Banco Popular's (BPESF) Management on Q2 2016 Results - Earnings Call Transcript

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Banco Popular Espanol SA (OTCPK:BPESF)

Q2 2016 Earnings Call

July 29, 2016 06:30 A.M. ET

Executives

Francisco Sancha - Chief Financial Officer

Analysts

Francisco Sancha

Good morning. Welcome to the presentational results for the second half of 2016. Mr. Diego Barron is here with me; he is the Investors Relations Director, and the director in charge of the relations with rating agencies.

On May 26, the Board of Directors of Banco Popular agreed to launch a capital increase in the amount of EUR2.5 billion in order to quickly recover the Bank's profitability, in order to continue making progress in our business model, which is focused on SMEs, as well as families, in order to guarantee the best long-term deals and returns.

As you very well know, Popular has been able to successfully attain this capital increase, despite the current complex macroeconomic environment. For that reason, I could like, first of all, to extend my appreciation to all shareholders for their commitment and trust in the Bank. Undoubtedly, we have been able to reinforce the balance sheet of the Bank.

The Bank, as a result of this capital increase, has set very demanding goals, especially in terms of profitability and solvency, and in order to reduce non-performing assets. In this regard, we are making steady progress to attain these goals.

First of all, the Board of Directors, according to what we reported this morning, has appointed Mr. Pedro Larena as the new CEO, to substitute for Mr. Francisco Gomez, who has come to an agreement for early retirement with the Bank.

The main function of the new CEO will be to carry out the strategic plan that has been presented as part of the capital increase approach. That way, Popular is now starting a new renewal restructuring process.

For this purpose, we have split management of the core activity of the Bank from the real estate-related business. The goal is to focus on the profitable part of the business, the recurrent business, the core business, and on reducing non-performing assets, as well as making the ordinary real estate business more profitable. At the same time, we are going to implement a cost reduction plan, in order to optimize profitability and productive capacity. We know that right now we have a lot of pressure in terms of interest rates; therefore, the operational model will focus on efficiency and profitability.

During today's presentation, we are going to walk you through some of the quarter's highlights. We are going to talk about the business performance. And we shall finish by talking about some of the lines of actions that we are implementing in order to attain the targets that we have set during this capital increase process.

Well, as for the highlights, they are mainly determined by the Brexit, and the second elections that have been held in Spain, which has certainly conditioned the market's evolution; and also, due to the success of the Bank's capital increase, and some of those measures that the Bank is now carrying out in order to attain its goals.

These measures consist in splitting the core business management. This will be done on a specialized basis through segmentation, and the separation of the real estate business, both performing and non-performing. The purpose of this separation, as it has been reflected during the capital increase road show, is that a portion of the organization will focus on the recurrent and profitable part of the business, while the other part of the organization should focus on reducing non-performing assets, as well as in managing of the real estate business in a specialized way.

Secondly, we are going to undertake an operational optimization process, with a goal of increasing productive capacity and installed capacity, which is now strongly conditioned by the current interest rate situation. As a result of this, we intend to increase the efficiency and profitability.

Now, we are going to thoroughly analyze the economic and financial environment in which we have been performing our business over the second half of the year. In this period, as I said before, the markets have been particularly conditioned, very specifically, by some developments, both at a national and international level, strong volatility in the global markets, especially after the Brexit referendum; and that uncertainty had an impact on the profitability of both the Spanish and the German bonds.

The German bond, the 10-year German bond, is now in a negative position for the first time in its history, and the Spanish risk premium, at the inception of this process, reached 170 basis points. So it's quite obvious that the main financial institutions believe that it's perhaps too early to analyze the long-term impact of Brexit. However, it is true that we're already witnessing some reductions in terms of GDP for the most advanced economies for the year 2016, and 2017.

At a national level, we still have some political uncertainty. It is true that this has come down slightly, due to lower fragmentation in parliament after the elections. And this has also had an impact on the price of the Spanish bond, and, apparently, the news has been welcomed. However, this uncertainty still exists. And we know that financial uncertainty is not a very good travel companion.

Another key aspect, or highlight, for this period, which is also very important, especially in this uncertain context, is that Banco Popular has been able to successfully carry out a capital increase that will enable us to reinforce our business model, a profitable business model that is mainly based on the SMEs business, while quickly recovering the Bank's profitability. These developments have shown that the timing of this capital increase has been suitable, because, subsequently to this transaction, we had the Brexit event; the stress tests; the election uncertainties; and many other developments that somehow impaired the investors' appetite in Europe.

This capital increase, amounting to EUR2.5 billion, has been successfully completed and was strongly supported, as you can see on the slide, by both the Board of Directors of the Bank. It was fully subscribed. And it was also supported by other institutional investors. The final demand surpassed that EUR2.5 billion; EUR3.4 billion was the ultimate amount. And we didn't need to launch any additional tranches.

So this capital increase, as I said before, will enable us to normalize profitability levels through the core business trends, while reducing risk, while speeding-up, at the same time, non-performing assets. On the other hand, we have set six targets, or goals, in order to reduce gross NPAs by more than 45%, while increasing coverage by above 50%, while increasing our solvency ratios, the CET 1 fully loaded; and, at the same time, obtaining a return on capital that will also enable us to go back to a dividend policy that will be normalized by 2018.

So, as I said before, we have been able to develop a number of immediate lines of actions in order to attain all these results. On the one hand, separating the management of our core businesses from the real estate and associated businesses, while launching an operational optimization plan in order to shrink costs, according to the current context, which is highly pressured, and which is having an impact on efficiency and productivity.

Therefore, the real estate business and the core business management should somehow address these goals, which are totally different. For that reason, we believe that, that separation is necessary in order to reflect the peculiarities and caveats of each business. When analyzing the core business, as you very well know, we are leaders in terms of profitability in the SME segment. We are also currently developing and boosting the consumer finance business.

Today, after the acquisitions of Citibank's and Barclays' cards business in Spain and Portugal, we have also become leaders in that segment. And we will continue to focus on increasing our profitability levels in those segments where we have good management capacity, and good proven leadership. Besides, we are going to focus specifically on profitability in order to generate value for shareholders.

As for the real estate business, the main goal is to reduce very quickly the volume of NPAs. The Bank, for this purpose, has a number of resources available, as well as specialized infrastructure for that place, in order to reduce NPAs, which will in turn, enable the Bank to focus on more profitable businesses.

Therefore, we need to understand this distinction between both businesses, which are to be managed differently. Therefore, for that reason, we are going to adapt this group's reporting system to this new management model or to this new banking model that we are going to carry out on an individual basis.

So in a highly competitive context, and with very low interest rates, we are trying to create value for customers, and profitability for shareholders.

We shall continue to evolve our business model in order to become a specialized bank that is highly focused on profitability. So, here you have an overview about the core business, before we start talking specifically about each segment. As you know, profitability has been 16%, this is the ROTE, with a market share above 17%. This segment, in terms of SMEs and self-employed people, also shows our leadership.

We also have a very high market share in terms of cards, both in Spain and Portugal. And this business, in addition, has a cost of risk that is now beginning to be set at 56 basis points. So, this is the Bank's balance sheet. And today it's very difficult to see such profitable businesses, with such a significant weight on a bank's balance sheet.

However, it is true that this profitability figures that on an aggregate basis, the group’s results have been adversely affected by the real estate crisis, and the figures resulting from that business. Therefore, as far as the Bank can reduce its weight in other business segments, the Group's profitability will be in line with that of the core business. The other major measure we have taken has to do with the operational optimization of the Group in order to reduce costs, and enhance our operational approach.

Here we have some early results, showing that as from 2017, as you can see here, expenses will come down by EUR175 million; and investments, in terms of this, in order to optimize productive capacity, will be EUR375 million. This impact is already reflected on the goals that we have set for fiscal year 2018. At any rate, this analysis is to be cued up; and once it's complete, we're going to make it available to you.

In terms of the business performance, I'm now talking about the second part of my presentation, as I said before, we are going to start reporting results based on our results in the real estate business, and in the core business.

These are the key figures from both businesses, which, you can see on this slide, the Banco Popular's core business has average assets for EUR128 million [ph], as you can see here, which accounts for about 80%, about 80% or 82% of the Bank's assets.

In the first half of this fiscal year, this activity has contributed nearly EUR577 million to the net profit, mainly supported by the SMEs business; corporate banking; as well as public administrations and large companies; the consumer finance business; and the banking insurance business; together with securities and funds.

On the other hand, as you can see on the slide, the real estate business and the related business delivered accumulated losses for this EUR483 million over EUR28,321 million. We are confident, however, that these losses will come down and, therefore, we are going to try to make this have a greater weight on the core business.

Now, I'm going to analyze of the performance of the Bank's core businesses.

During this half of the year, we can highlight three main aspects. On the one hand, the stabilization of the interest margins and the retail profit. On the other hand, the containment of expenses. And thirdly, the business profitability.

As for income, without consideration of the floor clauses, we see a reduction of 3% vis a vis the same period in the previous fiscal year. However, we are facing an exceptionally low interest rate context.

Without giving consideration to the single resolution fund, which was booked during this half-yearly period, and without regard to the ROI, we can see that the evolution of income and the operating income has remained reasonably stable with a slight fall below 3%. However, the performance of credit production has been very good with a 22% increase vis a vis the same period in the previous fiscal year.

Besides taking in to account the current low interest rates, the average rate of new products remains above their portfolio stock rate. We have some leverage for the upcoming quarters, in order to improve the interest margin. This has to do with a continuous decrease of liabilities. We are talking about EUR30 billion in terms of deposits for the next 12 months.

According to today's data, we are now renewing some of those deposits below 30 basis points; and, therefore, we still have a long way to go in order to reduce this further. And, undoubtedly, this will enable us to offset the fall of these margins that may occur in the upcoming quarters. In addition to the reduction of the retail liabilities, we also have the second claim of the LTRO from the ECB. We had EUR14 billion that we returned by the end of June. We have now obtained an additional EUR12 billion, and we can go up to EUR23 billion.

As you know, the expected cost of this facility is zero basis points. It's cost free. And, therefore, we can benefit ourselves from up to 40 basis negative points, provided that this portfolio grows about 2.5% in the next two years. I can tell you that we are already on the right track to attain this goal of 2.5%, which is already fulfilled by 80%. So, it's highly probable that we start accruing this negative interest in the upcoming months.

As for other levers, and in terms of liquidity, the current liquidity position of the Bank could be considered to be quite comfortable, because it will enable us to manage, in a practical way, any future wholesale issues. By way of example, I can say that the last mortgage-backed bonds that were issued were issued at below 1%. And the upcoming quarters, there is one note that will imply costs for over 3%. And this is the case for the next year. So this shows you, which is our current capacity for improvement in terms of reducing the costs of funding for the upcoming quarters.

Now, speaking about qualitative issues, I'm talking specifically about the sub-segments of this business scope regarding the core business. Let me now talk about the SMEs business. Of course, we are always committed to SMEs. We keep this commitment. We have over 1.5 million customers; over 1,000 specialized managers who are devoted to managing this business; and about EUR40,000 million of funding to SMEs and self-employed people. That's the stock of loans that we have granted, up to date.

Besides, we have the production now for SMEs is about 17%. We are talking about EUR4,000 million on account of new products for this quarter, which means that 60% of the new concession of credits continues to be devoted to the SMEs business.

As you very well know, this is also very relevant, because it's another example of this high profitability that we obtain from SMEs business, is mainly focused, as you can see on the slide, on those segments that have proven to be more profitable. 40% of the SMEs stock is concentrated among self-employed companies, micro companies, and merchants. As you can see, profitability, in this case, is much more higher than the one that we obtain from other segments. And this is not because we are charging more; rather, because we are delivering a better quality service.

Besides, this is an activity in which we have been involved for several decades right now. And it's very difficult to replicate this model in the short term. Besides, and in terms of granularity, the targets of these loans, we’re granted about 50% of new products, are aimed at the manufacturing sector and merchants' activities, which are very important for the Spanish GDP.

Some more data about SMEs, in order to reflect the strong activity that we carry out at the bank, we are a very agile bank. We are carrying out a very strong commercial activity, as you can see on this slide. You can see how we keep on supporting the funding needs of clients in the short term with a two-digit growth. In terms of confirming, factoring, credit accounts, we continue to foster international development. Foreign trade, that's another major lever.

In the case of Spanish entrepreneurs, Banco Popular maintains a very agile role in this, regarding in order to provide this service to customers, by promoting some key sectors, such as the agro-food sector, where Banco Popular has reinforced its commitment through specialization and advice to customers.

Another area that is also included in this core business area has to do with corporate banking management, banking through public administrations, and banking services provided to large companies. Performance, in this case, has been very good over the past half-yearly period; the cost of these activities much lower compared to the average cost of productivity that is 21 basis points.

New purchases are twofold. We went from EUR1.7 billion, upwards. So the volume of purchases is also increasing at a 3% rate. It's growing by EUR700 million during the quarter. And the profitable investment, as you can see in this presentation, has also gone up by 3% during this second period, up to EUR18.5 billion in terms of profitable investment. As for the future, this business will continue to be furthered, on a more specialized basis, by focusing on highly profitable niches, even though this could imply reducing the size of our balance sheet.

Today, we also announced the agreement that was reached with an international company that specialized in direct consumer products. But let me now talk about this segment. Consumer finance is another segment that has proven to perform very well. We will continue to foster this business through specialized management; this specialized focus, which we consider to be suitable in order to add value in this area.

In this last half-yearly period, we purchased the Barclaycard business in Portugal and Spain. This is a highly profitable business that continues to be a leader in Portugal, reinforcing our revolving cards leadership in Spain.

In addition, we launched the WiZink Bank, thus re-naming bancopopular-e, which was the previous brand; renewing this brand in order to give a new drive to the business. Perhaps, Barclaycard will be the Iberian leader in the revolving cards business.

And finally, and as I said at the beginning of my presentation, we have also entered into a partnership with the Pepper Group; an Australian group which is specialized in direct loans and credit that is operational in several countries. It has been operating in Spain for several years, by now. Well, in addition to this, consumer finance business and other core business levers has to do with the sale of insurance products, funds, and securities.

Despite the current market uncertainty and volatility, it remains to grow at a stable pace. We have been able to gain market share. We're already above 5%. We have been able to gain 5 basis points, while increasing our managed volumes, especially in terms of wealth management. We have also been able to increase the volume of premiums.

Now, we shall analyze the performance of the real estate and related business. Here, we have some of the key figures. We are going to make some comments on them. But, first of all, let me explain to you what this business implies. It's not a run-off business. It actually includes all real estate developments and real estate construction activities, and other related businesses, such as the construction of infrastructure, the rental business, or the hotel business.

So, the current net balance is EUR15,600 million. We should add EUR11,000 million, approximately, more in terms of net foreclosed assets. In this parameter, we have also included not only non-performing assets, but also performing assets. Specifically, at present, the business has EUR8,500 million in terms of profitable loans of credit. However, the reduction of NPAs is our key priority, as we underscored in previous presentations.

For the management of this real-estate business, the recent capital increase will also enable us to accelerate the divestment of these kind of assets; or, as I say, will enable us to do it in a more selective way. I could like to underscore, however, our conservative approach in allocating provisions, and in terms of the way in which we rate non-performing customers; and, thus, that's something that we will apply in the upcoming periods.

In terms of the divestments, we see a very strong pace in terms sales, and the reduction of non-performing assets. So, there has been an increase of 11% vis a vis the first quarter of this fiscal year. Specifically, in the second quarter of this fiscal year we have experienced very important sales, perhaps the most important ones compared to the previous 14 quarters. That is a lot of purchase appetite, which is favorable for retail investors and for residential and non-residential investors. We continue to reduce NPAs by 1.6%. This has been a fault that we have registered in this half of the year.

I would also like to highlight the increase in the sale of land, over total sales. 31% of these sales account for the sale of land, vis a vis 17% during the same period the previous fiscal year. These sales continue to be balanced out compared to the Bank's current stock and portfolio in terms of quality and geographical distribution. As you can see here, they concentrate mainly in the autonomous communities, where we have a more successful business.

Now, talking about granularity and divestments, these increased sales, as I said before, reflected not only on more sales of land. We have been able to fold our retail sales quarter on quarter. As I said before, this is also related to a number of micro indicators, as you can see here. And this is also very positive, because, again, showing some signs of growth.

According to some data that were recently published, we can say that housing prices are increasing by about 6%. The number of transactions is also increasing by about 20%; and both land prices, which are growing by more than 5%, and the price of housing, which is also increasing by above 40%.

So these are very positive signs and, undoubtedly, we will, thus, be able to attain our goals. Therefore, we can expect that the split between the core business management and the real estate management, together with a profit coming from the capital increase, will enable us to reduce our NPAs. We, therefore, hope that in the upcoming quarters we continue to accelerate sales, both at an organic and an inorganic level.

And finally, I would like to highlight that at present we are obtaining sales gains, which, again, shows that the relative business is performing very well. For three consecutive quarters, we have been able to deliver gains from the sale of real estate. These gains have been 1.8% over the sold stock for the past quarter.

Now, we are going to talk about the evolution of the Group's key figures, taken on a consolidated basis. Banco Popular currently holds a highly solvent and profitable business, and it has a very good liquidated position. The core business is a business that makes very positive contributions, with adequate profitability and adequate growth rates. It's true, however, the real estate business is somehow causing us to lag behind a little bit, reducing the quarter's results down to EUR94 million.

This year, we are going to allocate profit for provision purposes. As a result of the capital increase, and on an interim basis, said before, we allocate the provisions that we have just announced, the CET1 fully loaded capital is about 13.5%, and at 15.25% phased-in, together with the leverage, which is about 17%.

So, on an interim basis, as I said before, we have been able to use capital increase in order to consolidate our solvency, and now we have to allocate all these to provisions. As for the LTD, it's also performing very well; and it's in a very comfortable position of 107%. And as for the efficiency ratio, it's below 50% already; we’re talking about levels of 48%.

Over the past year, we have continued to grow in terms of market share, regarding both loans at 6 basis points, as well as in terms of deposits, in the amount of 7 basis points. In terms of net NPAs or non-performing assets, we're talking about more than EUR21 billion, with a coverage of 37%, which will reach 50% once we allocate the necessary provisions we mentioned before.

As we mentioned during the capital increase publication, we have decided to divest our NPAs in order to focus on the strengths of our core business. Therefore, on this basis, we believe that this quarter we are going to allocate EUR106 million, based upon the profit that we have been able to obtain.

For this quarter, we are talking, therefore, about a zero profit on accumulative basis, the attributable profit, and without consideration of extraordinary provisions. That is to say, this EUR106 million we are talking about profit having been EUR168 million, or 10% lower than the same period of 2015. This is mainly due to a reduction of margins because of low interest rates.

This has been partly offset by increased profitable investments, and the reduction of the cost of liabilities. At the same time, the floor clauses have also had an impact on - here, we are talking about a EUR47 million, which has had an impact on income. Then, a lower contribution of the fixed income portfolios, which, as you very well know, not one of the main levers that we use in order to increase our profit. Based upon this, the margin of interest is EUR80 million.

The gross margin comes down by 12% according to or compared to the first half of the previous fiscal year. Here, we have to take in to account the lower response from other financial operations or transactions, and the single resolution fund for EUR52 million. However, the operating margin is EUR757 million, after a very good cost management, coming down to 1%.

And finally, let me highlight some of the capital gains that we have obtained, amounting to EUR102 million. Capital gains near EUR69 million coming from the sale of the servicing, and mortgage, and leasing businesses; and another one in the amount of EUR34 million coming from the sales of - the purchase one of the businesses by Visa International. This is how we have been able to control the profit we have just reported.

Therefore, our balance sheet shows a very good performance in terms of profitable credit, which remains at a positive level. And year-on-year, they are growing by 6%, together with deposits, which are growing 1.8% year-on-year, and 1.5% quarter-on-quarter. As for equity, capital, I would also like to point out that we have allocated a capital increase to reinforce our solvency. We still have to a lot provisions.

On this slide, you can see the evolution of the ratio that we reported in the first quarter of 2016, this CET1 fully loaded rate. Here, you can see the impact, 320 basis points, of the capital increase; and 70 basis points that has to do with a cleanup results for the first half of this year; the increase of the risk-weighted assets as a result of more investments; and some adjustment coming from old shares and our fixed income products on the balance sheet.

Finally, we come to this 13.6% of CET1 fully loaded capital pro forma for the second half of the year. But this is just on an interim basis, because we expect to, well, fulfill our goals for 2016. We want to have a fully loaded capital of about 10.8%. And taking in to account coverage and provisions, the Bank is now analyzing the impact cost by the regulatory changes regarding provisions, what we call Annex 9. We are going to be very prudent in terms of assessing or appraising real estate items.

In the second half of the year, we’re going to allocate provisions, as announced in the capital increase measure, in order to incorporate the new measures of the new regulations. We are going to carry out some preliminary assessments. Credit coverages will be around 60%, and those for foreclosed assets will be above 40%. Therefore, the total amount in terms of coverage for non-performing assets will be around 50%, which has already been disclosed and reported.

Okay, to finish with, let me now talk about the main lines of actions that we intend to carry out in the upcoming quarters. This is the Bank's outlook. Let me emphasize that we are going to develop businesses on a specialized basis; not only the core business or the real estate business, but also each and every business held by the Bank. We’re going to do this separately, because specialization will result in value for customers and profitability for shareholders.

In this regard, we’re going to move towards a more specialized business model, based upon segments, with a focus on profitability. And I would like to underscore that concept. We will be very rigorous when it comes to allocating provisions. We are going to take a conservative stance in order to be able to face any adverse scenarios, or potential adverse scenarios in the upcoming years, and in order to attain the goals that we have set for 2018.

And finally, we are undertaking an operational optimization process, as well as a cost reduction process, in order to very quickly rally our profitability levels. The Bank has undertaken a number of very demanding commitments, but be are strongly committed to fulfilling each of them. We have embarked upon an operational optimization process, an independent business management approach, and we will keep the pace of our action and work in order to carry out the results and the figures that we have just announced.

We are certain that we are on the right path. And we are going to deliver good results; and we will provide very appealing profitability perspectives; and we’re going to reduce our raised profile markedly. This should eventually translate in to a much more positive performance of our shares. Thank you very much.

Question-and-Answer Session

Q - Unidentified Analyst

We are going to take questions in order. The first question, after the way the change of the CEO, do we believe that the new CEO will change the Banks business model, or lines of actions that have been set forth?

Francisco Sancha

Well, the Board of Directors have considered that, amongst the financial challenges that we have to face, as we mentioned at the beginning of the presentation, it is necessary to start a new management process. This new management stage will be reflected in this split between the core business management and the real estate management, the business that is mainly leveraged upon SMEs; and, on the other hand, separating management from the real estate business management, taking in to account not only foreclosed assets, but also the real estate exposure that we may have which maybe non-performing or impaired.

For these new stage we are embarking upon, the Board of Directors have considered it suitable to appoint a person who has a global expertise in the financial sector; a profile that we didn't have up until now. Therefore, there is no modification or amendments to the business plan of the Bank.

This plan has been supported the same way as the capital increase measure, which was fully supported by all of the Board members. And this is something that was timely supported by the Bank's Chairman himself.

Unidentified Analyst

Another question regarding segmentation. Can we elaborate a bit further on segmentation?

Francisco Sancha

Well, here we are talking about segmentation from the viewpoint of management. As I said before, we now have two different activities. The core business, on the one hand. Core business means all those activities which are considered to be key for the Bank, and which have to do with the Bank's traditional activities, I'm talking about SMEs; I'm talking about consumer finance. We're currently fostering this segment, as well as what activity with public administration, corporations, insurance, etc., so everything that has to do with traditional commerce banking, which caused the Bank's profitability to be so high in that segment.

On the other hand, we believe that specialization is a good thing in order to focus more. This activity is not non-productivity, but rather it's an activity, which had performing balances, and what we intend to do here is to manage these differently. We cannot say that this a one-off perimeter. It's a performing perimeter that we intend to manage in a completely separate fashion.

So we are not talking about a core-on-core segmentation, but rather a segmentation between core business and specialized business for the real estate separate [ph], specifically.

Unidentified Analyst

There is one question about whether we will provide more information on these perimeters in the upcoming months.

Francisco Sancha

The answer is yes. As with the allocation of capital to the real estate business, you have to remember the surplus capital that we have obtained as a result of the capital increase has been temporarily allocated to this, because we deemed it suitable.

Unidentified Analyst

As for the dynamics of our P&L account and their interest rates, regarding BPI, Tom [ph], Deutsche, at Merrill, this is one question asked for the guidelines for this year, and the evolution that we can expect.

Francisco Sancha

As for the quarter's margin, it has been impacted by the elimination of the floor clauses, we’re talking about EUR10 million approximately; as well as a lower contribution by their bonus portfolio in the amount of an additional EUR10 million.

It is true that during this quarter we have witnessed stricter conditions. And even though we have been able to improve our performance compared to previous quarters, we still have to grow at a higher pace. However, we’re still talking about EUR2.1 billion for the rest of the year, and we expect some stabilization in the forthcoming quarters.

As I said before, we have a number of leverage in place that will enable us to fulfill all these goals. We believe that credit re-pricing and interest rates should be completed by the end of next year; therefore, we will have a gap in between maturities and new products.

Credit, as we said before, is also growing, it’s showing some sound signs; however, we believe that this should speed up a little bit as uncertainty disappears in the political arena. Again, deposits are performing well, both in terms of retail and wholesale banking. And then the bonds portfolio, which will continue to make a similar contribution to the current one.

It's true that the rest of the year we will be able to further improve the profitability of that banking book.

Unidentified Analyst

There is another question as to how our interest rates performing regarding the new production, the new products, and whether negative rates are having an impact on that; whether they are also having an impact on SMEs?

Francisco Sancha

Well there is stronger competition right now. We try to defend margins. We try to deliver the best possible service, even though we have to say that the current interest rate scenario is quite adverse. So, the only way in which you can counterweight that is by taking other actions.

It is true, however, that the application of the new circular that will become effective in October this year should put some mortar in to the pricing system. And we hope that this will all stabilize in the upcoming quarters. However, in terms of the business plan, which we advocated during the capital increase process, the credit levels or the rates that we included at the time are the same that we are dealing with in this period. Therefore, any additional improvement on what we already have will, of course, deliver positive results.

Unidentified Analyst

As for credit, do we expect the guidance to evolve? Tom [ph] and Deutsche Bank, are asking this question.

Francisco Sancha

Again, we have been able to grow at a rate of 1.6% in terms of credit over the past quarter. We’re talking about 1.5% over the year. And we believe that we can maintain this upward trend in the upcoming quarters. Growth is very important in terms of both the SMEs, stock, and new products. We have been able to grow at a 37% rate in terms of SMEs and self-employed customers, therefore, we now have a positive stance for the upcoming months. Any decision that is taken in the political arena, we believe, will contribute to increase our expectations for this fiscal period.

Unidentified Analyst

As for the cost of liabilities, there is one question from Merrill Lynch. The question is whether we believe that the cost of liabilities can be reduced further down, and the impact this could have.

Francisco Sancha

Well, liabilities, of course, is one our key levers. We have about EUR30 billion in terms of deposits that will mature in the next 12-month period. We are now reporting 34 basis points for the renewal of these term deposits for the last quarter. We have already observed some renewals below 30 basis points. We believe that we will be able to hit lower levels. And that's the ultimate goal we pursue. This should be one of the positive results that we can expect for the upcoming months.

As for the increase of deposits, it's still growing at a very positive rate. We do not see any disruption in terms of the cost of deposits; they are also growing at a rate of about 6%. And we are also improving the mix of products. Right now, these products are increasing more than term deposits. And, therefore, we believe that this has an impact - or this shows that there is an increase in terms of the resources of customers.

As for wholesale funding, not only due to the LTRO, but also due to other reasons, and the fact that rates are very low today, we are talking about maturities about 3% in the upcoming months; therefore, we can expect this situation.

Unidentified Analyst

As for the LTRO, which policy are we expecting to implement, and how much we're going to claim? Whether we are going to benefit from those 40 basis points, or whether we can start providing part of this profit.

Francisco Sancha

Okay, I'm not going to insist on this LTRO anymore. We are talking about EUR12 billion. We are taking a tactical approach in this regard. This is a portfolio that is growing at a 2% rate in order to benefit from those 40 basis points; it has to grow at a rate of 2%. So, right now, we have fulfilled that rate by 80%, so we can start accruing 83% of those 40 negative basis points. We intend to do this in the upcoming quarter.

Unidentified Analyst

Carlos Peixoto is asking about capital gains of Visa.

Francisco Sancha

We have already mentioned that, that is EUR24.5 million in terms because this was accounted for in the equity method.

Unidentified Analyst

And there are other questions regarding N+1, Fidenttis, Merrill, and Goldman are asking some questions. The plan, when is it going to be implemented? When are we going to carry out the restructuring charge? How many people are we expecting to downsize?

Francisco Sancha

Well, this also shown in the presentation. From a qualitative viewpoint, this plan is aimed at optimization. Given the current environment and the technological context, we want to reach our customers better. We are not going to jeopardize, however, our core business, or the way in which we understand the business. We want to make this very clear. But eventually, we have to find mechanisms in order to support our relationship with customers in a more efficient and effective manner.

In this regard, we're now considering to reduce not only our installed capacity, but also our overhead. This should imply EUR175 million in terms of savings as from 2017, compared to those EUR375 million in investments and associated costs related to this program. So, financially speaking, we are talking about a payback for the next two years. For the time being, we cannot provide you with any further details about figures. Once we however have the plan ready, and once we have a clear picture about it, we are going to make it public; and that will be before year end.

Unidentified Analyst

As for provisions, they are asking whether we are talking about EUR106 million in terms of guidance for the upcoming months, and whether this will be included in the restructuring costs.

Francisco Sancha

The guidance, as we set provisions for this fiscal year, will be up to EUR4.7 billion; and that will be mainly allocated to improving credit coverage, and also for foreclosed assets, and in order to deal with NPAs. As for provisions, this will be allocated between the third and fourth quarters. It is true, however, that we have already anticipated EUR106 million this quarter. That's why profit has been zero.

Unidentified Analyst

As for this being included in the restructuring costs, the answer is no; they would be additional costs, which is the goal - do we keep that 40 basis points goal in force? The answer is, yes. As for the reduction of EUR15 billion, there are several questions here in terms of Autonomous and Haitong. There is another question from Goldman. The question is how do we expect to do this? And what kind of environment should we expect in the upcoming quarters in order to accelerate this reduction? And then, Goldman is also asking whether we can speak of a potential spin off, as it was published in the press?

Francisco Sancha

Well, first of all, let me say that we ratify our NPAs reduction goal on those EUR15 billion for the next three year term. Of course, we're not only considering this separation between businesses, but also the separation between the real estate business. By focusing on this, we will be able to harness our installed capacity, track record, and visibility. This will also enable us to keep on divesting, as we have been doing so far.

But it's also true that the Bank continues to explore other mechanisms in order to accelerate the sale of these NPAs by implementing certain facility mechanisms, or by doing some portfolio spin offs. We are trying to maximize value for shareholders with all this. And I don't have any much more to add.

Unidentified Analyst

As for the sale of real estate, they're asking how do we think the sector will perform, or whether we believe this level will be the run rate.

Francisco Sancha

As I said before, whether we are talking about residents, or non-residents, we can see that this quarter they sector went very well. We are talking about EUR560 million on account of retail sales, we’re not talking about wholesale sales, which somehow reflects this growing, or upward trend in terms of macro figures for the real estate sector.

It's true, however, that investors continue to have purchase appetite; but they are still waiting for the market to be clearer, or the macroeconomic context to dispel that. We believe that this should be still an up factor, eventually. In quantitative terms, we see also an increase in interest in the purchase of land.

Unidentified Analyst

There are several other questions from Haitong. As for the circular on provisions, the impact this could have, and whether this is already included in the provision allocation guidance for the year? And in terms of solvency, the question is whether we can provide more information about the quarter's figures? RCB [ph], Mirabaud, and Merrill are also asking this, and whether we are reiterating the guidance for this year; and whether we have included this in our costs plan?

Francisco Sancha

Well, I insist that we have some capital goals. They're saying that we reported for the end of this year. We’re talking about a CET1 fully loaded capital above 10.8%; and have phased in capital about 13.7%; and a total capital ratio about 15%. Therefore, these capital levels will be maintained for the remaining part of the year. And we will be very careful and thorough in terms of solvency, as I said during my presentation.

We also mentioned that the capital data that we published in this quarter are reinforced by the Bank's capital increase, without taking in to account the allocation of provisions; therefore, they're only temporary. That, we tried to make clear during my presentation.

So the negative impact, we pointed out, has to do with increased investments. And the risk-weighted assets, therefore, are related to our percentage of capital requirement and our private fixed income portfolio. And it's also related to the write-downs that we carried out during the quarter, and the DTAs that we set for the first part of the year. But in the second half of the year they will no longer exist, therefore, they have been deleted. Okay, we believe that the qualitative result will be published in terms of today's stress test, which is our vision about [indiscernible] for this year.

As for stress test, there's not much we can say until they are publicly published. That will happen tonight at 10.00 PM. However, we can say that we are very confident. We were already confident before the capital increase. And even though they are not going to take into account the capital increase, I believe that after the capital increase, we believe that the results will be satisfactory.

And as for the [indiscernible] and the capital requirements, this is something that was pointed out during the publication of the new business plan. As far as the capital increase measure, the Bank's profile is changing dramatically after this capital increase of EUR2.5 billion, and the risk solvency will have an impact on our Pillar 2 requirements. This Pillar 2, which apparently will be split up in to two parts, will even enable us to build a buffer for the payment of Ato1’s [ph] and, therefore, we will be able to improve our risk profile and our solvency, accordingly.

Unidentified Analyst

From Haitong they are asking, which is their dividend payout policy for the upcoming years?

Francisco Sancha

Well, the goal for 2018 is to recover the payment in cash of dividends as from 40% this year. Of course, we are not paying our dividends, due to their extraordinary characteristics of fiscal year 2016. In 2017, we expect to normalize the situation in order to have a cash out about 40% by 2018.

Unidentified Analyst

From Merrill they are asking about our view and our position in the national context?

Francisco Sancha

Well, we are fully focused and fully committed to attaining our business plan. That will be our script, and that will be our road map for the upcoming months.

Francisco Sancha

And that's all. Thank you very much.

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