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Banco Bilbao Vizcaya Argentaria, S.A. (NYSE:BBVA)

Q2 2012 Earnings Call

July 31, 2012 3:30 am ET

Executives

Ángel Cano Fernandez - President, Chief Operating Officer, Director, Member of Executive Committee and Member of Global Asset Allocation Committee

Tomas Blasco Sánchez

Manuel González Cid - Chief Financial Officer and Head of Finance Division

Operator

Good morning to everyone. Welcome to this webcast in which we are presenting the BBVA Group results for the second quarter of 2012. The presentation will be given by Angel Cano, the Chief Operating Officer for the Group, and then we will have a Q&A session immediately after the presentation. And Manuel González Cid, the CFO for the Group, will be involved in that as well. As always, any questions that can't be answered during the webcast because of lack of time will be dealt with by the Investor Relations team, during the rest of the day. Angel, you have the floor.

Ángel Cano Fernandez

Good morning, everyone. Welcome to this presentation of our results in the BBVA Group for the second quarter of 2012. Once again, this quarter, we've been dealing with a complex environment. First of all, the regulatory demands are becoming stricter and stricter with respect to the provisioning of real estate assets in Spain, and we're also seeing very uneven growth in different economies in which we operate. We've got Asia and Latin America with very sound economic growth being consolidated, then we've got the USA, where the economic recovery is still accompanied by rather sluggish growth. And then of course, the focus of everyone's attention is on Europe.

We could say that Europe and the peripheral countries, especially Spain, are going through perhaps, one of the most complicated times we've had since the beginning of the crisis. In fact, that goes as far as to say that it's a contradictory situation. Why do I say that? Well, because we are witnessing an increase in the distressed, in the markets with very high risk premiums, drops in stock exchange indexes, we're seeing what's happening to the euro with continuous drops and downgrades in the rating of different entities within Europe and within the periphery companies. But nonetheless, this half-year, we've been seeing a lot more going on in Europe, much greater political will to have greater integration in Europe. Elections in Greece, where the pro-Europe party is one more a lot of change in the fiscal structure; the approval of a bailout with also plans for ambitious growth throughout the EU; plans for a Central European Bank with greater powers; and clear progress being made in periphery economies with new reforms being brought, and especially in Spain, that's -- I'll be talking about later. So once again, we see that the highlights for the BBVA Group are very sound as well.

I want to talk of 4 main points in our presentation. First of all, the very sound and very recurrent revenues we're seeing in all the different lines of the income statement. So that once again, we are showing very strong operating income, which is a key item for absorbing the negative impact that we've had this quarter, with increase in regulations, and requirements of those regulations. We're still generating organic capital, and we're complying with the EBA regulations that were put out in -- at the end of 2011. And we're also seeing for the third quarter running, that we've got very stable risk indicators in the group.

So those are the fundamentals, and the fundamentals are what sets us apart from our European peers. Nonetheless, neither the rating agencies nor the markets seem to recognize the soundness of these fundamentals. So I was talking about this very sound growth in recurring revenues, starting with the net interest income, for the 7 quarters running, we're seeing sustained growth quarter-on-quarter of over 16%, because of the diversification we see in the way that we generate this net interest income, with the emerging economies bringing in 56% of the total for the Group and the rest coming from the developed economies.

Moreover, each of the geographical areas has been able to adapt to its own cycle. In the emerging economies, we are seeing buoyant growth, net interest income is growing at plus 20%. Whilst in the developed economies, even here in Spain, where there's lower business volumes, we're seeing very resilient business activity in generating revenues. Looking at the recurring gross income, we see the same tendencies, which were in the net interest income with 3 keys to this strong year-on-year growth. In the gross income -- the recurring gross income after factoring out net trading income and dividends, growing as I said, up very close to 14% quarter-on-quarter. Secondly, we're over EUR 5 billion for the fifth quarter running, and that means that we've got an annual figure of recurring gross income of over EUR 20 billion on -- the total gross income, which will be more like EUR 22 billion.

Moreover this quarter, the gross income, both in recurring gross income and total gross income is growing more than costs, which means that we continue to have a better cost income ratio and we are still leaders in the league table of our international peers in terms of efficiency, and we're seeing that the very ambitious investment plans we established some quarters back are now bearing fruit. Watching what's happening to cost and revenues, we can look in the developed markets where costs are actually falling off, and they are falling off much more than recurring gross income. And in the emerging markets, we're seeing growth but less growth than in the gross income. This tendency can also be seen after taking into account what's happening to costs in the net income, which is growing quarter-on-quarter, very close to 20%.

Once again here, there's a very relevant issue we have to look in, the recurring net operating income will be about EUR 10 billion for the year-end, and the total net income will be close to EUR 12 billion, including net trading income and dividends. So it's a very sound operating income, and that's vital in order to fund all the other activities that we have, for ordinary provisioning, and extraordinary provisioning, especially this quarter, once we've start to set aside the provisioning required under the royal decrees on real estate provisioning.

So if we look at what's happening to provisioning here, you can see from 2010, 2011 and especially, 2012, there's been a progressive increase in the requirements. What's going to happen in 2012? Well, we'll see that at the end of the year, we will have fully covered all the provisioning established under the royal decrees. So we will then have a clear path, as of 2013, to go ahead and deal with all the real estate assets on our books. So we can look at that sound operating income, and we realized that we have enough, more than enough 2.5x enough to deal with the ordinary provisioning necessary for 2012. That means, or it indicates, that the tendency we'll be seeing over the next few years, will be to go on generating operating income, which will be more than enough to cover the provisioning required, 2.5x, in fact. By the end of the year as I was saying, we'll have fully provisioned the requirement under the 2 royal decrees of this year. The latest numbers we've got for this item is over EUR 4.6 billion before tax, of which as you can see -- or as we saw in the previous slide, about 1/3 has already been provisioned for the end of this quarter. And the EUR 3.2 billion that is pending provisioning will be fully provisioned in the third and fourth quarter of this year.

So all in all, we are presenting a very sound income statement. And if we factor out the provisioning established for the real estate assets will be EUR 2.37 billion, which is a drop of 5.1% year-on-year. And taking out those extraordinary provisions, we'll be talking of an attributable profit of EUR 1.5 billion, or 35.4% drop. The data that we've already seen, the very sound fundamentals, looking at the net interest income, mean that our ratios are improving significantly. Although in recurrent terms, we're growing more soundly than we are with the one-offs. And having done 1/3 of the provisioning under the royal decrees, that means that we've covered all the requirements that we have to cover, which will be fully provisioned by the end of the year.

In terms of risks, now. Once again, the risks indicators are stable. As you all know from the end of 2009 when we peaked in the NPLs, we've been seeing both the coverage ratio and the NPA ratio the -- much more healthy, with an increase of 6 points in the coverage ratio since March 2012, and a stable NPA ratio still at 4.0%, which reflects the underlying sound performance of the Group, and the same, if we look at the NPAs to the net balance that we have. And that's very important focus on businesses and dealing with developer risks here in Spain.

In capital, the 30th of June, we've already covered the capital requirements of the EBA, reaching 9.2%, generating 10 basis points of capital organically over the quarter, or 40 basis points in the half-year. And what's important here is, the Group has been able -- ever since the new requirements were established under EBA, we've been able to raise EUR 6.9 billion in order to meet the EBA requirements for the end of 2012. Under Basel 2.5, the core capital ratio that we have is already 10.8%, with 50 basis points generated just in the first half. And moreover, independent analysts and independent experts have confirmed the very sound capital situation in BBVA, the IMF and the experts evaluating the Spanish system on involvement, and the other people who have been brought in from all of Spain. And we're seeing that we've done even better than we did in the previous stress tests in Europe, and we definitely do not have any further capital requirements. So that's why we have such a sound liquidity position. This is a structural position, and we have the position on the euro balance sheet and then the balance sheets we have outside the euro.

In the euro balance sheet, there are 3 points I want to make: Our debt redemptions in the wholesale market in 2012 to 2013 have already been completely covered; secondly, with respect to the deleveraging we're seeing on our loan book and its derivatives, and the raising of retail funding, we have improved all our internal liquidity ratios; moreover, we still have a lot of available collateral in order to absorb any liquidity shocks that might arise. In non-euro regions, we can confirm our financial independence for each of these subsidiaries. There are no transfer of liquidities over the different geographical areas. Furthermore, there are no wholesale structural financial needs, and we still have access to market in a lot of different places, such as Mexico, where we recently able to raise ordinary 10-year bonds worth EUR 1 billion, with a demand, which outstripped the final supply by 3x. That means we've got very sound fundamentals, and these are facts that you can see. You can look at our resilient earnings, where all the recurring income figures, the gross income, operating income, et cetera, are growing 13.1%, 17.8%. We are able to take on board, ordinary provisioning, 2.5x, as I already said before. And that's because we're constantly generating revenues in all the different areas, where we are operating, especially in emerging markets, where we're getting in 56% of our revenues. And also, we also have very sound foundations that we're working in terms of the EBA ratio, we're at 9.2% already, generating EUR 6.9 billion since these requirements were established last September. And in the first half of 2012, we've managed to increase our capital by 50 basis points. We are improving all our internal liquidity ratios. And once again, thanks to the global management of risk in the Group, we can see that our NPA ratio is stable and there's a substantial improvement in our coverage ratio.

And now, as always, we're going to talk about the different geographical areas, starting with Spain.

So starting with Spain. See, if I can find my papers here. Okay, Spain. I've started this presentation talking about the complex environment we are seeing in Europe, with uneven growth. And I'll say that in Spain here, perhaps, we were going through a rather contradictory situation when there's a lack of confidence, which means risk premiums are record highs with big drops in the stock exchange indices are above all, for us, what we're impacted by is the IBEX 35 index, which has gone down to levels it had in 2003. The downgrading of sovereign risk and the risk of very important financial entities. But at the same time, we're seeing a lot of progress being made. Recently, the approval of adjustment plans for EUR 65 billion, which really shows that probably, the government is going to hit its objective for 2012, 2013. We're seeing as well that the deficit window is widening in terms of the targets being established by the government. We've also seen the launch and implementation of several structural reforms. That's the most important, it has to do with the labor market. But also, we're seeing a lot of very sound measures being established to reform the financial system. We probably will know this data -- the financial system has already had reforms, which will establish the right kind of provisioning for the entire market. A lot has been done to provision against real estate exposure with the new royal decrees. And we also have the money coming from Europe, which is the extra EUR 100 billion, which has been agreed under the memorandum of understanding. There's definitely a spirit of reform, which will move us forward to recover the path towards growth as soon as possible. But the markets aren't recognizing that, and the rating agencies aren't recognizing that either. But we all know, that whenever such a structural reforms are established, it does take time before you can see the results that they bring about.

Nonetheless, in this period of time, we're seeing a progressive correction of the main imbalances that did lead to this economic crisis in Spain. Household debt has gone down since the peak of the crisis, which was in November 2009 by 8.2 percentage points, and in Europe the reduction's only been 1%. The construction industry for housing as a percentage of GDP is now 4.3%, which is about the same level as it was in 1997. The deficit on the balance of payments has gone down nearly 6 points from 2008 to 2011. Moreover, labor productivity has improved by 12% since the crisis began. When Europe has seen that figure, that productivity remained pretty well flat. So it's about time that we should see the results of these results being recognized.

And in this environment here in Spain, we see low business volumes, low economic activity and we are establishing a close management of pricing in both lending and deposits. And the net interest income for the first time, over the last few quarters, has grown very significantly, 4%, whereas in March, we were just seeing more moderate growth.

Apart from managing pricing, the second key to management in Spain is cost. As we've seen ever since the beginning of the crisis, we've been reducing the total amount of costs in this area. And once again, we're doing that close to 3% cutting costs against the previous year, in the same period. And after absorbing fee income, we can see that the recurring operating income without net trading income is actually growing 4.6%. And here in Spain, we're comparing against 6-month period in 2011, of which the performance of activity on markets, the net trading income, was much more positive.

But anyway, we're still seeing a very positive performance here in terms of NPAs. At the beginning of the presentation, I was talking about the risk indicators for the group as a whole. And here in Spain, with SMEs and developers, we have been focusing on growth over the different quarters. And you can see there are EUR 500 million more in net additions over the half-year, and these are fully provisioned. The NPA ratio has worsened, 10 decimal points, that's not particularly extraordinary. And the coverage ratio, because of the special provisioning, has gone up from 43% to 50%.

Earlier on, I was saying that the main focus of attention is on development and on SMEs. And with developers, we've got very specific plans, which are related to the royal decrees and with an exposure of EUR 13.8 billion, which has gone down 7% this half year. We've got an NPA ratio of 34.2%, which has increased over 600 basis points over the half year. The coverage to the 30th of June was 46%, which was 17 percentage points higher than at the beginning of the year. And the other area that we're focusing on is SMEs, where the total exposure was EUR 24.78 billion, which had seen a deleverage over the half-year of 5%, with an NPA ratio close to 7% -- well, 6.9%, to be more exact, we've got -- with an increase over the half year of over 123 basis points. Coverage here is 38%.

NPA and the other ratios are still stable for mortgages and Consumer Finance and for small, and for large enterprises. So that's the income statement, which we have here with an attributable profit of EUR 567 million after the royal decree requirements, and with all the special provisions that we have. Without that, it would be EUR 809 million.

So going from the top-down, net interest income has grown 4%. Gross income has gone down 3.4% after absorbing the drop in revenues coming from markets, because the recurrent operating income is down 3.9%. And in Europe and Asia with 51% in the gross margin. Most of this growth is putdown to Turkey coming into this, because in the full half-year, if we compare this with last year when they were only here for the second quarter. But now from Asia, the reoccurring sustained growth of profits from our investment in CITIC.

So here, we have the income statement from the rest of Europe and Asia with an attributable profit of EUR 576 million, which is a 29% growth year-on-year. And operating income is also grown by 29%, or contributing over EUR 700 million to the operating income.

Mexico now. Once again, we continue to see a buoyant activity, both on the lending and the funding side. Lending has grown over 10%, evenly spread both wholesale, retail and corporates. And in customer deposits, we can see an improvement in the mix of our balance sheet from the points of view of an increase in the headings concerning site deposits and saving deposits. And because of the major investments we made in recent quarters, we're still attracting a new client, especially over the last 12 months, we've attracted over 12 million new customers to their Mexican franchise.

So if you look at the revenues now on the income statement, the net interest income has grown by almost 9%, and it's true that in retail terms, the growth is over 9%, and the recurring gross income, we can see the -- how this totals down, which is growing by 9.1%. But total gross income has grown by 4.3%, once again, because we're comparing this with the quarter last year in 2011, where we sold ALCO portfolio. But in any event, the underlying margin is growing by around 9%, as we can see. If we look at the risk indicators, when you see that they remain stable, the risk premium is similar to recent quarters between 3.2%, and 3.4%, 3.5%, and the NPA ratio is still high at 111% -- the coverage ratio. And this is because of new reclassifications of some of our assets, due to the mortgage world, and this is just over 4%.

But if you look at the balances, there's nothing important here with regard to the risk indicators. And we look at the income statement for Mexico, we're talking about EUR 865 million contribution, which is a 2.4% growth. And it's true that if we factor in the effect that I mentioned before of not selling, or no revenues from selling our ALCO portfolio that we had in 2012, then these results would have grown by over 15%. And I think this shows the real underlying performance of the income statement, the net interest income being increased by 8.7%. And once I've said, if we take out the effects of the net trading income, we get this attributable profit of EUR 865 million.

South America, once again buoyant business, both on the lending side and also on customer deposit, it is the highest in the Group with growth on both sides of the balance sheet of almost 24%. And on both sides of the balance sheet, we're increasing our market share, both in individuals and in deposits. The net interest income as a consequence of the buoyant activity there, and the fact that we manage our spreads, has grown by 28%. And here, once again, we're seeing the results of the -- our investments. The reinvestments that we made in recent quarters within the region, which now enables us at the -- over the last year, we have attracted over 1 million new customers. The same performance we can see in the gross margin and in the operating income. Once we -- when we say the costs are growing far slower than the gross income and once again, we're seeing an historic record in both the gross income and in our operating income for single quarter.

And all of this performance in the gross income, the operating income and our cost management, increases or cost income ratio by -- to 41.7. It's over 3 points improvement. We see a stable NPA ratio and greater coverage rate. The highest impact of the Group, which is nearly 140%. And I repeat, the risk premium it remained stable, and this means that we can contribute over EUR 700 million and attributable profit to the Group and this is stable recurring revenue over the months and over quarters. Or if you like, almost 25% growth, if we compare year-on-year.

And finally, the profit [ph] in the United States. And in the U.S., we're seeing successive improvements in the growth on the lending side. BBVA Compass is now generating growth in their loan books of over 11%, basically, in residential mortgages and in commercial real estate. And from the points of view of customer deposits, we continue to improve the mix of our deposit. On the BBVA Compass balance sheet, we've seen increases of over 5% in liabilities with a lower costs.

And this leads us to the performance of the income statement, which is highly affected by the corporate investment banking and markets in the U.S., especially in New York. And this is why we can see this fall of 4.3%, or 9.4%, in the operating income. 2 keys to all of this, local business, BBVA Compass, without investment banking would've increased by 6.4%. Costs continue to fall year-on-year, and this quarter we're showing a fall of 2.4%. And the operating income is affected by 2 issues, apart from the negative performance in the markets. On the one hand, the replacement of the guaranty portfolios that gave us a high level of incomes in the net interest income, and these have been reduced to almost 0 now. And then on the other hand, we have the new regulations that have come into effect, and the best-known of this is the Darwin Act, which has had a one-off impact this quarter, which has reached an operating income of almost 9%. And with every tapers after that, it would have grown by that. So if we now turn to the risk indicators, loan-loss provisions are confirming, month-after-month and quarter-after-quarter, this full in provisioning of nearly 75% year-on-year. And this is compatible with the substantial improvements in the NPA ratios, because of the radical drop in net entries in NPAs, and this is also compatible with -- strength and the growing in the coverage ratio up to 82%.

And finally in the United States, they contribute EUR 245 million, which is extractable [ph] to the whole year, which is a 24% increase after absorbing, as I mentioned before, both the regulatory impact of the Darwin Act, and the loss of revenues from the guaranty portfolios, and also, the weak revenues generating from the portfolios from the markets area. So a strong contribution from the U.S. And as I said before, this is totally extractable [ph] to the year as a whole. And then there's global area, that covers all our different geographies. This CIB that has been very complex and the business here shows that it's highly resilient. The gross income is almost flat and net attributable profit, even in this complex environment, has only fallen by 14%, contributing over EUR 550 million to the Group's profit. And this is the result of diversifying our revenues by geographies, and by diversifying the revenues by products, too, but above all, because of the customer-based franchise, which offers over 85% of total revenues from this area.

So I will finish by summarizing the 4 basic keys for -- to this quarter. Strong recurring revenues this quarter, which enables us to show the strength in the operating income, which enables us to present around EUR 12 billion for the year as a whole, which will enable us to face ordinary and also extraordinary provisioning, due to the new capital requirements that we're facing -- have been facing since in the beginning of the year. But even so, we can still generate capital organically, and we can comply with the EBA without any problem at all, and also show enormous stability in our risk indicators. So overall, we are presenting sound fundamentals, which sets us apart from our main peers in the international market. Thank you very much. So now, Tomas, we can now move on to the questions.

Question-and-Answer Session

Tomas Blasco Sánchez

Thank you very much, Angel. So we'll start the Q&A session and as usual, I put the questions together into different groups in order to answer as many as possible. The first block deals with developers and real estate, Paco Riquel indiscernible] Vaamonde from Fidentiis have 3 questions.

First, can we explain in greater detail, the performance in the developer book over the quarter and the future prospects. Second question, it would appear that there's a migration from credit performing straight into NPAs. So what is the future performance in the quarter? And the future prospects for this book or this portfolio? And finally, if you could give us a detailed analysis of your plans to sell and the provisions that you would need to set aside -- to trigger greater developer churn.

Ángel Cano Fernandez

Do you want to start, Manuel with the developers?

Manuel González Cid

Well, if you look at the data for the quarter, the exposure to real estate has increased by EUR 544 million. This increase exposure is basically due to foreclosed properties, which have come onto our book under the recovery process, whereas the risk of our exposure to developers remains pretty well stable. With this increase of EUR 544 million, which is the outcome of more foreclosed properties, 2/3 comes from developers and 1/3 comes from residential mortgages. The reason for our stable exposure in the loan book this quarter is because during the quarter, we've had an exhaustive review of the entire loan book, which has led to the reclassification of some loans which used to be included in SMEs, and they've now been moved over to developers separately because the underlying risk with the collateral had a real estate component. The amount reclassified after this re-exhaustive review was EUR 745 million. If we haven't done that reclassification, the balance on the loan book to developers would have dropped by over EUR 1 billion.

Looking at divestments over the quarter of sales, we've had sales of EUR 224 million and we've sold 1,455,000 units over the quarter, which is approximately, in just this quarter, 60% of all the sales that we did all of last year. And at the same time, and I think this is public knowledge, we've also got underway a very significant operation to sell impaired assets or distressed assets. This is a pilot operation we're carrying out. And right now, we are receiving binding and firm offers for sales of assets with a current value of about EUR 2 billion. So with all of this, we are doing our usual recovery activities but we are also adding ad hoc activities to sell-off groups or by-property portfolio, above all, working at the wholesale level. And this is the first experiment of this kind that we have tried out, and we'll have the data for you by the end of September, according to the timeline that we are working with.

Ángel Cano Fernandez

And maybe, Manolo, I could add something, and say that in the half year, we have sold 2,500 units, which is the increase of 40% against the sales last year. And if you look at the assets available for sale, the period that we estimate will be needed to sell them off, is between 18 and 21 months. We are speeding up the process itself. We've sold 1,000 units in the first quarter, more or less, and 1,500 in the second quarter. So obviously, we are increasing the pace of our sales. With all the structures in place, we should go on selling it more and more every quarter throughout 2012 when we'll be selling off some big packages, and we will continue to reprice month by month in order to be able to speed up sales, in order to have our balance of 0 as soon as possible.

Tomas Blasco Sánchez

Okay. And then with respect to the net trading income, 2 questions for the group. The first from Rohit Chandra from Barclays, who considers that it will be necessary to know what the drivers are behind the improvement in the net trading income over the quarter. And what happened to customer spreads and the cost of funding in each of the different divisions?

And from Nomura, we have a similar question related to net trade in the income performance here in Spain.

Ángel Cano Fernandez

The net trading income this quarter, this is something that we have reviewed area by area, and maybe Spain was the flattest one, it was negative previously in March. There was a slight pickup and in the presentation, we saw that this was not due to business volumes as we can see from other areas, in fact, it's the spread management, the 31 basis points that we've improved over the last 12 months as what has caused this improvement in the net trading income, not just in managing asset prices but also in retail funding. And this is what's helping us to prevent any increase this -- and at the same time, wholesale funding is falling. It's picked up slightly in June, but in July, once again, we'll see it drop off again. So the net interest income in Spain is stable, and it's picking up very, very slightly month-on-month, which we'll see in coming quarters. One of the improvements to this has been the fall in interest rates by the ECB. So we'll see growth -- slight growth, in Spain as we've seen in the first and second quarters, and I'm sure we'll going to see the same in the months to come. The net trading income for other business areas, clearly in Mexico, there's -- once again, there's a slight increase, due to increase in business volumes. And in South America, the growth is even greater. And in this case, that -- where -- it is a combination of business activities and price managements. And for the United States, once we take out the contribution from guaranty, the underlying business at BBVA Compass is showing significant growth in net interest income month-after-month because of increasing business activities and also because of price management, both on the asset side and also as we saw the improvement in the mix on the balance sheet, and that basically explains the performance of the NCI, for 6 consecutive interests, the gross income, the operating income and the net interest to income. And all of this leads us to the slight trend and increasing activities month-after-month, and we can't see any change in this trend, at least in the next -- for the next 2 quarters.

Tomas Blasco Sánchez

Moving back to funding and liquidity now, Britta Schmidt from Autonomous, Carlos Peixoto, from BPI, and, David Vaamonde and Santiago Lopez, from Exane, all asked, more or less the same questions. Could you please indicate the growth in EUR 20 billion in customer deposits of the bank -- the central banks, Central Bank? Sorry. And the second question, what can have an impact on our liquidity by a potential downgrade in our rating, what impact would this have? And how much collateral would we need to set aside to attain the liquidity that we need? Could you also give us an update on your funding plans for 2012 and 2013, basically, in the mature markets and basically, in Spain, I understand? And can you tell us about the impact that a downgrade in the sovereign rating would have been Spain? So we could be downgraded to non-investment grade, what impact would this have on our fundamentals? And I think basically, these are the questions in this block.

Ángel Cano Fernandez

Manolo, you can start, perhaps, with the EUR 20 billion?

Manuel González Cid

Yes. I think the question has to do with a EUR 20 billion increasing on the balance of the deposits in central banks. So it's not just -- well, not the central banks but other financial entities. There are various impacts here. EUR 6 billion increase in credit institutions, an increase of EUR 14 billion in central banks, but all the central banks, not just the ECB. Part of this increase is due, first of all, to the impact of the downgradings that we've seen. We, ourselves, because of the downgrade of the sovereign risking, have been -- come down up to 6 notches over this period. So with this process of downgrading, a lot of institutions have automatic mechanisms, which have triggered off and automatically reduced the funding levels. And we have some deposits, above all, in corporate and investment banking that are linked to these downgrading downgrades. And another important part comes from the substitution of various sources of funding by the ECB, and because we have a change in the secured loans with the amount of collateral that's being required by the central clearing banks, and that's why we're seeing this increase over the half year. And in a way, we believe that to be something that the Group can easily absorb. And then we put a context in which the behavior of the retail markets, above all, with site deposits have been very positive here in Spain for us, especially over the last quarter in which they grew EUR 2.7 billion, or -- yes, EUR 2.7 billion just over 1 quarter. And that really, as Angel said in the presentation, generates an improvement in all the liquidity indicators for the group.

And then in terms of the impacts of the potential downgrade if it happened, well, we should consider here that the impact would be limited, as long as -- with all the rating agencies, and it's not even happened in Portugal, where all the agencies at the same time, brought down below the investment-grade level to non-investment grade. So we think there'll be a moderate impact, as long as it doesn't mean that all the agencies at the same time, downgrade from the investment grade. However, I should say, that the group has more than sufficient collateral. It has in excess, a significant excess, of collateral with respect to the unsecured amount, which is really the most sensitive to such changes. So as long as it's not all the agencies that simultaneously downgrade, we think that the impacts would moderate. And where the one-off downgrade, when all the secured loans will be called up, we have more than enough collateral in the Group, even in the worst-case scenario, to deal with all our commitments. And as to your third question, about the funding plans for 2012 and 2013, I'd like to mention the following: we've got a redemption schedule which is quite light. The main dependence on wholesale markets in the medium-term, in the current context, is with the European Central Bank, and we will have redemptions of about EUR 3 billion in senior debt this year, and another EUR 7 billion, in again, senior debt next year. Looking at the Europe balance sheet, every quarter, we're seeing a contribution of liquidity of about EUR 2.5 billion, that's every quarter. That means that just with the deleveraging -- or against the euro balance sheet in the complete year, we will be bringing in an extra EUR 10 billion in liquidity, which is more than enough to cover our unsecured maturities. As to unsecured debt, the kind of volumes that you already know because we are always referring to them, with what we've got from the last LTROs are already covered. And during the year 2012, using all the windows that the market has opened to us, we have already raised EUR 4 billion in senior unsecured issues, working in public and in the private sector, so that we can deleverage our balance sheet and generate a progressive improvement in our liquidity. Consequently, even in a scenario in which the markets would have totally closed, our strategy would obviously be to go back to the market when we can, which is something we've always done over the last few years. Even if the markets however, were closed, we've got more than enough mechanisms at hand to be able to cover the redemptions of senior unsecured debt that we have between now and the next few years, just with the normal deleveraging that we're doing against our balance sheet.

Tomas Blasco Sánchez

Antonio Ramirez from Keefe asks about the exposure to the European Central Bank, it's the same question we get Patrick Lee from Royal Bank of Canada. And Paco Riquel [ph] asks about our exposure to sovereign debt, and the kind of time periods that are at stake here.

Manuel González Cid

Exposure to the ECP. Our exposure are the 2 LTROs, which are one-offs, extraordinary LTROs, and we've used these to reduce our call to the markets for secured debt and to reduce our short-term secured funding, which has been very useful for absorbing the shocks that we faced this quarter in this context of continual downgrades. Then we've taken a tactical position, which depends on our exposure in the euro balance to liquidity, where we used the weekly auction, where the volumes can vary enormously but we also accumulate -- for reasons of prudence, we accumulate deposits in the ECB itself, or in our trading accounts in the Bank of Spain. So we used these 2 LTROs then as a tactical use of the funding, which will depend on the weekly performance of payments and collections that we have in managing our liquidity. So that's what we're doing. Sovereign exposure now. Our exposure to sovereign debt -- Spanish sovereign debt, which is basically where the question is going -- our exposure to sovereign debt in throughout Europe has gone in the same direction, it's been reduced over the quarter from -- it's reduced from between the first and second quarter, EUR 1.6 billion, because of the redemptions and the maturing of our assets availability management throughout the quarter. So we haven't increased, in fact, we've reduced our exposure. So that's -- we're highly comfortable with the exposure that we're facing at the moment. We have no intention of making any substantial change to this strategy, especially in the context where site deposits here in Spain are growing significantly, which is due to the differential position that BBVA has taken within that Spanish financial system.

Tomas Blasco Sánchez

Concerning business volumes in Spain, Rohit Chandra from Barclays, Alexander Pelteshki from ING Bank, and Daragh Quinn from Alruda [ph], ask about the fall in customer deposits in Spain. What's behind this? And what do we expect going forward? And Mario Lodos from Bank Sabadell asks about the market share that we estimate that we have increased in Spain due to the flight to quality in core deposits. And Patrick Lee from the Royal Bank of Canada concerning business volumes in Spain asks about the potential growth in loans over 2012, especially if we're going to increase our exposure to the public sector due to the different funding needs that some of the regional governments are going to face.

Ángel Cano Fernandez

Well, with respect to deposits here in Spain, I'd divide that into 2 different parts: first of all, what's happening to retail deposits, and then what's happening to wholesale deposits from institutional customers. Because they behave in different ways, in retail deposits, what we're seeing is more coming in quite soundly over the quarter, about EUR 3 billion increase over this quarter, which as Manolo said before, means that we're still improving the liquidity gap in Spain. And then we've got the reduction of more volatile deposits, coming from institution or customers in corporate investment banking. Those are those deposits that they have on their balance sheets, which are very closely linked to the rating. So when they mature, because they're linked to the rating, they will change their volumes immediately. But the stable resources are increasing quarter-on-quarter. Over the last few months, we've been seeing a clear flight to quality and we have gained market share in each of the months, in terms of the franchise here in Spain, I don't know if you got the exact figures here, Manolo. I haven't -- can't say much off the top of my head.

Well, I can't seem -- I can't quite remember either exactly -- and I don't want to give them wrong, so I'd rather read them from the paper. Well, Okay. But we are growing, that's for sure, quarter -- sorry, month-for-month. So our deposits are going up because of these very strong fundamentals that Manolo was talking about in all the geographical areas. What we're expecting to see from now on is further appreciation of our strong position here. We should gain market share in bringing -- in retail deposits. As for wholesale deposits, well, that's part of the management of the liquidity plans that the group for all the euro area. And that means that we subject the liquidity plans to maximum stress scenarios that in the future whatever might happen we can be sure that we'll have sufficient liquidity and more than enough collateral.

Manuel González Cid

Yes, I've now have the figures. The market share in deposits in Spain in December 2010, we had a market share of 9.3%. May 2012, which is the latest data, we were at 12.1% -- sorry, 10.1%. The main increase we're seeing in transactional deposits with the resident sector, which gone up from 9.4% to 9.6% from December to May 2012, and about -- that's about a 20 basis point improvement. So the shares in deposits -- the market shares in deposits, are systematically going up and have been ever since December 2010. So that's the data I've got here. But actually, if we go back further, I think that throughout 2010, these market shares in deposits were going up even before that December figure.

Tomas Blasco Sánchez

And then with respect to asset quality, from Pablo Lopez Cobo and Mario Lodos and Patrick Lee from the Royal Bank of Canada, Arturo de Frias from the Santander Group, and Andrea Filtri from Mediobanca, have asked us the following questions: net additions into NPAs over the half year looked rather high, is there any specific area which account for a big chunk of that increase? The second question, what balance do you have on restructured loans to June 2012? And then some guidance is requested regarding the NPA ratio in Spain, and what's going to happen to it over 2012, excluding real estate. What are the portfolios -- the main cause for concern? And then with respect to the further provisions that need to be set aside under the royal decrees, what are we going to do to offset these EUR 3.2 billion, which are still pending their recording into provisions?

Ángel Cano Fernandez

Manolo, if you want to start with the restructured loans.

Manuel González Cid

I think there are 2 items for questions to these kinds. One of the restructured loans and the others are refinanced loans. And these latter ones are the ones sort of would have been NPAs, if they haven't been refinanced. But all the refinanced loans are classified as NPAs, or substandard in our group. So this is not a relevant issue in BBVA, and I hope this clarifies this whole point. And they should be more -- other banks should be more transparent because of all the auditing that's going on in the portfolios in the Spanish financial system.

Ángel Cano Fernandez

And net additions to NPAs now, EUR 1.6 billion in this quarter, EUR 1.1 billion comes from Spain because -- and this was forecast. Basically, this is from developers and from corporations who have caused this -- or SMEs, that have led to an increase in EUR 1.6 billion -- or 120 basis points in the growth of NPAs in the SMEs, basically, in the medium-sized companies. Because the performance of the net additions both in Spain and in the other areas we operate in, have performed very stably quarter-after-quarter. So here are the 2 basic items.

Looking forward now with regards to NPAs, as this forms part of the focus on the developer in the real estate portfolio, and the effect of the royal legislative decrees, we will see the deteriorations as we go forward in these portfolios. But this is ring fenced. As I said, we're talking about the medium-sized companies, we're talking about the 120 basis points growth in this quarter, in the net additions to NPAs, where we continue to see increases or net additions to NPAs in over the last few months. And in our opinion, we think this is -- will continue to happen in coming quarters. It's difficult to give an accurate forecast as to how much will be added to it, but as we did last quarter, we are facing stress because we're talking about an exposure to SMEs of about EUR 124 billion. So if there's a similar impairment as we have seen in the last quarter of 220 basis points, and we're talking about EUR 300 million, or EUR 250 million for every percentage point, so EUR 250 million on the same coverage ratio that we are including at the moment, even in the 40% stress test. So we're talking about impairments in our loan-loss provisioning of around EUR 150 million, EUR 200 million on top for every percentage point. And then the rest will depend on when we actually see. We're not forecasting anything much greater than what we've already seen in this quarter, and this is the basic focus. In the other portfolio, as I said before, basically in Spain, because in other areas, things remain stable, whether they're SMEs, corporate or mortgages or consumer finance, month after month, we're seeing stability, both in the net additions and in the NPA ratio.

So moving on now to the question of alternatives. What we're forecasting is to continue to set aside the EUR 3.2 billion additional in provisions that are still pending, this will be done between the 30th of June and the 31st of December. This will be done over -- in the course of the next 2 quarters point. And of the end of the year, all of this will be booked to provisions.

And as for alternatives, fortunately, here in the BBVA, we do not have the need to use any alternatives that would reduce future revenues. So basically, we would do this against the income statements. We would not use any other alternative that would lead to a future deterioration in our capacity to generate revenues, which because that's the future stability of our balance sheet, so all of this will be against the income statement. And by the end of the year, all of this will be covered. And we can't give you any update on any kind of alternative for this, for the loan-loss provisioning.

Tomas Blasco Sánchez

Capital now, there are several questions here. Axel Finsterbusch from JPMorgan asked for a clarification as to how do we get to the ratio of 10.8% in Basel 2.5? Britta Schmidt from Autonomous would like further information with regard to our expectations for the end of 2012 in terms of Basel 2.5 and the EBA to finalize, 2012, once the 2 royal legislative decrees have been factored into the balance sheet. And Carlos Joaquim Peixoto from BPI, asked what the impact of Basel III will be on the Group, and what would be the annual impact that we are considering in the phasing -- in the phase-in as of 2013? So there are 3 questions there about capital, how do we calculate the 10.8%? How much the NPA ratio in the EBA and Basel 2.5 by the end of 2012, once we've factored in the 2 royal legislative decrees? And finally, what is going to be the impact of Basel III at the end of 2012, and the phase-in as of the beginning of 2013?

Ángel Cano Fernandez

Well, maybe Manolo should start with the beginning, how do we read that 10.8%, or the 9.2%. We've generated 50 basis points over the half year, we've already said them, where we talked about the 40 basis points of organic generation of capital, 30 in the first quarter, 10 in the second, and then we've got about 10 basis points from various miscellaneous items. The most important perhaps, is the improvement of internal measures to be taken as we roll out our plan for recapitalizing the Group according to the EBA requirements. As for the year-end, once we've incorporated the royal decrees requirements for further provisions, without any doubt, we have got sufficient plans to reach that 9% under EBA and the corresponding ratio under Basel 2.5, which will be about, more or less, what we've already seen at the end of this first half year. So looking towards the year-end, really, we have no doubt but -- that we will meet with the requirements, as we have done to the end of the first half year. And perhaps, you could talk about the phase-in in Basel III, Manolo?

Manuel González Cid

Yes. Well, this question has often come up. The EBA ratio is very similar to what our Basel III ratio would be. We are expecting to have a Basel III ratio in December 2012 with full phase-in. So that means if we have fully incorporated everything, December -- sorry, 2013, we'd be talking about a ratio of approximately -- well over 9%. And we can say that our ratio under Basel III would be above 9% by December 2013. But Basel III does start with quite a long phase-in over 2013. So in the first year, we would -- even if we did include all deductions all at once, without any phase-in, we've already hit those levels. Very similar, actually for the regulatory environment that we have under EBA, where our ratio -- our core ratio is 9.2%, and that includes capital consumption of EUR 2.3 billion, which is approximately 70 basis points of capital consumption associated to the sovereign buffer, which means that if we talk about an EBA ratio without that buffer for the sovereign risk, we'd be at levels which would already be 9.9%. And it's important to remind you that in BBVA, we're talking about risk-weighted assets to total assets of 53%. And we should remember, when we look at the organic capital regeneration, that just from September 2011 to date, we've already generated organic capital of 70 basis points, that's EUR 2.3 billion, and that's definitely a strong point for BBVA because we have a very good capacity to organically generate capital even in the current environment.

Tomas Blasco Sánchez

3 or 4 questions regarding Spain now. Frederic Teschner from Natixis asks about our expectations regarding net interest income in Spain from now to the end of the year. Antonio Ramirez from Keefe asks about sensitivity here in Spain to a potential drop in interest rates. Andrea Filtri has the same question, from Mediobanca, asks about our sensitivity in net interest income, should there be an increase of 100 basis points in the interest rate? So the same question, but the other way around. Juan Pablo Lopez Gomez from Espirito Santo, wants further explanation about the net trading income for the quarter. And Matteo Ramenghi from UBS has a similar question, we seem to know more about the impact of the sale of the ABS over the quarter. And Antonio Ramirez from Keefe, wants to know what the balance is on commercial paper at the end of the half year.

Ángel Cano Fernandez

Okay, Manolo? Sensitivity. Maybe, we can start with the net interest income, and they -- our expectations for Spain. In the lack of lending activity that we're seeing, and this has been -- if this is confirmed in coming quarters, then there's price management both on their lending and the deposit side, and what we're seeing is stability in generating net interest income, I think basically, it's going to remain stable. I don't think we're going to see any great falls or jumps. So I think it's going to remain in stability. So Manolo, if you want to talk about sensitivities?

Manuel González Cid

The sensitivity of our net trading income to the -- on the euro balance to further falls by 100 basis points. We are talking about 0 interest rates, and we were at 0.75 at the moment. This would improve our net trading income on the euro balance of approximately, 6%. At the moment, the balance is positioned to further falls in interest rates. Obviously, this will be in the first 12 months, and this will be the impact on the net trading income. The other question was the impact of buyback, the ABSs. We did this in a relevant factor, in the buyback. We've had gross capital gains of EUR 250 million, with a purchase of assets of a nominal value of EUR 650 million, and a consumption of liquidity of under EUR 400 million. So that is the impact that we can see in this quarter, and this is in the net trading income this EUR 250 million income total buybacks of asset-backed securities.

Ángel Cano Fernandez

And these are the financial operations of the quarter, the net trading income. EUR 8 billion and more or less, maybe the most important figure here would be the percentage of our business volumes, or the flows of managing renewals and placements of deposits to -- and here, we're talking about commercial paper. And in the retails market, you're talking between 15% and 16% of all the flows that we do each month. So it's an immaterial figure. But as I said before, we're talking about EUR 8 billion as a stable figure in recent months.

Tomas Blasco Sánchez

Moving on now to the Telefonica dividend, and the fact that they're not going to pay out in 2012 or 2013, Andrea Filtri from Mediobanca, Antonio Ramirez from Keefe, and Ignacio Cerezo from Crédit Suisse and someone from Natixis and JPMorgan also asked the same question, do we have the same commitment to Telefónica after their decision not to pay out a dividend this year and next year? And what's the reasoning behind retaining us, the stake in Telefonica? And do you have any plans for the Telefonica stake in the short- to medium-term?

Ángel Cano Fernandez

Well, I think that this is a question we've discussed in previous quarters already, when we said expressly, that our investment in Telefonica is a financial, not a strategic investment. But as long as we have this stake, we will continue to be fully committed as a qualified investor in this company, with a seat on the board, and we will continue to live up to our commitment in this respect. Nothing has changed. The cancellation of the dividend is decision that we support, because it was a resolution passed by the board on which we sit. And this is not the place to talk about the discussions in the board, but we have the same commitment to Telefonica as we've always had. And I repeat, we're not talking about a strategic, rather, about a financial investment. We will try to find the best timing to divest, and the best timing would not mean divesting now.

Tomas Blasco Sánchez

And then regarding dividends, Barclays, Nomura, Merrill Lynch, and J.P. Morgan asked about the threats from elsewhere, which could impact our payout policy, and what impact the 2 royal decrees on the payout policy in the BBVA? "Are the regulators happy with the divergence between earnings-per-share and dividend per share?" And I'm quoting what they say in the questions.

Ángel Cano Fernandez

Firstly, the performance of the dividend, this is going to depend on the -- what you can expect from the results of the Group. In my presentation, what I tried to show you was how the close of this year, 1 of the lines that was increasing was the loan loss provisions in the real estate portfolio, will be fully covered by the end of the year. So as of 2013, the income statements right up to the operating income, that we, sort of, at the close of June showed sound growth. And what's even more important to that, they're highly resilient and recurrent over time. So our provisions, our forecast for the future because of the diversification that we've brought into the Group, we're talking about resilience generation of operating income, and I think it's about EUR 2.5 billion, or around that figure, to the ordinary provisioning, loan loss provisionings. Whence the more specific ones, the real estate provisions are taken out the equation.

So looking forward, the income statement and therefore, looking forward, any change in our payout policy that would lead to a reduction in dividends that we have nothing in mind and no indications that would show us to change -- that would lead us to change our current payout policy, which has been approved by the Board of Directors. So as far as dividends go, there's no comment. With regard to the regulators, I think the most important thing here is -- that what the regulator wants to see is a resilient and recurrent progress in the income statement, which we're showing in all our operating areas, and we're showing how do we comply with the capital requirements, both the present ones and the future ones, and we are in constant communication with them so that they do stay calm about this. And we present all our capital plans to them, or the recapitalization plans that we have ongoing at any one time, not just the current 9% with the EBA requirements. And as Manolo González said, this also includes the sovereign buffer of EUR 2.3 billion, but also future Basel III and the different phase-ins that are coming up over the next few quarters. So from this point of view, we are very comfortable that we have no disagreements with the regulators because of the maximum transparency that we show and because of the positive performance that we're seeing, basically, in future earnings once we can take out the loan-loss provisioning for the real estate portfolio.

Tomas Blasco Sánchez

A specific question for [indiscernible] from [indiscernible] And Andrea Filtri from Mediobanca, Unnim. After the recent closure of -- the takeover, Unnim -- or the acquisition of Unnim, how can this affect the second half of the year? How will it affect the consolidation of the rest of the BBVA Group with regard to capital consumption and liquidity needs that we may have going forward if in the Royal Legislative Decree 18/12 [ph], will have included the provisions, are these include -- does this include Unnim? So how are we looking forward to the second half of the year with regard to the consolidation of Unnim in the group?

Manuel González Cid

Well basically, what we can say about Unnim, is that -- well as you know, the formal approval was given to the transaction last Friday, 27. And what we can say is basically that we are sure of all the figures we presented, when we first presented the transaction to you. So look at it from all different angles, up to this period, it is important to say that we can go confirm everything we said, when we announced a transaction we think it will be a tremendously positive transaction in spite of this discriminate size. For the bank's position in Spain and especially, in Catalonia, we think it will be accretive for shareholders with an impact on earnings per share of about 2% and returns on capital invested of over 20%. To the phase-in, we'll be very quick. We think it will take 2 years to do the consolidation. And really, what we're doing is incorporating risk-weighted assets of about EUR 11, EUR 12. As we said initially, taking into account coverage under the Asset Protection Scheme for our exposure to the real estate market, at the moment then, we are feeling very upbeat about Unnim. And if we look at the maturity schedule over the next 2 years, it's not more than EUR 3 billion that -- of redemptions coming up. So this balance sheet is not going to additionally stress the group's balance sheet over the next couple of years, but quite the opposite, it's going to be contributing liquidity in the short term to the euro balance sheet of the Group as a whole. And we think that in terms of capital, the Group will have the possibility to work on the balance sheet in Unnim in various different ways in order to generate capital at very similar levels to the consumption through the risk-weighted assets that we have at the initial point. With the rein of management of working on the Unnim capital, we think that we will be able to follow criteria that are really completely similar, or equivalent, to the ones that we have always upheld in such exercises with our own customers. Because really, from the 27th, Unnim customers become BBVA customers. And I should remind you that in terms of all the capital optimization and ability management tests, looking at convertible issues and such like, it's quite clear in this context that in the same way that we have treated BBVA customers very well, offering them the best products for their own interests, we will be doing the same for the Unnim customers from now on, who are BBVA customers. So we can just reaffirm the target figures that we established when we started this transaction, because we now have a lot more information and a lot more detail on the bank, which we've got over the last few months.

Ángel Cano Fernandez

And we could talk about the incorporation of the loan book, over EUR 17 billion; deposits, EUR 19 billion. So in terms of liquidity, as you can see, there's no -- there are not going to be any additional liquidity stress for the euro balance sheet. The synergies in current value are about EUR 800 million. And so that means, that we will be able to close about 1/2 the branch offices of Unnim there, with a reduction in staffing of over 1,200 people in accordance with the trade unions, and we will be able to put all of these improvements by 2014, accretive value for our shareholders, as Manolo said. And so this is a magnificent transaction for us in a region, which is showing the greatest potential economic growth of all of the country, which means that we can reach market shares in that region of between 15% and 16%, where we used to have a much lower quarter below our natural share.

Okay. Let's move on to the block of questions on Mexico. Rohit Chandra from Barclays asks, "Well, we know that Bancomer is leading in Mexico, and in your opinion, do you think that there's an increase in the bottom line, in the income statement? What needs to be changed in Mexico, so this business unit can increase its contribution to the group along similar lines?" Quinn from Nomura asks about our best scenario for revenue growth, and the growth of income in Mexico during 2012, and asks if we see any impact coming from the potential reforms that might be enacted by the new government. Alexander Pelteshki from ING Bank asks for further information about what might be the cost of risk over the next few quarters in Mexico, and Latin America, as well. Do you think that we'll have further growth like we've seen this quarter? And Benjie Creelan from Macquarie asks about the performance of the net interest income in Mexico, which has gone down quarter-on-quarter over 2012. So what's behind this performance? And what is the best estimate we have for the end of 2012?

Ángel Cano Fernandez

So first of all, when we're looking at Mexico, we're seeing growth of around 10% in general, and we're seeing growth in the net interest income of around 9%. By dropping to 9%, maybe, this has something to do with the composition of the dollar funding with regard to the balance sheet in Mexico, which makes -- which increases or decreases the cost. But basically, the -- any change in the mix in the dollar has an effect on our lending, but what we will see in the future are growth of around 9%. The next point, sometimes, what distorts the presentation of the numbers, I said before, is when the previous year, we have sales of the ALCO portfolio because of our forecast with regard to interest rate in order to assure our capital gains, this happens in the first quarter of last year, but it hasn't happened in the first quarter of 2012. So when we say reduction in the growth of the operating profit -- our operating income of about 1%, then all the margins, the gross income, the net interest income, and the operating income, if we take out this non-sale of ALCO asset, you'll see that it's fairly stable with growth of around 9%. What do we expect to see and -- from now to the end of the year? We think there's -- the growth is going to continue around 9%. And if we bear in mind the stability and the cost of the risk premium in Mexico, as we have seen in recent quarters and as you've seen in presentations, the 3.3%, 3.4%, 3.5%, 3.3%, so these loan losses remain stable and our -- and these are the forecast that we have for Mexico for the next few quarters. We are not expecting any surprising on either side, whether negative or positive, from what we've seen in recent quarters. And this means that our objective, we'll start to see cost growing less than revenues this year and recurring revenues of what we're seeing in Mexico, and these are what we're seeing in Latin America in general. So once we made the investment effort to attract the 2 million customers that I mentioned in the presentation -- but what we have to do now is to make sure that we invest to ensure future growth in Mexico. I think the important thing here that we shouldn't forget that we have some 30% market share in most of the business lines in the Mexican franchise. But if we look at the different income lines and the profits, we're talking about 40% of the profits. So if we can remain -- maintain this high market share -- what's even more important than that is the quality of the market share, if we'd look at the profit that we get into the income statement, which is greater than the market share that we actually have. We do not expect any significant change on the asset side, but that could be a one-off movements. We're not expecting, but we do expect to see this gradual improvements quarter after quarter and finally, when -- Tomas, when you were talking about the cost of risk in LatAm, maybe 1 of the advantages here is that within the diversity of the BBVA Group, the 25%, 26% that was contributed by South America, once again, within the region itself, is highly diversified. So I think we can expect this creeping up in countries such as Venezuela, or Argentina. But these will - won't even distort the risk premium for the region as a whole, and even less so, for the group as a whole, because of the diversification that we have in Latin America. And quite honestly, we have no provisions of any significant change to the cost of risk in South America.

Tomas Blasco Sánchez

Okay, we'll have the last 3 questions now, I divided into 2 blocks. The first of is, there are various analysts concerning whether we have any percentage, or a figure in the flowback from the conversion of the convertibles. Bearing in mind the reduction in the deposits in Spain that we've seen over the year, are we worried about the loan-to-deposit ratio in Spain? And another question concerning what we are going to do with CITIC. What are our plans? Are we going to sell a part of it, or all of it? And whether it would make more sense to sell CITIC, rather than to sell off the Pension business in Latin America. Several analysts would like an update with regard to LatAm.

Manuel González Cid

Regarding what you asked about the flowback from the convertible issues, as you know, when we swap the retail preferred, it was EUR 3.4 billion that we issued in the last part of 2011. In March, there was a voluntary conversion period, in which approximately -- well, 30% of the issue was converted. And on the 30th of June, recently, we saw the redemption of the 50% of the remaining outstanding amount, which was EUR 1.26 billion. And so the further conversion will take place in June 2013. So unless we have early redemptions, we will wait until then. So I can say, that from that 2/3 then has already been converted, and we can also see that most of the flowback that we could expect from the conversion, given the characteristics of the customers who have the convertible securities, in terms of prudent management of the asset situation, we see mostly of the flowback already. Our customers have obtained our product with more than 6% return. Recently, they've been able to get a cash dividend of 0.10 because of being shareholders, and they've been able to get out, if they wish to -- or if they were making to do, in order to diversify their portfolios at market prices which were higher or equal to the conversion price, such that they haven't lost any money in the conversion process. And those who had a component which meant that they wanted to be mid-term shareholders in the group were able to remain, or those who didn't have relevant chunk of their portfolio in these convertibles. So most of the flowback has already come from the March and June conversions against the issues that we'd already made, and we're not expecting, therefore, to see any pressure coming from further conversions.

Ángel Cano Fernandez

Then with respect to the liquidity, deposits in Spain, well, I said that we're seeing a net reduction in deposits. But this is very much linked to the institutional investors in corporate investment banking, customers with more volatile positions, which are closely linked to the rating. The generation of more retail funding, which is much more stable, continues to grow quarter-on-quarter, EUR 3 billion this quarter. And when we talk about the performance of the loan-to-deposit ratio, last year, this year and next year, we're expecting to see the ratio evolving stably, with a stable reduction over time in our LPD ratio. In the first half year, it's been about 5 percentage points, and the idea here is to continue to improve this ratio over time. Above all, here in Spain, with the plans that we currently have on the table, I'm absolutely sure that we will be able to meet our targets in terms of the loan-to-deposit ratio, and we can't expect any further shocks there.

You also asked about what could be done with CITIC, or with the Pension business. But it's quite different, so the CITIC investment is the strategic investment in a high growth country where it's possible to generate business. It's true that in situations which are more sensitive, prices like the present time maybe isn't a highly-rated asset, but we think that this is going to be a very important country in the region in the long term. So along the way, we want to stick with the investment. And at the moment, we're incorporating a lot of profits from this investment. We are recording them to the books, with payout in cash dividends of over 20% of the revenues. And a lot of other financial entities in Europe would like to see those kind of cash payouts. Obviously, we're always on the lookout, in strategic terms, to see what is happening. I don't want to talk about any current decisions though. At the moment, our focus on CITIC continues to be the same as it always has been. And that's not comparable to the Pension business, which is a business that has given us high returns in the past. But this is a business. As I've said, when we talked about its divestment, that in the future, it's going to have much more limited growth. In practical terms, what we put out to sale is the Pension business, with high liquidity in the region with a lot of offers for the business. Obviously, our expectations to generate revenues from this transaction, and if they're not in line with our expectations, then we don't have to sell, and we won't sell. As you know, the bids are coming in and it would happen from now to 2013. But it would have to be compatible with an inflow of money, with a return on investment, which was sufficient with the right kind of multiples. And that's what we're looking at. And if the offer is -- meet all our criteria, we would be willing to accept them. We are receiving various offers at the moment in line with our expectations. So we do expect that by the beginning of 2013, we should be able to go ahead with that transaction.

Tomas Blasco Sánchez

Okay then, the final question comes from Javier Bernat from Bolsa. And it's not relating to BBVA but rather, the environment that we're all operating in, with a lot of speculation going on. And so he asks your opinion regarding the right mechanism that the European Union should use to support the Spanish situation, should it be the FSF or other mechanisms? What do you think will come out of the decision made last Thursday at the European Union level? Do you expect to see further LTROs coming up? What impact would that have on the BBVA? And do you think these measures will lead to growth? Are the loan books again here in Spain? With that we can wrap up.

Ángel Cano Fernandez

I'm trying to bring this into my presentation, i.e. the current situation here in Europe. It's funny because I was saying that the situation that can be called as contradictory because on the one hand, we are seeing clear advances, clear progress, and some very sound declarations. The governor of the ECB has recently said that Europe's real intention, which is to build more Europe, to create more Europe and this depends on greater physical coordination and having a single financial supervisory system, i.e. more Europe. And that's the end of the discussion, really, especially the research team who have all the data behind the economic performance of Europe. And we are in no doubt that the euro will survive, despite the fact that the risk premium and the stock markets may lead you to think that some important countries such as Spain, Italy, Portugal might have to leave the euro, I think that based on the information that I have, this is far from true. And Europe is showing more and more backbone. And in these processes, where drastic decisions have to be made, time is short. Time is against us. We need time to roll out all the plans. Recently, we've adopted the European bailout fund and the ESF. There will be enough money to face the redemptions in the case of stress of debts -- if a country such as Spain and Italy. And in the case of Spain, financial aid has been approved in order to finance a restructuring of the 30%, which according to our results, are the problem area in the banking industry. From the point of view of Europe, in the short term, I think we can continue to see tension in the coming months. But on the other hand, we're also to see more and more steps to generate single supervision of the banks in order to set finance banks directly from the European stability fund. And by the end of the year I think we're going to see the results of this. And with regard to Thursday, I don't know if you got any data on this, Manolo. Do you have any information on this? Or any thoughts on this?

Manuel González Cid

Our opinions are just like anybody else's in the market, and what we have to do is to wait for Thursday to see exactly what decision is going to be taken by the ECB.

Ángel Cano Fernandez

And I think this will all depend on the meeting that's held on Thursday. And we really don't have any further information on that. And whatever happens, whatever comes out of that, I don't think it's going to change anything very drastically. But in any event, Tomas, whatever happens, the impact that we'll have on Spain, I think we continue to believe, that the deleverage will -- is something we'll continue to see in the financial sector in Spain, in the main portfolios. So banks will continue to work on ensuring their liquidity and to keep it under control in all the national banks especially those who don't have access to the markets, which is the 30% that I've mentioned and then some others as well. So this deleverage is something that we're going to continue to see. And I think in the coming quarters, I don't think we're going to see any recovery in the lending here in Spain. But I think we will see strong growth in South America and double-digit growth in the U.S. and Mexico. And this is possibly due to the fact of the Group that we'd have diversification where we have in both our revenues and our business in the BBVA Group. And this will enable us to continue to make our contribution and to present this resilience and recurring earnings, and a positive outlook for 2013.

Tomas Blasco Sánchez

So I'd like to thank all of you for attending this webcast. And I would remind you once again, that any questions that have not been answered will be answered by our Investor Relations Department in the course of the day. And for all of you who are going on holiday, a quick tip, enjoy your holidays. Thank you very much.

Ángel Cano Fernandez

And I would like to thank you on behalf of Manolo and myself, and I agree with what Tomas said. And of course, we are always available for any kind of information or details you may want in both now and in the future. Thank you very much.

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