Bankia's (BNKXF) CEO Jose Sevilla Álvarez on Q2 2014 Results Earnings Call Transcript

Jul.28.14 | About: Bankia SA (BNKXF)

Bankia SA (OTCPK:BNKXF) Q2 2014 Earnings Conference Call July 28, 2014 6:30 AM ET


Cristina Daza – IR

José Sevilla Álvarez – CEO

Leopoldo Alvear – Financial Director and CFO

Cristina Daza

Good morning, everybody, and welcome to the presentation of results of the second quarter of 2014. We will have José Sevilla, for the first time as a CEO of Bankia; and Leopoldo Alvear, Financial Director, CFO. The presentation will last around 30 minutes and then we will pass onto the Q&A session, 20 minutes more or less. The questions that will not be solved, the Investors Relation team will be ready to answer them afterwards. Without further ado, I will give the floor to Pepe.

José Sevilla Álvarez

Thank you, Cristina. We start with the presentation of the second quarter results. I am going to make a very short introduction to what the keys of the semester have been. Should we have to highlight four events in the first semester, I would highlight these ones.

First, the commercial activity dynamization. We talked about it in the first some quarter of the year. One of the best news we’ve had this year is that once we have finished the restructuring of our network of branches, the attraction of customers, resources and the formalization of credit increase had a good pace. I will take about the strength of the P&L account, the evolution of P&L, NPL and the capital issuance in the first quarter. We will talk about profitability and profits, and lastly, we will talk about the markets confidence and the issuances we have carried out during this first semester of the year.

So let's start with the dynamization of the commercial activity. You have here the evolution of the customer funds in and out balance, the strict customer funds, plus the out of balance which is investment funds, pension funds and savings insurances mainly. Year-on-year June-over-June the total growth would be close to 4%. I would especially highlight the evolution of deposits within the balance sheet in a context of a major decrease of the deposits remuneration as you can see this June’s figure 2014 is above June 2013.

And it’s true that last year, as we closed more than one-third of our branches network, we had partial reductions of the deposits figure, but these reductions have been overcome with the closure of June this year. As you see in the second quarter, the attraction of customers resources is EUR 2.2 billion, EUR 0.6 million out of balance and EUR 1.6 million strict deposits, accelerating thus the growth we had in the third quarter of EUR 1.6 billion.

From the standpoint of credit, I would highlight the increase of the formalization of credits in the second quarter versus first quarter. We have had a growth of almost 27% and EUR 3.5 billion and the growth that the concessions have had in the companies. In companies, we’re talking about SMEs mainly.

As indicators of evolutions of our credit flow for SMEs, we’ve got the turnover of ICO credits in the first semester. We have granted almost 12%, 11.7% of all the loan given by the sector, ICO credit of course, versus 9.3% we had last year.

And with regards to businesses above EUR 1 million, which is for SMEs – big SMEs or the statistics of Bank of Spain stops only at credit above EUR 1 million and below EUR 1 million. We have increased our production share in credits reaching 10.90% at the end of May which is the last figure we have got available versus 8.50% that we had last year at the closure. And credits below EUR 1 million for companies, we have increased our market share to 10.4% versus 9.5% we had last year.

As you know, we are following a plan to develop and grow our franchise of SMEs and it’s true that as we’ve said on several occasions this is going to take time. The change in volumes takes time, but when we take a look at our turnover factors, we start to see an improvement in the new granting or concessions.

Here you have the evolution of NPL and coverage increases. In the semester, as Leo will explain, the NPL figure has reduced by EUR 1.4 billion. The NPL ratio has reduced almost 70 basis points, and the NPL coverage has increased up to almost 59%, 2.5 percentage point above what we had in December.

In the semester, we have also improved our LTD ratio, loan-to-deposits ratio from 115% to a comfortable 109%, above 110%. And from the capital standpoint Leo will explain it with further detail. We have generated 113 basis points of core capital phase-in and we will see the capital ratio evolution fully loaded.

On profitability and yield, we’ve got exploitation profitability and yields. These are the six quarters of our strategic plan. And we see how in each quarter we have increased our margin before provisions. They are pre-provision profit excluding the results by the ROF, the financial operation results.

And if we see the figures at the end of the semester. This semester we have generated EUR 982 million of pre-provision profit, which is almost 50% more than what we generated in the previous semester. And as you see the last quarter, the growth of the pre-provision profit in the last quarter has increased by 10% in the second quarter versus first quarter.

As a result of the revenues, the banking revenues are increasing commissions and the ex costs, the expenses are reducing our recurrent efficiency ratio, excluding financial operations results. This has reduced to 46%. So, we have started our strategic plan with an efficiency ratio which was 62% and we have maintained our improvement trend quarter-after-quarter reaching 46%.

In terms of profits, you have the lists, last three semesters of our strategic plan as after-tax profit these have increased. And this semester they grow by 48% versus the first semester last year. In terms of sources, return on expenditure, ROE reaches 8% at the semester closure increasing the average ROE of 5.90% that we had in last year in 2013.

Within this introduction, the last element I would highlight is the trust markets. Investors – is to just show investors have on Bankia’s project. Let's recall that during this semester, we have issued EUR 1 billion of senior debt. We’ve placed 7.5% of shares in Bankia, EUR 1.3 billion. And in the second quarter, we’ve closed our subordinated issuance of EUR 1 billion.

So we have – in the semester, we have done more than EUR 3.3 billion in senior and in subordinated equity debt. This confirms that the objective of the recapitalization plan, the plan to restructure Bankia which was to gain and to bring back confidence to markets, we see how this semester we have met these objectives.

So now I will give the floor to Leopoldo Alvear.

Leopoldo Alvear

Thank you, Pepe. Let's now take a look at the results of the quarter with greater detail. Let's start with evolution of the P&L account. As we’ve done in the previous quarters and regarding the comparison to be full for 2013, we took out in terms of interest margins the costs relating to the subordinated loan that we had between BFA and Bankia, which in semestral terms represented EUR 142 million.

As you can see, the evolution inter-annum in quarterly and semester terms are equal with a similar evolution in all the lines of P&L account, starting with the interest margin, we see an increase above 15%, 15.3%, 15.7% quarter and semester. And this is based on the great evolution of the gross margin of clients that increases in the period quarter-after-quarter which increases more than 50%.

The fees and commissions increased in quarter terms by 5.5% based mainly in the out of balance products. And this gives rise to an increase of recurrent gross margin excluding the financial operations result which leads to an increase of almost 15%, 14.9%. The evolution of operating expenses has been very positive and we see a reduction of almost 11% inter-annum. And that takes us to an increase of the margin pre-provision which is recurrent excluding the ROF of 52.1%.

The elements of the quarter have increased EUR 241 million and with the reduction versus second quarter of 2013. And this entails a risk cost of 63 basis points. That’s a reduction of that versus what we have had in previous quarters. And all these takes us to profit-after-tax that is EUR 245 million for the second quarter, 56% more than the profit we had last year in the same period. And in semestral terms, EUR 431 million, 48% more than what we had in the first semester of 2013.

The evolution of the interest margin as we were saying increases in fifth quarter in row since the first quarter of the year 2013 and we see a positive evolution of plus 15.3% in inter-annum terms, and a growth also in this quarter of 4.6%.

We also see that the evolution in semestral terms is very similar and the increase is of 15.7%.

With regards to the core banking business and gross margin passes from 0.81% in the second semester of 2013 to 1.22%. That’s an increase of 52% or 41 basis points. And you see that the yield of credits remains stable when we finish the depreciating mortgages in the third quarter of last year, and that remains 245 basis points. As a counterpart, we see a very positive evolution of cost of clients’ deposits. The quarter average is 1.23% at the end of the second quarter of this year, 2014. And this is based on the positive evolution of the cost of term deposits that you see in this right side of the slide.

In quarterly average terms, the cost of the new entries of the front book are at 1.10%, whilst the stock or the back book is at 2.10%, with a clear improvement that we see since the first quarter of 2013.

The fees and commissions increased by 5.5% in inter-annum terms up to EUR 237 million. And that increase is based mainly on the commissions that we’re gaining from the products regarding out of balance resources, mainly investment funds that are growing quarter-after-quarter. Together with the positive evolution of the interest margin, we see that the banking basic business before quarter increases almost 30%. That’s 12.8%.

Gross income, for the first time we reached EUR 1 billion in the quarter. And it’s the fifth quarter in a row where we see an increase of the gross recurrent margin excluding the most volatile part which is ROF.

Additionally we see that this quarter, the gross margin has grown to 7.7%; 4.4% if we exclude the volatile part as the financial operations results. And if we compare inter-annum, we see that this increase reaches almost 15%, that’s 14.9%. That’s leave out of those EUR 1 billion in gross margin that we have reached in this second quarter, 25% of them are a result of the recurrent business of the bank, that is the interest margin and fees and commissions.

The operating expenses have reduced almost 11% versus second quarter of last year at EUR 435 million, 1.5% less than the expenses we had in the first quarter of the year 2014. And this good evolution of operating expenses together with a good evolution of the banking basic business, the increase of the gross margin leads us to having an efficiency ratio ex net is at 46%. And when we include the ROF, it’s at 43%. But we have to highlight here that the objective that we had for the end of the year 2015, that’s the end of our strategic plan, we wanted to have an efficiency ratio at low 40s between 40% and 45%. So we are very close to reaching such an objective.

In terms of operating expenses, the objective in the strategic plan was to reduce EUR 600 million in the period, and that is an objective that we will meet in this year 2014 already.

All these takes us to having a pre-provision profit, the margin reaching EUR 514 million, 52% provision profit and we include the ROF variation inter annum reaches 20.7% of increase.

All these takes us to having a pre-provision profit, the margin of reaching EUR 514 million, 52% more than the pre-provision margin we had in the second quarter of 2013, with an increase of 10% in this second quarter which is very important. When we get all the pre-provision profit and we include the ROF, the variation inter-annum reaches 20.7% of increase.

Lastly, in the low part of the P&L account, we see the pre-provision notation represent EUR 260 million and the recurrent risk in the second quarter, the risk cost related to credit is at 63 basis points decreases from 74 basis points, that’s the closure of 2013 and that’s actually in line with what we had foreseen reaching a risk cost at the end of 2015 of 50, 55 basis points. That takes us to profit-after-tax of EUR 245 million, 56% more than what we had in the second quarter of 2013 or an accrued result for this semester of EUR 131 million, that is 48% more than what we had in the first semester in 2013.

Let's go to the balance sheet. And with the credit quality ratio, we see that we still have a good evolution in all the ratios. The NPLs reduces EUR 600 million. All of them an organic reduction were in the quarter where we have had no asset been sold. That accrues a decrease in the semester of EUR 1.4 billion, reaching EUR 18.6 billion. As you shall recall, the objective what we had was to reduce $2 billion organic, and in the semester we have already reduced in the second two quarter – in two quarters, we have reduced EUR 1.1 billion, so we are in line with that objective and we have to add EUR 300 million of NPLs that we reduced in the first quarter of the exercise.

In the second semester, we see the positive evolution of the NPL ratio that reduces by 28 basis points, totaling 14% of NPL ratio. And this is accompanied by an increase of the coverage ratio, which is 200 basis points in the semester or 153 basis points in the quarter, reaching an almost 59%, 58.9% of NPL coverage.

When we take a look at the evolution of the coverages per segment of the credit quality investment, all segments remained their coverage ratios or increased versus the previous quarter and we see that there is an increase in the developers’ coverage, 45.3%. And the businesses we have provisions covering 16.9% of the total of the figures of exposure with businesses.

We also see an increase of the total of provisions for the portfolio excluding developers, figures representing 7.3%.

If we now go onto liquidity and solvency ratios. The group continues generating liquidity and solvency as we have been proving in the previous quarters, and we can see it in a very positive evolution of the LTD ratio as you see in this slide, where the loan-to-deposit ratio is below 110%, that was the objective we had for the end of 2015. And it’s at 109.7%. That is 2.2 basic percentage points less than the previous quarter, and 8.5 percentage points less than the second quarter of 2013.

This change in this ratio is due to amongst other factors. The very positive evolution of the LTD figures that has been increasing in two quarters in a row despite the reduction of prices and the cost of deposits and a flow that is been produced from deposits to products with greater profitability such as out of balance products which are investment funds. This is in line with the – and accompanied by the commercial gap evolution which reduced 13.1% in the semester or 36.7% inter-annum terms.

The issuance of wholesalers have been covered by the generation of liquidity of the groups, so there is no need to go to market to cover such occurrences. And we have liquid assets that are above the total of maturities we had on the wholesale issuances we had in the markets.

Lastly in terms of the evolution of solvency, we’ve had a very positive quarter, that has added to the positive first quarter we've had in this year, and we see that the ratio of core equity Tier 1 BIS III phase-in, the regulatory one is at the door of 12%, 11.82%. And this is fruit of a very good evolution in this semester on one, the one side of the profits the bank has had generating 45 basis points of capital and the reduction of APRs is generating 68 basis points where we have different impacts.

On the one side, we would have the reduction of the deleverage [ph] of the credit investment. We also have disinvestments in variable rate that liberates capital consumption through APRs and we’ve got a first bite of the reorganization also well. Last year as you shall recall, we had an impact as a consequence of the repurchase of Aseval, that was negative in solvency ratios and we told there that we would see that inversion and we’ve had a first impact because of the reduction of equity of Aseval funds and we will see another impact when we will sign the agreement with Mapfre maybe before finishing July.

So we have been active also in the compression of derivatives that result in a reduction f the capital consumption on other side. So if the measurement of capital is exactly the same as the one we carried out in the first quarter, we haven't changed the basis of this measurement of capital. As a consequence of the APRs reduction in the capital increase, because of the generation of profits, we have almost 12% in phase-in terms and almost 10% in terms fully loaded 95% -- 9.95%.

We’ve done an issuance of Tier 2 this quarter, so we see a significant difference between the core equity Tier 1 and the total solvency, and we see total solvency where we had already the contribution of Tier 2 in phase-in as 3.99%, and in terms fully loaded it reaches 11.43%.

I shall now give the floor to Pepe, so that he can draw some conclusions.

José Sevilla Álvarez

Well, some very short conclusions to finish this presentation – this first semester of the year 2014.

This represents for us the equator. We finished the first half of our strategic plan launched by the end of 2012 for the exercises 2013, 2014 and 2015. I think that these have been 18 months of major transformation at Bankia, a transformation that has been followed by an ambitious process of restructuring of our group.

After the closure of the restructuring at the end of last year, we have regained dynamics that are positive and satisfactory from the standpoint of commercials. 18 months where we have increased substantially our profitability, our operative or expectation profitability with increase in the commissions fees and margins and cost reductions that take us to speed of having more than EUR 500 million per quarter of cash generation, 55% more than what we had at the beginning of the strategic plan.

As a result of all these, our efficiency ratio is at 46% and it represents an advantage in our business when we analyze the relative evolution to our entity. The NPL ratio has reduced in line with the forecast we had. We have coverages increased at almost 59%. The capital evolution during these 18 months and in this first semester has been very favorable that growth of capital in organic terms that we were talking about in our strategic plan has been met even above what we had foreseen.

And as I would highlight, this is a very major semester because it represents the normalization of Bankia in the financial markets. We’ve closed this first half of our strategic plan with yields – with an ROE which is close to 8% and we are aware that we still have many things to do and to improve for the coming 18 months, the second half of our strategic plan from the standpoint of credit generation, from the standpoint of continuing to increase and consolidate that advantage we’ve got in efficiency and to continue increasing our benefits and reaching the objectives we have marked in our plan in profitability over equity terms.

So we shall now finish here the presentation, and we are now open to the Q&A session.

Question-and-Answer Session

Cristina Daza

So let's cover some questions that have come through webcast to in our email. Let's start with the P&L account and interest margin. Many questions, Marta Sánchez of KBW, David Vaamonde of MainFirst, Leonardo Banca of Fidentiis, Autonomous, Thepes [ph] doubt about where we see the term deposits situation. Will they decrease because of the new production, because it’s being above the sector and what’s the average duration?

José Sevilla Álvarez

Leo, let me answer and then you would add or nuance to whatever you think. Fixed deposits, the evolution of course you see that this quarter we have attractive terms at 1.10%. And we are having it at less than 1.1% in the third quarter. And what’s normally is – due to the dynamics of the market, we would reduce the cost of the front-book during the second half of the year. As we also saw, there is a difference of 100 basis points between the front and the back book. So that means that that difference will be transferred little by little to our margin and to our P&L account.

What the duration of this front book? Well, they last around 18 months. That means that we still have some quarters ahead where we will reduce the costs of the back book to reach the level of the front book. And as I was saying, during the second half of the year, we think that the new entry prices will reduce still.

Comparisons sometimes I don’t know if they are in homogenous terms. That will depend on the mix of the retail or wholesale deposits but we believe that we are placing where the average – where we do the market analysis we see that the costs of front book and their generation we are doing is placed at the average or in the conservative side of the average of this sector.

And maybe we might have mixed effects that may change the cost of the deposit. In any case, our intention is to continue to reduce costs and to reduce them going to the mid-term to the average low part of this sector costs.

Leopoldo Alvear

It’s been quite complete. I will just say that 1.10% that you see in the presentation is the quarterly average. So as Pepe was saying in June, in July we are producing already less than 1%. You asked about the average duration in the stock, is around 18 months.

Cristina Daza

If we continue with interest margin on credit side. We are being asked from Fidentiis and BBVA, BIS, Credit Suisse. Which is the average yield of credits of the new production of businesses and do we see pressure for the credit prices for the coming quarters?

Unidentified Company Representative

I think that the yield is still stable from what we saw in the last quarters. Right now the business production average terms is around 30.5%, in some cases 4%, that will depend greatly on the kind of company that we are giving money to, if it’s a micro-SME where the levels are slightly higher or a bigger company where levels are slightly smaller. In any case the production is still focused on short-term. There is no more weight than what it is the short-term credit up to 12 months instead of longer terms such as it was – what we had in previous quarters, though the mix is changing little by little.

The question was about pressure in competition of prices for loans. So I think that the pressure is normal in a very low interest rate environment, what’s normal is to have a transfer of the new environment of interest rates, and the fact that today banks have a funding cost which is cheaper towards credit.

We do believe that this will happen in an environment of rationality. I mean one of the advantages we’ve always said of the restructuring we’ve had in the financial system in Spain is the fact that today players in this sector are rationale players that are looking to optimize their yields on their equity. So what’s normal is to have more pressure in prices. For the time being this pressure is not being too significant, but what’s normal is for it to be higher in the future. In that context, we are reasonably calm, as you know the weight we have in the business credit world is below our natural size of the entity. So we do believe that either as we see the whole segment of the businesses and SMEs as an opportunity to grow.

Cristina Daza

We now go onto expectation costs. It’s been said in the presentation but do you see as recurrent these EUR 435 million of quarter cost and if we take out the objective EUR 1.7 billion for the end of 2014?

Unidentified Company Representative

This figure of the quarter is recurrent. It should be the base for the second semester and 2015. And yes, we reached – we think we will reach that figure that we said at the end of 2014.

Cristina Daza

For provisions, KBW, plus JB Capital [ph]. They ask about the level of provisionings for this quarter. Are we going to see the coming quarters, a normalization in forecast? What’s the objective of risk cost we have and the coverage for the future?

Unidentified Company Representative

Regarding provisionings, I think that the dynamics are being positive. We also said it in a meeting not long ago. This is the first quarter over the last two years in which the net entries we’ve had in mortgages portfolio retail have been negative. We’ve had more recoveries than entries. It is true that the dynamics of the economy are improving. The other day we saw the employment data, which has been the most positive since 2007 in quarter terms. And de-seasonalizing in semestral terms also. So we have got – we have great sense – we’ve got very sensitivity to the job creation in our mortgage portfolio because as its normal, we will always have certain time lag between the improvement of macro data and their repercussion in the NPLs figures.

So the second quarter, while the dynamics that we’ve had of NPLs have – we like them and we think that things are improving. And in that sense it’s possible that we might have room in the future to see slightly figures to one we are seeing in this quarter and semester.

Risk costs, we have placed it as an objective 50, 55 basis points for 2015. And we think that this objective should be reached. It’s too soon to make changes on that. We’re at 63 basis points today. So we still have room to decrease in the coming six semesters.

And in terms of coverage, we have no specific objective but it’s true and it’s a very good indicator to us, the fact that we have reduction of NPLs. That reduction is also reflected in the NPL ratio, but that NPL reduction is caused in an environment of increase of coverage. That is a reduction of NPLs of a good nature, if we could say so.

Cristina Daza

So related to this from Credit Suisse, we are being asked about the origin of the NPL reduction. EUR 1.4 billion that we reduce, how much is already allotted, how much is of portfolio sales and how much we foresee that this will represent in the future?

Unidentified Company Representative

Well, we had an objective for the whole of the year of reduction of NPLs organic of EUR 2 billion. In the first semester, out of those EUR 1.4 billion, EUR 1.1 billion were organic reduction, and the other EUR 300 million generated in the first quarter of the year are the result of sales of NPL portfolio.

So EUR 1.1 billion of organic reduction, that are in line with the objective we had of EUR 2 billion in the whole of the year. And it’s true that we’ve got margin to sell NPL portfolios. We’ve got a couple of portfolios that we’re working on right now that could be closed between the third and fourth quarter of the year. And that would represent EUR 1 billion additional of NPL reduction from this line or even slightly more. And this is the fact.

Within this EUR 1.4 billion, we take out the EUR 300 million of portfolio sales. The EUR 1.1 billion, from that we have a rule that says 60% of those reductions are cash payments for restructuring credits and out of 40%, the other 40%, 60% is allocation. And the other 40% would be reclassification, restructuring or updates of credits. So that 60/40 rule that works.

Cristina Daza

We continue with the balance sheet. We’ve got questions from KBW, Deutsche Bank, BIS, Citi. They are asking about the forecast for the credit figures.

Unidentified Company Representative

The credit will be conditioned by the cancellations we’ve got and the newer originations. In the mortgage portfolio, we’ve said that we’re having reductions in the portfolio with a normal process of reducing the principal and the payment of the fees. And as we are having reductions in credits that come from good years, the reductions that we’re having are above the mortgages originations.

It’s not that we don’t want to create mortgages. We do want to, but it’s true that today the demand we have for new retail mortgages is very scarce, and it’s logical within these economic cycle that we’re living to have this feature. We are generating mortgages in a very low rate. We would like to have a bigger level of generation, but it is true that when we see the market share that we have of new mortgages, we see that we’re not losing market share in this mortgages creation. So it’s much more sectorial issue and it’s normalized, it’s because of the cycle that we’re living where the new mortgages are minor. I am sure that as the economic cycle moves on, this will grow in the future.

And with regards to businesses, we also we also have a kind of a mixed year, because apart from the natural maturities and the renewal of business portfolios, it’s true that we also have our portfolio that we call the legacy portfolio. That’s a portfolio focusing on syndicated international operations, project finance, many of them outside of Spain.

And as a result of the restructuring plan, we’ve got a vocation of disinvesting or add maturities not renewing this kind of operations. So there is also another side of the credit decrease that is related to the business world, these legacy portfolio.

Therefore all these effects are stock evolution. What can we expect in the future? Well, that the mortgage portfolio in the coming months will continue to reduce and what we would like is to start to see growth in the business portfolio. Growths eliminating those effects I said before of the legacy portfolio.

When will this happen? Well, we will see it when we would like to see it in the second half of this year or maybe the longest, the first half of 2015 to see growth in the business credit portfolio.

Cristina Daza

Now questions on the bonds portfolio. There is many questions on detail of profitability and the duration in portfolios, ALCO and non-ALCO. Deutsche Bank, Ropero of Fidentiis [ph] and Morgan Stanley asks this.

José Sevilla Álvarez

As we have been saying in previous quarters, you know that in our portfolio we’ve got different sub packages. We have the ALCO portfolio, which is stable at EUR 30 billion. It has been and it will remain because the size of the portfolio we consider to be reasonable for the evolution and for the size of the balance sheet of group. You know that this portfolio meets two proposals – two objectives to hedge partly the mortgages portfolio and these are the liquid assets of the group. This portfolio has a duration of 3.2 years and a yield of around 3.6%.

Additionally we’ve got the ESM’s portfolio that will reduce. These are the bonds that we received as a consequence of the capital increase. And you know that they are amortized. We’ve had an amortization in June. At Bankia, we have EUR 7.6 billion spending that will be amortized between December of this year and December 2015.

We have the portfolio of the SAREB bonds. We’ve got EUR 18.5 billion there. The bonds we received as a consequence of the transfer of the developer credit and as allocated assets. This is the yield of this portfolio that came from the credit investment that we gave to the SAREB.

And the last, the duration is more difficult to estimate because that depends on the capacity to generate liquidity by the SAREB, the business plan of SAREB. And we also have the legacy bonds portfolio, the one we inherited from the previous situation in Bankia, which lasts longer because as it’s been said on some occasions, this portfolio is not sovereign bond, but it’s a mix of fixed rate corporate European bonds, mortgages from other banks and even DGBs from other financial entities.

The last thing is higher here, the duration above five years – around five years duration. And the yield is slightly lower, it’s 2.5%.

What will happen with these portfolio in the future is that the volumes will reduce as some of the parts will be amortized and will not be renewed because they are in legacy by the duration of the portfolio. It will increase as mortgages that are inside will have greater weight.

Maybe I shall mention that in the quarter result, we have the break down in the Page 15, the amounts of portfolio. This is new information that we are providing with greater detail.

Cristina Daza

We’ll now go into liquidity, ECB. Insight Investment [ph], Fidentiis and KBW asks about the financing figures we’ve got with European Central Bank, and with the new policy if we’re going to take banks of the new – well we also had prepared this question to be answered by Leo.

Leopoldo Alvear

Well, ECB, in first semester of the year, that has decrease at EUR 8.3 billion. The figure of the group Bankia is EUR 46.5 billion. It’s important to recall as we see it in the first quarter as a consequence of one of the milestones we had in the restructuring plan was to reduce or to take out for BFA to renounce its banking license and that was done December last year. So since the end of March this year, the financing that BFA had to do – or the ECB is done through Bankia through a repo. The repo, as I said is done at market price. The operational risk derived from this – this is at the risk of BFA Bankia is asking BFA the haircuts applied by ECB and a little bit more to be covered and all the assets that ECB are finance are collateral of BFA.

Therefore the reduction within this EUR 46.5 billion is EUR 8 billion, EUR 9 billion financing that Bankia is doing to BFA, ECB. The rest of the funding we have all the bonds that we received as a consequence of the capital increase and the transfer of assets to the SARAB.

In any case, we’re 30% above what we had planned in a restructuring plan for the ECB reduction, the group. And its highest peak September 2012 had around EUR 84 billion in the ECB. And we want to reduce this figure during the rest of the year mainly through the organic liquidity of the group and the recovery of the repos private market which in the last months is starting to show improvement. So we see that these reduction in the figure maybe significant at the end of the year and will be significant.

With regards to the TRO [ph], the auctions of September to December have as a basis credit result which is almost – everything except for mortgages, retail mortgages. We take into account this parameters and small fine tuning of some parameters to be adjusted, the total that we can give as far for the ECBs around EUR 3 billion.

José Sevilla Álvarez

Maybe on the side of repo that BFA has with Bankia, it’s true that in the first moment, we transferred the financing fully from BFA to Bankia, so that Bankia would discount from the European Central Bank but what Leo was saying is true that the private market is starting to improve and we’ve got offers on the table, specific offers to structural finance the BFA portfolios directly in the market with third banks, private banks.

And during the second half of the year, part of this funding will be transferred to the market. Yes, that’s true.

Cristina Daza

Solvency. Morgan Stanley, BBVA, KBW, Credit Suisse asks if we can give more explanation on the expansion of the capital ratio of fully loaded from 9.1% to 9.95% before the end of the quarter?

Leopoldo Alvear

As I said before, yes, that’s a mix of different factors. First, I’d like to highlight that we still use the same basis to build the ratio that we – basis that we had at the beginning of the year. So we haven't changed any base. So there is no change in the APRs. We have a part of capital generation which is quite clear as a consequence of the results generation in the semester, EUR 431 million. And in another side is a reduction of APRs as a consequence of different factors. Logically the deleveraging of the credits that entails a reduction of capital consumption in terms of APRs because of the different basis, we’ve had – we still have little by little an improvement in the ratings behind the collaterals behind the credit investment, therefore that demands a lower capital consumption.

In the semester we have been quite active, as Pepe was saying, in the disinvesments. So we have sold a variable rate portfolios having an impact in the APRs. And we have first impact of the Aseval restructure. Last year we had an negative impact because of the purchase of Aseval. And as we said back then, that negative impact will be compensated in the future with the restructuring of the insurance banking business. This restructuring was done last year.

And in this second quarter of this exercise, we’ve seen a first compensation of part of that Aseval restructuring which is the reduction of the net equity of Aseval, less consumption of capital therefore.

In the future once we close the agreement with Mapfre in the coming years, we will have a second positive impact as a consequence of the recovery of the goodwill generated in this purchase operation.

And the last impact that we’ve had has been in the exercise to reduce derivatives. As you know, the group have got derivatives that are similar in the – all the parts of the balance sheet, the IRS quite simple, and we’ve started to do compressions with the counterparties, with the investment banks through conversation chambers and the compression of this derivatives entails also the reduction of capital consumption of them, therefore reduction of APRs.

José Sevilla Álvarez

I don’t know if you said it, but I’d like to say that the second half of the year, we expect for this dynamics, as Leo was saying, we’ll continue to hit the capital ratio and we should expect for this figure to be above 10.5% at the end of the year. Yes, 10.5%.

Yes, we had an initial target of reaching 10%. And this period of the exercise we will be above and we will be at 10.5% at the end of year. And in terms of phase-in, so we can compare in the stress test, we should above 12.5%.

Cristina Daza

To participated, which is the current situation with City National Bank and when do we foresee to be sold and how are we putting that?

José Sevilla Álvarez

Well, it’s true that the City situation is pending of the regulatory approvals. We’ve had milestones being passed, the approval by the Bank of Spain, the Chilean authority approval. And we are still pending the approval by the North American authorities. They have taken look at the file. This takes time. We are running slower than what we expected. So we expect that we want to see we’ve got more authority on the date of the approval and we will share that information with you as soon as possible.

Leopoldo Alvear

And with regards to the contribution of the City to the P&L account. In this quarter report, we also have some data, so that you see the figures of the indices. How City contributes to the P&L account in terms of the financial margin? That’s EUR 28 million per quarter more or less.

In terms of commissions, it’s not too much, the commissions generated by City. And you also have the information of the contribution in terms of operating expenses. So City is a bank that has got a cruise speed of around EUR 30 million in gross numbers versus expectation margin per year. If you take out the provisions and taxes, the contribution as a whole is relatively small in the consolidated group.

In terms of accounting, the City result are in the P&L account. In terms of balance, they are as a current asset not in sale, BPAs.

Do we foresee any impact from KW on the project of the new fiscal reform act? We have studied it and analyzed it because the fiscal norms have to be read several times before you understand them correctly, but the conclusion that we are drawing is that the impact of the new norm if approved as such would be somewhat beneficial for our capital ratios, because it will allow to consume more than what we could of the non-monetized credits. Therefore we would have somewhat positive impact in the capital ratio future evolution. And it’s also true that the fiscal losses will last infinite, and in the mid-term that could give us some room for the accounting rates – the account of fiscal rates. And the short-term before the end of 2015, we do not foresee major changes but it’s true that for the mid-term we will have to assess how the group is going the results generation and the possible effect that this fact may have, that fiscal losses will last infinite.

Cristina Daza

Another to finish, Morgan Stanley, Deutsche Bank ask about dividends and dividend policy.

José Sevilla Álvarez

Dividends and policies. Dividend policies, we can pay out a dividend versus the result of 2014 in 2015. This means that we have to closure the P&L account for 2014, audit the accounts and that’s when the board will take a decision on the amount and the payout for dividend. Our idea, we’ve said it many, many times, that we are in conditions in terms of capital and bank’s stability to start to payout dividends versus profits from 2013, benefits 2014 from their amount will have to be determined by February 2015.

Cristina Daza

That’s the end. If you need more details and for figures or more information, the IR team is ready to give you any information asked. Thank you.

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