Angel Cano – President & COO
Manuel Gonzalez Cid – CFO
Eva Hernandez – Morgan Stanley
Javier Bernat – Caja Madrid Bolsa
Jernej Omahen – Goldman Sachs
Arturo de Frias – Evolution Securities
Carlos Digrandi – HSBC
Matteo Ramenghi – UBS
Banco Bilbao Vizcaya Argentaria SA (BBV) Q4 2009 Earnings Call Transcript January 27, 2010 3:30 AM ET
(Interpreted) Good morning, everyone, and welcome to this presentation of results for 2009 here in the BBVA Group. We are going to use the usual format. First of all, we will talk about the results at Group level. Ángel Cano, our COO, will be talking about that; and then Manuel Gonzalez Cid, our CFO, will start to talk about the different earnings in the different business areas; and then we will have our Q&A period.
And as usual, first of all, we will start with the questions rising here in the room. Secondly, we will take some questions over the conference call. And then finally, we will take in the questions that come over the webcast. For those of you who are here physically, you can come and have a cup of coffee with us in the next door room once we finished the presentation and the Q&A. So without further ado, let’s get the floor to Angel.
(Interpreted) Good morning and welcome to this BBVA results for 2009. As we expected, it’s been a very complicated year in macroeconomic terms. After starting with a lot of uncertainty and after all the measures taken by the main governments worldwide, the financial markets did stabilize at the beginning of the year, but then in the second half, we had to solve all the questions about the speed of economic recovery and also what kind of timing we could expect in the withdrawal of the qualitative easing and other programs and what was going to happen with the public deficits in many countries.
So given that scenario, BBVA once again has done – stood out because of the excellent earnings they got in 2009. Actually it was characterized by magnificent operational profit, which has enabled us to really take measures that would anticipate what could happen in the future. We will be explaining that a bit more later.
The idea is to show up the balance sheet though and to really consolidate our franchise. In particular, we ended the year with more provisions, with greater efficiency, more solvent with better diversification, and I’d say, more resistant than we were a year ago. And we made that compatible with, at the same time respecting commitment to dividends and payout that we gave at the beginning of the year and meeting all our business targets.
So we’ve seen a growth of 18.2% in net interest income – sorry, 18.8%. But if we compare it quarter-on-quarter, we could say it’s gone up 4.5% or we can compare it against the same quarter last year, in which case it’s grown over 16%. And in particular, I’d point out the especially good price management that we’ve seen in all the franchises that the Group’s businesses and the improvement in the mix of customer funding where we have the tendency to move from time deposits to current accounts.
The gross income is nearly in double digits, 9.9% growth. And the net interest income has also gone up nearly 6% – that would be gross income, sorry, has gone up nearly 6% quarter-on-quarter and 16% against last year. And the quality of the results in gross income has also improved because the net trading income has gone to 7%, which is a better percentage than last year and a better percentage than two years ago. And if we add an improvement in our cost profile, we have seen a drop of over 1% in costs. We have managed to improve by more than 4 percentage points in our cost income ratio, reaching 40.4% at Group level.
Here, talking about cost management, what’s important is the dynamic management of network and all the measures that we’ve taken that we rollout the transmission plan that we established in 2007. Improving efficiency is something that we’ve done in all the different business units within the Group, as you can see.
And we’ve seen an improvement that doesn’t only impact costs, but also revenues, because as our revenues improved, we increased the gap between revenues and costs by more than 13 percentage points, which means the growth in operating income of 17% and we also improved quarter-on-quarter by nearly 2% and nearly 29% against the same quarter of the previous year. And here I would highlight that this is the biggest operating income that the Group has ever produced and for us and for you.
This line is the critical variable. It’s really the benchmark for how well we are managing the Group and it’s also a buffer when we are talking about risk – the cost of risk. And it’s meant that we are still leaders in efficiency, and we’ve gone up 170 basis points in the market share of operating profit to the market share of total assets. And that’s a much higher level then that we have than any of our peers, which means that the recurrent profit is nearly double that of our peers.
As I was saying, it’s made it possible to take measures to anticipate the future. First of all, we’ve had several early retirements in the year, both in Spain and some in South America, for 551 million euros. A lot of that was booked to the final quarter of the year. We’ve got better coverage of our property with more provisions going up to a coverage ratio of 32%. And in terms of our loan loss provisions, we have set aside additional provisions of over 1.41 billion, especially in Spain and in the United States.
And what’s this meant in terms of the future and how we see the future? Well, here in Spain, as you can see on the screen, after seeing a slight drop in gross additions to non-performing assets, we have set aside over 1.8 billion basically in developer risk and property risk. More than 81% of this classification of subjective doubtfuls, which are still pending payment, are in real estate, which gives us that 3.77 billion figure as a total.
This is a consequence of the fact that we’ve been seeing sufficiently positive indications this year to think that we can feel totally comfortable. So we decided to look at each risk within this loan book, and we decided that on the basis of our best expectations of recovery, this is probably a figure, which would give us greatest comfort.
So more than 1.81 billion has been classified as subjective doubtful that so excluding this, we would have 4.3 NPA ratio, and the public side of that is 5.1%. So our anticipated specific provision is then 805 million. So we have been quite conservative in terms of property purchases with no new purchases this quarter. And we’ve also been managing our write-offs, and you can see that they are performing as would be expected in a natural way.
You could say there is no surprises there, no extraordinary one-off write-offs. Because we are anticipating things and always looking at the future of these provisions, we are focusing above all on our developer exposure here in Spain. It’s over 17.74 billion euros that we are talking about, with a market share under this item only of 5.6%.
Now, that figure, 3 billion, what we term doubtful risk, a lot of that is subjective doubtful risk that we decided was doubtful, although they are performing, which gives us a 17% NPA ratio. Expected loss on this 3 billion is slightly above 900 million [ph] euros. And the specific provisions set aside for this loan book are over 1 billion. So our first conclusion is that we have more than sufficiently covered our risk on this loan book.
What about the kinds of securities that we have for this package of doubtful loans? More than 6 billion. Therefore, what we are taking into this calculation of expected loss is a haircut of over 65%, as you can see in the slide. So our conclusion has to be that we are anticipating the possibility of non-performing assets on the basis of our worst-case scenario. Secondly, the rest of the outstanding loan book is up-to-date in its repayment and there is no additional impairment that would lead us to set aside any more provisions with doubtful risk.
Additionally, if we want to do stress testing on the rest of the outstanding balance on our loan book and if we apply the severity that we have for doubtful risk here, we would be talking about a maximum impact over the next few years of about 10 to 15 basis points of the cost of risk. And we think that we can feel quite comfortable then with what’s happening to the cost of risk here and how it’s likely to evolve over the next few years here in Spain.
Talking about the US, things have been pretty similar there. Looking at commercial real estate, we’ve had to focus carefully there. The normal evolution of doubtful debt is very much in line with previous quarters. But as a consequence of the capital enlargement in the United States in that one-off booking, we’ve seen a volume of provisions of 533 million euros in gross terms, which meant that NPAs in the USA have gone up 120 basis points to 5.2%.
And you can imagine that because of the higher provisions, which is one-off, the coverage has gone up 11 percentage points. But anyway, we should highlight that the volume of provisions here are charge-offs, as we call them there, is over 800 million euros just in 2009. And in this specific case, we think that the current cost of risk, that is without the one-off, has probably gone as high as it will.
We’ve also done the noble annual revision of the goodwill we have on the investment in the US, which has led us to set aside a provision for impairment of goodwill for over 700 million euros. As you know, that has no impact in economic terms on the cash flow or on the capital because it’s an item in which we are just making a shift from P&L to reserves.
Doing the same kind of exercise, as I did when I was talking about Spain, the total loan book in the US is 28 billion euros, of which 20% is the loan book that we consider to have the highest risk. That is the non-performing assets related to the property and the rest has an NPA of 2.8%. And I would say that this level is quite stable. This 20% of loan book, more than 20% of it – sorry, has an NPA of 20.2%.
So of all of this, 30% is non-performing now, but we’ve added there some charge-offs that we’ve made over the year against this loan book in the US. And we do this because the way to provision the collaterals or the guarantees we have in the US is slightly different from what we do here in Spain.
When there is an impairment on your loan book instead of setting aside a provision, you directly charge it off the account. And that’s just for the principal that’s been impaired because of the value of its security. So if we include the gross up on the risk that we have on the balance sheet, we get a total of 1.9 billion euros, which is 30% of the developer loan book in the US.
The provisions that we’ve made over some of the provisions in the charge-offs is 1.2 billion euros or 63%, which means that the fair value of the security allocated to this loan book of NPAs would be 37%. And I can assure you that the collateral values are totally updated to the end of the year. And this exercise of anticipating things by more provisioning has been done on the basis of analysis of each risk on that commercial real estate loan book in the US. We’ve done the same stress testing that I was talking about in Spain as well.
Applying the same standards with respect to the severity of impairments, we would be talking about a 13% over the cost of risk in the US. That’s a recurrent cost of risk. So once again, we feel that this is quite comfortable. It can be absorbed by the operating income that we will be making in the US over the next few years. But anyway, in no way do we think that there is any impairment on the rest of our loan book.
The strength of operating income has meant that we’ve been able to absorb the 2.4 billion more in provisioning, pretty well just with the gross of this operating income. And the operating income at the end of the year was over 2.4 times higher than the provisions that we set aside. The quality of the doubtful loans, as you can see, we’ve got secured loans, which account for 195%. And in those unsecured loans, if you look at the provisions that we’ve got on the balance sheet, we’ve got 128%. Apart from that, we’ve got unrealized capital gains to date of over 2.8 billion euros, and for the Group, we’ve got a 57% coverage ratio.
So moving on to capital adequacy, the attributable profit before subtracting one-offs was 5.26 billion euros, which went down 2.8%, or plus 2% in constant euros. With one-offs, which would be the 704 for the impairment of goodwill, and then the rest that we have from the one-offs that we did in the United States for provisioning would give us 1.05 billion in one-offs in 2009 after tax. And that’s down 395 million in 2008 after tax.
So in no way does that undermine our promise to pay out 30% against the net attributable profit, excluding one-offs. So that’s our commitment. And we are going to propose to the AGM next March a final dividend of 15 cents of euro per share, which would mean 42 cents per share in 2009. So the dividend yield at the moment is about 3.5%. And I’d say that in – it's just probably one of the best kind of yields that you can get on the market at the moment.
Next to our capital, in the last quarter, we saw a generation of another 30 basis points of organic generation of capital, which has offset what happened with the goodwill that 10% – on the 10% holding that we had in CITIC at the end of the year. That happened because in the final quarter, the stake in CITIC, which still includes the 5% that was booked to the first quarter of 2010 had a goodwill, which had to be deduced from the core capital. So at the end of the year, we had the same ratio of core capital that we had at the end of September, which is 8%.
And if we look at our returns in return on equity and in returns on equity without intangibles, we’d be talking about 21% in ROE [ph] and 22% in ROTE, and excluding one-offs, the return on equity would be 16% at the end of 2009. In terms of the dividend, we can compare ourselves against our peers. We are giving 3.5%, nearly double the average of our peers who are offering 2%.
And in earnings per share as well, excluding one-offs, you can also see that we compared very well against our peers. So we’re talking about a year, which was characterized by recurrency in operating profit anticipation and by high returns on profitability, with a growth of 17% in operating income, reaching record highs, efficiency improving 4 percentage points, reaching an attributable profit without one-offs of 5.26 billion euros, which has made it possible to anticipate future events with subjective provisioning with additional provisions in order to boost the capital adequacy of the Group and its profitability and be able to commit to the payout that we had promised.
And at the same time, we’ve been able to manage our businesses properly so that we can transform them for the future and invest in technology. We’ve put over in more than 1.5 billion euros into investment in IT this year, and above all, we’ve been able to respect our commitment to keep up the dividends and offer this dividend yield of 3.5% that was so spectacular.
Manuel Gonzalez Cid
(Interpreted) Okay. What I will do is talk about the highlights from the different business divisions. And I think the message here really is that the Group is increasingly diversified. We have different pools both geographically, but also with regard to businesses that are generating results. We have a headline to try and summarize the quarter and the year for each of these business groups. I’ll start with Spain. We’ll talk about anticipating a risk management.
And if we start on the operating side on the income statement, here you can see the performance, and I think this is excellent. There is 3% growth in net interest income, and expenses are down 4%, which has increased operating income. And don’t forget, there are some units that do not have individual balance sheet. So the risk management of interest rates are not within the business groups. They only manage volumes, prices, and contractual commissions with customers.
So this performance in the context such as the one we’ve just seen in 2009, I think, is enormously excellent. A major effort has been made to defend the spreads, growing in transactional deposits and funds throughout the year, and at the same time, we’ve been trying to make a major effort for repricing stock and also in credit investment flows, which we’ve even seen in turnover, where we’re seeing major improvements in this last quarter.
The cost control has been amazing with the measures that we’ve been taking in as an anticipation. We’ve been doing this since 2006 where we have changed the whole structure of our branches. As you know, a few – one quarter ago we did a sale and leaseback operation with our branch network, which has given us great efficiency of 35.6%, which is over 1% increase – improvement with regard to risk quality.
I’m not going to go into too much detail here. I’d just show you this slide that Angel has just shown us. On a group-wide level, which shows the coverage ratio that we have for the doubtfuls in Spain and Portugal, including the subjective doubtfuls that we’ve included in this portfolio at the end of the year, where we have a coverage rate that are excellent and with major guarantees for the book as a whole.
I’d also like to mention that all this investment in technology that we’ve made and that we are continuing to make is leading to major changes in how we roll out our distribution model and our servicing model. So we are making major changes in how we manage our network, which makes it far more productive and greater returns, not just in absolute terms, but also in relative terms that we compare ourselves with our peers because we are now generating 45% more in net interest income in each office and 45% more business per branch if we compare this with the average of our peers.
Let’s move on to Wholesale Banking and Asset Management now. Well, here the message is how we are moving towards generating income of greater value added. And this has to do with China as well. And I’ll go into this in greater detail. So if we talk about the major divisions in this area in corporate and investment banking, we are generating a gross income with a growth of 22.6%, which is the best way to measure the income in this business. And what’s also important for us, of this gross income, there is a greater weight for fees. The fee income is growing, which makes a more recurrent income, which gives us closer relations with our customers. Here we are talking about 37%.
I would also like to say that from the point of view of global markets, it’s been a relatively good market in general for all areas of global markets. In our case, what I’d like to highlight is that it’s also been this way for us with 36.6% of growth and 3% in growth of our net interest income. But what is also important is that the weight of our business with customers continues to increase in all our units.
We’ve shown here that in global markets, 41% of our business outside of Spain is associated with customer relations. And this is the message of the quality of our results. These results are not just a product of high leverage or the positions that we hold. This is because we are working with our customers to provide them with a whole range of services of the very best quality.
Moving on to China now, we are continuing to reinforce our position in Asia. This is a long-term project that we’ve brought up on several different occasions. As you know, during the quarter, we’ve bought another 5% stake, Angel has just mentioned all of this, with an additional investment of 1 billion euros. And at the moment, in the equity method in this term in CITIC, we have 154 million euros. But to this, we need to add the results that is coming from our network in Asia, because two or three years ago, we set up a range of branches in the main countries of the region. So 2.5 years later, this network is now profitable and offering results at 36 million euros in just over two years when we started to open these branches.
So at the moment, I think we can say that the Group is generating 190 million in results in Asia. The reason I talk so much about Asia basically is because we think that 60% of world growth over the next ten years will come from Asia. That’s unbelievable. So we consider that a group like the BBVA with a footprint that we have in some emerging markets, especially in Latin America, and with a strong position in global markets through the branches in Europe, we have presence in the US, Latin America, et cetera. So we need to think about a region like this with growing flows in Asia.
So basically our growth strategy is aimed at these areas we can see here. From retail banking, we are concentrated on learning. And to do this, we are going to roll out in two business units, which are considered strength – strategic. One is the car finance. Last year in China, they showed 9.3 times as many cars as they sold in Spain, for instance. So the potential here is enormous in this market.
And then on the other hand, we have a joint venture in private banking, which is another component, which has shown incredible growth in China, because if you look at the enormous population in China with increasing purchasing power, these joint ventures will come online during 2010 and they will start to generate results in 2010. In wholesale banking, we are focused on expanding all our divisions in Asia through this network of branches we are in global trade finance where we’ve gained market share over the last two years, above 5 percentage points in the share in overseas trade in Asia and Latin America, which is a critical element in my opinion.
In trading, we are going to support our close relations with the customers in the region. Also in the pensions business, which is a concern of the Chinese government, and we are one of the leading experts in pension systems because of our presence in Latin America. And our idea is to reinforce our entire footprint with new – opening new branches and larger teams, what we call Plan Asia 2, which is the second phase of the plan that we started two years ago.
And just to give you an idea, over the next three years, the results the Group will get from our presence in Asia will explain 8% of the Group’s attributable results without any need for further investments over and above the ones we have already announced. So this is clearly an area of growth that we will make increasing contribution to the Group’s results.
Moving on to Mexico now. The headline in Mexico, I think, the worst is over. We’ve bottomed out, especially from the point of view of the quality of the assets, risk – the cost of risk and the NPA ratio. If we look at the performance in Mexico, we can see that the first part of the year was highly affected by the economic climate because there was a recession despite the improvement in the final part of the year. They were still 7% in GDP. The economy is estimated as going to grow by 3.8%. The IMF announced a 4% growth for 2010. So we think that they are changing the face.
Now we can see how the investment has going to be improved over the year with strong growth once again in the fourth quarter. It’s true that the fourth quarter in Mexico is always seasonal to a certain amount, but obviously the business activity is starting to improve significantly, and also in different areas of credit, which also includes these that show poor performance during the year.
And if we look at customer deposits, we can see the pathway filling is 1133 as quarter-on-quarter growth. This is the improvement that we’ve seen over the year with the improvement and strong growth in the fourth quarter. And if you consider the market position at Bancomer over the year in transactional accounts and savings accounts has gained over 80 basis points throughout the year. Obviously, this means that we are looking forward with enormous optimism in such a complex environment where GDP has fallen.
There has been enormous folds in the most profitable portfolios such as consumer financing and credit cards of 14%. But we have improved our trading income. We’ve been able to have negative cost net interest income we have improved. We have reduced our costs. And this way, we can protect on net interest income, which has grown by 5.4%. And this has improved our cost income ratio to 31.9%. So apart from the difference with regard to our peers, I think the situation is an excellent one in December.
On the income statement in the provisions, we have introduced the effect of the recalibration of our model, because as you know, every year we have to re-estimate our estimate with the latest information from the latest year. So we are incorporating information at five or six years, which is the history that we have for credit cards in Mexico.
Obviously the last year has probably been the worst year in this whole cycle from the point of view of the performance and the losses on the credit cards. But the introduction of these data has led to an increase in the current value of the expected loss in 2010 for these credit cards portfolios, which are completely covered by provisions by the end of the year, where this is a 73 million that we have introduced in this quarter.
Without this effect, the provisions would be stable in Mexico. And as you can see, the risk premium, the most recurrent one, is now below 5%. So these levels are very similar to the levels that we had in the third quarter of the year with a total NPA – where it is very, very slightly throughout the quarter, and this is basically associated to the whole issue of credit cards under the coverage ratio of 130%.
So in Mexico, once we overcome this cycle in the credit card business, which in our case were provisioned against this, so it’s had less effect. So I think the future is going to improve the NPA reach. And there are also going to be improvements in the cost of risk.
Moving on to the US now, we have already discussed the whole issue of the impairment, the one-off, the provisions, and recognizing additional NPAs and what we’ve been doing with our real estate loan book. So I just want to put across a very important message. The strength of the operational earnings, it really sets us apart from our peer group.
Here you can see the net interest income improving 7.8% with selected growth in activities, strong defensive prices with the impact of repricing, which has been quite important, while focusing very seriously on profitable business. The synergies that we’ve seen have made it possible to bring down costs by about 7%.
And here we are absorbing the impact of things such as the 50 million euros additional to what we have already contributed to the FDIC through extraordinary contributions in putting out the crisis, the commissions, the fees we have to pay, and some of the effects – half of them aren’t going to be recurrent in the future. Nonetheless we are still bringing down costs 7%. And that means that our operating income has grown over 20%. Now that really sets us apart from peers in the American banking industry at present.
Current year is having a very positive impact. It is performing very well, but nonetheless even without guarantee, we’d still be growing in operating income with very sound earnings, at least double-digit. Moreover, we are also improving efficiency. We are already below 60%, and we are better than our peer group in the US with an improvement of 60 points in the year – 6 percentage points in our cost income ratio, without having yet rolled out the platforms that we want to have in Compass that we have one single united platform for all of the businesses so that we can take advantage of synergies by holding our retail business.
Here you can see what’s happened to risk. You can see NPA ratio and coverage ratio. In red you see what would have happened if we haven’t done that in-depth reclassification of our loan book that Angel talked about earlier. And I wanted to say that this situation, because we are anticipating things on the basis of our operating income, we are now relatively much stronger than others in capital, in provisions, in capital ratios because we’ve recognized the possibility of anything that could happen in 2010, and there we are clearly outperforming our peers who have set aside early on 2009 without looking forward. So we’ve made the provisions.
And we feel increasingly sure about the consistency of the opportunities that we can see for the BBVA in the future in the USA, because in the market, there are some enormous structural changes taking place in the economy. So we think that we could do very well in insurance as well because that will mean we will get a lot of the kind of business opportunities in the areas that we have know-how in.
So to start with, in terms of market opportunities, things are changing radically. There is a process of consolidation in the US, we are seeing a lot of banks disappearing that used to be very strong with critical mass in reference market. However, there are very few. But we are one of them. And we are also seeing re-intermediation of financial services by banks. So more and more banks are doing this re-intermediation. Traditionally, banks controlled a very small part of this financial business as a whole.
So with this crisis, a lot of the specialist shops are now not getting the confidence they used to. So people are shifting their banks. For example, in mortgages. Before the crisis, 60% of mortgages weren’t originated by banks, but by property agents. And that’s now gone down to 10%, while banks are generating the highest volume of mortgages. And servicing, it’s the same, and consumer credit, it’s the same.
We can talk about all sorts of areas where this re-intermediation is shifting definitely in banks’ favor. We have also got a great opportunity in cross-border business because we are an international bank with an international footprint, in the context in which the American economy is increasingly opening up to abroad, with the deleveraging of American consumers. And that has an important impact on business models. We are based on our relationships with our customers.
And the strength of our bank is in distribution network and the possibility of cross-selling with our customer base rather than selling one-off products to one-off customers. We do this relationship banking very well. We’ve got lot of experience in it. And the cross-selling ratios in Compass have gone from 1.2 to 1.8 products. And when we are talking about new customers, the ratios there would be 4.5 products per customer.
And finally, the development opportunities in corporate banking as well. Over the next three years, we will see maturities of 260 billion in corporate banking. And we are talking about a lot of lending with small entities, and there when we see the refinancing, we think we will be able to move in and service bigger and bigger customers with bigger international footprints.
We think that over the next three years, USA will come to account for about 15% of the Group’s net attributable profit. Once we’ve seen what happens to the cost of risk, we are expecting it to flatten out and we can expect it to come down even in 2010. And that will be very marked in 2011 and 2012 after we come out of this credit cycle where we are currently operating.
And then South America, there we can talk about how dynamic all the different items on the account are, in all the businesses, in all the countries. In pensions, in insurance, and in banking, we are talking about growth on operating income of 25% and a net attributable profit growth of 21.9%. Our efficiency ratios are already equivalent to the Group level, 40.6%. And the cost of risk is pretty stable, and we are getting excellent results in both the banking business and in insurance and pensions. You can read about that in the quarterly report, but everywhere else too.
At the end of the year, we have also included the impact of the inflation legislation in Venezuela, and there is a minus 90 million there, which we have absorbed very comfortably this quarter. And I think that that’s what I wanted to say about the different business areas. And so that’s the end of my part of the presentation.
(Interpreted) As Manuel Gonzalez said and as I said at the beginning, the franchise is sound. It’s efficient. We are getting returns from all of them. The operating results are reaching maximum records for operating profits of over 12.3 billion euros, cost income ratio of around 40%. And once again this makes us the leader amongst our peer group.
I think we’ve made it very clear that the future of our management for our business is going to be good, which leads us to think we can concentrate more on our business priorities rather than on managing the crisis. So I think our portfolio is very sound. We have clear and transparent information. We are ahead of the market. And all of this is compatible with maintaining solvency, greater solvency than last year, greater returns than last year. But at the time we are expecting the dividend that we promised, as I said at the beginning, the return on our dividends is way up at the top in comparison with our peers, and we are continuing to manage our business and focus on our business priorities.
So looking ahead now, first of all, after everything that we have done throughout the year, I would say that the BBVA is the bank in the best position to face 2010. Once again, 2010 will be a relatively difficult year, not as difficult as 2009. There are regulation changes that would affect capital, liquidity. The advantage that we have in the group is that we have a clear focus on the customer, not just in the retail, but also in the wholesale banking. And we have the retail funding on the balance as a whole. And our management model for liquidity is a decentralized one.
Our business focus is far better diversified than it was a year ago and of course much better than two years ago, especially in the regions that are showing the strongest macroeconomic growth for 2010. Manuel has said that the – talked about the growth that he expect from the market in Mexico, in Asia, the growth that we are going to see not just in the US, but especially in the Sunbelt where we have our presence, but also clear edge that we have in Spain over our rivals.
Moreover, we are well able to face the changes in customer habits the way they use banking services highly leveraged on technology. And that’s what we’ve been doing in recent years with the dynamic management of our branch network, which means that we are ahead of all of these changes.
So my conclusion would be that the BBVA in a preparative point of view, we are facing a difficult year, but quite honestly, we have a sound and solvent franchise. So I don’t see any problems.
So Manuel and I are now open to your questions.
(Interpreted) So let’s start the Q&A session with questions from the floor. Please if you would introduce yourselves before asking your questions.
Eva Hernandez – Morgan Stanley
(Interpreted) Good morning. Eva Hernandez from Morgan Stanley. I have several questions about the results. The first question, during the presentation you said that much of the efforts in provisions this quarter is due to an effort to stay ahead. So could you give us a bit of guidance of what we can expect for next year and especially whether given the effort that you’ve made this year in recurrent terms, are we going to see a fall in cost of risk next year?
My second question is, the ALCO portfolio, what’s their contribution to the results of this quarter? And then I have a question about the movement of the EFS. I’ve seen there is a positive move of some 500 million. I’m not sure I read this properly. Could you confirm this figure and tell us – and explain it to us? The movement, the EFS in the quarter – the IFS, I think it was positive, but maybe you could confirm this.
Then maybe you could explain the situation in Venezuela, and do you see any risks here in the future? And my final question concerning the results, the non-recurrent charges in the quarter, I’m a bit confused about what’s included in the P&L and the non-recurrent billion that you announced for the quarter. Could you explain a little bit more about these charges – the one-off charges? Which of these are accounted by the billion in extraordinary in the quarter and which were included in your income statement? Thank you very much.
(Interpreted) As we were saying during the presentation, in terms of the end giving guidance for 2010, one of the main aims we’ve had, and as I said in the presentation, was really to clear up the future so that we won’t permanently having to worry every quarter about what might happen and if we’d see further peaks in the third quarter, we said we thought the peaks in NPAs would possibly be reached between the second and third quarter of 2010, above all here in Spain.
And our aim was, as I said, to anticipate this instead of waiting until that happens, to hit highest provisioning levels right now. It’s possible that some of the objective doubtfuls at the end of the day might not go into a risk and people will continue to repay that debt, but that’s what we think will happen. And along with that, we’ve got a certain volume that’s the 805 million that we showed for Spain and the 535 million for the United States. And that means that we are peaking in the cost of risk in Spain and in the United States right now. What will happen next year then? I’d say that we’ve already peaked in cost of risk without one-offs. I’d make that clear so that we don’t mix up the one-off charges in the last quarter, because we’d be talking about improvement spending and cost of risk in 2010 compared to 2009 without one-offs.
And I’m going to let Manuel talk about your next two questions. But in Venezuela – well, Venezuela, as Manuel said, first of all, that was the impact of the hyper inflation on the P&L. That’s difficult to calculate. It’s a very technical matter, but we know that when you get over certain inflation over two years, you move into hyper-inflation and that has an impact on net assets, and with that 90 million impact on 2009 accounts there. But then we’ve also got the devaluation we are expecting in 2010. But it’s still not quite clear what exchange rate will be applied to the boulevard at the end. And here, when we are trying to consolidate our accounts here, it might be 2.6, it might be 4.3. But anyway, our best focus for next year would be that that will accommodated by South America’s account and shouldn’t generate drops in the results of the region as a whole.
Manuel Gonzalez Cid
(Interpreted) You were talking about trying to understand that billion in one-offs there. Well, first of all, we’ve got impairment on goodwill in the US, that 704 million euros. And before we were saying that this is a goodwill that when we did the purchase, we’ve already subtracted from capital. We said the impairment doesn’t have an impact on net assets on our P&L because the payout or the dividend is applicable to the gains without one-offs – the profits without one-offs. So that 707 million in impairment and 346 corresponds to the one-off charge for the United States, that gives you the 1.05 billion, which we have deducted from the total profit for the year.
And with respect to your questions about the ALCO portfolio, for the year as a whole, the net interest income on the ALCO interest risk hedging was 6.3% for the year as a whole. So it’s marginally – well, there was a very small increase between the third and the fourth quarter. In terms of what happened to the available for sale, the AFS, for this risk hedging on the interest rate, there wasn’t a lot of change at the end of the year. The portfolio was on the euro balance 31.4 billion euros, and this portfolio has an average maturity of two years. It’s got significant unrealized capital gains. And in a way, it compares against the position on the balance sheet of the current accounts and deposits and savings accounts of about 50 billion euros, 47-point-something to be precise. So this portfolio is moderate, given the size of the bank and the contribution to the net interest income. So we can’t say that it was absolutely critical to the net interest income of the Group as a whole.
Any more questions?
Javier Bernat – Caja Madrid Bolsa
(Interpreted) Javier Bernat from Caja Madrid Bolsa. I’ve got various questions. I would be interested to know if you could give us a little bit more color on your forecasts regarding the growth of the business in Mexico. A month ago, the market consensus for growth in Mexico was 2.5% and now we are at 4%. So have you reduced – you have reduced your credit card loan book. How much though, 20%, 15%? And it was about 30% before. The mortgages, I’ve seen the latest data to September, they were growing 3% to 5%, and also business credit. So all in all, it would seem that the scenario is really changing qualitatively. So what are you going to be doing there? I mean, that’s 25% of your total earnings that come from that country. So what are you doing there? How do you see things?
Another question has to do with your business here in Spain. You’ve talked about the cost of funding not [ph] 60%. It would seem that it might be bottoming out. I can’t imagine that this scenario would be sustainable. And what would happen if there was a possible rise in interest rates? Do you think that this is a sustainable level of funding? And a question that always comes out, what would happen if those – the rating that would have an impact on your cost of risk, it would go directly to the liabilities side of your account. What’s the ALCO doing about that if anything? Could you talk about that a bit? And then with respect to what you said about developers, could you tell us how much of that is land? I think there is a big amount not just with the bank, but for the market as a whole, the financial sector here in Spain. And that’s – yes, I think that’s the summary of all of my questions if you could answer them. Thank you very much.
(Interpreted) Let’s start with Mexico. The numbers that you mentioned with regard to the better performance of mortgages and credit cards, there is 16% drop in credit cards and about 2% in mortgages. To 2010 now, in general, macroeconomic expectations as usually worse than what people agree on. In Mexico, we are very similar to the consensus, about 4% growth, as you said. What you must realize in Mexico in 2010, if we – the activity has dropped off in 2009. And as Manuel said in this presentation when he was talking about Mexico, we are seeing that it’s picking up – business is picking up towards the end of the year. And we think this is the way 2010 is going to start. So business activity is going to grow and improve throughout 2010, we believe, but we think – but in 2009, it had dropped out. So if you look to the average, it’s going to be very similar if we take the year as a whole. So quite honestly, we think that 2011 will be a lot better if this trend continues, the trend that we’re starting to see now that the business is picking up.
With regard to the rest, as we said before, the volume of provisions quarter-to-quarter throughout the year is, I think, we hit the ceiling in 2009. So the cost of risk in Mexico will improve slightly in 2010. And that’s about all I have to say. With regard to cost management, I think that’s in line with all the rest of the group. Manuel?
Manuel Gonzalez Cid
(Interpreted) Javier, with regard to your second question, we – you asked quite a lot there. And these are important questions. With regard to the cost of liabilities, if you look at our leaflet, cost of funding, there are details in here as we usually add about the cost and the return on assets and funding in the residence sector and as a group as a whole. And basically, our average cost of funding in the residence sector is 0.61, and it’s continuing to fall. For instance, it’s dropped by 1.2. So it has fallen almost about to half its level. So we don’t have a lot of margin to drop it further with interest rates the way they are. This is certain amount we can do, but bear in mind that our growth mix basically has been the current accounts, transactional deposits, savings, and we haven’t got into any kind of term deposit wars.
We’ve given the least return on term deposits of any banks. So we were with transactionals and with customer funds, and that means that profitability of our deposits has been high in comparison with our peers who had to pay much higher prices for term deposits, much high above market costs, that being about three months – three months with 70 basis points, which means that you have a negative margin in the intermediation market. And this is – it's very difficult to recover from this over time. Because it’s not that you’re up [ph] or it is income is being affected, but rather your trading income has started to generate losses. And this is something that we have not done in Spain and Portugal.
With regard to investment or lending, don’t forget that there has been a fall in the return on funding, which was 3.41. So we are generating a trading income of 2.80, which is a fantastic margin. Very few banks have got margins of this kind. So we are resisting this process of review of interest by generate – by increasing our margins in our new products. Also we are generating margins in the back book, but at the same time, we are absorbing the effect of repricing mortgages, which obviously the mortgages are going to be repriced down with lower rates. So this is what we are saying. This will continue in the first quarter of 2010. So we’ll have a look at our customer margins, whether these will stabilize in this first quarter of 2010 because of the repricing of our mortgages to current prices and because our trading margin can accept these higher interest rates. And obviously here we have to have our strategies of how to tackle the market climate in 2010.
Quite honestly, we are quite optimistic about this, because BBVA has full access to all the capital markets as you’ve seen. In January, we’ve conducted funding operations of more than one year of around 5 billion, where we are not paying negative margins of 2.3 points on top of the (inaudible) three months. We are getting competitive prices over costs [ph]. So this generates lending. We can afford to pay this in risk adjusted return. So from the point of view of looking forward to the rest of this year, we are very optimistic we don’t think that we are going to see any major increases in interest rate in the euro regions. We’re going to continue with low interest rates and fairly stable for sometime yet in our opinion. I don’t want to say exactly how long, but I don’t think we are going to see major increases in interest rates in the short-term.
From the point of view of the ALCO, the sensitivity of the financial margin at the moment is about 3%. So increases in interest rates would generate a reduction in the financial margin of about 1 point in interest rates in parallel throughout the curve when we generate a reduction in the financial margin about 3%. So it’s a highly manageable sensitivity, if you like. But this is not what we would consider the most likely scenario over the next three to six months. And that’s basically my answer to your question.
And with regard to developers, with regard to your question about the land in our NPA portfolio, the weight of land is 41%. In the outstanding portfolio, it’s 25%. One of the reasons that we are so comfortable with our developer risk structure is that the quality of this risk in terms of what we – financing is very high, because with regard to our exposure to the land, 75% of this is urban land. This is land within major city centers. We are not talking about land that’s apt for urban development or rustic or being built, but we don’t know where. We’re talking about land – urban land in cities. And this is an important point, which shows why Angel was so comfortable with our outstanding portfolio at the moment. Any further questions?
Jernej Omahen – Goldman Sachs
My Spanish is not good enough. It’s Jernej here from Goldman Sachs. I just have a couple of questions. The first one is, just staying with this topic of credit quality I guess. One thing is obviously the P&L charge, the other thing is the gross inflow. And I think most people are going to be more concerned about the gross inflow figure in Q4. It was my impression after Q3 that BBVA was suggesting that there was some sort of a peak achieved in gross inflows. And I was just wondering if you’re willing to say now that compared to – 2010 compared to 2009 is going to see in your view a substantially reduced gross inflow figure into NPAs as well, I guess, first relatively pointed question.
The second question is on the high level of collateral that you show on your non-performing loans and your non-performing assets. Is this to say that BBVA expects the workout process to be relatively swift and painless as you go through it? And in that context, could you give us a sense what you think the NPL balances will do as you go through 2010? Should we expect a sharp decrease there?
And then the second set of questions is, again continuing to debate somewhat on your – on BBVA’s net interest income performance, you have very helpfully pointed out that the full year increase is around 18.8% and that the ALCO portfolio contribution of this is around 6.3. That still leaves roughly 12%, if you want, of core increase of net interest income year-on-year, or something along those lines. Given that the loan book growth is relatively anemic, I was just wondering if you can split that 12% growth.
So growth ex-ALCO portfolio into the key constituent parts as you see them, i.e., how much is due to the time lag in repricing? How much is due to the real increase in asset spreads if you want? And just the final question, I guess this one is a bit more strategic because – I only ask it because I thought it was alluded to in the presentation. The capital ratio is stronger. There is a lot of things moving, not the least in the US. Do you feel that BBVA even under the new regulatory changes coming up has some capacity to deploy capital organically – inorganically without having to raise capital, I guess? Thank you.
(Interpreted) Okay. First of all, with respect to the NPA ratio, as I was saying, in the third quarter we were forecasting – or we wanted to estimate a time when we could see NPA ratios peak. And as Eva was saying – or as I was saying to Eva, there was a lot of uncertainty on some of the loan books. Things were different of course. But we didn’t exercise to estimate what the levels would be, and we thought that probably the summary of 2010 would be the latest.
Now what did this exercise mean? It meant that we satisfied things around the watch list as if they were NPAs. And that means that we are already booking our best or our worst expectations of NPA ratios in the group. So we’ve brought that peak forward, because we’ve already got a 100% cover. Obviously there is some uncertainty assumed [ph]. I think all of you in your reports have written about this and you’ve talked about the development loan book here in Spain, and you’ve written about commercial real estate in the United States.
So what we are talking about – I don’t think it’s going to be anything new for you. You are not going to be surprised. What you might be surprised about is that we are just going to flow along with the current quarter-by-quarter, reflecting new inflows as they arise. We wanted to solve the problem before that even happened so that from now on, we can focus on managing the Group as if there were no crisis, business as usual. And so we don’t have to set aside a lot of time and worry to these matters. And that was why we wanted to anticipate that peak in NPAs and anticipate the peak in the cost of risk and that gave us reductions in cost of risk.
Well, before I was talking about Mexico, wasn’t I? And the USA, one of the fact obviously. We are with the one-off of course. It’s essentially lower. But we will see reasonable reductions in Mexico. We should expect to see them in the US as well. Obviously there is a lot of uncertainty. We can’t be completely sure about what will happen to commercial real estate in the US, but we’ve anticipated what we believe to be a worst case scenario for that loan book in the United States and in Spain. So we will have better cost of risk in 2010, and we shouldn’t expect any increases in NPAs in any of our franchises.
And then you were talking about capital in strategic terms, right? As you saw in the presentation, in the year as a whole we’ve generated 140 basis points in organic capital and 30 basis points in the last quarter. And in the presentation, I talked about the reduction of core capital because of the goodwill and the investment in CITIC, which was 10%. That accounts for about the same amount as the generation of organic capital – or the organic generation of capital.
For 2010, we are expecting something close to what we said at the beginning of the year. 20 basis points in new organic capital, taking into account that there will be, in terms of our macroeconomic expectations, higher business volumes than we had in 2009. So we can expect higher levels of risk weighted assets during 2010, and that generation, which we’ve been seeing quarter-by-quarter, will be slightly lower. But we still think that those 20 basis points quarter-on-quarter will continue to be possible.
In expectations and plans we can have, any capital issues with the regulation at its stance at the moment in writing, first of all, we don’t think there is anything that could have a material impact on 2010. We are talking about regulations, which will be debated and maybe developed and slightly rewritten during the year, but the impact as we can see it will be more on 2012. So we will go on generating this level of organic capital in comparative terms comparing what we are doing on the basis of – with respect to what could happen with changes in regulations.
We think we’ve got a clear-cut contested edge in that because we would be less impacted by a change in regulations. So we’ve been generating and we will continue to generate capital organically. So we won’t have to make any rights issues, and we will just have to see what kind of developments happen in the regulatory matters that affect capital. And we think that in 2010 though this will be insignificant.
And just to add something, in terms of the future, a lot of the regulation is already being used in the BBVA to calculate our core capital. So if there is a change, its impact on BBVA will be much less than it will have on other banks that haven’t already incorporated these standards, because we know more or less what standards are going to be introduced in general and we are already complying with them. I mean, with CITIC, for example, we’ve already deducted all the goodwill associated to that transaction from our core capital. So that’s one of the impacts we could have in the future, but we’ve already incorporated it.
And then your question about net interest income. In incremental terms, we could say that 2009 to 2008, the ALCO – euro portfolio was about 12% approximately. The rest is completely linked to the rest of the balance sheet in the bank. And so that’s the rest of the business, which is basically customer-related business, our customer franchise. And in percentage terms, its contribution would be about 40% in lending, where clearly the price impact is vital. Volume is only relevant in some geographical areas, but pricing is the fundamental element. And the rest is associated to the cost of funding. There our strategy in different geographical areas is to have non-interest bearing accounts and have more accounts generating bank charges and fees. And that’s shown itself to be the right strategy.
And on our ALCO portfolios, what we are doing is trying to stabilize net interest income and buffer it against ups and downs because we don’t want to be impacted, mainly working as retail bankers, which means that interest rate is the most important fundamental variable that we have. I think we’ve answered all your questions. Have we?
(Interpreted) Yes, good morning. Inver Corporacion [ph]. I don’t know if you’ve answered my question, but should I understand that you are going to have that 30% payout again for 2010 with the organic growth of capital about 20 basis points of course and more or less your risk-weighted assets of what you said.
And then Compass, you got over 6 billion euros there and what you provisioned down at 705. So could you explain how you reached that figure? How did you calculate it? And what is the risk, which added to the amount of the goodwill? And then China and other geographic areas – Compass, for example, I see a significant increase in their contribution over the next three years. So how you made these forecasts? What are they contributing to the business and what you expect them to contribute over the next three years for the Group as a whole?
And then finally, this is related to the previous question made by my colleague from Goldman Sachs. What gross inflows could you expect to see in Spain? I mean, you talked about 4 to 5.1 talking about NPAs. So could you talk about gross inflows, the gross additions, and how many of them are already being anticipated? And then generic calculations, the balance was below what it has been in previous quarters. Could you perhaps give us a bit more color on that? How did you evaluate it and how do you see it performing in 2010?
(Interpreted) First of all, you talk about the dividend for 2010. The first thing I’d like to make clear is that the dividend will be not be affected by the one-off charges in 2009. And with regard to 2010 and the dividend itself, I think we’re seeing the floor of the dividend in 2009. So as I said with regard to capital performance with the expectations that we have for generating capital over the coming quarters and in the face of the capacities, the changes, the regulatory changes, we think that the dividend flow we’ve already seen in 2009. In spring 2010, in April/May, I don’t think we are going to see our policy until that time.
The next one I think was goodwill, I think. The impairment calculation was made on a local level and also on a consolidated level. It’s the same calculation of course. The American regulation and the Spanish regulations differ, but we’ve done exactly the same calculation as they did locally in the US, which is the stricter way of doing the calculation. And this has been revised by the American regulators and revised here in Spain too, not just by the auditors but also by a second top-rate auditor that there is a specific audit of the impairment process. And basically this is evaluation, i.e., the value of the Compass in the future.
Based on its goodwill as required, so this is done based on very strict criteria, so we are very comfortable quite honestly with the volume of the impairment and of the goodwill we have in Compass with our expectations to date. If we saw some deterioration in the American economy that we’ve not borne in mind, then maybe we would have to provision even greater. But these are the figures that we’ve got from the calculations that have been done. And these have been reviewed, revised, as I say, by two auditors and two regulators, both in the States and over here. So this is not something that is of great concern to us at the moment. I think we are talking about 5.2 billion on the goodwill in the balance sheet at the end of 2009. That’s 5.2 billion on the balance sheet at the end of 2009 of goodwill.
This next question I think was about – we talked about the contribution that Asia is going to make in the coming years. Back in September, even as far back as June, we shared with you the need that we – there was to talk more about Asia. The 8%, as you say, the contribution over the next few years when we talk about our long-term investment in Asia, it’s true that this is a region where we will see these contributions to our results in the long-term.
But if we don’t just bear in mind the performance of CITIC in China, as Manuel said before, if we also look at the positive trend that we are seeing in the wholesale businesses in these regions, if we bear both of these factors in mind plus these joint ventures, investment banking is starting to work and the rollout of comp funding is something that we will see on the resources we will see between now and the end of the year. But these are two businesses that are up and starting to run this year, and this 8% is a figure that we considered to be a reasonable target over the next years as a contribution to the group.
The other question was about the United States. We said back in September too, and throughout the year we were talking about an investment that we’ve made in the United States just before the crisis started. So we are running two years late. Because of the crisis, this has delayed the contribution made by the US. But in 2011, once the new IT platform is rolled out and all the business are really up and running and we are starting to see signs of commercial improvements, as Manuel said, the number of products is increasing in the format that we are more used to in managing customers as an integral approach rather than doing it product-by-product. So over the next three years, I think we are going to see this 15% contribution to the results coming from the US.
So here we are talking about a 23% improvement due to the diversification of our results. We also said that we were going to leave our strategy on the edge. We have – for instance, we have an efficient productive franchise that has introduced dynamic management for its branch network, the technology that it has is cutting edge if we compare ourselves with our peers.
So we are going to see efficiency not just in cost, which you’ve always seen during a crisis, but we are also going to see efficiencies in incomings due to the improved services that we can provide, especially here in Spain where we are starting to see. We are also going to see improvements in organic market share in 2010. This is organic market share, which we think is going to be highly manageable. And the franchise in Spain over the next three years will continue to show the resilience that it had shown in the last few years and in the same sort of proportions.
Inflows now, the subjective inflows on a Group level we are talking about over 2.5 billion euros. This is inflows to the doubtfuls to the total portfolio, and these doubtfuls are up-to-date in their payments. They are not arrears, but doubts have arisen. And what we are trying to anticipate is, of this 2.5 billion, 1.8 billion is here in Spain. And basically, as I said in the presentation, this is the real estate developers portfolio that we have here in Spain. Generic provisions, with regard to 2010, I think there is going to be a very manageable figure throughout the year. I don’t think we are going to have any problems. Well, there is not going to be any lack of generic provisions throughout 2010.
Further questions? In that case, we can move on to the conference call questions in Spanish. We have one question in Spanish from Arturo de Frias from Evolution. Please ask your question.
Arturo de Frias – Evolution Securities
(Interpreted) Good morning. I have a few questions for you. A couple of them are detail questions and a couple of them are more general ones. The detail questions first. Angel, you just said that the goodwill remained was 5.2 billion. Is that just in the US or is that the total? Maybe you can tell us about how much goodwill is coming from China from CITIC, I’d be grateful for that. And then the second detail question, of the 533 million in anticipated provisions in the United States, is all of this from the 644 that you reclassified to NPAs, i.e., the NPA that you reclassified? Does this come into the 80% – 75% or 80% coverage, or in this 533 million, have you also cleaned out parts of the NPA that you already had?
With regard to more general questions now, first of all, China. The returns from China, in the previous quarterly presentation, you talked about the possible profitability of China, you talked about crystal balls, but I think things are a bit clear now. We are starting to see some numbers. But I would like to focus on the profitability, the returns, the yield with Basel III, holdings in financial entities in the capital of – 100% of the capital, we are talking about – we are talking about 3 billion in China, if I am right. And we are talking about the contribution to the results of about 300 million, 400 million euros and we are talking about a return on capital that is slightly above 10% within three years. So this is the same discussions we had last quarter. China is obviously a question of long-term growth, but the impact it’s going to have on the income statement or on return is not very large. A return of 10%, 12% is obviously going to be diluted throughout the Group. So I’d like your opinions on this and whether you agree with the numbers.
And the final question, and maybe this is the most difficult one to answer, when banks like yourselves anticipate provisions, its investors never know whether this is really anticipating possible problems and whether this can be recovered or whether in 2009 you anticipated 2010, but in 2010 you’ll be anticipating 2011. So in the end, we see a structural reduction in the bottom line of the results. So the consensus of the profits, not my numbers, the BBVA has put out this morning, we are talking around 5.2 billion for 2009 and about the same for 2010. So if in 2009, this falls to around 4 billion, as you suggested, and we need to assume that the provisions for 2010 should be less, if it’s true, then this is really an anticipation.
So in the end, the only reasonable conclusion to draw from this is the profits in 2010 should be greater than your consensus figures. So your growth rate in comparison with your – the ones you’ve reported for 2009 should be significantly higher, very very roughly in 2010. If you have the consensus to 5.2 billion and you anticipated some 500 in provisions, so maybe we are talking about 5.7 billion in comparison with just over 4 billion that you said. So we are talking about a 25% increase in profits. This is what should happen, and this is really anticipating provisions. So what I really wanted to know is to hear your opinion on this. Thank you very much.
(Interpreted) Goodwill in China, which we deducted from core capital, the first 10% is 800 million. And basically along with the United States, the two goodwill figures that are really important for the bank, we’ve really not got anything else of importance. I mean, some small items, but nothing else that’s really going to have an impact. So the goodwill of Compass in the United States, the other bit. Yes. And then you talked about the one-off and its relationship with the objective doubtful loans incorporated to the last quarter.
Earlier on, I was saying about – I was talking about the ways of accounting for and managing NPAs or impairments on the security, the collateral for NPAs in the United States. Arturo, as you know, that we write off a loan when its provisioned 100%, but the charge-off is done in the US only on the part of the loan that’s been impaired. So what we’re seeing at the moment is loans which have got part on the balance sheet and part on the P&L. And that means in the presentation, we were adding up the part that have been written off or charged down that was put to NPAs – book to NPAs because that’s the best way to compare what’s being happening and see the outcome of the process of this provisioning with this recategorization of risks related to developers. So that 644, that’s the volume of objective doubtful loans, which have come up in one-off process. This one-off process is related to the objective NPA measurement. Part of the one-off process is led to written-downs or charge-offs on the accounts. And there is really not much more we can say. Everything is interlinked. And you’re quite right.
With respect to the crystal balls of Asia, what I was saying indeed that the third quarter in the long-term – well, first of all, it is a long-term investment and we are talking here about a region, and especially China, which is a country where our presence is subject to changes, regulatory changes, because there was a lot of illegal – well, no, I’m talking about the loans that come out and are intended to encourage the economy to grow with higher consumptions.
Manuel was talking about the growth of China over the next few years. He gave some figures. When we went there in December, we talked to people in the research department, and they are talking about 20% of economic growth of over 8%, 20 years. So sales of cars, for example, they are selling more cars there than in the US. And the affluent – the affluent customers, which have a higher consumption of banking products, is much higher than most other countries.
And when we talk about our investment, it was a long-term investment. We understood that. And the returns, we are expecting to get, will be long-term returns as well. And that’s about three years. It’s true that the information we are receiving increasingly from China and Asia as a whole lead to us to think that we can anticipate a higher long-term growth and that we will have higher contributions earlier than we had expected. So we were talking about 12% returns in the next three years, but possibly it might turn out that it’s long-term that we are talking about at the moment. So we are working on that. And the idea is to get deliveries in shorter periods than we had initially established. And at the moment, that 12% is there, but we are talking about long-term investment, as I said.
Your exercise regarding anticipation with the numbers that you gave, quite honestly – well, first of all – yes, you are absolutely right in what you say. But we should (inaudible) goodwill, that’s a peer accounting concept for the end of the year, that 704 million that we talked about, they really don’t have an impact on cash flow or on capital or the bottom line. The reincorporation into earnings without one-offs would make sense on that 700 million.
Okay. Now, of the rest, it’s evident that we are not going to have a year in the USA when we are losing the kind of money that we did in 2009. That’s evident, but shouldn’t happen definitely. And in terms of anticipating provisions, a lot of this has been done in Spain. Take into account that the provisioning in Spain is always linked to the calculation of generic and specific provisions with a minimum cap. So you have to – some of that you have to make, and it will go to generic or not to generic. So anticipating what we are really doing, I don’t know if you looked at this, Arturo, but the anticipated provisions in Spain aren’t incorporated into the one-off results, which have brought down the final profit for the Group. So it’s really just a matter that is being provisioned here in Spain.
And between specific and generic provisions, what we’ve got is a way of making future situations of certain risks come to the surface. No. If these provisions turn out not be necessary in 2010 or 2011, I got to mention that they will be needed in 2010 or 2011 what would be that would have less needs to allocate anything more to the generic or the specific provisions. So it’s quite a simple interplay here in Spain.
With respect to 2010 then, things have to go better logically. Provisions, that’s got no impact on profits here in Spain because of the way that things are regulated. And so we think there will be no cost of risk for 2010 as a whole. And I’d say we’ve just got to take out the extraordinary part of the US accounting, and that’s the only – that's the one-off charge, credit goodwill is the only thing that’s had impact on things. And if the consensus of analysts is often right, but sometimes it could be above the reality and sometimes below. Arturo, that’s the difference I think between understanding the accounts in one country and understanding the accounts in another country. It depends on the local gov.
Any more questions in Spanish? No, there are no more questions in Spanish. So shall we take questions in English? Please keep it quick because we are not doing too well with the time.
The first question comes from Mr. Carlos Digrandi from HSBC. Please go ahead with your question.
Carlos Digrandi – HSBC
Yes, good morning. Carlos Digrandi from HSBC. Three questions, but they will be very short. The first one, it’s referring to slide 13, the coverage of the real estate, you are saying that it will be increasing in 2010. So first of all, if you can provide us an indication of the coverage that you expected, I guess that it was 22% at the end of the nine months officially. And if that implies also that you will be buying further real estate during the course of 2010.
Second, on goodwill and loan losses provision in USA, I mean, lots have been said, but the question is, first of all, where is that [ph] you posted more provisions or you’ve decided to post more provision is on the Compass alone, it is on the grant acquisition, it is on a specific issues here and there, so if you can provide us a little bit of a flavor there. And given the fact that you said that the US will be improving during the course of 2010, I understand that that was probably a little bit of goodwill to be taken off, but why you didn’t – you didn’t think that eventually the operation would have improved to a point in 2010 and 2011 that would have not required that. So given the fact that you did it, you must have seen something that from outside we don’t see it.
And lastly, on net interest margin, you spoke a lot about the ALCO et cetera, but if I look on page 10 of your report where you provide the yield metrics, it seems to me that you’re still having customer spread declining in Spain, whereby net interest income as a percentage of average total assets did increase mostly on the deposit front, i.e., on a much better cost of financings. So if you can provide us an indication in which areas or regions you did have a much better cost of financing, and if in that number you also have in terms of aging facilities, something that has been taken in Q4. Thank you very much.
(Interpreted) Carlos, with regard to your first question, we are not saying that we are going to continue to buy real estate in 2010. In fact, property purchases – the preventative property purchases in the last quarter have been 4 million, i.e., it’s nothing. As you know, BBVA has a balance – the lowest balance of all the Spanish banks and savings banks. What we have done is to maintain a degree of coverage that we consider to be at suitable level and enables us to be comfortable with these properties from a regulatory point of view. It’s been suggested that we maintain this at 20, and we have it at 32%. So we’re far above regulatory requirements and we have no plans for buying further property as preventative purchases. So real estate is just part of our usual recovery activity for doubtful portfolios.
What you are saying about Compass? Basically you are talking about – the US is all about Compass. And a small effect that comes from Puerto Rico with the capital increase that we’ve made in November in the US, $600 million, this was for Compass and 100 were for Puerto Rico. And in guarantee in this case, their portfolio was guaranteed by the FDIC. So it had no impact on the quarter. So this had no effect, either a one-off effect or on the addition to doubtfuls at the end of the quarter.
So from the point of view of goodwill, maybe the only question is when we value the goodwill at the end of the year, we’d value both the goodwill from Compass, which is on the balance sheet, as Manuel said, but we’ve also added the value of buying guarantee, which guarantees a negative goodwill or positive goodwill depending on how you look at it as a consequence of the fact that it values more than what’s been generated, although the price of the transaction we’ve guaranteed, which generates a negative goodwill or positive one. It depends on how you want to look at it.
With regard to the customer spread, basically this remains stable in comparison with the third quarter. With regard to the resident business, we are talking about 280 compared with 283 in the previous quarter. So there is no real difference. With regard to the geographical areas that have had cheaper funding, basically I would say this is a general thing. The most dynamic growth we have seen on the balance sheet of the Group with regard to funding has been the transactional accounts and savings accounts with a group – with growth throughout the Group of some 12%.
And basically we have Spain and Portugal, as we mentioned, but there is also Mexico where there has been an increase in quota. There is also Latin America and the US with excellent growth in deposits with that cost. So I think everybody has benefited both from the price of funding, but also with regard to the change in the mix. In fact, in the United States, there have been a major reduction in the price we pay for term deposits.
Further questions in English?
We have another question from Mr. Matteo Ramenghi from UBS. Please go ahead with your question, please.
Matteo Ramenghi – UBS
Yes, good morning to everyone. Just three very quick questions. First, I was wondering what is the size of the restructure loan book. Second, I saw the NPA coverage is now about 50% in Spain and 60% at the Group level. Given your assumptions on releasing generic provisions, where do you expect the coverage to land at the end of this year? Further, the results of the corporate activities division are very strong with 100 million euros additional net interest income compared to Q3. Is that all related to the ALCO portfolio and what do you expect here? Finally, just two very quick confirmations. The goodwill, is it still about 7 billion euros, perhaps I missed that? And CITIC, is it confirmed that it will be consolidated at equity, i.e., proportionally going forward? Thank you very much.
(Interpreted) Well, first of all, with respect to the volume of restructured loans in our portfolio, I’d say they are slightly higher than what we had at the end of last year as a consequence of the inflows – the net inflows this year. There is hardly any change in the year as a whole. Maybe it’s very slightly higher than it was at year-end 2009, but it hardly has any impact. It’s not relevant. And then generic, the generation of generic provisions – I can’t remember what the question was exactly. Okay.
Earlier on, we were saying, Matteo, when there was another question about generic provisions, we said that we’ve got about 3 billion to allocate for the Group as a whole, a lot of that comes from Spain. Our comfort in 2010 getting through the year with the generic that we’ve already got, as I’ve said before, is pretty high. So in principle, we then see that we’ll have any problems managing generic provisions throughout the year.
And in terms of the corporate center, increase quarter-on-quarter in net interest income, well, you can’t attribute it to the ALCO portfolio. There is some contribution from that, but it’s quite small. There are a whole lot of factors there. The updating of rates because they have been going down, and that’s had an impact on the balance sheet as a whole, not reverted. That is, it’s not shifted on to the business units. And that’s the main reason. Net interest in corporate activities, yes, we’ve talked about that. That’s the corporate center.
More questions in English then?
There are no more questions.
Okay. Then we’ve got some questions from the webcast, but I think everything has already been answered. There are some questions about detail, but given that we’ve now got to prepare for the press conference, I think it would be best to answer them through Investor Relations. So I think that we can ramp up now. So the Q&A is finished.
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