Ángel Cano Fernández – President and COO
Tomas Blasco Sánchez – IR
Manolo Rodríguez – President and CEO
Banco Bilbao Vizcaya Argentaria SA (BBVA) Q3 2012 Earnings Call October 31, 2012 4:30 AM ET
(Foreign Language – Spanish) After which, we’ll have a Q&A with Manuel González Cid, who’s the group CFO. As always, any issues that can’t be covered during the webcast will be dealt with by the Investor Relations Team during the rest of today.
So, Ángel, you have the floor.
Ángel Cano Fernández
Good morning, everyone, and welcome to this presentation of the BBVA Group Third Quarter Results for 2012. I’d like to start by highlighting some of the progress made in Europe and in Spain over the last quarter. These are things that we can consider significant. Firstly and most importantly, the firm, unequivocal backing that the EU is giving to the euro.
With the announcement of the quantitative easing here in the EU, there’s been an important step forward, with a sound backing given to the financial markets with an unlimited buying of bonds from European institutions through the new mechanism setup in order to reinvent the situation here. A message has been put out that everything that’s necessary will be done in order to show that the euro is irreversible.
And this message later on was seconded by the main European leaders. The second thing that has happened has been the progress being made towards banking union with the backing of the European Central Bank and this union will be put in place during 2013. And then thirdly, the restructuring of the Spanish financial system, which is rolling out as established in the memorandum of understanding.
Looking at the results of the recent stress tests in Spain, we’ve seen two things. First of all, that we know how much capital is needed in the system, and this is well below the €100 billion that Europe is willing to offer for a financial bailout. And secondly, it’s been possible to establish the perimeter of the entities in the Spanish system that actually have problems.
Having said that, we can’t rest on our laurels or be complacent, because there’s a lot of work yet to do and a lot of challenges. So from now to the end of the year, all the restructuring of the financial system will have to go on as we implement and monitor the restructuring plans of all the entities that are receiving capital from the public sector. And with the ECB, the Bank of Spain and the Troika, decisions will have to be made regarding what’s going to be done with the real estate exposure of those entities that are using capital, public capital.
And in December, the European Council meeting will have to establish a schedule as Europe moves towards the banking and fiscal union. And then thirdly, given the express commitment that Europe has made to Greece and Greece has made to the euro, the Troika and the Greek authorities must reach an agreement in order to clear up any uncertainty regarding Greeks remaining in the Euro. It’s true that a lot of us would like to see things happening quicker, but nonetheless, we are definitely on the right track moving towards a stronger and more integrated Europe.
In this context, BBVA once again is presenting results which are very sound, very well balanced, which confirm, yet again this quarter, just how strong the group is. The earnings show that we’ve got integrated, well balanced management looking at the four basic drivers behind banking business; first of all, earnings, where once again, we’ve got good news.
Growth in our recurring revenues and in our net interest income, growth in the items that are vital to absorb the amount of provisions that we’ve set aside this quarter; again, above all, those that had to be set aside under the new royal decrees. And so, as we announced at the beginning of the year, we’ve already allocated two-thirds of the provisions required under these royal decrees.
Then with respect to risks, I think the hallmark of our business would be continuity, as we rein in the risk indicators, keep everything well under control and focusing on Spain, the performance of all our different portfolios is online with forecast, above all, with respect to exposure to SMEs and real estate. The liquidity position of the bank is very sound.
In four quarters, we’ve been able to raise €7 billion in new capital without having to sell off any strategic assets and being able to incorporate all the activity of Unnim this quarter straight away. So we are well-capitalized, even under the most adverse scenarios established in the latest stress test.
Finally, our capital adequacy is very sound as we’ve seen throughout the quarter, when we’ve been very active issuing on North American, European markets, and markets elsewhere, taking advantage of different windows of opportunity in those markets. As we shored up the key indicators, above all, on the euro balance sheet, where we closed the commercial balance – I’m sorry, the commercial gap by €10 billion. And so, we’ve got very sound financial fundamentals, especially if we look at what’s happening in the international banking industry.
So, when we’re talking about what’s happening, we have to start at the beginning with more than 10% growth in our net interest income, growing at 18.1% year-on-year or 16% year-to-date. In all the different geographical areas, this positive growth can be seen in the recurring gross income and in the total gross income. The recurring gross income, after we’ve taken out net trading income and dividends, has grown again quarter-on-quarter by nearly 16% and the recurring gross income in the first nine months of the year has grown 14%. This growth is very similar, if we look at total gross income as well for the group.
There are two important things here. First of all, with this tendency, by the end of the year, we think we’ll surpass €22 billion in total gross income and easily go beyond €20 billion in recurring gross income. This is the outcome of the excellent diversification we have. And we see then that with the buoyant economies in the emerging markets, which account for 57% of our gross income, this is obviously good for us, whilst what’s happening in Spain and in the U.S.A., it’s contributing slightly less, but it’s still growing.
And were also containing costs which are growing well below income. 2.9% of the drop is due to exchange rate differences, which have a positive impact on all the lines of revenues on the cost – on the P&L. And then another 2.1% or percentage points has to do with perimeter changes, with the incorporation of nine months of guarantee in Turkey. And this quarter we’ve already brought Unnim onto our books, which makes it possible for us to improve our cost income ratio so that we’re still one of the most efficient banks in our peer group.
Moving down from net interest to gross income, we come into the operating income, which has grown over 16% quarter-on-quarter and the – this is up 17.3% year-to-date, which means that all in all, we’re growing 16.1%, with a total level of €2.4 billion in this third quarter, which gives us over €12 billion for the end of the year.
And that’s probably the main reason why we feel very comfortable about being able to allocate all the provisions that we have to do, which – because we’ve already done a lot in the first nine months, where we have been able to allocate the provisions for our real estate exposure with over €6.5 billion, as you can see here on the screen.
It’s important to look at what’s been happening when we compare ourselves against what’s been happening over the last three years. And in 2012, there’s been a slight increase, which could be between €100 million and €110 million greater provisioning required under the new legislation. So with this volume of provisions, in line with the plan that we launched at the beginning of the year, we’ve already covered two-thirds of the requirements for real estate exposure provisions, with over €1.5 billion left for the rest of the year.
And so, here in this case, we should highlight the operating income to provisions. On average, over the last few years, we’ve had between 2.2 times and 2.4 times operating income to provisions. At the beginning of the crisis in 2008, 2009, it was between 3 times and 3.5 times. So as we move through the crisis, we see that the level goes down and then goes back up towards a more normal level.
So, our income statement is sound. Very resilient, because of the diversification of sources of our revenues. And our attributable profit is now €1.6 billion, which gives us an adjusted attributable profit which we consider to be correct, €3.34 billion, which is slightly below what it was a year ago, but we have to take into account the provisions with respect to the real estate exposure that we under the new royal decree regulations, plus the impact of the bad will that we get with the incorporation of Unnim, which is €320 million. So just looking at the items on this account, we can see that there is a trickle-down, which shows that the basic business is performing very well.
I was talking about the risk indicators. I said that they were well reined-in. NPA ratio would have been 4.3% without Unnim, and the incorporation of Unnim pushes that up to 4.8%. Unnim brings in €3 billion in NPAs and its NPA ratio is over 17%, and that’s the reason why there’s that slight rise of 8 points. But without including Unnim, that would be 3 points only, which is mainly because of real estate assets and SME assets here in Spain. But the coverage ratio has gone up to 69% over the same period.
In terms of capital, which is the third pillar in our financial situation, earlier on, we were confirming how sound our position was and how we were able to generate capital. We are reaching 10.8% core capital under Basel 2.5, having absorbed the corporation of Unnim. And also, at the same time, we continue to comply with the EBA recommendation on the core capital ratio, where we’re above 9%. And we can confirm that by the end of 2013, we will have a fully loaded Basel III core capital ratio of 9%. That’s including all the requirements and all the deductions. And I should remind you that we have over €11 billion of capital over and above what’s required under the most adverse scenario in the latest stress test.
And then in liquidity, there, very similar picture. We’re talking about a situation in which we’ve been very active on the American and European markets and elsewhere issuing more than €6 billion, nearly €7 billion, and taking advantage of all openings on the markets to continue to reduce our commercial gap, above all, on the euro balance sheet, which has meant a reduction of nearly €10 billion this quarter, which made it possible to improve our financial indicators of liquidity on the euro balance, because the other balance sheets, as I said, are still at very high levels.
Consequently, to sum up, we can confirm that we’re presenting very sound fundamentals in our financial statements that enable us to show structural soundness due to the growth in our recurring gross income, growing double digit.
And, as I already said, we are – we’ve been able to absorb provisions for those two-thirds of the further requirements under the royal decrees because of the very diversified revenues we have, with 57% coming from emerging markets. Capital, 10.8% under Basel 2.5, over 9% under the EBA regulations, and over 9% under Basel III fully loaded, with an improvement in liquidity being able to issue on many different markets all over the world, with risks very contained and under control.
Now let’s have a look at the different business areas. I would like to emphasize the different areas. First of all, I’m talking about the developed world and here, I’m talking about Spain and the United States. And what I would highlight here, or one of the characteristics here, is the management on the one hand of the key drivers in a crisis environment. And secondly, we are seizing opportunities that emerged from restructuring the different business areas, and we’re also investing in the future, despite the adverse conditions and with a clear objective to improve and create a future for this group.
In other words, we’re talking about a suitable combination of present and future management that, on the one hand, translates into improving our balance structure. On the Spanish side, if we look at Spain, which we’ll look at now, we’ll see how there’s a significant delevering on the one hand and there are assets. And on the other hand, we’re attracting major retail deposits this quarter. We’ll see almost €5 billion, without including Unnim.
The United States continues to improve their investment. The commercial and real estate is down to 40%, which means that the rest of the stock is growing by over 16%, which we’ll see when we come to the United States, with the lending mixes also improving, because we’ve reduced the cost there with greater growth in site and savings accounts.
The costs, as we said right from the beginning of the crisis, as in other calls, have fallen both in Spain and the United States. And our competitive positioning, our performance there, our management means that we’re gaining market share in Spain and also in the United States.
Technology is one of the key drivers for this group, and this is where we’re investing a lot of money as for the future of the group. The platform is ready now in Spain. We’re five or six months from finishing or rolling out the platform in the United States. And we’re starting to see the first result of this, because even in the United States with partial deliveries of modules of this platform, this is translating into clear improvement in commercial, cross-selling and time-to-market of our commercial offers and an improvement in the commercial tools that we use to make offers to our customers. So that’s the performance we’re seeing and we will continue to see in the developed world.
With regard to the management of our franchise in Mexico and South America, there are three main points here. We’re focusing on bringing new people into the bank. Growth is adjusted to risk, which is very important, and the continued improvement here, too, in Latin America of our infrastructure.
All of this management means that we’ve won new customers in Mexico and Latin America, of course. Over the last 12 months, we’re talking about over 2 million new customers in Mexico and over 1 million in South America. So it’s flourishing, dynamic business, both in credits and also in deposits in Mexico and Latin America, which means that the earnings are growing, as we will see when we come to that in the main lines.
Controls are well under control. In Mexico, we’re seeing how the cost of risk is stabilizing. And in South America, NPA has stabilized at very low levels, the lowest levels we see anywhere in the group. We’re still investing in infrastructures. We’re building head offices in some areas in order to bring our teams together, so that they’re not scattered all over the place. And this way, we can generate more synergies, again, cost synergies in this case, once we have everybody working in the same offices.
We’re continuing to invest in ATMs, so that we can reduce the unit cost of servicing or the services that we have to provide to our branches. So we can move on now to the different units and we was – one second, I just put my telephone to one side, because I was looking at the person looking at me and that’s an easy problem to solve.
So, Spain. We’ll start with the net interest income, which is growing in sound term over recent quarters and it’s true that this – as a letter add of the net interest income from Unnim this quarter, we’re talking about €14 million, but in any case, we’re seeing sound performance in the net interest income over the last few quarters. This basically is due not so much of the business, which is falling as I mentioned before, but more to the improvements in the customer spreads or the positive price management that’s been implemented over the recent quarters.
Moreover, we’re continuing to gain market share both in lending and deposits. That’s about 100 basis points comes from Unnim. So there’s a clear gain in market share in lending than in deposits, but it’s positive on both sides of the balance.
Cost is another positive feature of the income statement and as we’ve said right from the beginning of the crisis, the continual fall in costs due to our stringent controls of them, almost 7% fall in costs year-on-year – or since 2008, sorry. And if we bear in mind the net interest income, then this cost means we grow year-on-year, the operating income, at slightly over 10% to reach almost €3 billion.
The risk indicators; once again, they’re performing according to our forecast. These are impacted by three issues. One, the reduction in the balance, which means that the NPA ratios have grown by three points through the performance of developers, where we will emphasize later on and also in the business world, would add another three decimal points with the incorporation of Unnim, which adds eight decimal, which brings us up to 6.5%.
If we took out the effect of developers, and here, we’re talking about an NPA of 42%, we’re talking about an NPA ratio of 3.9% but in any event, this 6.5%, which includes everything, this is more over 400 basis points below the average in the industry.
The coverage ratio continues to grow 15 percentage points in the year-to-date. I was talking about focusing on the two portfolios that we are attending to. The developers, which has been ring fenced, once it’s been dealt with properly and with a lot of caution, by the two decrees that have been issued this year. So we’re talking about an exposure of €16 billion, which grows by 8.8%, because here, we’re including €2.7 billion from Unnim. If – without this, this portfolio to September would have fallen by 9%.
NPA ratios have grown to 42%, and here, the contribution of Unnim is very important but there’s still 42%. That’s grown by 14 percentage points in the first nine months of the year and the coverage ratio has grown by 17 percentage points to 47% coverage. And what we can’t forget, that this includes the guarantees that underlie all of this.
The other portfolio that I mentioned that we were focusing on, which is the SME portfolio that is growing the NPA ratio to 8.5% in the first nine months and has grown by 2.5 percentage points at the close of the September quarter. Here, the exposure, we’re talking about €24 billion. The contribution of Unnim here is not very large, because it didn’t have a very large SME portfolio.
In the other headings or the NPA ratio in the other headings continues in line with the other quarters and remain stable. And to round off on the real estate sector, here, we can see the exposure of the 30th September to the real estate requirements. We’re talking about doubtful loans of €6.8 million. We’re talking about €1.2 billion of Unnim, €1.9 billion are classed as sub-standards, and foreclosures is 11.7%, if we include €3.3 billion from foreclosures from Unnim.
It’s true that all the lending and foreclosure from Unnim comes backed by the EPA, which gives us the guaranty that the first 80% of our losses will be covered by the EPA. But these are the full aggregated figures, the coverage ratio after the first three quarters of this year has reached 47% and apart from these figures, we still have outstanding debts of €7.5 billion, with coverage at 30th of September of 9%. But once we’ve – in the last quarter, if we cover, though, the other €1.5 billion in general provisions, then the coverage ratio will be 30%.
So focusing on this portfolio, we have managed to cover it properly and to ring fence, which gives us an income statement with positive growth in all lines which is €848 million, without taking into effect the provisioning from the royal defense. So this has fallen by 32%. The rest of Europe and Asia is making an increasing contribution to group earnings with varying contributions between these three areas: Turkey, Asia, and the rest of Europe. Here, basically, we have wholesale business.
What I’d like to highlight here is the growth in Turkey, which is closely related to almost an additional full quarter over and above last year, which gives us an attributable profit of over €800 million, which is a 13% growth year-on-year.
Mexico. The Mexican franchise continues to grow in a balanced fashion, highly dynamic, with growth of 11%, basically in consumer finance and cards and SMEs and on the customer fund side, we continue to improve our mix there with better deposit mix and strong growth in current accounts. And this is due to the change of the new customers that have come, which has increased it by 10 points. The net interest income has grown by 8.5%.
This would be 11% if we only looked at the retail business. This is impacted by the lesser contribution from the net interest and from the ALCO portfolios, especially when we sold part of this in the first half of 2011, which has reduced our net trading income.
But in any event, if we take out the net trading income and if we look at the recurring gross income, then the growth will be very similar to the net interest income. The NPL ratio and coverage ratio are very stable, as had there been in recent quarters. And the cost of risk, as I said, is stabilized between 3.3%, 3.5%, 3.6% over recent quarters, which gives us an income statement that provides €1.3 billion in attributable profit, which is 4% growth.
South America continues to show the greatest dynamism of all our different business areas, where the business has growth, both in lending and balance sheet funds has grown by over 20%. We gained market share in almost all areas, both from the point of view of lending and deposit, and this translates very quickly into a performance of net interest income that is growing by over 25% and the gross income is growing by over 22%. And the operating income is growing by around 29%.
And this, because costs are growing less than revenues, this has increased our efficiencies in Latin America as well. The risk ratios are well under control, the NPA and coverage ratios, they’re all around low 2%s, 2.2%, 2.3%, with coverage ratios of over 140% and with a cost of risk very low and stable. South America is contributing at the end of the first nine months €1.014 billion, which is 24% growth. So here, we continue to see sound performance in the statements in this area.
And finally, the final business area is the United States. At the beginning, when I talked about the United States, I was saying that we continue to improve the mix between lending and deposit. And when I talked about lending, we’re still seeing falls in the commercial real estate of around 40%. But despite this, the full stock is growing at 11.6%, and this is due to the fact that the rest of the stock in commercial and real estate, without that, is growing by over 16%.
And in the deposit side, once we have sound liquidity in this area, it means we can continue to work on improving our mix in our deposit, which is growing far more in savings and site accounts than in term accounts. What’s important here is not just to look at the total margins, which includes the wholesale activity, especially the New York office, where business volumes have fallen significantly in recent quarters, but also, the purely local business, i.e. BBVA campus. In the local business, they’re all positive on all lines and the operating income is growing by almost 15%. And this is the real underlying performance of our franchise in the United States.
Lending continues to confirm the improvement with sharp falls in the cost of risk and provisions and improvements in the NPA ratio which has reached 2.8%, which is from 1.2% since the beginning of the year and the coverage ratio has increased by 22 percentage points this year to 94%, and this enables us to see light at the end of the tunnel. We’re seeing there’s clear water between us and our rivals in these areas. Our loans are growing, are outperforming our peers and the return ratios are much better and have improved quarter-on-quarter, if we compare them with our reference group, and we are showing a sound solvency position in both in terms of capital.
And once again we’re clearly above our peers, as we have expected in recent quarters, which gives us an income statement with an attributable profit of €341 million, which is 29% growth, and I would repeat, if we look at the underlying performance of BBVA Compass without the wholesale business, which are highly impacted by the environment there, then BBVA Compass contributes most of this covenants and it’s grown by 63% year-on-year.
And finally, the cost-cutting business unit in a clearly adverse environment is showing that it’s capable – adapting to the different cycles in different area, delevering in the developed world and particularly in Spain, and growing strongly in the emerging world by over 14%, as we can see. This is closely associated to our business model levered on our customer franchise and is growing by 6% at gross income, which is highly resilient, far more so than any of our international peers. So at the end of the day, we have an income statement of over €800 million and almost flat growth, which is an excellent result in the current context.
So in short, we can confirm that this is a sound quarter which confirms the strength of the group. I think our results are sound, they’re balanced, levered or driven by the growth of our recurring revenues and our total operating income. That means that we can phase up to large volumes of provisions emerging from the two royal decrees and meet our plan of reaching two-thirds of the cover of all the real estate needs.
Risks are under control, they’re reined in, as we’ve seen in recent quarters, and performing in line with our provisions with the focus placed in Spain, we’ve reached 10.8% of core capital and according to Basel 2.5, once we’ve taken on board the union business.
And thirdly, what is also important, we can confirm that we will, at the end of 2013, we will meet the 9% or we’ll even exceed 9% of Basel III when it’s fully loaded. Moreover, all our internal liquidity indicators are positive we’ve issued and we’ve reduced our commercial gap on the euro balance by almost €10 billion. So I will finish by saying that, another quarter in such a complicated environment, all the fundamentals are sound and powerful. Thank you very much.
Tomas, you have the floor.
Tomas Blasco Sánchez
Thank you, Ángel. As you always – on starting these Q&A sessions, we’ll put the questions together so we can answer as many questions as possible. So we’ll start with a block of questions on exposure to the property business, the real estate. Matteo Ramenghi from UBS asks concerning the €6.6 billion that we have in non-performing loans in real estate in Spain, how much of this has been restructured and what part of the restructurings could – are included in this €6.6 billion?
Rohith Chandra from Barclays asks about or asks whether the prices of the (inaudible) Bank could push up the property or the real estate provisioning that we have on the balance?
And Carlos Berastain from Deutsche Bank asks about the provisions that have been assigned according to the two Royal Decrees, whether we think that further provisioning will have to be made and whether we can give a breakdown of the charges of the Royal Decrees in gross terms in Spain and in the corporate center?
Antonio Ramirez from Credit BW asks about what we’ve seen about the possibility, the chance that we could assign more to provisions according to our real estate exposure, and whether we expect the provisioning regulations to be reviewed along with the real estate in Spain? And Mario Lodos from Bank Sabadell asks about the discounts that we’re applying to the sales of real estate here in Spain.
I don’t know if you got all the questions.
Ángel Cano Fernández
Well, I think I’ve got them. But if I miss out on any, just tell me. Okay, with respect to the problematic assets, which have been restructured, I don’t know if there’s anything that still classified as substandard or doubtful.
But at this stage, all of the risks have been classified and they’ve been put into non-performing or watch list substandard. And so those that are up-to-date in payment are classified as up-to-date in payment, because they haven’t been restructured. And if they had been, then they would have been classified under either NPAs or watch list or substandard. There might a tiny percentage maybe that hasn’t been dealt with, but I don’t think so. And so, everything is already classified where it should be.
And looking at the new asset management company, you were talking about (inaudible). Well, they’re offering additional discounts over and above what was required under the legislation and the royal decrees to cover two issues, mainly.
First of all, over the next 15, 20 years, we might see the absorption of the operating costs stemming from this activity, which is one of the reasons why there’s an additional discount. And moreover, in order to be able to present capital gains throughout the life cycle of this vehicle, because the Bank of Spain and the FROB as they incorporate this company are trying to get returns of 15% over the total time period. And that’s reason why they’re applying higher discounts, even higher than those applied under the two royal decrees.
So when this is applied to us, if we look at the operating costs, they’re already included on our balance sheet. We’re not generating a business count to make capital gains over 15 years and the prices we’re selling at, which is another one of the questions, are clearly below the figures that we saw of 47%, which is the figure we have for coverage, because at the moment, the average discount, I believe, is 23%. So very clearly, we are above – well, in fact, below the – we have better coverage than what we had to September.
So we don’t think that we’ll have to allocate any more provisions to this item. In fact, we’ve got surplus coverage, according to the market conditions, as I’ve said. Our volume of sale is many thousands of homes and properties, which means that we’re able to very firmly state that our situation is sound and we don’t think there will be any additional increases in provisions. Obviously, we’ll have to see what might happen in the market in 2013, but at the current moment, I repeat, with the prices that we’re selling at, I wouldn’t anticipate any further requirements or provisions for real estate exposure.
So I’ve talked about provisions and discounts on sales. At the moment, new legislation isn’t expected that would lead us to have to increase provisions any further. That’s really what I said. We’re in contact with the Bank of Spain and we are not aware of any more legislation that’s likely to come out. Manolo, is there anything you wanted to say, okay?
Well, we’ve got our provisions under the two royal decrees. In gross terms as you’ve said, it’s €3.69 billion, and of these provisions, approximately €2.2 billion have been in – dismissed in Spain for provisioning against loan loss provisions, and then €897 million, which is for foreclosed assets are on the line of corporate activities. That means that the impaired assets, or distressed assets are in an independent part and aren’t considered to be recurrent business, but rather, are considered to be business that will be discontinued.
And so as explained in the documents that you get, that’s been booked to corporate activities. So year-to-date €2.2 billion in loan loss provisions and €897 million which is booked to corporate activities which is associated to our impaired assets or distressed assets. So €846 million in Spain and €789 million for foreclosed assets in corporate activities.
Maybe, Tomas, talking about sales, I might add that if we look at performance of sales, the number of units we’ve sold from the BBVA real estate unit, the pace of sale that we’re reaching on average over the first three quarters of 2012 has been 66% greater than what we reported in 2011 and nearly three times the volume of sales we had in 2010.
So in the incorporation of this unit with the incorporation of all the necessary resources in order to make the sales has definitely worked well and at the moment, we’ve approached increasing speed, because we expect the level of selling to increase even more. We’ve sold over 4,500 units in the first nine months and we’re growing 66% over and above what we sold last year, and definitely6 we’re seeing quarter-on-quarter growth in our rate of sale as well.
Tomas Blasco Sánchez
And with respect to the bad bank, Britta Schmidt from Autonomous asks what our expectations are regarding involvement in this bad bank and how would it be? By equity? By debt? And this potential participation in the bad bank, would it affect our capital levels? Will it bring down the core capital or the risk-weighted assets?
And Andrea Filtri from Mediobanca asks how we might be impacted with respect to capital levels and funding if we were involved in helping the funding of this bad bank? And Antonio Ramirez from KBW asks about the transfer prices to the bad bank. Will that create a precedent or not?
Ángel Cano Fernández
I think it’s a bit too soon to see exactly the exact composition of this bad bank. I don’t want to call it a bank, really. It’s more an entity that will manage the real estate assets that have come from other banks that need public capital injected into them.
So we need more information about the business case, the model. Some aspects we have heard about, as I’ve mentioned, the transfer price. We’ve seen this in the press conference a couple of days ago. With regard to the government and absorbing the operating cost and generate minimum return of 15% going forward. I really can’t say any more than that at the moment, but in our opinion, what’s happened to the financial business in Spain, there’s a clear distinction between the sound, healthy entities and those, at the end of the day, who required a public capital injection. So we can continue to develop strategies that will enable us to build and grow banks that are just as solvent as ours is at the moment.
There is no way that we are going to increase our exposure to capital consumption in any significant way that would affect our solvency. We’re pretty clear about this and I say this quite clearly to you. I repeat, it’s too early to see exactly what the creation of the real estate asset management entity is going to do.
I mean, in answer to Antonio Ramirez, it can’t set a precedent for other assets that have not been transferred by banks that have not required public capital, because the discounts over and above the discounts that have already come from the royal decrees. This additional discount is aimed at costing operating cost in this long period of time, but above all, to gain – to generate capital gains for banks that – of around 15% for banks who come on board with this new vehicle. But I don’t think it’ll have any major impact on our statements.
Tomas Blasco Sánchez
Asset quality, we had several questions about the increase in the NPA regions in 60 basis points. And what is this due to, and what are our expectations for the end of 2012 and also for 2013?
Ángel Cano Fernández
Is that it?
Tomas Blasco Sánchez
Yes, these are the three questions, okay?
Ángel Cano Fernández
In the presentation, what we did was to give a breakdown of the different impacts coming from the various sources. We said 30 basis points are due to the lower denominator. That’s the total investment. And that’s 30 basis points which means that if I look at this point in particular, later impairment is taken into account. But we’re talking additional deleveraging over the next few quarters, so a few more decimal points of impairment might be linked to a drop in the denominator. That’s the total loan book.
Another three decimal points, here, we’re talking about approximately €500 million of higher NPA balances related to developer risk and SMEs. The proportion might be €350 million, developers, €150 million, maybe a little bit less from SMEs. And that’s the reason why we’ve wanted to put up a slideshow in the exposure to developers, which we’re not that concerned about with respect to the classification of the assets and the impact that has on provisions, which we will have to set aside, because we’re sure that we are covering all of the exposure to the real estate sector either through loans or through bricks and mortar or foreclosed assets.
And consequently, if we see that 42% NPAs ratio which, after having incorporated Unnim and another – talking about €16 billion exposure, above all, we’re looking at that €7.5 billion in loans which are still up to date in payment where there is no restructuring. And there, what we’re seeing is that we can still expect further impairment on the NPA ratio, €1.9 billion loans classified as being on the watch list, for example, as substandard. So the impact – or the negative impact on provisions are really already covered under the royal decree provisions.
Then we’ve got that €140 million increase in the SME exposure to NPLs and that has to do with the exposure we have in Spain, that €24 billion that I mentioned, that 8.2% of NPA ratio and a deterioration of 2.5 percentage points in the first nine months of the year. And here, as we’ve done in other quarters, what we can do is to apply additional stress.
During the year 2013, we may see 2.5 points or two points being added to that, just to give you a figure with – a ballpark figure and so that’s another two points. That means we’d be talking about €480 million. And if we had a further €500 million added to that, at a stable level, we could talk about 50%, although it’s probably – it’s lower than that at the moment, but let’s say 50%. Then we’d be talking about an impact on provisions for all of the year of about €250 million, which would be slightly above the run rate of provisions that we have on that loan book for 2013.
That means that what we expect to happen in 2013, to answer the final part of your questions, it’s the increase in NPA with respect to exposure to developers and SMEs, but in terms of provisions, we’ve already covered our real estate risk, and that’s really not a material increase likely with respect to our SME loan book. And then, with respect to our SME loan book and then the rest of the loan book, we’ve got very good control in all the other geographical areas and there, we can expect very, very low levels of impairment.
Tomas Blasco Sánchez
And the block of capital, from Fidentiis, we have a question for more color regarding the impact of Basel III, which you talked about having fully loaded already for 2013 and the change in the risk-weighted assets and asks if you could give more information about the impact of the DTAs.
Carlos Berastain from Deutsche Bank asks about the Core Tier 1, which under EBA regulations, would be reported in the final part of this year.
Ángel Cano Fernández
Well, let’s start with the first part of the question, i.e. the color on fully loaded Basel III. I’d just like to say that this calculation includes all the deductions and all the modifications included in Basel III, which includes excess in minority percentage software, tax deferrals, deduction by investment in financial entities and insurance companies, i.e. all possible impacts.
And in our case, the DTAs that we have in the group are not very large in comparison with the other institutions. According to the information that we have, this is not an important issue within this calculation of 295 basis points. The issue of deducting financial investments or insurance confidence and software deductions is far more important.
So we don’t have any fiscal deferrals that we can’t really absorb in the current environment. And of course, this includes – is included in our calculation of 295 basis points.
With regard to the question about the EBA ratio, if we look at the quarterly performance, basically we had an EBA ratio including 0.7 percentage points of sovereign capital deducted from our capital of 9.2%. So we are absorbing Unnim this quarter, and basically here, we’ve added the risk-weighted assets of Unnim. And we also have the Unnim bad will, the 320 basis points.
So we have a negative effect of almost 15 basis points. And all the other impacts of all the different impacts on the capital during the quarter, we’re talking about a neutral effect, because the effect of risk-weighted assets would, on the one hand, by incorporating Unnim on the one hand, but we also have the dividends and the earnings for the quarter, which would offset that.
So we are talking about 9%, 9.1% in the quarter due to absorb – taking onboard Unnim. But we must bear in mind that in October, at the end of October, we swapped capital, retail capital instruments, both preferred shares and subordinate ones with Unnim maturities for trading shares. This was €420 million.
And all of this is generating an effect on core capital, and it will on the EBA as well, of approximately 13 basis points. So in the fourth quarter, this negative effect will be offset, especially in the EBA ratio, by this swap that we’ve made on the market that has not counted at the end of the third quarter.
So I think we can say that we’ve taken, we’ve absorbed Unnim in terms of capital, by optimizing the Unnim’s own customer deposits without any additional weight or burden on our shareholders. And this is just a transitional period that we’re going through for this quarter.
Tomas Blasco Sánchez
Moving on now to the different business areas with regard to spend, Britta Schmidt from Autonomous, Ignacio Cerezo from Credit Suisse, and Daragh Quinn from Nomura. First of all, they ask about the delevering process here in Spain. What are our forecasts for 2013? And they also ask about the trading net interest income in 2013 and the strength of the net interest income is divergent from the trends we’re seeing in our peers, and why? And so, how much has the absorption of Unnim made a contribution to this? And in this – along the same lines, what’s our outlook for the different lines for revenues in Spain for 2013?
Ángel Cano Fernández
Well, we’ve seen a lot of deleveraging in Spain. And by that, I mean drops of 7%, because with the incorporation of Unnim, it’s pretty well evened out, so that the evolution of the stock is pretty well evened out. But with the deleveraging we’ve had over the last months, we’ve seen drops of over 7.5%. And that performance isn’t expected to change that much over the next few quarters. When will it stop? Well, we don’t really know. Our outlook for 2013 continues to be of further deleveraging. I don’t know if that 7% drop will continue, maybe it will be less, more like 5%.
But nonetheless, there will still be further falls in business volumes, above all, on some of the loan books where we want to reduce our exposure, as in the real estate portfolio, for example, where we’ve had more than 9% drop in the first nine months of the year, discounting the incorporation of Unnim, obviously. And therefore, we think we will continue deleverage there with respect to our exposure to real estate in 2013 and maybe less so, maybe about 5% deleveraging over the following year.
In net interest income, well, there, we’re talking about the normal performance we’ve seen with firm price management and working on assets to get re-pricing. And there’s been strong control of the cost of deposits, above all, in the first eight months of the year. And that’s what made it possible to get that gradual positive improvement in the performance, so that we can compare – well, if we compare this quarter against the same quarter of last year, we got growth, as you saw, in the screen of over 16%. So that’s because of customer spread and the better cost of deposits year-on-year. And here, above all, we’re talking about retail deposits.
From now on, well, what we’ve seen since September, taking out the ceiling on the remuneration of deposits, which was in place until September. So there was a penalization when there was remuneration over and above a certain level which was higher than EURIBOR. And that ceiling was taken out in September and the cost of deposits afterwards increased again in general in the market. As always, in our case, we’re talking about 60 basis points once again, very similar to what we’ve been seeing throughout the liquidity crisis, below our peers, but that will mean that over the next few months, we’ll see a slight rise in the cost of deposits. What does that mean? Well, we’ll be seeing net interest income pretty well stable.
Looking at 2013, compared to 2012 as net interest income goes from less to more, the performance comparative year-on-year will be positive, but less positive than what we’ve seen so far, because of this higher price of deposits. It’s difficult to foresee what will happen at the end of 2013, because a lot will depend on what happens on the markets during 2013. But if this continues as it is to date, ceteris paribus, then we’ll see a slight positive performance in 2013 in the comparative year-on-year, because we’re comparing averages over the different years.
Looking at the improvement that we’re getting in our net interest income, I think, well, what were we talking about, €43 million incorporated under net interest income for the quarter? Manolo – no maybe, Manolo, you should say that.
Yes. Basically, looking at the contribution of Unnim to the quarter, you’ve got that in the presentation. I think it was €42 million from the net interest income. And if we look at Spain without Unnim, we’re talking about year-on-year growth of net interest income of 7% and quarter-on-quarter comparison as well very positive.
Tomas Blasco Sánchez
Yes, continuing with Spain, with respect to costs and including Unnim, from UBS, we have a question as to whether there’s a restructuring plan for costs in order to bring down costs in Spain, above all, in corporate activities,0 in order to adjust to the new environment.
Carlos Berastain asks about Unnim. Have you already charged the restructuring costs of Unnim? Antonio Ramirez from KBW asks about the €320 million of bad loan from Unnim. Is that net or is that gross of tax? And Mario Lodos from Bank Sabadell asks about the contribution to the gross income in terms of million euros that you’re getting from Unnim during the whole process.
Then there are other questions that I think have already been answered, from Jaime Becerril regarding the performance of deposits in Spain, in BBVA, and in Unnim. What kind of performance have you seen over the last quarter? The same question from Antonio Ramirez. And Frédéric Teschner from Natixis asks about the quarter-on-quarter and year-on -year performance of the net trading income. That’s already been answered, as has the question from Rohith Chandra about – from Barclays, that is, regarding the main drivers and how they’ve performed in net interest income in Spain.
Consequently, I think that the questions haven’t been answered directly would be those with respect to expenses and savings, and whether you’ve already charged that €300 million – that’s the Unnim Incorporation. And then the €320 million, are they gross or net of tax? And the contribution to gross income from Unnim.
Ángel Cano Fernández
As you saw in the presentation, the cost performance is 7%. There’s a 7% fall since the beginning of the crisis. As we’ve said, sometimes we forget the fact that when the crisis started, we’d already reduced our cost by – our network branch by 17%, because we didn’t expect the system would reduce. We thought that we had to reduce the number of branches that we needed here in Spain. From then on, we’d continue to reduce and adapt our structures to the market needs.
So I think we can still see that costs will continue to fall. We are constantly launching internal plans to reduce our costs in general throughout the group, not just in Spain, obviously in all the different areas where the business volumes are more dynamic, then obviously, we have to invest so that we can seize the opportunities for organic growth in those areas and in Spain and this is something we’re seeing in the United States and we will continue to see it in both these areas, are reductions in costs, because what we’re trying to do is to adapt as far as possible and to stay ahead of the curve.
We’re going to keep a very close eye on the restructuring processes in the financial industry over the next 12 months here in Spain, but we will react very quickly with plans both in the business headquarters. These plans are already there, but not just in our business in Spain. We try to take on the best practices in all our head offices, not just in the developed world, as you may imagine, but we also do in the rest – in the other areas as well.
With regard to the Unnim restructuring, the price paid, the €1 that we paid when we bought Unnim, this included the price or the sum that we were going to assign to restructuring and closing branches and downsizing, so all of that is included in the investment we made in Unnim. So the answer whether this has been booked, the necessary provisions for the restructuring, yes, they are booked. Manolo, maybe you’d like to come in on this now?
The bad will for Unnim is €320 million. This is net of taxes, the €320 million is net of taxes, and I would remind you this goes into the income statement, as was explained in detail in the quarterly leaflet, in line with other reviews below the operating income. With regard to the Unnim’s contribution in terms of gross income this quarter, we’re talking about €59 million.
Tomas Blasco Sánchez
Mexico, now. There are several questions here. Ignacio Cerezo from Credit Suisse asks about the third quarter in Mexico. In his opinion, it seems to be – has grown below expectations and worse than the second quarter, which seems to contradict our view of the performance of Mexico. His question is, what do we expect with regard to loans and provisions in upcoming quarters?
Daragh Queen from Nomura asks about the comments that have been made about the margin in Mexico, which is weaker than expected and the increase in provisions since the second quarter. So he asks, why? Can you explain this? And what would be your forecast for performance for 2013?
Juan Pablo López Cobo from Espirito Santo, he says that provisions have increased, as they have in Latin America. What – so what is our outlook for 2013? He asks about the staff, which increased by 4% in the quarter and 11% overall. So when can we expect the costs to stabilize?
Benjie Creelan from Macquarie asks exactly the same as Daragh Quinn. What is our outlook performance for Mexico in coming quarters? It would appear that costs in Mexico are accelerating in the third quarter. So what are the drivers that would explain this acceleration in costs there?
And finally, with regard to Mexico, in – a block of questions regarding the possibility of listing shares in Mexico? Antonio Ramirez asks whether there are any restrictions from the Mexican regulators with regard to non-listed banks, and as well as Jaime Becerril from JPMorgan. Is there any chance of an IPO for Bancomer?
And Andrea Filtri from Mediobanca, after the success of the Safin IPO in Mexico, are we considering any similar actions? So basically, it’s the same question Jaime Becerril and Antonio Ramirez are asking the same questions.
Ángel Cano Fernández
Well, let’s start then, and say that in principle, Mexico is growing business – is growing to about 11%, as we’ve said. However, what we’re seeing is growth on net interest income of about 8% – 8.5%. And I was explaining during the presentation that this year, we’ve got less ALCO portfolios in this year, especially in the first part of the year when we had some divestment according to expected performance of interest rates, which meant that there was some net trading income which was booked last year, but not this year.
And that’s the main reason why the NTI went down. If we didn’t take into account the impact of not having that NTI in this year, the growth of the net interest income would be about 10% for 2013. So the costs would be growing below recurring revenues. That’s the figure that we’re always looking at in the presentation.
So net interest income is growing in the retail loan book very much in line with general growth, about 11%, which is offset by a lower net interest income on the ALCO portfolios. With no more changes in the ALCO portfolio, we won’t have future year-on-year comparisons with this enormous change. So what we’re expecting is to see the growth of net interest income to be much more in line with our lending business in 2013. So that’s net interest income.
And then looking at costs, about two, 2.5 years ago, we launched a plan, under which our aim was to take advantage of the whole process of increasing penetration with new customers coming into the banking business in Mexico. And we wanted to review the volume of our installed capacity, the number of branch offices and the head count we have in Mexico, in order to take advantage of this growth in financial business.
Of course, when we compare Mexico and look at banking penetration, we compare it to other developed countries, it’s well below levels elsewhere. So our expectations in the mid to long term is that this will continue to grow. And that’s why, at all times, we have to analyze the installed capacity we have and make sure it matches the current circumstances and that’s why we have been opening new branches and that’s why we have been hiring people to cover this expected growth.
Moreover, one of the issues we’re working on in the U.S. is to see what alternative channels there are to bring out other operating and administrative services which we can use so that our branch offices will be able to increase commercial productivity and do more cross-selling. Now, what does all that mean? We’re investing call centers and in people, of course. So we’ve been investing there to get medium to long term returns in our investment.
In terms of Mexico, we can say that our expectations are the same as they have been. We might, of course, change the timing because that’s never a mathematical science to work out what the timeline will be. But we know that the – that Mexico is underbanked at the moment. And so, we know there will be growth and that’s why we’re still investing in the infrastructure, above all, to take advantage of the organic growth that we can see there.
So if we look at the costs, obviously taking into account that inflation in Mexico is higher than elsewhere in the developed world, but even taking that into account, we’re still seeing growth which is below the recurring revenues. So that’s when we’re talking about costs, although, as I said, there was an impact from the net trading income. As I said, we’re not expecting to see costs taking off that much in Mexico.
And as in Spain, we’ve got plans that affect the organization of the central structure for businesses and also, the more corporate activities which are outside the business areas in order to reduce not just head count, but above all, at the end of the day, just to get a leaner cost structure in Mexico, as we want to do everywhere else. Just because you have a buoyant economy in a country, that doesn’t mean to say you can let costs grow without any limits. No, we have cost curtailment plans everywhere. They might not have such a big impact in areas that are seeing their business volumes grow more, as they would where they’re not growing.
Now, looking at the higher provisions and NPA ratios there. We’re talking about a volume of NPAs which could be €1.6 billion. If we compare that against the €20 billion NPAs that the group has all in all, incorporating Unnim, or when we compare it against the €17 billion, without taking Unnim into account, or when we compare it against the €11.8 billion that we have in Spain, we’re talking about infinitely smaller amounts and impacts of one decimal point of what we’re seeing elsewhere. So these increase, well, it might be €40 million, €50 million compared against what we’re seeing elsewhere.
And then in terms of higher provisions, what we’re seeing there is quite stable levels. Cost of risk is about €3.5 million, €3.5 million, €3.4 million, €3.3 million and that’s the outcome of the growth of the business in consumer lending and cards, which has higher cost of risk although it also brings in higher returns at the same time for our net interest income. And so that’s what’s happening over time.
Normally if we look at the performance of the increase of NPAs and the cost of risk, we have to look at what’s happening to business volumes. If we’ve got 11% growth in business volumes, then we can expect to see growth in provisions of about 11%. But in fact, the growth is lower than that and that’s happening in Mexico and elsewhere in South America. We’re seeing growth of over 20% in our lending activity and yet, we are not seeing similar growth in our cost of risk on average at that level, nor in additions to NPAs.
And looking at the possibility of an IPO in Mexico, are there any restrictions or capital because we’re not listed? Well if we were expected to do an IPO, I have to say that actually, we couldn’t even tell you, obviously. And so obviously, that’s not the case. So, so far, we haven’t listed there, nor have you seen any communication disclosing intentions to do so, because our idea in strategic terms is that we’re in a business that is growing in the mid to long-term, moving along the direction we’d always expected.
We’re not foreseeing macro changes in the performance of the economy in Mexico in the near future, so unless we need capital and we don’t, as you’ve seen from all the comments that Manolo and myself have made during this presentation.
At the moment, definitely in the short-term, we’re not expecting to list the shares in Mexico. Anyway, with respect to capital restrictions for unlisted companies, well, there aren’t any which are any different from the limitations that all listed entities have. Pressure, well, in Mexico, they’d like to have more financial and non-financial entities listed on their local market. But we have to be faithful to our strategic vision as respect to the performance of our business in Mexico and how we expect it to roll out over time. And in principle, right now, in the short term, we’re not expecting to list our stock on Mexico markets.
Tomas Blasco Sánchez
We’ve got various different questions about different areas, a whole lot of questions related amongst themselves. But maybe you can answer them a bit more briefly. In Eurasia, Carlos Garcia from Société Générale asks about the outlook for the rest – well, for business in Europe. What are the drivers behind the business we have in Europe outside Spain?
And Frédéric Teschner from Natixis asks about the expected performance of Eurasia in the loan book? Will it grow, will it go down?
Santiago Lopez also asks about the United States. Are we thinking of charging of the potential goodwill in the fourth quarter of 2012? In corporate activities, Britta Schmidt from Autonomous asks about the drivers we have in corporate activities. With respect to net interest income, what we expect to happen in the rest of 2012 in net interest income?
And Ignacio Cerezo from Credit Suisse asks about the tax credit that we have in corporate activities, where does it come from? What tax rate do we think is sustainable for the group in the medium run? I think maybe that’s the question.
Juan Pablo López Cobo from Espirito Santo asks about South America and the charge to – from the provisions. What can we expect in the next few quarters in Latin America? Will there be further provisioning?
Ángel Cano Fernández
First of all then, provisions for business, in the outlook, business as usual, the same as the last three quarters. Delevering, where I think we’ll see a similar trend to what we’ve seen to date. So we don’t see any major change then. We – our forecasts are for loan business to be similar to what it is. No charge for goodwill in the states in the fourth quarter.
South America, Manolo, maybe you can talk about the corporate activities and the tax credit in South America?
When we’re seeing growth in operating costs of 22%, the impact of the increase in provisions in South America is a very small impact. And this, above all, comes from the strong growth in our loan book that we’re seeing in this region of over 20% and this has nothing to do with similar growth that we’re seeing in provisions.
So the best way to look at the performance of the impact on provisions over time, is when we see the net interest – the operating income and we can see that the profit is growing less than the operating income, corporate activities, net interest income, and the fiscal credit.
The net interest income from corporate activities, there are a lot of points here. But the most important point is the reduction in interest rates in the short term that we’ve seen in recent quarters, especially in recent months. So it’s unlikely that the short curve will increase, will pick up and over 12 months, the spread has been quite high, so it’s very difficult to maintain the spread so wide over next year. And this, together with the stability in the portfolios and it’s difficult to improve funding cost in the short term so I think that over the next two or three quarters, an improvement in the net interest income is unlikely in corporate activities because of the cost of funding of the balance that’s absorbed by the corporate activities, amongst other things.
Moving on now to the tax credit that we have in corporate activities, basically, this is due to the provisions, the amount of provisions that would remain because of the foreclosed part arising from the royal decree, plus the usual provisions that they make in corporate activities and this is – this explains the positive tax rate, but don’t forget that some of the results in corporate activities and dividends are earnings that are not taxed, or the tax rate is very low.
The group’s tax rate for the group at the moment, the group pays a relatively low tax rate because of the tax credits we have in Spain and because some of our revenues are not taxed, as we mentioned, before the equivalence of dividends, which comes in net and also, the greater weight in earnings of different areas with lower tax rates than we have here in Spain. So all of this put together, I would think it’d be reasonable that the tax rate in Spain will gradually converge to the standard rate of around 25%.
Tomas Blasco Sánchez
In this block on M&A strategy, several questions. Daragh Quinn and several others ask about if there’s any change in our strategic sale of assets or sale of strategic assets. Are there any non-core assets that we are considering selling? Are we – do we still consider Citic to be a strategic asset, bearing in mind the capital consumption in accordance with Basel III? We’re – ask for an update of the potential sale of pensions, the pensions business in Latin America.
And with regard to dividends, there are several questions. Santiago Lopez asked if we can confirm the dividend of €0.42 per euro. And Daragh Quinn asked about dividends. Under what circumstances could we consider an increase in the scrip or an elimination of the dividend?
Ángel Cano Fernández
Well, strategic divestments, there’s no change there, really. As you’ve seen over the last few quarters, not in particular this one, we’ve been working using different means, so that we won’t consume future revenues that could come from our more core strategic business. And that’s why we continue to work with the same perimeter of business that we’ve always had.
And – so taking into account that we are meeting the requirements established every quarter, we aren’t thinking of changing this strategy with respect to divestments. Citic is a strategic investment. We’re investing in a strong growth market, which will continue to grow over the next few years. And definitely, we would have to have a complete change of strategy to change our approach to that. It’s true it’s consuming capital, but even taking into account all the fully-loaded Basel III requirements, even under that, we’re still getting levels which are comfortably over what would be required by the end of 2013.
And that’s the outcome of our strategy. We have to think about the market, which is definitely growing in the long term and in the world market, it’s going to get a bigger and bigger share. There are very few other markets that have such upside, and it’s very difficult to get into an entity which helps us get a foothold there, as well as having a clear link-up with South America. And as we go to China, we see increasing interest in South America amongst Chinese investors.
As to the pension business, we can’t talk about any confidential issues, but we know that interest is very high, even higher than expected. Our time schedule is way beyond the close of this year, so we’re not expecting to incorporate any effects from such sales before the end of this year. So really, we’re talking about the very end of the year, or maybe moving into next year.
So there is interest which is higher than expected, both for the entire operation and also broken down country by county, higher than expected, and then, dividends. Well, there’s no reason to change what we’ve already stated regarding the payout of those €0.42. So that’s an answer to what Santi Lopez asked about.
And with respect to what might happen over time, the dividend performance depends firstly on capital. And here, there’s some uncertainty with respect to regulation which might lead us to be conservative or prudent and to add on a few more quotas. But our intention is that once we have regulatory certainty about what’s going to happen with respect to capital requirements, then we’ll eliminate the scrip dividend. And then, the performance of the payout over time will depend on the profits that the group makes.
And in principle, as we get rid of some of the uncertainty we have on certain loan books, such as the real estate loan book then, we will have more traction with respect to profits. And then we will be able to think about the dividends. But it has to do with capital and there is still some uncertainty about capital requirements, but mainly, it has to do with expectations of future profits.
Tomas Blasco Sánchez
And then impairment, are we expecting to charge an impairment?
Ángel Cano Fernández
No. But I’ve answered that very quickly, of course, it was true. We aren’t expecting to have any additional impairment in the U.S.A.
Tomas Blasco Sánchez
Okay. During the presentation, more questions have come in related to the bad bank exposure to real estate in Spain, provisions, et cetera. I think that actually, they have already been answered. So now, we’ve got the final three questions, which are the following. The first is from Patrick Lee from Royal Bank of Canada, and he asks about the potential new price for deposits in Spain. Is there such a price war in Spain? How could that have an impact on income over the next few quarters?
Juan Pablo López Cobo from Espirito Santo wanted an updated on the bank’s exposure to sovereign debt. What is our exposure there, above all, in the peripheral countries?
And finally, Muriel Perren from Morgan Stanley asks about the rating. What impact would come from a potential downgrade for Spain and, consequently, BBVA, to non-investment grade? If there was a downgrade to non-investment grade, then the funds would have to divest. And how do we see that? What kind of measurement do we have?
Ángel Cano Fernández
Rather than talking about a deposit war, what I mentioned before in an answer to the performance in the net interest income in Spain, since the cap for deposits was removed without any penalty, we have seen that some of our peers have started paying more than they were. And this has meant that the average cost of entries into the system has gone up again from the moment that the cap was taken away, particularly in the last month. And of course, if we compare our prices with those of our rivals, we’ll see there’s about 60 basis points of difference.
The advantage that we have maybe is that there’s a clear flight to quality with regard to entries into our deposits, and maybe this is the main reason why the cost of our deposits is below the business average and the flight to quality in this occasion has not been curbed. On the contrary, it’s ongoing and this is maybe one of the main reasons why if we take out the Unnim effect from this quarter, this is why we’ve increased our retail deposits by almost €5 billion. And I think this is a trend that will continue going forward. What I said before, I think, answers this question.
We’re going to see a greater cost initially, new business. And if we compare this with the crisis liquidity, the banks that were paying the most have consumed much of their income statement, so they haven’t got very much left to offer these high prices. And this time around, the aggressive business is not just aggressive business is not as aggressive as it has been in the past. And we do not think that the war is going to be as fierce as we’ve seen in the past.
So I think the fundamental thing, as I said at the beginning of the presentation, we have to continue over the next few months in restructuring the financial industry. So the weak entities are restructured as soon as possible, so they can come back into the Spanish financial industry, along with the healthy banks. And this the most important point, and in the short term, we could see some increase in the cost of deposit, but it’s not going to have a significant impact on our operating costs.
In the rest of the developed world, the customer spread here in Spain is far and away the lowest that we can see in comparison with other countries. So moving forward, any deterioration in the customer spreads could happen. But the only thing we’re going to see are going to be clear improvements here. We’re talking about spreads that are only half of what they are in the States here in Spain, just to give you an example. So those are our expectations for the future. Our exposure to debt – Manolo, do you got the figures on this? There is no exposure to Ireland or Portugal.
In the case of Italy, our exposure remains the same. In the case of Spain, there’s a slight fall because of maturities in BBVA to sovereign debt, but we’ve added the portfolio of bonds that comes from Unnim. So the portfolio has grown by €3.4 billion and Unnim adds about €3.7.
Sorry, I think my microphone was turned off. We have no exposure to Portugal, Greece, or Ireland – on €11 million in Portugal. In the case of Italy, our exposure remains the same, so we’re talking about €3 billion approximately. In the case of Spain, BBVA, there is a slight fall in our exposure, but with the incorporation of the Unnim, which adds €3.7 billion, the portfolio increases by €3.4 billion, so.
This is fully linked to adding the bond portfolios of Unnim. With regard to the portfolio yes we are talking about, as we’ve said, €2.3 billion approximately. So the portfolio is slightly biased towards three years. With regard to rating, I think the most important thing here in the face of a possible downgrade in any rating would be that our management of liquidity basically on the euro balance, where there’s been balance sheet – where there’s been more tension in recent months, but there’s not very much, given that the liquidity buffer when you have available liquid assets to raise liquidity, whether it’s in the clearinghouses or whether it’s on the markets and the bond auctions, I think it’s two times the three-month level.
All the maturities that we have there are in the next three months, of all kinds. But even all the volatile redemptions on maturity, if we consider all the maturities related to the wholesale world are considered volatile, these – all these accumulated, irrespective of that term, are less than our available liquid assets. So we have a positive liquidity buffer in all the terms of – apart from the fact that this would not be desirable from the point of the view of the impact it would have, it would have no significant impact on our liquidity once we have all the ratios under control. Okay?
Ángel Cano Fernández
So having dealt with that last question, it just remains for me to thank all of you for taking part. And remember that all questions that haven’t been dealt with in this webcast will be dealt with by the Investor Relations department in the course of the day. Thank you very much.
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