Bankia SA (OTCPK:BNKXF) Q3 2018 Earnings Conference Call October 29, 2017 7:30 AM ET
Iñigo Velázquez – Head-Investor Relations
José Sevilla – Chief Executive Officer
Leopoldo Alvear – Chief Financial Officer
Marta Sanchez – Bank of America Merrill Lynch
Ignacio Ulargui – Deutsche Bank
Carlos Cobo – Societe Generale
Javier Echanove – Banco Santander
Ignacio Cerezo – UBS
Carlos Peixoto – Caixabank
Mario Ropero – Fidentiis
Britta Schmidt – Autonomous Research
Good morning. Welcome to the presentation – quarterly results presentation of Bankia, which will be done given by our CEO, José Sevilla; and our CFO, Leopoldo Alvear. This will last about 60 minutes and including the Q&A that we’ll have after the presentation.
[Operator Instructions] I’ll pass the floor to Mr. Sevilla.
Good. Thank you very much. Welcome, and good morning, and we begin this presentation, and I have to point out the most significant fact of 2018 for Bankia, which is the integration of BMN. In this regard, in the last few months, we’ve made progress with the progress of integration with the labor agreement, the restructuring of the staff. We have a date to finish that, which is the end of November. This means we said the last quarter that 100% of synergies of the €190 million that we have calculated will be captured 100% within the – within next year.
We’ve also made progress in the agreement of reorganization of the insurance companies, insurance business. We’ve bought 50% of the life insurance companies of Caja Granada Vida, Caja Murcia Vida, and we’ve completed agreements to have final picture within the group with life agreement for the whole of Spain except for the Balearic Islands with Mapfre. And in the Balearic Islands, we would continue to distribute life insurance, Caser life insurance, and then an agreement of global insurance with Mapfre for the whole of Spain. The repurchase of the shares and the participation has meant 17 bps in the quarter as a result of the funds that come out of the acquisition of – and the goodwill that comes out of the acquisition of these companies.
These 17 bps and this activity we expect to recover over the next few quarters once we recover from the operations. After all this, we have finished the integration, the computer integration in the first quarter, the integration of brands, also the reorganization of these services agreements. We have agreed is the insurance side, and we’ve begun to work on the integration and the consolidation of the commercial management model, which will be applicable to the old – the former BMN network.
We see in the quarter, the third quarter, that this begins to produce results in terms of turnover, in terms of consumption. We see on the left how currently the BMN – former BMN network is producing about twice as much as what it was producing in the first months of the year. And the third quarter, you know that it has seasonal effects because of the holiday. So this is leading to the consumer rate, aggregate consumer rate for the group for new production is going from 5.50% that we had at the beginning of the year to 6.41%. And the same can be said for credit cards, turnover in credit cards and payment means, means of payments that have to do with the former BMN network is also growing the area.
Notably, significantly, we must remember that this is one of the advantages that we saw on the integration process, the fact that we could apply a business – different business model, in this case, the business model that has to do with the pregranted operations to the new BMN base customers, 500,000 customers approximately with payrolls registered or income registered, and their tendency or trend to consumption was low. We think that this will get better however, much better over the next few quarters.
In terms of customers, well, within the group, here you see the evolution of the new customers with direct income deposits. And we’ve been working for several quarters on this. That is annual speed of growth in new customers with direct income deposits of more than 100,000. And this speed is being maintained and will – has been maintained in spite of the integration process, which always generates certain level of turbulence. And within the means of payment area, we continue to have growth 12.4% sales at retail businesses, 27% in sales at e-commerce, online Internet with an 11.18% market share. And point-of-sale terminals figures of, well, growth of more than 15% in sales of POS terminals and a market share that is 12.54%.
Now Connect with your Expert, Conecta con tu Experto, is one of the key distribution channels in our model, Connect with your Expert. And we have about 9% of our customer base, 600,060 customers are connected to Connect with your Expert. And the end of strategic plan, our aim was to serve one million customers using this channel. And with this percentage, we are – with the turnover we’re covering, we’re doing 20% of the new mortgages and 20% of the new consumer lending. We are producing 20% of new mortgages, 20% of consumer lending. It’s a very good experience, and we think it will continue to grow and be good for our customers.
Here you see the data of customers, digital customers and digital networks. As was expected, the growth rates are good. And this quarter, we’ve had significant advance in terms of digital sales in Bankia. You also have some indicators of the levels of use of our web page – website, rather, for new mortgages or for loans and home appraisals. This is having great success. And also we have Bizum, the application that is used. Bizum, the application that is used for payment services for private people, this has increased by three in users. We have a market share in this – within this field of transactions operations of 12.3%. And also instant transfers are growing very significantly. We’ve got a market share in instant transfers of 19.4% within the system, and that accounts for 8.9% of Bankia’s total transfers. And this will grow over the next few quarters, undoubtedly.
In the last few months from the point of view – commercial point of view, we’ve launched the Pack – Business Pack initiative to help the Pack Negocios to help freelance professionals, self-employed people and small businesses. We’re moving towards the Cuenta On Nomina, and our idea is to continue to grow in the number of customers that have their payrolls deposited with us. And also, we’re offering payroll advances to new customers. Now if we go to the balance, this is the – these are the customer funds that have grown in the last 12 months by about €1,200 million, €1.2 billion, with a growth of mutual funds that is higher, €1.7 billion interannual.
And this, obviously, you see on the right of the slide, means that in the last 12 months, we’ve made – we’ve increased by 16 bps our mutual funds market shares since the beginning of the year. We are capturing the net inflows, 8.14% of the market share, and the weight of investment in mutual funds continues to increase in terms of what our customers save. In the first quarter of this year, we launched a new service, Gestion Experta, Expert Management for middle – medium and small portfolio management. And this Expert Management service is capturing more than two billion – has under management more than two billion.
Here we see the new lending in mortgages, consumer and companies. In mortgages, our growth is 4.7% versus last year. And as you can see here, there’s a significant difference between the Bankia – former Bankia network that is growing at almost 26% and the former BMN network branches that are growing at 33%. We think that, as we saw in consumer, in this quarter, over the next few quarters, the branches – former BMN branches will improve their speed of growth in mortgages. And well, because we’ve taken a series of measures, there’ll be changes in procedures, circuits, risk assessment procedures, and this will allow the new – or the former BMN network to be in line with the growth of the former Bankia network or the Bankia network itself.
In consumer, we’ve got growth of almost 10%, and this includes Bankia and BMN, similar growth rates. And within lending to companies, the growth is 3%. This is producing a situation where, in consumer and companies, you will remember that these are the two key segments for us, the rates of growth – year-on-year growth are increasing. Consumer, we started at 4%, 10% by June and we’re almost at – growing at almost 13% right now. In company lending, we were 0.9% in the beginning. And now, we’ve got a growth of 2.7%. We are – these increases are increasing, obviously, our market share.
Quality of our assets. Well, asset quality. From beginning, problematic assets are being reduced by €1.7 billion, 14% NPLs. Coverage hedging of doubtful – of NPL is more or less stable – and the – we’ve gone down to – the NPL ratio has gone down by – down to 7.8%. Also, the foreclosed assets have and the – the gross foreclosed assets have gone to – come down to €4.2 billion, and the gross NPAs have come down to €14.5 billion. As you can see here, this is very much in line with the asset – with the aim that we had set ourselves within the strategic plan of reducing the NPAs in 2.4 – €2.9 billion throughout this year. And on the right, you see the gross NPA ratio. That is at 16 – 10.6%, 5.3% after provisions, and this is in line with what we had set ourselves in the strategic plan.
Capital ratio. Well, we’re going to hear from the CFO a bit more about the quarter in this – from this perspective. The capital generation, the CET1 fully loaded in terms of management taking away the – is growing by 64 – is growing – has grown by 12 – or is in September, 12.46%. And the management ratios, part of these latent capital gains are – part of these capital gains are latent, and this has had an impact. In terms of total solvency fully loaded ratio, we’re above 16% after the issuance of AT1 €500 million throughout the first quarter. And then you have the evolution of the profit, which has grown 0.6% up to €744 million, with a profile – quarterly profile slightly different from last year.
But in any event, at good cruising speed, more than €220 million for the quarter. And I’ll now pass the floor over to Leo, our CFO, for him to give us the second part of the presentation.
Thank you, Pepe. Now good morning, we are going to read the presentation on quarterly results. As always, we present this first slide where you can see the official accounts in 2017 for Bankia and the nine months of 2019 in corporate Bankia and BMN. As with – in past quarters, we got a pro forma account, the nine months of 2017 and 2018, and the same scope up until their result for provisions.
Now we go through the three monthly – the quarterly account and the different quarters. You see in the three quarters of this year, you see that the third quarter, as always, is influenced by the seasonality, especially in margin and income and also doubtful or NPL. The financial margin goes back or goes down regarding the second quarter. That’s explained by the bond portfolio movements and a lower contribution of the income from problematic assets.
Now commissions, fees are behaving well, bearing in mind seasonality. There’s an increase over the first quarter and good percentages of advanced as regards or as compared to similar periods in 2017. At the bottom of the P&L account, we’ve – we continue to consolidate the reduction or the limitation of our costs, our expenses. There’s a drop as regards the past quarter and also as regards or as compared to last year. And also, provisions for credit and foreclosed assets are behaving well. And as we’ll see later, the cost of risk in the quarter is 18 bps.
Now let’s start with the gross income. You can see in this slide that all third quarters, we have a negative impact due to the seasonality, the months of the summer, and also because we have less contribution from income or – income from doubtful or problematic lending – loans. You see that the figures are more or less stable in terms of the gross customer margin as compared to 2017. But the exchange rate – the interest rates in this period are worse, obviously, than ones we had in 2017. And this is the result of the fact that we have still the price, the entry price is constant. That is the price of the credit originations, which in this quarter account for 2.7%, front book new lending, slightly above what we had in the second quarter of this year.
If we look at what we’re doing with our portfolio management, well, as I’ve explained in past quarters, we’re more or less for 1.5 years, three quarters, we’re positioning the portfolio in such a way that the positive – we’re positive to the increase in interest rates. So we’re actively managing the economic value of the bank in the long term, although the reduction of these portfolios has an impact. The impacts – financial impacts. The impacts are two. On the one hand, financial impact as you can see here, you can see the figures for the P&L account in this view. We’ve got €346 million in NTI in the first nine months, and we got – that’s in the plus, on the plus side.
But on the negative side, minus €45 million in terms of NII for the whole – for the full year of 2018. So NTI has been generated at a ratio of 7.7 times more than the margin that we’re going to lose in this year. And then we have impacts in solvency, on the balance and on the solvency ratios. We see here that on the one side, we’ve got all those capital gains that have gone through NTI, they used to be latent, and now they consolidated capital ratio. On the other hand, thanks to the sales, we don’t have negative gains in the capital area, which we would have a negative capital impact if we hadn’t done the sales that we’ve gone through with. We don’t have a negative capital impact, we’ve actually grown our capital.
And as a result, this strategy we’ve reduced – very significantly reduced the volume of portfolios. As compared to September last year, there’s been a decrease of 13% as compared to the levels that we had in past years up to €35 billion in those portfolios. We’ve reduced that by 25% to the €26 billion – €26.2 billion. But we very much reduced the risk that we have associated with these portfolios in terms of interest rate changes. So 63% of the portfolios are not sensitive to interest rate changes. What we expect is that this impact on the income from NTI – NII this quarter will go to minus 18.
For the fourth quarter, basically, it will be netted out in such a way that our calculation is that the total NII for the fourth quarter is superior – is higher than net worth that we obtained in the third quarter. In other words, we think we have reached a floor in terms of NII because, on the one hand, we won’t see any more movement within the portfolios; because, on the other hand, as we’ve seen, the margin – gross margin of customers should begin to increase and increase the contribution to the income.
Now if we go to fees, we see that it’s very positive. The evolution of the third quarter is always biased by the seasonality, as we said before. But we have more fees than in the first quarter of last year – sorry, first quarter of this year, something that we didn’t achieve in 2017, where fees of the third quarter were lower than the first quarter. If we compare the same period, third quarter against third quarter, the commissions, fees have increased by 3.1%, that for the year, and we think that we can continue to improve in fees in such a way that the annual evolution should be even higher than this 3.1% that we’ve seen in the first months of the year.
The increase in fees comes, as we saw in past quarters, from products that add value. We see an increase of 30.6% in mutual funds, 8.5% in pension plans or 13.1% in payment services. Now if we go to the lower part of the P&L account, good news once again in terms of expenses. Costs, as a result of the consolidation, running out the restructuring plan and the synergies that were achieved, costs are down by 5.4% as compared to the third quarter of last year; or almost 3%, 2.9% in the nine– accumulated nine month period.
This leads us to maintaining and consolidating our competitive advantage. And we see that in the costs over the total risk-weighted assets, 100 bps less than – from expenses over risk-weighted assets than our competitors. The fourth quarter, historically, costs go up slightly because there’s a certain seasonality in the general overhead. But in this line, we’re going to finish in a better situation than we expected at the beginning of the year. We expected to finish at €1.9 billion. So we think we’re going to exceed that figure, and we’ll finish at more or less €1.8718 billion, €1.870 billion approximately.
In terms of cost of risk, good news, too. We see the cost of risk for the quarter is 80 bps, as a result of the good evolution of problematic assets as we’ll see later. And this leads to a level of provisions that we wanted to have in the first nine months. As you see on the right, basically, these provisions are very similar to those we had in the first nine months of 2017 but with a different perimeter, different scope. The figures that reflect 2017 only incorporate the Bankia balance; whereas in the figures for 2018, we’re incorporating, we’re including the BMN balance all in – €22 million in credit more and €2 billion more in foreclosed assets.
So we see that the contribution of fees, costs and the cost of risk have helped us to stabilize the loss of income, of NII that we had. So the accumulated profit for the year is €744 million or slightly higher than the result obtained in the first nine months of the year 2017. And the result, we exceeded by 0.6%. If we go to the balance, we see the NPLs have also – the ratio’s gone well. The doubtful – we’ve brought that down by €448 million, which means a drop of 30 bps of the NPL ratio, going down to 7.8%, and the coverage ratio is stable at 55%. In terms of foreclosed assets, we see that the balance comes down by €200 million.
We compare sales that we might have done in the first nine months of the year, we see that there’s been an increase of 13% as compared to what was produced in 2017, or 47% in terms of units sold, 10,700 this year. And as we’ve said in some of the instances, the units we’ve sold in the first nine months are an increase – or account for 20% of our initial stock, which is exactly the figure that we reduced this by in the 12 months of 2016 and the 12 months of 2017. So there’s an increase in the sale of foreclosed assets, and this year, we expect to be at about 25% of our stock, nearer to 25% than to 20%.
And all this we are achieving by selling vertically, as we’ve said before. That is to say we sell not just the highest-quality products, but also together with lower-quality products. And we’ve maintained our coverage ratios for origin – or from the moment of origin to the moment something big foreclosed, an asset being foreclosed. Solvency is good. We’ve got our an LTD of less than 100%, 93.6% actually. 85% of our deposits are retail, so we’re very much up-to-date. The LCR is 157%, and we got liquid assets that represent 1.4 times the expiry dates of all the liabilities, wholesale liabilities we have.
In addition to that, the liquid assets have very high quality, and 96% of them are HQLAs. In terms of rating, we’ve got investment grade in senior and in SNP, or we’re being given these rated – senior ratings. In terms of liquidity and solvency, we’ve complied with the regulator AT1 level and Tier 2. So we’ve got the €500 million that we issued in September and 2% Tier 2. And in terms of phase in, we’ve got CET1, CET1 is 13.83%. Remember, we incorporated 100% of the IFRS 9 in the phase in and fully loaded ratios and here, we have 517 – 527 bps buffer. So the total solvency is 17.64% or we have a buffer of almost 560 bps after issuing these figures. In fully loaded terms, we’ve got at the end of the quarter 12.17% in regulatory ratios and 12.46%, respectively.
This is organic, in line with what we’ve achieved in other quarters, about 70 bps. But with the negative impact, as Pepe mentioned before, the consolidation of the purchases of the insurance companies that have increased the goodwill. And therefore, the numerator – the ratio has grown. But this is 17% – 17 bps, and we hope to recover this ground over the next few quarters once we reorganize the situation after the sale of these companies. In terms of total solvency, we have 16.27% subordinated MREL ratio, the leverage fully loaded ratio of 5.6% – leverage ratio fully loaded 5.6%. Good. Pepe, do you want to finish?
Well, yes. We continue to grow in the process of integration with BMN. That will gradually produce more and more activity, commercial activity, especially within the BMN network. And cost synergies side and everything that has to do with the issue I think is making good progress, and better than we expected at the beginning of the year. And also NPAs, which we’ve seen – as we’ve seen before for the whole of the year, we will be able to exceed the objective that we had set ourselves in the strategic plan.
And once again, the organic generation of capital, organic model continues to work. And we believe that for the next few months, we’ll recover that. And the generation of capital over the immediate future has to be a strong point of our management model. That’s all. We’re going to the questions when you’re ready.
We’ll go to the Q&A now. We cannot hear the speaker. Microphone, please. We cannot hear the speaker. Microphone, please.
Thank you very much we begin the Q&A [Operator Instructions] We have Marta Sanchez from Bank of America Merrill Lynch. Marta Sanchez you are ready.
Good, thank you. I’ve got a lot of questions, but I’m going to focus on capital and fiscal issues. This 22% you mentioned in the quarter as you’ve explained, what can we expect in the future? Bankia has buffered the NII with fiscal rates that are much lower than the rest of the banks. Are you benefiting from activating DTAs out of the – off the balance, about €1 billion slightly more this year? What can we expect in the future? What’s the sustainable fiscal rate for Bankia? And the second question about capital, your plan for producing €2.5 billion over the next few years is, well, something that the market doesn’t really fully believe.
We’ve got legal issues. We’ll see what happens on Monday with the judgment from AJD. But if there are no negative surprises in the banking industry, how likely are paybacks? Do you think the 11% for – ratio for nonperforming assets, do you think that will be an obstacle for us to begin to see a better situation? Where do you think that ratio should be? What should that ratio be? Do you think this is an obstacle? Where would the – where the supervisor would like to see that ratio? Do you think that’s an obstacle before the plan is developed for covering shareholders?
Well, thank you very much. As regards to taxes, tax issue, the rate – the fiscal rate has been slightly lower this half of the year. But it changes from year-to-year. We’re not activating DTAs or anything like that. I think what we have is a closure of the accounts of the corporate tax final figures that were slightly below what we had calculated initially. But in the medium term, our fiscal rate, our tax is more or less the same, slightly above 25%, but near to 25%. So we – the difference is not, I don’t think so material, so significant. I don’t know whether you want to add anything, Leo.
Well, this has been the result of the payment of the corporate tax for 2017, which is paid in July. And we’ve had, well, the provisions on corporate tax were reverted. But as Pepe had said, it’s going to be 25% to 30% in the short term for 2018. We’re into this year by three quarters, we’ll be nearer to 23% in accumulated or aggregate terms.
Good. As regards capital, the €2.5 billion, well, paybacks, well, we spoke about €2.5 billion of giving back capital to shareholders, giving back €2.5 billion, and we would see how it would be done using ordinary dividends or buybacks or not. Because we always insisted in all our presentations, quarterly presentations, that the board has not yet given its opinion about doing buybacks or not. But this is a more technical clarification than anything else. But we’re talking about the same thing.
We’re talking about the potential of giving back or sharing out €2.5 billion in capital with the aim of, well, having a fully loaded of more than 12 – above 12%. There’s nothing new here, no change. The supervisor hasn’t said anything about this, and we are exactly in the same position we were. We understand that this will depend on whether we are able to generate that capital excess and consolidate it through the next few – the next three years.
Thank you very much. We go to the next question.
Yes, the next question, Alvaro Serrano from Morgan Stanley. Go ahead with your question, please. Alvaro Serrano from Morgan Stanley your line is open. Please go ahead with your question.
Good we will go the next question.
Yes, We’ll go to the next question, Ignacio Ulargui of Deutsche Bank.
Good morning. I have a question. What do you think will happen with the AJD on Monday? And what strategy have you regarding the mortgage strategy in the future? Thank you.
Well, we expect – obviously, we don’t know. It’s easy to get confused. I mean, you can wish, and sometimes it’s wishful thinking. But our hope is that the situation continues, the situation we’ve had in the past 23 years. We’ve had a fiscal law that has been analyzed and – by the Supreme Court several times, and this has continued to be the criterion has been maintained. The person who pays the tax is the customer, that’s been the case in the past.
The second possible scenario is that the Supreme Court decides to change this, change the law and say that, no, in the future, it must be the customer – sorry, the bank who pays the tax and the private individual does not pay for this tax. Now in that scenario, if the law changes, if the standard changes, well, logically, it should affect the new mortgages that are subscribed after the change in the standard future mortgages. That’s what we expect. Thank you Ignacio. Next question.
Next question is Carlos Cobo from Societe Generale.
Thank you. Thank you very much for your presentation. I want to know about the effect of seasonality on the recovery of NPLs. Could you give me this in terms of millions of euros or in terms bps, what the impact has been on NPLs, the effect of seasonality? Could you give me an idea? That’s one question. Another question is I would like to know more about consumer credit. What do you – how do you see this business. If consumer lending has gone down, what is the situation in this area?
Has perhaps auto lending gone up or down? The average saving rates – ratio in Spain is below historical minimum values. People are not saving money. People are not – the maximum levels of cars are being sold, and it doesn’t seem to increase above that. Do you think consumer lending can continue to grow? Or should we – or is there going to be a slowing down? Thank you.
Well, thank you very much. Well, shall I answer the second question and you, the first, Leo? Okay. Good, regarding consumer lending, we can see that, yes, we – the volume – the growth of lending, consumer lending, for the system will be slightly lower in the future. It will come down probably. As we’ve said in other presentations, the consumer lending is a consumer lending that is – has to do with the external competition, because it’s consumer lending that is based 100% on our customers. We only lend to our customers for consumer purposes, and customers that have their deposits, their payrolls and their incomes deposited with us.
So credit consumer lending is going to continue to grow, but we hope and expect that the contribution of about 0.5 million customers with payrolls registered that come from BMN and that don’t have – well, their consumer balances are very small, will allow us to grow in consumer lending throughout the rest of this year or next year, above the average in the industry. In fact, in this third quarter, we’ve seen some of this already. We’ve seen that the former branches of BMN are growing strongly, and we think that we have an ability, an additional ability to grow, especially consumer lending because when you begin, the growth rates usually are faster because these are younger people, people that don’t have very high average balances, and they don’t have portfolio expiry dates.
So yes, consumer lending in Spain will probably slowdown in Spain. But in our business, in consumer lending, our business is more protected and depends more on our customers and our ability to grow our customers with the registered payrolls and incomes. So we have organic ability for growth within Bankia based on our customers and the contribution of the 0.5 million new customers from BMN. And in regards to – as regards seasonality, I’ll pass the floor to Leo.
Well, yes, basically, the NII in the quarter has gone up to €495 million. So €26 million lower than what we had in the second quarter. Now the variation is due fundamentally to two factors. On the one hand, lower contribution from the mutual fund or the bond portfolio, which explains part of it. In 4T – in the fourth quarter, we expect that will no longer be a significant impact or – and then €8 million, €9 million that are explained as a result of the rest of the lending book.
Now in those operations, there are several factors involved, lower contribution of doubtful lending and loans that were recovered in the fourth quarter as we’ve seen in other years, and over the 12 months, we’ll have the same contribution levels, but they change from quarter-to-quarter. And then the other hand, we have average balances that are slightly lower than the previous quarter, but they’re stabilizing. And we are positive in terms of what we expect from the fourth quarter because we continue – we hope these balances – average balances to continue to be stable and generate more income.
And then we’ve had some material loans that were above the entry prices for the new production and companies. In terms of total prices, the consolidated price of all the new operations is 2.7%, very much in line, in fact above, quarter two – the second Q. So if you brought all this together, in 4Q, we don’t expect to have material negative impact from the bond portfolio, and we do expect that we’ll recover part of our doubtful, or our NPLs, and that prices are stable from what we’ve seen in October. We’re optimistic, and we think that the NII in the fourth quarter should be clearly higher than in the third quarter.
Thank you very much, next question please.
Next question is from Javier Echanove from Banco Santander.
Good thank you good morning. I have a couple of questions. I want to go back to the NII issue. You’ve mentioned that you think that in the third quarter, we’ve seen the lowest level for NII, and you said what you expect for quarter four and why. I would like to think what about in a more distant future, what do you see going forward? Have you reached – has this bottomed out, do you think? What’s going to happen over the next few quarters in terms of NII? That’s one question. And then also an update, I would like, on the situation of the arbitration with the debt bonds.
And the other question, I had a question about capital. Capital, fully loaded, based on the regulator’s criteria, there’s been a drop there of about 15 bps. What has led to that drop? And slightly more detail. Thank you.
Good. Will you to the last question, Leo? I’ll do the other two. Good. Well, for the fourth quarter, Leo has said this. As you’ve said, Javier, in the medium term, what we see is that the trend of average balances within the credit portfolio is flattening, but is beginning to grow. We hope to have a more expansive fourth quarter in terms of new formulizations.
In past quarters, there’s been – the situation has been affected by the integration, and we should go to moderate growth in average balances over the next few quarters, thinking about 2019. We also see that the entry prices are stable in some segments, and this might have affected us this quarter like corporate banking. We think that the – and the quantitative division could improve the situation or lead to figures that are less lower than they are today and within an environment where the portfolio should not continue to contribute negatively in the future. We think that the NII – the NTI will grow if the interest rates help us, too.
The Euribor over 12 months, which is the key indicator for us in our portfolios, has improved very, very, very slightly in the last three months. It’s come from minus 19 to minus 15 bps – minus 15, minus 16 bps. Every bp counts. To the extent that throughout the first half of the year that Euribor evolves towards zero, moves towards zero, that should help us, no doubt should help us in achieving higher NTI levels and financial income that is higher over the next quarters.
The la SAREB is arbitration, we have a deadline which is end of this year – month. So over the next few days, we’ll have a resolution from the arbitrators. And whatever they tell us, we will tell you. And capital?
Capital. Well, the deviation comes from the latent issues in the portfolio. That has – the portfolio has two impacts. If they go down there, we have less latent and less numerators. On the other hand, this affects fiscal loans because fiscal loans that are taken away from the numerator are the addition of the fiscal liabilities, which are explained by the latent figures in the portfolios because they go down, and then net of assets minus liabilities changes and there’s a reduction in the numerator of the ratio, too. But what is important is that from the beginning of the year, we’ve achieved – we’ve consolidated a good part of those latent values at the beginning of the year. The regulatory ratio was at 12.46%, and that is where it is now.
And you must remember that the management ratios, so to speak, which doesn’t exclude – that does exclude latent values has gone from 11.95% to 12.41%. So what’s happened throughout the year is what we expected, and that is why we’ve always focused and always spoken about the management ratio, which is the ratio that we focus on and base all our measurements on, and we’re going to build the capital return to shareholders on. The regulatory ratio is very volatile. So we use – we focus to management ratio. That is the true – the actual ratio.
Thank you very and we have next one. Thank you.
The next question, Ignacio Cerezo from UBS.
Hello good morning. I wanted to go back to the issue of the portfolio with a couple of questions. The first one is how do you consolidate the current situation with what you might consider an ideal size, portfolio size in the future? And how far – near are we for the capital gains in the portfolio lead you to situation where you sacrifice the income slightly and do a bit more trading? I understand – I think you haven’t got very many latent capital gains, and that leads to the next question. What is the sustainable trading level that you might expect over the immediate future?
Well, thank you very much. Will you start, Leo?
Yes. As regards the size of the portfolio banks, we have the portfolio for two reasons: one is the result of the liquidity ratios in order to have liquidity; secondly, to do a hedging of the rest of the balance, especially those parts of the bonds that are not sensitive to rates to simplify the deposits, current accounts or even the long-term accounts. But in the last few years, going back to 2012 – 2012, 2013, we’ve seen that the structure of liquidity of Bankia has moved towards a higher weight of deposits, and deposits account for more than 65% of the structure of liquidity of the bank.
We have less portfolios and more deposits. Historically, we had portfolios of about €35 billion; today, we have a portfolio today of €26 billion. If we look only – we talked about that part that’s hedged, that part of the balance that’s hedged and is not sensitive to rate changes, our portfolio should be at least similar to the one we had in the past. If you want a figure, I could say €35 billion possibly would make sense, if you bear in mind the historical figures of Bankia and how those deposits have evolved.
A different matter is whether we consider – if we took up those portfolios again today to hedge the balance, we would have, in the very short term, negative impacts. We see that long-term interest rates are beginning to go up again. As the QE finishes and we begin to see an increase in the interest rates, it’s reasonable to expect that the rates in the long term will increase. So we don’t think it’s the right time to take in new portfolios. That has a negative impact on the NII in the short term, but as managers, this is what we think we should do to preserve the economic value of Bankia.
So yes, we think that the portfolio size should go up. But we think we cannot increase that size materially in the short term. Throughout 2019, we do hope to have opportunities to grow our portfolio. So part of that contribution that we’ve not – we’re not getting right now, we should be able to recover in the next quarters, probably not in the fourth quarter, but possibly over the next year.
As regards to trading, well, I think that for the fourth quarter, our trading should be, well, not too different from the third quarter this year. Going forward, it would depend on the variation of the interest rates. We don’t think we’re going to change our volumes as significantly as regards 2018. So we think that trading next year should be lower than in 2018.
Good thank you very much.
Now show the next question.
Good thank you. The next question from Carlos Peixoto from Caixabank.
Hello, good morning. Two questions. The first one, allow me, I want to go back to the AJD issue and the issue with the judgment on Monday. If this comes out, and you have to pay back or the industry has to pay back, what could the impact be for the bank in terms of what cost would that mean? And how would you deal with that? Would that be done – how would you amortize that throughout the life cycle of the mortgage portfolio or in a different way? And also NPA sales plans, what plans have you got in that area for NPA sales? Other banks are selling big chunks of those, what are the possibilities that Bankia might do the same? Thank you very much.
Well, thank you. As what AJD and the ruling on Monday, whether this is retroactive or not, well, we don’t know. We’re going to wait. We’re going to wait. Wait and see what the judgment is of the Supreme Court on the 5th of November. And depending on what the Supreme Court does, we will do one thing or another. But if – until that happens, we will not share information publicly on things that we don’t know or about something which we don’t know about yet. This will be the 5 of November.
We don’t know what’s going to happen. So we would rather wait for another three days and tell you when it happens. As regards to the NPAs and the speeding up there, well, we – our policy is we’re reducing – organically reducing NPAs combined with selling off medium-sized and small portfolios throughout the year. We’ve got portfolios that we are doing – dealing with, foreclosed assets and doubtful loans.
Over the next few months, we’ll probably see some of these portfolios together with the organic reduction for the end of the year. We will speed up or not depending on whether we are up-to-date with our objectives or not. We think that this year, we can close above our objectives. We’re thinking and working about next year, not the last quarter, but thinking about next year. And we think that the objectives for next year, we can manage well. And that is the spirit that we’re working – that we have in our work. Good next question.
Thank you. Next question is from Mario Ropero from Fidentiis.
Hello good morning or afternoon, I want to ask you about the mortgage models. We seem to be nearer to the dates that you’d given us. Could you give us an update? Have you started the inspection – on-site inspection phase, and what do you think about that?
And the second part or second question is, well, some of the competitors – could you give us details of your exposures – your exposure levels within mortgages and exposure to IRT?
Yes. I’ll answer the second one and pass the one to you. In terms of mortgage model, the new behavioral model for mortgages for calculating capital, we’ve put in the formal request. The process has become slightly complicated in the last quarters. You need to presubmit then submit formally. We’ve submitted formally, and we’re waiting for – we’re waiting until the first quarter of next year to get the ECB people to review the model. So until the first quarter of next year, they’ve confirmed that they are going not to be able to come before the end of the year. And as regards the IRPH.
Well, the mortgages that we have with our IRPH from Catalonia, mainly have to do with Catalonia, that’s where this kind of product was concentrated. And it’s about 1.45% of the total of our mortgages.
Next question – final last question from – which is going to be asked in English. The next question is from Britta Schmidt. Ask your question please.
I’ve got two questions, please. One is again looking at the net interest income development, or the loan yield development to be specific, would you be able to provide us with the bridge in terms of the quarter-on-quarter NPAs, either changes in the NPL seasonality, new business coming on and also other business running off.
And the second one will be on the mortgage tax issue. Do you see this is having any impact on the Q4 new business so far?
I’ll start with the first question anyway. Pepe was saying that the Euribor has gone up by one – two bps. The impact, I haven’t seen them yet. In the fourth quarter, we’ll probably feel the impact. But mortgages it takes about 10 months for them to increase, to reappreciate. It’s not immediate. It takes time as the mortgages – as the periods expire. Now for the fourth quarter, our vision, well, it must be positive because balances are increasing. New mortgages – or new operations in consumer lending and even company lending are increasing as the year advances, and those percentages are higher and higher.
Also, as Pepe was saying, as the old or the former BMN network kicks in, so we should have more balances. Prices, entry prices are at 2.7 for the third quarter, slightly above the second quarter. So that also will have a positive contribution. And then finally, we don’t expect a material impact from the bond portfolio because, practically, everything that we had to deal with throughout the year has been accounted for. That, together with seasonality of the NPAs or the doubtful loans, leads us to think that the interest margin, the NII, should be higher in nominal terms and also in terms of gross margin or gross income.
Good. Well, thank you very much to everyone. Britta, please get in touch with our team for us to answer your second question, which we didn’t understand because of problems on the line, and the same we say to all other participants. We’re at your disposal at Bankia for whatever you need. Thank you very much.