emerging economies and then the developed economies. In the developed economies, we are seeing that there is still a complex environment with, above all, a difficult situation in Europe. The objective is very clear: to achieve some kind of economic, monetary and banking union. So we have seen some advance being made towards those objectives with the bank recovery and resolution directive. Looking at the emerging markets, we see that they are very buoyant, albeit there has been a slightly lower growth rate in some of the emerging economies. But there is still going to be sustaining world GDP growth for the next few years, as we see it. So it's still very important to have a business portfolio which is well-balanced and, above all, diversified, exactly what we have in BBVA.
If we now look at the highlights of this quarter, the first thing that we'd like to point out is that we have some recurrent revenues, which are very sound this quarter, growing even faster than they did in the first quarter of this year. We've got high earnings coming in as well from one-off transactions, some of them, I think, all of you know, the sale of a pension business in Mexico, in Peru and Colombia. These last 2 have been booked to the second quarter. And we still have to book the capital gains from the sale of the pensions business in Chile, EUR 500 million net, which should be recorded to the third quarter. And then we've got the recent communication of the sales of the banking business in Panama. We are expecting that to be booked to results. So we'll see those capital gains in the final months of 2013 on our books. We are talking about EUR 150 million there, which will add another 8 basis points to our capital ratios. The reason behind this sale has been published. It's pretty clear. It was impossible to generate critical mass in order to be what we always like to be anywhere that we're operating so that we could be leaders because that's our aspiration in any country. And the multiples that we got from the sales was something that made it very easy to come to this decision. And apart from that, what's most important is about EUR 12 million in gross income this half year. And it's also important to remember that for the last 18 quarters, we've been reporting more than EUR 5 billion in gross income every quarter. And that's the best proof, I think, we can give of how well our diversified business model works because that's what gives us such stable income levels.
And then in risks, our exposure is obviously influenced by what happens in the risk profile in Spain. Elsewhere, the main indicators are stable. It's only in Spain really that we continue to see quarter-by-quarter additional decimals being added onto the NPA ratio. Above all, with respect to SMEs and with respect to real estate, that's led us to a 5.5% NPA ratio at the end of the quarter, which is 2 decimal points above the ratio that we reported last quarter.
In terms of our core capital, once again, we are shoring up our different ratios. All of the ones are to be reported to the market in terms of leverage under the BIS fully loaded or what we currently have, which is the core capital ratio under BIS 2.5, which is now 11.3% at the end of the half year.
In liquidity, we continue to improve our financial structure on the balance sheet. Above all, the euro balance sheet, we've reduced the liquidity gap this half year by about EUR 15 billion. And we have been able to issue EUR 6 billion under the markets. And with both of these factors, we have covered all our wholesale maturities for the entire year of 2013.
If we now look at the income statement, first of all, earnings. I should remind you that interest rates are very low in Spain and in the United States, which means that our margins are subject to a lot of pressure in both places. Nonetheless -- and this is quite important, the net interest income for the second quarter is even higher than the first quarter although it's below the same quarter of the year ago. That's mainly because of the impact of the mortgage floors and the ruling from the Supreme Court about the floors established in the mortgage agreements here in Spain. The impact on this quarter was just EUR 93 billion, EUR 57 billion in June, and that would have led us to be above the same quarter the previous year had we not had that ruling.
So basically, there is an underlying stability in the performance of net interest income. If we add fee income, which is doing very well at the moment in the first 6 months of the year, then the quarter shows an even better performance, growing against the previous quarter at 2.8% and would be some millions higher than the same quarter of last year despite the negative impact of the disappearance of mortgage floors. And if we compare it against the previous year, we're comparing with the quarter in 2012, when, basically, we had the dividends from Telefónica, which, in this quarter, we aren't yet booking.
And there is a lower contribution as well, above all, from Eurasia, from the companies in China booked under the equity method, and as well as the business in Venezuela. As you can see anyway, the recurrent revenues continue to grow in a very resilient way over time, which I think proves how sound our policy of diversification has been. Emerging economies are bringing in about 58% of the business, growing about nearly 10%. And in the developed countries, we see that the business is holding out even in Spain, where we have 42% of our total business in these developed economies. But there is a pretty good balance, I'd say, between both.
And then expenses, they are growing at 8%. That's true. But they're behaving very differently in the developed and the emerging economies. In the developed economies, they are impacted by the EUR 155 million that came in with Unnim this quarter, although slightly less than EUR 30 million have actually been incurred for the operational integration up to the end of May. And then the rest, the EUR 123 million is what only brings it over the first 6 months of the year, compared to last year. Of course, we're comparing Gap 0 because that was when we started to consolidate only in July. So what's most relevant here, at the end of June, we haven't yet got any synergies from the incorporation of Unnim. But for the rest of the year, we are expecting Unnim to give us half the costs that have been booked to the first half year of this -- sorry, the quarter of this year. And we'll be getting 1/3 of the annual normal earnings booked to the total year. So in the end, if we exclude the impact of Unnim and the non-incorporation of the synergies, we are seeing costs in Spain and U.S.A. which are under control and definitely growing under the level of inflation. In the emerging economies, the growth is higher than inflation. But we're talking about 2 countries with very high inflation, above all, Venezuela, with inflation of about 30% or 40% and in Argentina as well. It's true that we are taking advantage elsewhere in the developing economies of our capacity to go on, getting organic growth with more investment in the region. I'm not talking about what we've already invested in Chile, where we're opening branches, but also our plans for Colombia and Peru to grow more. We've been trying to go on, growing non-organically in these countries, but it hasn't been possible, above all, because of the high multiples we're seeing in the region. So we think that it makes more sense to go on investing in organic growth in these countries because the payback will be seen much sooner in time.
That gives us operating income which is pretty stable over the first 2 quarters of the year. And the comparison against the previous year is influenced, what I've said about the companies that are brought in under the equity method, above all, Telefónica and our business in Venezuela. And the breakdown is pretty similar in what we saw when we looked at gross income. So that's what makes this banking business different from that of our peers because we have this diversification, which gives us much more stable income over different quarters.
In risk, we can see what's happening in the NPA ratio that's very much influenced by what happens in Spain. We've got 5.5% NPA ratio. And we should remember here what the ratio would be without the enormous weight of the real estate business in Spain. It would be 3.8% to the end of June. Even incorporating the other impacts from the Spanish economy, the risk premium in the first quarters is pretty well stable, although it's true that there is a higher volume of provisions which have to be set aside for better times in Spain. And NPA levels are absorbing that EUR 3 billion from Unnim, which took place in the third quarter last year. So the comparison is impacted by that and then the incorporation of NPA loans from real estate, which is about EUR 8 billion. It's true that the first quarter and the second quarter incorporate lower provisioning for the real estate business, whereas in 2012, above all, as of June last year, we had to set aside a lot of provisions in order to cover the write-downs in real estate.
So we can see this EUR 2.88 billion in net attributable profit with growth, which is very much helped by one-offs, 3 things we've said: the sale of the pensions business in Mexico, Peru and Colombia. And we shouldn't forget that we still haven't got the EUR 500 million from Chile or the EUR 150 million net from the capital gains from the sale of the banking business in Panama. Net interest income and gross income are the main sources of recurring income, and they're pretty well flat year-on-year. And so that's the main hallmark of just how resilient our income statement is, whilst operating income has gone down around just over 8%.
If we look at the capital position -- we could go into more detail if you have any questions, of course. But it's gone from 10.78% at the end of December to 11.26% at the end of June because of the proceeds from the one-off sales, the generation of earnings for the period and then a combination of net effects, the negative impact of the exchange ratios -- the exchange rates, sorry, and then the application of the new models that we've got, which gives us that final figure. By the end of the year, we think that the ratio under Basel III fully loaded should be at about 9%. And if we look at the different leverage ratios, which are considered to be very important and everybody is publishing them now, we've got 4.8% for fully loaded under the Basel III or 7.8% in terms of equity to total assets. And there, we are very comfortably within the limits established by the authorities.
So yet again, this half year, we've got highly resilient, very sound earnings, about EUR 11 billion, which added to the one-off operations this quarter, gives us this EUR 2.9 billion in net attributable profit. And that's because of the diversification business model that we have. We've managed to continue, quarter-on-quarter, improving our different capital ratios under all the different requirements and recommendations that we have seen published in the last few quarters. Our exposure and our liquidity are also doing well. Obviously, risk is very much influenced by what's happening in Spain.
So let's move on now to the different business areas. And as usual, we'll start with Spain. As in other quarters, we are dividing this between banking and real estate. And when I talk about real estate, if I'm separating this, it's because that this is the business that will gradually disappear over coming quarters and we're going to focus more on the banking. Lending has continued to deleverage here in Spain as a whole. On this occasion, BBVA's business in Spain has fallen by 0.5%, even adding Unnim to the equation. And this is in line with the deleveraging in the Spanish economy that we've seen in recent years. And this is something we're going to continue to see in future quarters. We're going to continue to see delevering in the economy. There are couple of data that we usually use to look at this. And we look at, for instance, the leverage rather than deleverage in Spain as a whole, which has gone from 89% of GDP in 2000 to 175% in 2008 when it reached its peak. We're now at 143% approximately and -- but this is still way above the ratio in the average for the European Union. So I think we're going to continue to see deleveraging probably over the next 6 quarters here in Spain, although it's true that we will continue to grow selectively in some areas.
Customer funds are performing well, both in deposits and in investments. We have added business here in Spain. We've seen increased market share by around 200 basis. There is more in deposits than in lending. But on both sides, we're seeing growth. So half of this comes from Unnim joining us, and the other half comes from organic generation of new market share. And we look at this in terms of margins. And as I said before, with interest rates and especially the spreads that are so low that we're seeing here in Spain would have let us to put the 2 quarters together. But I think we even outperformed the first quarter, but this is impacted by the EUR 93 million that we saw in the second quarter with the disappearance of the floor clause in -- on mortgages. And all of this translates to the operating income.
The risk indicators now. These continue to grow with regard to NPA ratio in the real estate business and even in the other banking business. It has picked up to 4.7% in this case. Once again, we have to talk about SMEs and real estate. Once coverage has been built, then it looks better, then it is ethical. But if we look at provisioning now, here, we're adding both the lending provisioning and also provisioning to cover the assessment, the appraisals on the real estate that have already been booked. And as we can see, we're reaching a figure of almost EUR 1.9 billion altogether between lending insolvencies and real estate.
Here, I would like to state that this EUR 1.9 billion, there are 2 considerations here. First of all, we're talking about provisioning for the real estate business. And this will continue as long as prices in the real estate business continue to fall, which is something we're going to see over the coming quarters. I think there is still some downside for prices in Spain. So I -- we will continue to see this effect, which affects appraisals. Then on the lending side, obviously, we are provisioning beyond what we need for our recurring revenues. In this first 6 months of the year, we're talking between EUR 500 million and EUR 600 million in provisions plus one-offs. And these are related to a conservative analysis of our certain lenders, especially with regard to companies and refinancing. In the second half of the year, I think we're going to see the same sort of figures we've seen in the first half. And this may -- could have other effects, including refinancing that we're talking about with the Bank of Spain for September.
So the income statement. We have EUR 742 million for the banking business. This is growing by 5.2%. And with this performance in the different margins, maybe the key to this, at the end of May, Unnim has joined us, although this income statement does not include the effects of the synergies that we will start to see in the second half of the year, although it's true that the closure of the branches is going faster than planned. One thing that's very important there is the EUR 93 million that I repeated, which is the impact of the disappearance of the floor clause in mortgages. And on the upside is the gain in market share, both organic and -- but especially organic growth between 5 and 15 basis points a month that we're seeing in the banking business here in Spain.
Real estate now. There's been a fall of 16% since the close of 2011. These figures are around 30 -- would be around 33% if we didn't include about EUR 2.7 billion from Unnim. So the 16% is after having absorbed assets from Unnim. The rate of sale continues to accelerate since the first quarters of last year. And as we can see at the close of this first half of the year, we have won -- we've sold 6,600 units on the books plus another 2,000 approximately that were sold from the books of the developers. And this is, of course, that we've been able to reduce our exposure to developer lending.
If we look at the income statement now. If we add all the spending to include all the structures necessary to manage all of this, it gives us a net earning -- a loss of just over EUR 600 million that's attributable probably -- what's important here is the increase in the rate we're selling these units. Because up until now, we've only seen sales to individuals, i.e. we sold all of these units individually. There has been no packaged sales. We continue to reduce our exposure to the developer world as a whole. And the performance we're seeing in nonperforming loans is very much in line with our real estate assets. So we're accelerating sales on the one hand. And on the other hand, as we're managing the nonperforming loans that is still on the balance sheet, that's related to the real estate business. But -- and most of which are individuals
Eurasia. I mentioned before -- I gave you the news that there are less revenues from the equity method from China. But the most important thing here is that as a whole, Eurasia is continuing to grow. We're talking by almost 11% at operating income. And obviously, the driving force behind this growth is Garanti, our Turkish bank. The importance -- it's very dynamic. It's important -- it's very important the way they are managing their margins. And in general, they're managing their business very, very well. And they're standing out as the leading franchise in the geography.
The income statement gives us EUR 429 million in attributable profit versus the negative impact of the equity method of valuing China. But margins are growing, especially the operating income, which shows us the growth trend that we're seeing in the net interest income in Turkey. So this should be repeated throughout the income statement if it was not for the impact of the Chinese before the gross profit.
Mexico business is around 6% growing on lending and 7% on deposits. So we must remember that in this first half of the year that we're seeing the impact on the -- at the slowdown of public investment in Mexico because of the change in government there. We're forecasting for the second half of the year, there's going to be an improvement in lending, especially in SMEs and corporations. This is what we're seeing in the pipeline of our SME portfolios for the second half of the year. And this translates down to the margins, the main margins, the gross, the operating income and the net interest income. We're seeing good growth there, growth that's above the business volumes that we're seeing. And basically, this is based on consumer credit and credit cards in Mexico. The year-on-year operating income has grown by just over 7%.
Risk indicators have picked up the 3/10 that we -- I mentioned in a presentation in this quarter. And this is due to the fact that our exposure to major developers in Mexico has been counted as is, that our bank's exposure to the developers is reclassified -- it's now classified as NPA at the end of this quarter. And that is why the NPA ratio has picked up. And also, the risk premium has picked up at the end of June. And if we look at this snapshot now with regard to the risk premium, although the risk premium has been stable over the last 4 quarters, if we look at the account as a whole, we're comparing this with the first 2 quarters of the year in which the NPA ratio was somewhat lower, as we can see here in the slide.
This gives us an income statement, wherein Mexico continues to be the greatest contributor to the group's income statement with EUR 876 million, which is just over 2% growth, with margins growing, as I said before, of -- by over 7%. Clearly, a lot of work has been done in managing margins. In a change of our deposit mix, we're moving towards cheaper deposits once the liquidity has been stabilized. And we're continuing to defend our leadership. But basically, we're protecting the return on the income statement because -- and if anyone wants to look at the performance of the main return ratios, we'll see that they're way above those of our peers and moreover with major investment plans, especially, to be able to continue to cover the areas where we still don't have a footprint, although we are the leaders in the country as a whole. And our idea here is to self-finance the growth in investments by reducing the legacy costs, the stock costs.
In South America, we are continuing to see growth that is slightly lower than last year. But they have still quite spectacular rates, as you can see, in lendings, nearly 17%; and deposits, over 26%. And this means that the main margins are growing very, very well, 28% in the net interest income quarter-against-quarter, gross income over 14%. And operating income, because of the high inflation and the costs, is growing by 9%. But in any event, it's the best growth we've seen throughout the group.
So if you look at the risk indicators for South America, the NPA ratios remain stable, as we've seen for quite a long time now. The higher coverage rates that we have throughout the group and the risk premium are highly stabilized. Maybe in order to compare 1 year with another one, and we'll see this when we see the income statement, we're comparing 2 quarters that are very, very similar from the point of view of provisioning of risk premium as we saw at the end of 2012. But we're comparing this with 2 quarters in 2012, wherein even in some areas, there were redemptions, so with 2 low quarters from the comparative point of view.
And that is why the interest -- the operating income has fallen from 11% to 4%. From the point -- there's a fall here that is -- because of taxes in Venezuela, because this cannot be written off against taxes and the adjustment because of high grade inflation. We have EUR 561 million in attributable profit. And in operating income, there is almost EUR 1.5 billion. And once again, this is highly stable and resilient over the different quarters. Dynamism is being maintained. We continue to grow well in the main areas in this region. And we're continuing to invest in order to continue to grow organically in the countries where we can't grow non-organically. And we continue to optimize our portfolio. And as I said at the beginning, this is -- refers to the investment -- the divestment that we made in Panama.
And finally, the United States. The United States maintains their business levels that have been growing in recent months. And here, I'm referring to the invoicing and the new lending flows. These new flows have grown in the first 6 months of the year, 20% more than last year, which means that we've grown lending by around 80%. Deposits have grown by over 11%. And this means that we can make this positive quarter-on-quarter comparisons. And obviously, this is -- the most difficult thing is to manage margins here, especially with regard to the SMEs.
Risk indicators in the United States. As we can see, we're seeing the best ones in the group, 1.8% in 2009. We're talking about 6.5%, so fantastic work has been done here. The risk premium is at very, very low levels. And there are no expectations for the risk premium to start growing over the coming quarters because of the mature balances in risk portfolio in the United States, which gives us -- in the income statement, we've got just over EUR 200 million in attributable profit. And what is fundamental here, especially when we start to see interest rates grow up in 6 or 7 quarters' time, we have -- we are highly sensitive -- positively sensitive to increase in interest rates, which creates an excellent lending loan book, where we're continuing to reduce our exposure to developers. So this portfolio is more and more sound and diversified. And as we've seen in recent quarters or even years, I would say, that they have excellent risk management and also excellent management of cost, which enables us to offset the major investments that we've made in the platform, which are now finished for the United States.
So in summary, I would say that the income statement is sound, resilient, with an outstanding recurring revenues, quarter-on-quarter. And if we add the one-offs from these 6 months, we're talking about EUR 2.9 billion in net profit, which is due to diversification, which enables us to improve on our capital ratios. So there's nothing new here, but there's continuing to see positive growth as a whole on the euro balance. And risks are stable throughout the world because of the impact of what's going on in Spain.
And that's about it. So I now hand the floor over to Tomas Blasco, and we can move on to the Q&A session.
Tomas Blasco Sánchez
[Spanish] Okay. We'll carry on with this presentation. As always, as we've done in previous quarters, I am going to try to divide all the questions into different blocks so that we can answer as many as possible.
The first block is -- concerns capital. I have several questions here, including Stefan Nedialkov from Citi, Francisco Riquel from N+1, Rohith Chandra from Barclays, Carlos Peixoto from BPI, Ignacio Cerezo, 3 or 4 questions concerning capital and the performance of our risk-weighted assets. First question, maybe you can give us some color on the growth we were seeing in risk-weighted assets, about 170 basis points year -- quarter-on-quarter? Second question, can you give us an update of the fully loaded Basel III by the end of the year? How do you think we're going to be? What position are we going to be in? Third question, could you give us a percentage of Basel III core capital, bearing in mind the different DTAs, the deferred tax assets? And a final question concerning risk-weighted assets and that is, if we have any plans to -- optimization plans for the second half of 2013.
Angel Cano Fernandez
Well, Manolo, as always, you can add to anything I say. But first of all, there has been no surprise as we saw what happened to risk-weighted assets. They performed in a manner that you'd expect. We have internal models in certain places where we can use less capital based on the past record and all the information we have on the main risks besetting any of our entities. At times of crisis, what tends to happen when you incorporate another year of crisis, as 2012 has been, you have to calibrate your internal models. And we have to grow a certain number of basis points, as you've seen, about 28 basis points. We're talking about for this half year, which means that we have used capital -- well, we haven't. This capital is still there. It's on the balance sheet. So when we calculate the group's capital, it's there. The only thing is that the way that we calculate the RWAs is more demanding, more stringent than if we did it in another way. So when we come to better times, then the bad deals will come off the track record that we have to use for the internal models. And we'll therefore be able to calibrate the models more favorably in the future. So the capital is there. And it will be recovered as soon as the economy recovers as well. So that fully loaded Basel III ratio there, obviously, we are above any of the requirements for the phase in, for the fully loaded, whatever. I think what's important is we've got 9%, 9.3%, 9.9%. But those figures aren't so important. The main thing is that we're above that 9%, which was the target that we established. In terms of core capital, we haven't included any impact from DTAs in that target level. The structure of deferred tax assets that we have, in general, here in Spain means that we're above what you have in Europe. I mean, on average, it will consume 220 basis points of capital. The average for us would be 175 -- sorry, 165 basis points, all the DTAs that are recorded right now to our books. So maybe this greater increase or the fact that we've got more DTAs in Spain than elsewhere is mainly because it's not possible to offset losses with profits from the past, which does happen in other countries. And in other economies, where you've got similar standards as here, as in Italy, we see a similar situation. There is, of course, a debate going on and the Ministry are working on that. The way that we'll be impacted with that 165 basis points will be about 2/3 of the total. So we're talking here between 90 and 100 basis points, so a positive impact that we'd get. And with that obviously, we'd be above that 9% that I gave you before. So optimization plans, we don't have specific ones, but we are permanently working on the assets and the risks that we consider have the lowest productivity because they are consuming more capital. And then we have the impact of the way we calibrate our internal models as well, which I've already explained.
Manuel González Cid
Maybe I should just add that the calibration of the internal models is done every year. And we've always done it normally at this time of the year when we incorporate the latest observations available from the previous year onto our databases, along with the expected performance of the next few months. And so there's a procyclical impact on our risk-weighted assets, which we have to incorporate, above all, in Spain. In Spain, lending has fallen off 4.4% in the quarter, and the RWAs have gone up EUR 3 billion because of this impact. But as Ángel said, really, what we're doing is to establish a capital buffer so that when get to better times in the economic cycle, there will be a reversion. Another impact is the exchange rate. That's 11 basis points impact because of the -- what's been happening with the hedging that we have in the United States, which -- where things are denominated in non-euro currencies. But we can expect to see that improving over the rest of the year with the kind of hedging that we have in non-euro currencies. And there shouldn't be any more impacts from any further recalibration of internal models for the rest of the year so that, in general, we can expect to see a more positive picture than the rest of the year.
Tomas Blasco Sánchez
And then finance and liquidity, Filtri from Mediobanca and Carlos Peixoto from BPI. The first question, the composition of the ALCO portfolio, the Assets and Liabilities Committee? And then what's the situation with the LTROs that we had to the end of June 2013? And third question, what's the exposure of BBVA as a whole to the European Central Bank? And what is the level of collateral available on the balance sheet, which can be discounted with the European Central Bank?
Angel Cano Fernandez
[Spanish] Manolo, I think these 3 are for you. I'll give you a hand with some of them, if you like. No, you get on with it.
Manuel González Cid
The ALCO portfolio, our exposure and our interest in our exposure, with regard to Spanish sovereign debt, in a 6-month period, there has been a slight increase of EUR 1.2 billion. So we're talking about EUR 32.5 billion of exposure. Most of this increase, EUR 600 million, EUR 700 million, is because of our negotiation with the markets with our portfolio. So this could be a purely ALCO portfolio. Held to maturity is stable over the 6-month period without any major change in the ALCO portfolio and the euro balance in the 6-month period. With -- if we look at the ALCO portfolios in other units, there hasn't been any great variation that we have EUR 6.6 billion in the United States. And we have a portfolio of EUR 7.6 billion in Mexico. And in Mexico, because of the increase in duties in Mexico, because of the increase in the American curve and rates, because of the change of monetary policy in the United States -- so with this increase in rates, we've added EUR 1.5 billion extra to the Mexican portfolio at the end of June. Once -- after this movement, at the moment, we have low durations in our portfolios in the 3 countries of around 3 or just over 3 or just under 3, depending on the country. And in some way, the portfolios are performing very, very well. And we can see that despite this increase in interest rates, there hasn't been any kind of problem anywhere with regard to net trading income or mark-to-market on the contrary. LTRO now, during this quarter, we've amortized some of this LTRO. We have about half of this left to pay back. The only exposure that we have to the ECB is through the LTRO. And at the moment, we have no plans for any further amortization probably until the end of this year or maybe the beginning of next year. Our liquidity position is extremely comfortable. And as Ángel said, the euro balance to focus on this balance, this balance has generated liquidity in the 6-month period of EUR 15 billion additional. We've issued -- we've had issues of around EUR 6 billion. So we have -- all the maturities for the year are well covered. And just to remind you, this was about EUR 13 billion. Obviously, for next year, the budgets include the estimates for generating liquidity for the balances, the maturities. We have the LTROs with the remaining one. And based on all of this, we will draw up our strategy for managing our liquidity. And finally, with regard to collateral, the euro balance -- because I think the question is aimed at the euro balance. Obviously, we have ample collateral on other balance and other areas. But we have enough collateral to absorb any liquidity shock on the euro balance. We have a liquidity buffer of approximately 2.5x all the unsecured maturities we have for the next 3 months. And I think this clearly shows that even in the worst possible scenarios, our liquidity position is guaranteed and totally sound.
Tomas Blasco Sánchez
On the strategic block, we have several questions, Andrea Filtri from Mediobanca, Carlos Peixoto from BPI, Jaime Becerril from JPMorgan and Britta Schmidt from Autonomous. The first question is we've completed the sale of non-core asset. Have we completed the -- do we have any ideas to go any further in this area? Question 2, what is our position concerning CatalunyaCaixa and Novacaixagalicia? Question 3, what are our plans for Garanti? Are we going to increase our stake in Garanti and under what conditions? Questions about -- in what circumstances would we send -- sell CITIC, our exposure in China? And the final question with regard to strategy would, what is our position at the moment in Telefónica? Because it hasn't made a really great contribution to dividends, so are we thinking about selling this stake, and in what conditions?
Angel Cano Fernandez
Well, the sale of non-core assets, have we finished our plan? Well, when we decided to sell off the pension business, it wasn't what we had as our objective, initially. We just wanted to look at the multiples that we were getting from the sale of this business there because of the excess liquidity. It's a very profitable business. But the multiples paid, taking into account that it's not a business that gives us synergies, bringing in additional revenues because of synergies with the banking business. That's why we decided to sell. Well, Panama, I've already explained the reasons behind that sale. If there hadn't been, as I've said before, offers with the multiples that we could get, we are obviously getting good earnings and not very high earnings because of the market share that we have there. But since that we did have those offers, we thought that they were just too good to refuse. So apart from that, apart from maybe some small minor transaction, we haven't got any assets that we're thinking of selling off that we consider non-core. Catalunya, Caixa Catalunya, NovaCaixaGalicia, well, obviously, we have to analyze them on a case-by-case basis. We'll have to look at the books that are open to us, and we'll do what we always do. We will always see how much value we can generate for our shareholders and we'll be highly objective in the way we approach these transactions. And then guarantee, there, obviously, we can't say anything apart from that we're seeing excellent performance in Turkey, as we've seen this quarter yet again. The earnings coming in from Turkey are excellent, and we are seeing that over the first few quarters in which we have been booking the earnings from Turkey. The integration in corporate terms has also been excellent. And in fact, they've done better onboarding, we could say, than almost any other strategy we've got in terms of their HR, in terms of their technology, the way that they're so customer oriented. The way that they run their franchise has meant that we managed to combine our businesses very well. We just have to see when the time is right to increase our stake, but there are no restrictions regarding that. When will we sell off CITIC? Well, it's something I said last quarter as well. We're very clear that we have to manage our exposure with respect to capital consumption in the first quarter. And in the last quarter of last year, we already talked about that. And maybe the main thing is that taking into account the capital surplus that we have at the moment would mean that it wouldn't make any economic sense to sell off these positions and so we then hang on to this stake. We're definitely not in any hurry. There's no regulatory pressure on us. There's no problems with the consumption of capital. So as long as it makes sense to have to hold it, we'll keep it. And as for Telefónica, I've been saying for several quarters now that this is an investment that we have which doesn't consume very much capital. So in terms of capital consumption, there wouldn't be much impact where we do change our level of investment there. And we're going to go on working with this investment and trying to make it a rational investment, and it will depend on what happens in the markets, what we decide to do with this at any one time. Manolo, have you got anything else to say?
Tomas Blasco Sánchez
Well, asset quality is the next block, talking about the restructured loans above all. Frederic Teschner from Natixis, Carlos Digrandi from HSBC, Rohith Chandra from Barclays, Paco Riquel from N+1, Carlos Peixoto from BPI, Antonio Ramirez from KBW, Ignacio Cerezo from Crédit Suisse asked us about the restructured loans. Let's see if we can sum things up. How much do we estimate should be classified as restructured with respect to NPAs that we have through 2013? Might we have an update on the cost of risk in Spain for 2014 and 2015? What kind of figures are we using in our estimates in BBVA? What volume of foreclosures would we have by the end of 2014? Are we seeing a fall in the foreclosures? There has been a fall in the first half year, is that expected to continue or not? And then the final question here in this block would be, what kind of coverage do we expect to have of our nonperforming assets in the group and in Spain which would make us feel comfortable? So what level of coverage do we want to have in Spain and group wide?
Manuel González Cid
I'll try and answer all of these questions. The first thing is with regard to refinancing, this is a work in progress. We have good communications with the Bank of Spain, so we're going to share all of these in September and we'll make all of these public at the end of September. So what we can't do now is to give you any information that we haven't been able to check with the Bank of Spain. There are 2 things to bear in mind here with regard to classifications. We need to remember that the data for reclassifications of the group here in Spain, which is basically what affects us, we're talking about EUR 24 billion in refinancing at the close of June. This is not public information yet, but this is sort of EUR 23 billion at the close of December, which are in the public domain. And of this EUR 24 billion, EUR 8.6 billion are outstanding, and 6.5% are classified as substandard and EUR 9 billion are classified, at the close of June, as nonperforming assets. But the refinancing for this in the 6 months has increased by EUR 1.6 million. The view that we have of all of this with regards to this reclassifications, what we're going to find in September are going to be substandard -- from substandard to nonperforming assets. I can't give you any figures at the moment because I think it would be irresponsible, because we don't -- we haven't even sat down and talked to our supervisor yet. Secondly, with regard to provisioning, we do think that we'll have a limited impact, especially because as most of these reclassifications come from the substandards, a lot of this has been provisioned, so we will see some additional additions to provisionings, but I don't think it would be very much. To give you an overall snapshot of what we're expecting for the second half of the year. In the presentation, I said that just over EUR 1.4 billion in provisioning, those have been carried out in the first half of the year here in Spain. EUR 500 million to EUR 600 million, depending on how deep you want to zoom in, can be considered as related to reclassified transactions or operations with specific companies. So somewhere around EUR 900 million, maybe a little bit less, could be considered as normal recurring things because of our normal timelines. What we're estimating for the second half of the year here in Spain, I think the figures are going to be very, very similar to what we've seen in the first half of the year. These means that we will continue to have an excessive provisioning to make relating to what I have mentioned. So I don't think we're going to see anything different in the second half of the year from what we've already seen in the first half of the year. The risk premium for 2014 and 2015, once again, we're talking about recovery of the economy here in Spain, we're estimating this is going to be 0.9% growth at the end of 2014 and further growth in 2015. And this will help us to face less elements if we talk about this EUR 900 million in recurring provisioning for 2014, then I think we're probably talking about a risk premium about 0.9% or 0.85%. And then between 2014 and 2015, this will fall off. And that's what we are seeing for the risk premium once we've finished all the one-off operations, basically SMEs or, in this case, reclassifications, such as the ones we have seen in 2013. But way below the provisionings we had in 2012, especially with regards to real estate. I also mentioned in the presentation the -- not so much provisions as the write-downs that we're seeing in real estate. Because basically, in book value, in the first 6 months of the year, we're seeing loss on sales that, I think, they've only gone up by EUR 19 million, and all the rest is the high appraisals because of this slight fall in prices that we're continuing to see month after month. Foreclosed assets. I did give you a figure on how developer risk is performing as a whole. RE assets on the balance and also exposure to developer risk, we're talking about 33% reduction since the close of 2011. So practically 1/3 has been -- were reduced by 1/3, which means -- which is enabling this to offset the assets that were taken on board from Unnim, which come from the Asset Protection Scheme, but we're managing them all the same. I think it's fundamental that we have the organizational structure, which is already adapted, it's up and running and it's coming up to full speed. We're seeing these -- the rate of sales that we're seeing, we're selling assets off very, very quickly, these foreclosed assets. And what we have to keep an eye on in the coming quarters is how mortgage -- nonperforming mortgages fall off in coming quarters, which will directly -- which reduces stock of foreclosed assets. Coverages, whatever we need. From the point of view of prudence, maybe we want to stay ahead of the curve, as we have in the past. In the end, we'll have less provisioning impacts is because part of this work has already been done every month. So that when we see effects like this, when things like this happen, it has less of an impact on write-downs and it will for our peers. So for coverage, whatever is necessary from the point of -- and international rules at any one time. With regard to coverage of nonperforming assets, I think it's important that current coverage, we feel very comfortable with this. If we take the stress tests as a reference against the ones that we've done in Spain by Oliver Wyman on a detailed review of audit companies other than the normal ones that work to these banks. If you remember, the expected losses in the stress tests for BBVA in 2012 to 2014 were EUR 20.3 billion. At the end of last year, we had provisions for write-downs of all kinds of almost EUR 17 billion. So we need EUR 3.5 billion in extra provisioning in 2013 and 2014 to cover these expected losses. Just with the write-downs and Ángel Cano says that we're going to do it in 2013, not without 2014, we will have sufficient provisions to cover these expected losses, which is the basic scenario mooted by Oliver Wyman. So we're very comfortable with the provisions that we have.
Tomas Blasco Sánchez
So let's move on to the questions on each specific business units. Starting with Spain, practically, all the questions have a common denominator, and that is what is the expected trend in 2013 in the trading profit, in the net interest income and nonperforming assets, bearing in mind how the impact of the foreclosed mortgage could have an effect on this in 2013? And with also regard to the net interest income, what is our price policies we're going to see on deposits going forward? Carlos Peixoto, Antonio Ramirez, Ignacio Cerezo, Paco Riquel and Frederic Teschner asked about this issue. And 2 further questions that are slightly different from the ones I've already gone through concerning, first of all, what is our exposure to renewables in the energy sectors that we have, and what could the impact arising from the new legislation will be the -- that we'll see after the summer? And the other question concerning mortgage forecloses. Antonio Ramirez says that we have appealed to the constitutional court their decision to do away with this floor clauses, so what can we expect to hear from the final decision? And maybe the most important thing is, is to see whether this ruling is going to be favorable, what effect would this have on BBVA if the constitutional court ruled in our favor? So the question is, would they go back in writing out these mortgage closes, the floor clauses from mortgage contract?
Angel Cano Fernandez
Is that it?
Tomas Blasco Sánchez
Angel Cano Fernandez
Okay, then. First of all, net interest income. During the presentation, I was explaining the impact of these floor clauses being taken out of our contracts because of the ruling handed down. EUR 93 million in the first quarter was the impact, but it was mainly in the second quarter that we got that impact actually. But the first complete months has been due [ph] where it's had an impact of EUR 56 million before tax. And that gives us our performance, which was growth, positive growth speeding up over the year, and then we have this sudden drop, which will continue. The way we see it, well, with the impact of the change in the floor players, we could extrapolate from that 1 month that we've got so far, but it will depend on the euro board [ph] rates any time. But with the extrapolation in the next few months, where we've got some visibility with not much change in euro board, we could extrapolate that level, make EUR 56 million, EUR 57 million. And then the second question, about the cost of deposits. What we're expecting in the final quarter, above all, is to see an additional reduction in the cost of deposits because of the renewal of term deposit, which is the most expensive ones we have in our stock of deposits, which we'll have to repriced to the much lower rates that we now have compared to 1 year ago. So we'll see an improvement in customer spread, above all, in the last quarter. And we could talk about a slight upward rise in customer spread in the final quarter, above all, because of the repricing to prices, which was significantly lower than what we had 1 year ago in the term deposits that were taken out in Spain at that time. Nonperforming assets. Well, with respect to the loans that -- with SMEs and real estate business, performing quite stably. So they are offsetting one another. And we're talking about 11.5%, there's a NPA ratio, above 43% for real estate. It's difficult to make any predictions here, but we think we may see some additional decimal points of increase in the NPA ratio being added, above all, in SMEs and real estate developers going on into 2014. But it's difficult to say. If the economy recovers as we're expecting it to, maybe the peak in additions will be at the end of this year. Otherwise, it might be perhaps moving on to the end of 2014. That ruling about the foreclosed becoming null and void, obviously, we have appealed because we have the right to do so. We also have responsibility to our shareholders to do so. And so we are talking about the constitutional court looking at the Supreme Court ruling, and they could rule in the next few months. But talking about what we might do before we know what the court is going to say is very difficult. What we have to do is to analyze the ruling, see how it's worded and see what impact it might have when the time comes. And then renewables. Perhaps, Manolo, you could talk about that?
Manuel González Cid
BBVA closure to renewable energy, which could be impacted by the reform that was presented recently by the government, would be about EUR 1.95 billion. Obviously, as part of that exposure, we've got various different risks with industrial investors. We're talking about big companies in this sector with the financial position. But we consider it to be very sound. So obviously, we have to be on top of the risks associated to financial investors who came on board at the beginning of projects, some of which have progressed quite far. We've classified some of the portfolio substandard, and we've already got provisioning set aside for them all, but they haven't entered into being considered nonperforming. And we will have to see what the final regulations are once the law is enacted in September, so we can see the cost of investment in each kind of technology. But on the basis of the figures that we've already given you, we're not expecting to see any big surprises or anything that might change the outlook that we currently have with respect to the kind of provisioning we have.
Angel Cano Fernandez
And Manolo, just to add to what you said, all the projects we studied in great depth. We looked at them in terms of their economic rationale, and we knew the possibility of some changes and we've classified them on the basis of very prudent, very conservative criteria. So we feel very comfortable with our exposure to renewable energy.
Tomas Blasco Sánchez
Let's now move on to Mexico. There are several questions about Mexico. From Antonio Ramirez, from Benjie Creelan, from Alvaro Serrano from Morgan Stanley, Jaime Becerril, Jaime Rigel, Carlos Peixoto, Ignacio Cerezo, Antonio Ramirez again, and Benjie Creelan, and Arturo de Frias who've asked the question about Mexico. So what the questions are is basically, first of all, NPAs in the second quarter have gone up 30 basis points after 2 quarters in which it was improving, 2 quarters running. Could you explain what happened in this quarter? And what's your outlook for the next few quarters to the year-end? Second question about Mexico would be, what's the impact we expect to see from the banking reform being enacted in Mexico, how would it impact our outlook there? Third question would be, what do we expect the cost of risk to be in Mexico? How will it be in 2013 and do we have any visibility for 2014? Fourth question has to do with what might happen to our loan book and how we expect it to grow in Mexico? We've seen in second quarter that it's below double-digit growth, but what's the outlook for the growth of our loan book towards the end of 2013, this -- will it be higher? And then finally, I think I've given the summary of all the questions. But finally, we've got the question: What do we expect to see in 2013 in Mexico with respect to net attributable profit, 2%, 3%, 4%, 5% growth in our bottom line there?
Angel Cano Fernandez
First of all, NPAs. Basically, I mentioned this pickup of 3/10 in the quarter, and here I said that, basically, this was due to the fact that the 3 major developers in Mexico have been reclassified to NPAs. It's true that with these developers, since the end of 2010, we have reduced our exposure to them by 60%, and this is an important figure. And the remaining figure in all 3 classes has been reclassified as NPA at the close of this second quarter. So going forward, I think what we can expect is another few tenths of a fall in the second half of the year. And this is the only one-off that we've had in classifications in this second quarter that has had a slight effect on the risk premium in the second quarter. The risk premium for 2013 as a whole, I think is going to be around what we saw at the end of last year and the beginning of this year. So the risk premium is going to be slightly lower than what we're seeing at the moment. Reforms, now I think it's too early to say anything about -- to talk about it really, because what they are trying to do basically, above all, is to reactivate the growth in lending especially to companies. Don't forget that in Mexico, bank penetration is still below 30% or low 30s, so the emerging markets, the best emerging markets probably has the lowest ratio. And the reason for this -- and that's why we're working on this in order to reactivate lending, to bring it up in line with other emerging economies. But it's still too early, really, to see the results. Maybe in the third quarter results or fourth quarter results we can maybe give you an update of what we consider the effect of this reform. Lending. This is something I also mentioned in the presentation. We're around 7%, and it grows occasionally. But basically, it was around 7%. And what I said was that there was -- it's growing less than expected for 2 basic reasons. The most important reason is because of the slowdown we've seen in public investments because of that change of government in the first 6 months of the year. And the second reason -- I didn't say this in the presentation but I will now and that is the transformation of bank debt of the major corporates in Mexico versus issues of vehicles or instruments in the wholesale markets, such as debt, which means that total debt is not changing significantly, but the kind of instrument that we're using for financing all of this has shifted from bank debt to wholesale capital market debt. And moving forward, I think I did mention this in my presentation. Talking to our team basically, and the SME teams and the corporate team in Mexico, what we're witnessing is growth, low growth of around 2%, 3%. 7% is SMEs, and, consumer loans and individuals. I think in the second half of the year, this 2%, 2.5%, I think is going to be closer to 10% to 12% growth if, as we think, there's going to be a recovery in public investment. And also bearing in mind, the number of transactions that we have in the pipeline for these businesses in Mexico. So I think we should see growth of -- from the 7% that we're seeing now to around 10% or 11%. And if it's not by the end of the year, it's going to be in the first quarter of next year. And I think that's about it. Now on profit. I think profits are going to -- the trend that we're going to see is going to be very similar to what we've seen at the close of June. We don't think there's going to be any major difference in the snapshot that we've seen at the close of June.
Tomas Blasco Sánchez
Okay. Moving on to Latin America. I have 2 questions here from Antonio Ramirez and from Rohith Chandra. First of all, are we witnessing a certain slowdown in growth in Latin America? What do you think it's going to be like by the end of 2013? And could you give us some details on the inflation adjustment that you've made in Venezuela? What can we expect in coming quarters? So 2 questions. The close of 2013 in Latin America, and secondly, the effect of inflation in Venezuela.
Angel Cano Fernandez
Let's start with the business volumes we've got. We see some buoyant growth in several countries, the most stable countries, Peru, Chile, and Colombia whose economies are performing in a very stable way. And even in Venezuela, we're seeing growth in business volumes. Maybe the most significant impact is hyperinflation, which impacts accounts for the whole region and mean that costs are growing very fast, although revenues grow, too. Nonetheless, they are offset. And you have to go on from operating income where we have to book all the impacts of the hyperinflation. And there, you'd have the weigh that revenues and costs offset one another. What we're expecting for the second half of the year? Well, it's difficult to see ahead, but we think there should be changes in the inflation rates in Venezuela, which should go down quite significantly, which will mean that it will offset that impact that we've seen in the second quarter. Although it would probably remain quite high in the third quarter, but it should go down in the fourth quarter. So that is the outlook we have for the rest of the year. And then business volumes. Well, there, because we look at Columbia, Peru and Chile, and see their economies working well. We want to invest in Columbia and Peru as well. And last year, we made quite significant investments in Chile already. And because of their sound economies, we think it's worthwhile growing. We want to grow organically, increasing our market share in those countries. And in Peru and Colombia, we already have reported some growth, organic growth, so looking at double-digit growth even after the accounting adjustments over the next few quarters.
Manuel González Cid
And when we look at the increase in business volumes in Latin America and how they're going to be recorded, we have to take into account that we've seen double-digit, high double-digit growth throughout the region for the last 2 years now. So it's not easy to go on growing 30% for the fourth year running, and it wouldn't be good if it did. So a slight slowdown in the region is a good thing. And we are seeing that base affect us well with comparison year-on-year. And so we are seeing growth, okay, 17% compared to 20-something percent last year, isn't a bad thing at all.
Angel Cano Fernandez
And with what you said, Manolo, when we look at the business world there, earlier on, we were talking about the liquidity we have in the region and that everyone has, that means there's some pressure on the different lines of income for businesses. And obviously, there is more activity with individuals, and that's growing faster than what we're doing with corporates and business, and that has an impact. It's -- but there's also that's shift from bank borrowing to market issuance amongst the corporates, which is a phenomenon we'll see over the next few quarters as well.
Tomas Blasco Sánchez
Okay. We can now move on to dividends. There are several questions from Rohith Chandra, Mario Lodos from [indiscernible], Luis Peña from JB Capital, Carlos Peixoto from BPI. They mainly have to do with the potential impact of the 25% cap on dividends in cash. How will that impact our dividend policy, our payout policy? Are we going to continue in 2013 and 2014 paying out dividends in script? Is there any possibility of cutting back total dividends because that's the recommendation emanating from the Bank of Spain? So that's the block on dividends. And then capital. There, there were 2 further questions. One from Javier Ruiz from Interdin. He asks, at the end because of the DTAs, will we have a capital ratio under fully loaded Basel III of over 10%? Will policy change with respect to lending or dividends because of the DTAs? Carlos Garcia from Société Générale asks about our vision of leveraged operations and how that will affect us.
Angel Cano Fernandez
The impact of the recommendation that we've received and the combination from the IMF and the Bank of Spain, we're talking about a recommendation that would only cover the dividend for the earnings for 2013, that and that alone. A lot has been talked about 25%, but nobody's mentioned the time periods. It's only for 2013. We have already distributed the first dividend in July, which has been in cash, then there's the October dividend with a policy that we've established, which will be in shares. And from there on, we'll have to see the behavior of our earnings from now till the end of 2013 to see the impact this recommendation would have. But we are continuing on an ongoing policy. And from here to the end of the year, there might. We will let you know if there's going to be any change in our dividend policy. With regard to your question on capital. What is true is that we are already over any capital -- regulatory capital requirements, whether we're over 10% or not doesn't affect lending and doesn't affect dividends. It's necessary but it's sufficient -- but it's not sufficient. Lending will continue to perform in line with demand, and depending on the economic situation of the countries and also the asset allocation we have in each country, which has nothing to do with capital, but rather, to the generation of return to the group. So we're not -- this is not going to change. Lending is not falling off to protect capital. It's falling off because -- basically because demand has fallen significantly, basically in Spain. And in each area that we operate in, in the United States, it's growing 20% or it continues to grow at around 16% in South America or only 7% now in Mexico. But here in Spain, although it's -- what's happening here is because of the enormous growth that we've seen in the past, so the deleveraging is not related to capital. But capital is affected by the continued strengthening of our capital position that we're looking for. And especially moving forward, we think it's important to be highly solvent. We need to be in surplus especially to see growth in each area. Dividends, this is the first need. We have to have sufficient capital to be able to pay dividends. But from there, our dividend policy depends on the recurring nature of our revenues, not just present revenues for future ones. So the payouts that we set out for the future would always depend on the recurring behavior of our earnings. And the leverage ratio, Manolo?
Manuel González Cid
The leverage ratio, I think this is important. I think it's important to put this into its context, the regulatory framework of the sector. It's highly complex, but basically, it's triangular. And the top, we have liquidity ratios. And at the base of the triangle, we have capital. And on the left-hand angle, we have the traditional ratios of capital based on what risk-weighted assets, where we have fully loaded Basel III. But as we witnesses significant differences in the density of risk-weighted assets between institution and even in the performance of these risk-weighted assets between different institutions, we're starting to look at leverage, and this leverage ratio is very important, it's very pertinent. We've received an important news today that show just how important the leverage ratio is for supervisors, especially here in Europe. The ratio that we published here is the leverage ratio that includes the capital circular and enumerated, it has a fully loaded tier 1 for Basel III. So all deductions from the fully loaded Basel III and the denominator where assets are based on derivatives and assets that are off the balance sheet, such as credit lines that are available, et cetera. So this is the most -- the worst ratio. And in our case, this leverage ratio is 4.8%, which comes from the 4.3% that we're going to see at the end of the year and the first quarter which was 4.2%. So we're consistently improving quarter-after-quarter our leverage ratio. We're way ahead of the performance of the improvement that we're seeing in total capital ratio. So I think it's important to put things in that context. The importance of leverage ratio as a mirror to look at the traditional capital ratio is based on risk-weighted assets.
Tomas Blasco Sánchez
And the 2 final questions that we've just received. The first comes from Ignacio Sanz from UBS and he asks about funding in Spain. What level do we expect loan to deposits to stabilize at, and where are we -- where will be comfortable, what will be the optimum level? And the final question from Andrea Filtri concerning regulation funds, the European regulation funds. Do we consider any risk of perpetuation of the asymmetries between banks if the banking union was rolled out on national resolution funds rather than European resolution funds?
Angel Cano Fernandez
Okay. Manolo, maybe you'd like to start?
Manuel González Cid
Okay, then. We haven't got a loan-to-deposits target in Spain. We feel very comfortable with the situation we've got. Our loan-to-deposit ratio, when we adjust it for total assets and temporary retail lending, at the moment, it would be 128. If we include the mortgage warrants issued onto the market, then we'd be talking of about 100 or even less than 100. So we're talking about a situation in which we feel relatively comfortable. So we think it's a prudent funding for medium- to long-term books with those kinds of loans. So with the provisioning we have, it's suitable for Spanish economy. Deposits are growing quite fast, and we are benefiting from people preferring us for their deposits. We're gaining market share with organic growth, as well as the incorporation of Unnim, going up over 120 basis points in the year. So we've gone up 4% in market share deposits within the system just through organic growth. And if you look at lending, there is some deleverage there, and it's quite positive to get that kind of deleveraging. And so we think there should be a substantial improvement on our loan-to-deposit ratio on our balance sheet here in Spain. But we feel very comfortable with the current situation. As we said at the end of the year, we think the situation will be of an even higher loan-to-deposit ratio than what we're currently reporting.
Angel Cano Fernandez
And then the regulations funds that you are talking about, and Manolo will probably have more to say about this, and symmetries as well. Well, there will always be asymmetries until we have a single supervisor, a real banking union. And that's one of the objectives of the banking union for Europe. And we can't expect to see that until at least the end of next year. Along the way, before we get that, there are various exercises being carried out with security review stress tests, or whatever you want to call them. So the European Central Bank will know exactly what the accounts are and how things are being reported in different ways. But there will continue to be asymmetries. We're seeing them, above all, in the reporting of capital ratios, also DTAs as well, the deferred tax assets, because there's different kinds of regulations in different countries. So it's not just capital when we're talking about the DTAs, although in part that does have an impact on capital, but there isn't a level playing field with respect to regulation on DTAs. And then the resolution funds, what's really important with the new directive is the regulation on bail-ins. So it's really important to separate out what's happening in the financial industry from what's happening in terms of sovereign risk. And so I think the initial approach has been quite positive before going to resolution funds, there will be bail in on the balance sheets of the different financial entities. So that the taxpayer bill will be kept as low as possible unlike what happened to date.
Manuel González Cid
I totally agree with what Angel said, but I would like to add something that I do think is relevant. If we look at 1 year back what was happening in Europe then and what's happened now, we have made some progress. Sometimes people are a bit skeptical about what happens in Europe. But if we look at what was happening 1 year ago, it's important to see now we do have a single supervisory system, which is being prepared and ready to work. We've got a draft directive from the European Council with the very important factors improved -- improving, the separating out of sovereign risk and banking risk. And that will mean that individual asset quality in the different banking entities will be much more important than their post code. And that means that discussions about the possibility of having this European resolution fund won't be so important as long as there is a national resolution funds in all the different countries and additional activities with the European stability mechanism in order to have the bail-in of up to 8%, as the junior debt holders are bailed in before the authorities are brought in either at national level or at European level. I think that's the most important thing to take into account.
Tomas Blasco Sánchez
Okay, well, that was pretty well the last question I think. So thank you for attending this webcast. And do remember that any questions that haven't been answered now will be covered by Investor Relations during the rest of the day. So thanks. And those of you who are lucky enough to go off on holiday, I hope that you enjoy your summer holidays. Thank you.
Angel Cano Fernandez
Tomas, I wanted to say, I wanted to wish everybody happy holidays. But it's important, I think, you've all deserved the rest. We've had difficult times. We've had to get through them, that's pretty stressful sometimes. And so it will be great if people can go on holiday and really charge their batteries. So enjoy your holidays.
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