CaixaBank, S.A. (OTCPK:CAIXY) Q3 2019 Results Conference Call October 31, 2019 6:30 AM ET
Edward O'Loghlen - Director, IR
Gonzalo Gortázar - CEO
Javier Pano - CFO
Conference Call Participants
Sofie Peterzens - JP Morgan
Carlos Cobo - Societe Generale
José Abad - Goldman Sachs
Alvaro Serrano - Morgan Stanley
Andrea Unzueta - Credit Suisse
Stefan Nedialkov - Citi
Andrea Filtri - Mediobanca
Ignacio Cerezo - UBS
Fernando Gil - Barclays
Benjie Creelan - Jefferies
Gonzalo Lopez - Redburn
Britta Schmidt - Autonomous
Marta Sanchez Romero - Bank of America Merrill Lynch
Good morning, and welcome to CaixaBank’s results presentation for the third quarter of 2019. With us today is our CEO, Mr. Gonzalo Gortázar; and our CFO, Javier Pano.
We plan to spend around 30 minutes for the presentation and 45 minutes for live Q&A, and you should have instructions on your screen to participate. Let me reiterate that my team and I are available for any questions that are not answered during the Q&A.
And with that, let me hand it over to the CEO.
Thank you, Eddie. Good morning, everybody. I'm going to try and beat Eddie's forecast for the presentation to be shorter at least on my side because I feel it's a relatively clean quarter with probably less explanations required. You have a summary of this quarter. On a quarterly basis, we have a strong growth on core revenues, and we have some cost savings coming from the restructuring plan. So quarter-on-quarter, pretty good figures, returning to -- just on a quarterly basis to those positive jaws.
The long-term savings and the insurance have been pretty good in this quarter. And it's a seasonal quarter, and it's also a quarter in which we have had, since the 1st of August, 2,000 people less. So I feel very good about the achievements in the quarter. Taking that factor into account, in terms of fees and life risk insurance revenues, they resume the growth that we have structurally had and where we have had clearly a slower beginning of the year.
On the lending side, it's business lending and consumer lending that continue to grow the business. Long-term savings, AUMs are up in the quarter and up significantly with that 7.6% year-to-date. And finally, on solvency side, we built capital to 11.7%, and we have continued to build that ratio to a level that is just now very close to what we have been asked to have by the end of next year. So all in all, pretty good trends. Return on tangible equity will exclude the extraordinary charge of 10% -- 10.1%, also indicating what we feel is that our business model can actually deliver and prosper despite the very negative interest rate environment.
Commercially, you've seen this slide before. It's year-after-year, we continue to gain market share in those areas that are more strategic for us. This year is no exception, particularly, obviously, life and pension business lending, you can see in terms of market shares, also strong gain in payrolls in the last 12 months. And the number of customers that we call relational or in Spanish is now above 8 million, a significant increase year-after-year. Obviously, our strategy is to grow clients, but particularly grow relational, individual clients, and that is working nicely for us.
Balance sheet-wise, in terms of customer funds, you see the strong increase of the year, 22 billion. Obviously, 2 big contributors. Demand deposits, costly, but indicators of the success we are having in the business, and market-related. But I would also highlight that on the long-term savings and mutual funds, we have seen better trends in terms of net inflows, particularly in the month of September in particular after the August holiday.
The year up to September, as you can see on the right-hand side, is record in terms of the increase in customer funds. And obviously, it reflects, yes, partly a good evolution of markets, but generally, commercial strength, the fact that the model is working and that the machine continues to be rolling forward.
On the long-term savings and protection. I said, it's been a pretty good quarter. As we had good levels of activity but maybe not full reflection of those in the P&L in the first 2 quarters. You can see market share in long-term savings, up 22%, sorry, 33 basis points, so 22%. And inflows, you can see in the third quarter, at € 600 million, it's a good level compared to what we had seen in the previous quarters. MyBox has been clearly a success. It's allowing us to increase the penetration of insurance products in our client base. You can see that for life risk and household, health, auto, all these indicators are up. And I think it shows that it was the right strategy to deliver this new commercial offering, which had a transition period in the first part of the year, but it's now, I think, working at a very appropriate and good speed. The lending side, it's again a story of growth in consumer, growth in business and mortgage deleveraging. Those are the trends that we have seen. Public sector's a bit more volatile. This year is contributing, but it tends to be more tactical and obviously more volatile quarter-on-quarter, but it's also contributing to lending growth, is 2% growth on performing loans year-to-date, clearly above what the market is doing and showing the same, I would say, successful trends, particularly relevant in consumer with that 11% growth year-to-date. But also on the business side, it's pretty good trends. New production is up on business and consumer lending. As you can see, we continue to push various initiatives that are making us more successful in both sides. Specialization of our branch network is a key one. We have close to 200 centers now supporting businesses throughout Spain. We have moved from the [Foreign Language] the larger businesses to smaller branches, what we call the business bank, which are having a very good, I would say, very good performance in the early days across Spain.
Consumer lending continues to grow. We are, as you know, innovating both in terms of delivery channels, technology, AI in terms of credit scoring and pre approvals, also in terms of what we're doing in consumer lending, where we have now distributed, as you can see, over 240,000 TVs, cell phones and equivalent selling cars in through, what we call in Spanish, [Foreign Language] and security alarms, a number of things that are helping the traditional consumer lending activity, which is doing fairly well.
Mortgage side. You clearly see a fall in new production. And it's a bit early days, but I think there are 2 factors. One, clearly, is the new mortgage law, which has a slowdown. I think the, during the summer period has slowed down production and that should be obviously temporary. But I also feel there's some stabilization, I would say, in the market. Some of the numbers that we have seen recently indicate that stabilization, which suggests that the mortgage book is unlikely to grow going forward in any case for us. As you know, that was what we were predicting when we presented our strategic plan.
And talking about the strategic plan, I think it's a good time to just mention that actually the various drivers for revenues that we said were going to be critical for our success in these 3 years and longer term, actually, are working pretty well. Obviously, the environment is more difficult with negative rates and the slowdown in economy. But if you look at what we said is growth in, on the lending side in business and consumer, this is doing very nicely. Growth in payments with a 10% year-on-year is actually doing nicely well.
BPI growing, and we'll see the numbers on the P&L as well, at good pace despite the environment. The long-term savings, particularly, good quarter and year-to-date, clearly continues to be an important driver as it is the protection, both the nonlife and the life risk element of our offering. Mortgages, clearly, both in terms of pricing and volumes, are weak. We were predicting it to be weak. And probably it's unfortunately even weaker. And then we have on the negative side, the excess cash balance around €17 billion, which we have at the ECB, which is obviously a drag on results. But if we look at what we actually said we could grow and allow us to continue making progress and reach adequate profitability, all these drivers are there. We have a bit more headwind because of rates. But clearly, it doesn't mean that the model is not actually doing nice.
In terms of results. P&L., I think it's marked by recovery of core revenues. And when you look at the recovery in core revenues quarter-on-quarter, obviously, there's a significant difference between the stable NII and then 3% growth in fees and close to 7% growth in insurance. I think this reflects well the trends in which we are and trends that we expect in terms of further pressure on NII, but ability to continue growing net fees and insurance income going forward. That's clearly what we expect to do in this quarter. I think we've shown it can work.
Other than that, we have lower non-core revenues associated to the fact that we no longer have Repsol on year-on-year. And obviously, the Telefonica dividend which we recorded in the second quarter, but nothing unexpected on that front. Expenses are coming down as benefits of the restructuring program started to fill in since August. And that is, obviously, helping to slow down the significant growth in expenses that we had shown as of, at the end of June. On the asset quality side, Javier will discuss, but we see stable trends in terms of cost of risk, good progress in NPL reduction and, as I say, obviously, a return on tangible equity that is only 6.8% in terms of reported. But given this singularity of the restructuring charge, I think it's appropriate to adjust for that to estimate what is the cruising speed of the bank. And at this level, we are at this 10% threshold.
BPI been clearly a success story for us. I think what I would highlight is core revenues growth. NII fees with because we had this transfer of businesses from BPI to CaixaBank, the reported figure is not comparable. When we adjust, we see significant growth in fees. We're investing on the cost side, clearly, even if we have a quarter-on-quarter reduction, year-on-year, we have an increase. And the good thing is that we are seeing the revenues come associated to these investments. Credit quality, very good. We'll continue to see write-backs and, hence, a good contribution to our P&L. Obviously, compared to last year, there are some differences because there were a number of one-offs last year but, clearly, quite good. And also in terms of activity, consumer lending, business, customer funds and savings, BPI is quite aligned in terms of its performance with the kind of things we're doing in Spain that are working, and Portugal is following similar trends.
With that, I think, Javier, you may want to go into the detail of the P&L?
Okay. Thank you, and good morning. From my side, some more details. On NII, as you may see, we are up by 0.1% quarter-on-quarter and 0.3% year-on-year. On the positive side here, clearly, higher average loan balances helping after a strong loan growth during the second quarter. Also, we have the help of higher rate count this third quarter. And on the negative side, as already commented by Gonzalo, it's the ALCO, and obviously reduced size and also the excess cash that is having a negative impact. Going forward, I would say that in the fourth quarter, we also -- sorry, we will already have the positive impact from tiering and into next year, TLTRO gives us optionality to partially offset the lower impact of lower rates.
With this, let me now focus into the customer activities in our assets and liabilities. First, on deposits. You see us in recent quarters, there are no changes. We are repricing our euro deposits at zero. The book yield remains at very low levels. On the asset side, you may see that the front book yield comes down by 23 basis points this quarter and to 257 basis points. This also has to do with the fact that during this third quarter, on average, we have had lower market yields. The LIBOR, depending on the tenure, is below -- between 15, 20 bps compared to the second quarter and also long-term yields have been lower. Having said this, I would say that segment-by-segment, we have not seen a tightening of spreads of the new production. On the contrary on mortgages, as we can probably comment later, we have seen a positive development on this front. On the back book yield, it comes down by 2 basis points, in this case affected by this day count effect also that this technical reason because of the different basis of our loan book that once we have a longer day count a quarter affects downwards our back book yield and it stands now at 223 basis points. With this, our customer spread comes down also by 2 basis points, and our net interest margin by 1 basis point to 121.
Now into the ALCO activities. From now, we have decided for disclosure to merge the former structural and liquidity portfolio. The latter no longer having the purpose it was designed for, has lost a little bit its purpose as we now have TLTRO3 available for TLTRO2 redemption. Well, you may see that the size of the combined portfolio has remained at a stable €34 billion, with a stable yield this quarter at 0.9%. We disclosed also for the first time, the maturity profile. As you may see, those maturities from 2020 and 2022 are spread across. And also, you may see that the average life and duration of the portfolio during this third quarter has remained stable. On the liability side, despite the new issuance, our wholesale funding cost remains fairly stable at 124 basis points over 6 months of LIBOR. And the average of the issuance of this year has been a LIBOR plus 134. So as you may see, pretty in line with the average of the stock.
With this, let me turn to fees, where we have had a good quarter. We think, despite the seasonality that usually affects the third quarter. We are up quarter-on-quarter on fees by 3.2% and by 1.7% year-on-year. We have good performance across the different categories. On recurring banking fees, we are up by 2%, both quarter-on-quarter and year-on-year, around 2%.
On asset management, we are strongly up, both quarter-on-quarter and year-on-year also. Here, you may see on your right-hand side chart that we have the average AUM balances that this third quarter have been progressing, not only because of good market conditions, but also because we have started to have some inflows. And you may see that the end-of-period balances are already higher than the average which bodes well for the performance of the fourth quarter, markets permitting. In insurance distribution, although a negative growth compared to last quarter and also to the third quarter last year. Here, we have a more positive trend, and we think and we will look this into the detail in the coming slide. We are recovering after a weak first half of the year. And wholesale banking this quarter, despite being more volatile, have done really well during the third quarter despite seasonality. With NII and fees in mind, a more detailed look into core revenues. As you may see, we reach on a quarterly basis an all-time high, both in group terms or in only considering CaixaBank. As has been commented, the core revenues are up 1.2% year-on-year, 2.9% quarter-on-quarter. Looking into the detail of our key businesses, you may see that we are doing well year-on-year on long-term savings, up by 4.1%. In protection, 3.8%. In payments here, clearly, thanks to electronic payments that are helping a lot, up by 3.6%. Those businesses already represent long-term savings, protection and payments 41% of our core revenues, up by 1 percentage point year-on-year and quarter-on-quarter.
As I said, focusing more into our protection revenues, you may see that across the different segments of this business, we are improving our performance. Life risk is consolidating. Clearly, a recovery, and we expect this trend to continue. We also have this third quarter, strong growth in equity accounted from several [Foreign Language]. There is always here some seasonality. But even compared to last year, doing better. And in insurance distribution fees, still, as I said before, slightly negative compared to last year. But clearly, on a steepening trend and here on this front with MyBox, the MyBox offering, we expect that this is set to improve also.
Now I turn to costs. Here, clearly, we have the impact of the restructuring program that starts to fill in. Costs are down quarter-on-quarter by 1.3%. You may see that it's personnel costs what is driving our cost base down. And this is more than compensating an increase in general expenses and amortizations. This is mainly due to the investment that we are doing. In many cases, in IT and also in the reshape of our network.
As a result of 2,000 people leaving the company, in August, now the productivity per employee has really increased. Our core revenues per employee grew by 7.4% compared to the third quarter last year and by 24% compared with the starting point of the previous strategic plan late in 2014.
Finally, on the P&L, a few comments. Our, sorry, on our loan loss provisions, a few comments to end the P&L. Our provisioning levels are decreasing. On a 12-month trading basis, you may see that down compared to the situation last year by 28%. The cost of risk remains at 14 basis points this quarter and already down by 6 basis points compared to the third quarter of last year and well below guidance, remember, for cost of risk to be below 20 basis points.
And with this, we turn to the balance sheet. A few comments on our nonperforming exposures. You may see that our nonperforming loans come down by €400 million round numbers. This allows the nonperforming loan ratio to come down to 4.1% on track to be below 4% by year-end. We think that this is clear achievable target now. Our OREO exposure continues to be nonmaterial, €0.9 billion. And also we continue reducing our rented real estate portfolio. Now we are standing at €2.2 billion. And as you may see, the pace of inflows continues to slow down. And if you look at also the first nine months of this year compared to the first nine months of last year, down by 15%. And at the same time, despite reducing our non-performing loan exposures, you may see that the coverage ratios remain sound and stable with our -- I would remark here, our uncollateralized coverage ratio standing at 83%.
On liquidity, no news. We continue to have a really strong liquidity position with all metrics in very comfortable levels. Liquidity cover ratio at 190%. And net stable funding ratio is 124%, despite that TLTRO is now already not being considered as long-term funding. And you may see also that we have had continued and successful market access, 5.4 billion issued during the year. During the third quarter, 1 billion, 5 years senior non-preferred inaugural social bond with great success. And as commented before, the new TLTRO3 conditions that clearly have been improved since the earlier version provide the ability, management optionality, both in terms of corporate deposits and also in terms of wholesale funding.
And finally, on solvency. It's a quarter where we improved our solvency metrics across the board. Our CET1 ratio up by 11 basis points to 11.7% with contribution from organic capital generation and also market and others helping. I will remark also that our tangible book value per share goes up by €0.13 of the euro quarter-on-quarter and it now stands at €3.42 per share and as commented, our MREL ratio here on our solvency metrics at now we're standing at 21.4%, really close to the target or the requirement at 22.5%, something that we can manage easily during next year.
And from my side, some final remarks to wrap up. It's a quarter where core revenues have clearly grown, supported by a strong recovery in long-term savings and insurance revenues. At the same time, it's a quarter where we have the impact of from lower cost savings, and this has resulted into a boost of our quarterly net income. In terms of volumes, we continue to do well in businesses and consumer lending, this supporting the loan book and also it's a quarter where long-term savings have started to do well, maintaining what we think maybe structural growth going forward. And at the same time, further reinforcing our solvency metrics.
Thank you very much. And with this, I think that we may be ready for questions.
Okay. Thank you, Javier. Before we proceed to Q&A., just let me remind everyone to please keep your questions brief for the benefit of everyone on the call. I believe we have over 12 callers on the line.
So operator, let's start then with everybody's name and company they work for, please.
[Operator instructions] You first question comes from the line of Sofie Peterzens from JP Morgan.
So my first question would be on capital. What regulatory headwinds or tension headwinds and Basel IV headwinds should we expect going ahead on your capital? And then my second question would be on NII. How should we think about net interest income going forward? At Investor Day last year, you guided for around 1% NII growth in a flat rate environment. Is this still fair to assume in the current environment and how should we think about the TLTRO3 and other potential help to your net interest income next year?
Okay. Thank you, Sofie. Well, on capital, we are in the same place last quarter. So we're ending the process for the portfolio on TRIM. And, we expect that the final news on this will come early next year. This is our expectation. That's probably in the next call in January, we can update you on also. I think that this is the part that is spending on TRIM, as you know, it's the last part of our TRIM process. In terms of other impacts, it's well Basel IV. We have flagged this since 1 year ago when we precisely decided to put this kind of extra buffer on our capital planning of 1 percentage point. That was precisely designed to absorb Basel IV mainly, and the potential pending impacts from TRIM, which only pending one, if any. It's this one for the overall portfolio. So from our side, other than this, no other significant issues on the capital front. On net interest income going forward, well, here there are plenty of moving parts. I'm not going to give you today guidance for next year. We're working now on our budget for next year. And on NII, there are a few positives compared to the situation we had in August. If you look at the screens, you could think that it would be the situation, but now the market clearly is discounting not so lower rates. So if you look at the forwards for 12 months, however, are more or less around minus 30 bps, which is the level that are now. On top of this, we have, in our case, we expect to take advantage of tiering in full. We already hold at group level, € 17 billion at ECB by the close of the quarter. On the tiering, in order for us to benefit from tiering, the maximum amount is 13, 1 3, and we expect to maintain those € 13 billion at 0% at ECB at any time. This results into a positive impact on our net interest income of € 65 million per year. Around € 60 million in CaixaBank and € 5 million in BPI. This is € 13 billion are more or less € 12 billion in CaixaBank, Spain, and € 1 billion in BPI or slightly more than € 1 billion in BPI. So this is the plan. So from here, we are working on, as I say, on our budget, on volumes.
In terms of loan growth, in terms of segments, in terms of pricing, and obviously, TLTRO3 offers us some optionality, as I said before in terms of funding, in terms you have to still need to take a final decision, obviously, on what to do with TLTRO3. We face redemptions of TLTRO2 next year. We need to decide if we need this liquidity or not. And if we roll over the TLTRO2 into TLTRO3, and to what extent, et cetera. Remember that there are many windows for this. So it's not only one shot. So the next window in December, the following in March and so on. And so we'll decide because we are doing the numbers. So all in all, obviously, it's a revenue line that will be under pressure, clearly, because rates are lower, but not that low as at least in August that could be expected. I don't know Sofie if with this, I answered your question.
Next question comes from the line of Carlos Cobo from Societe Generale.
A couple of questions. One on capital and the other one, I think, it's a must on IRPH. I'm not sure how much you can explain, but I guess you are under a better position to understand potential scenario there, that is the basic question. If the general advocate recommendation is reaffirmed, could we be talking about no impact at all? Or that would still have some impact in terms of litigation costs.
What would be your measures to compensate them? It would be only P&L readily over time or you would still need to take some upfront charges? And second on capital piece, first is on the 100 basis point buffer that you mentioned for TRIM and Basel IV, we've already, I wanted to understand how we should read that buffer? Is this a dynamic buffer because you've already absorbed part of the TRIM impact? So now it should be lower than 100 basis points? Or how should we read that? You will maintain it at 100 basis points until Basel IV is clarified.
And lastly, also on capital, if you could elaborate on the 5 basis points capital generation organically, in Slide 10, I think, of the pack. It looks low when you look at the retained earnings in the quarter and the fact that the loan book has fallen a little bit. I could justify more than 10 basis points or even more of capital generation organically this quarter. So I wanted to understand what have been the negatives or the increase in risk-weighted assets that compensate that.
Thank you, Carlo. Let me maybe start with the IRPH. Our base case, so far, has been and continues to be that we will not have a material impact from IRPH. And certainly, when you say is it no impact at all possible? Obviously, yes, it is, no material impact. We think that based on what the general advocate has said in terms of the index or the clause not being void nor abusive that it has to be the local Spanish courts that are the ones that have to analyze transparency case-by-case.
And based on this particular situation, actually from another bank and being in accordance with the transparency requirements and the practice that we have followed, we're optimistic that this will eventually be the case. Having said that, obviously, we need to wait and see what the final court decision is. With respect to the buffer, we have created 100 basis points, include TRIM and Basel IV. As Javier said, TRIM is not yet finalized for us. So no default portfolio pending that is likely to be next year, we'll have to see if and what is the final impact from that. There's also a few things about Basel IV that still need to be defined about operational risk, which are relevant for us. And certainly, also, what is then the timing because it's more and more that there might be a delay.
But in any case, we have -- a year ago, we provided an estimate of moving parts which was 100 basis points. And I think that estimate is -- today is still valid. We may have some variations over that 100 basis points, but it continues to be a good buffer to offset these 2 things and something that we are still able to build organically in the two years and now one quarter that we have between now and the end of 2021. Besides that, I think there could be delay on it, not just on the output floor, which doesn't have a real impact for us, but the rest of the Basel IV package, which do have impacts for us may actually also be delayed. But our strategy, at this stage, is to build this buffer by the end of 2021, so we can operate in a 12% post Basel IV fully implemented. After that date, we cannot be 100% certain, as because there are some moving pieces. But I think it's a good comfortable estimate that we have, and that we actually -- already disclosed almost a year ago because we saw this coming and we always want to be quite fair to the market and also for our own planning purposes. Just acknowledge that whether we like it or not, Basel IV is there and it has a small impact on us relative to others, but it's still a significant impact. And Javier, you can elaborate on that and the quarterly buildup?
Yes, Carlos, on the quarterly buildup is what you say, there's more -- probably more intense risk-weighted asset growth organically this quarter and this is for a few reasons. Well first, we have had a strong growth in Portugal, remember, still not under advanced models. Second, there is growth in contingent liabilities -- or balance sheet contingent liabilities. Probably you don't -- you look at this then we have had growth this third quarter. And then there is a mix effect nor because the loan book has come down, we continue to have growth in corporates, SMEs, plus consumer. So there is a little bit a mix effect on this. So that's it. This is probably the reason.
Next question comes from the line of José Abad from Goldman Sachs.
I have 2 questions. The first question is on the other income and losses line. You've booked 44 million this quarter, which is above expectations, at least my expectations and also of your own guidance for seasonal net real estate-related impairments. So I would like to know, I mean, if you could actually please elaborate a bit on your expectation for this line going forward. The second question is on global macro trends actually, in Spain, in particular, we're seeing actually a slowdown actually in the economy driven by weaker, actually, household consumption.
So this leads me to 2 sub questions, if I may. The first one is whether you still expect, you have a guidance of below 20 bps cost of risk this year and below 30 bps next year. So do you still expect a pickup in the cost of risk for next year? And would next year, actually, cost of risk be above your guidance, given that the macro outlook is weaker than at the time that you announced your guidance? And the second question here is how do you expect your consumer lending originations to evolve? Do you expect them to continue at double-digit growth? And if not, would you be willing actually to sacrifice prices?
Thank you, Jose. Maybe I'll start with the second question and Javier perhaps you can build on that and answer the first one. In terms of the slowdown, yes, there's a slowdown. Clearly, when we look at the latest employment figures in Spain, there is still growth, but at a much slower pace than what we had seen before, which has the message this is a slowdown, but we're still in positive territory. And that is what we're expecting.
And in fact, and I think depending on, I think, the increased confidence that should come associated with the creation of new government, which my expectation is that it will take place after the election and obviously subject to final agreement on trade issues between the U.S. and China, even if today, there was negative news on that front it's still our best case that we will have some kind of agreement. And hence, that first point is, yes, we're in a slowdown area but not in something worse than that. We'll have to see. In this scenario, we're confident to stay within the limits of cost of risk that we discussed, both for this year and next year. We actually have had a pretty good year in terms of cost of risk. And certainly, the negative rates is also a great environment for us to continue reducing NPLs.
In the past, we've been asked whether we would see cost of risk going into negative territory or very low, and we've always said, obviously, cannot predict the future but we're going to still work on reducing our NPL book. And that may have costs implicit on that. And hence, as of today, we still feel that we will continue to reduce NPLs strongly not just by the end of the year, as Javier said, below 4%, but also into 2020. And that is consistent with the cost of risk targets that we have announced.
In terms of the consumer lending, we have been surprised to some extent of the strength of the growth of our book. In this case, what we're doing is actually yielding better results than what we expected at the beginning of the year, as we were not expecting double digit, even if we were expecting high single-digit growth.
I think it's logical to think that this will slow down. It's in our forecasts, in our expectations. And that we would have growth going forward in 2020. But below that level, and that will be consistent with the current pricing policy that we have. I don't think we can outgrow the market so much, and pretend to keep or intend to keep double-digit growth if the market is just not growing at that level.
We have had a good rate performance this year, but I think it's prudent to think that we'll continue to grow faster than the market and at good levels into next year, but at lower levels than what we have today. That is, in fact, what we said when we presented a strategic plan. In this case, 2019 has surprised us on the upside, which, from time to time, is not bad. We're keeping a very close eye on asset quality, particularly on this book. So we've commented in the past, we've discussed how we'll track various vintages.
And actually, we're having pretty good performance in terms of improvement of asset quality statistics of each quarterly vintages over the last couple of years. So we feel good about the business. But obviously, we agree with you, it's difficult to keep the double-digit growth rate into the future.
Okay. From my side, on your question on our gains and losses. Here, we have a few impairments on the new inflows into OREO. So you mentioned that guidance for 0 net real estate impairment, but this was before the disposal to Lone Star. Now there are small inflows into the OREO portfolio, now we're standing at €0.9 billion and well, from time to time, we need to provide a little bit on this. Other than this, I would say that we are accelerating the pace of, the restructuring of our network. So we have impairments related to branches, as we are closing branches, old branches into new ones. So we, there are some impairments related to this. So we may have had an uptick on those expenses due to this, but I would not expect that this is setting a trend for the future. So we have had this quarter, probably with a slightly larger impact, but it's not a trend at all.
Next question from the line of Alvaro Serrano from Morgan Stanley.
Two questions. First of all, this year has been a pretty rough ride for you. I mean, the first two quarters revenue you missed quite a lot. You announced a big restructuring plan. The question is, what part of that first half misses, and looking back, do you think was market-related and what, I think what was maybe sort of you restructuring some of your internal processes? Or for example, in insurance, redesigning the insurance offering. And because if I look at the Q3 performance, this is much more what we're used to from CaixaBank with fees up 2, insurance up 4. Is this disruption over?
And is the 2% and 4% kind of growth that we should be looking forward to going forward is really the question. And the second question is about costs. Realized 2020, you haven't given guidance for 2020, but given the experience this year, how committed are you to have positive growth in 2020? And how much flexibility do you have to be able to commit to that?
I would say we agree with you, the third quarter shows the strength of the franchise. And first and second quarter, it wasn't that obvious, if we're looking at the P&L. I insisted a lot that the activity was doing well, that we have been, obviously, affected in terms of net inflows, which I think have some like slow period and have been slower at the beginning of the year. They're picking up into third quarter, and I expect them to continue to be positive. Although, obviously, we'll have to see, but we have a good progression there. And then it was associated to the change in our, particularly insurance offering with a MyBox product, which took a while to replace one former offering with the current offering. And the products are different. We try to insist that, actually, the machine was working and that in terms of activity, number of policies, etcetera, that this was more a temporary accounting related blip than anything else. And fortunately, the third quarter is suggesting that, that was the case. Obviously, we're working now in, I think, in good shape to continue on this path, and we understand that you'll have to see how that continues to consolidate quarter-after-quarter to confirm that this was more a temporary thing. I do not think it was distraction internally. The agreement, obviously, that we had to get a headcount reduction was difficult, but I don't have the feeling that the people have been really worried or distracted.
In fact, when we have had the biggest challenge has been in August and particularly in September. In August, we had 2,000 people less, but people on holiday. So the clients tend to be on holiday, so it's less of an issue. September when people come back, it's quite tough. Because, obviously, we're operating with 2,000 people less and these employees were doing things. They were not sort of idle, and we need to reengineer things. And we have been working on that. But the first couple of months, they're always a challenge. And what we have seen is that, actually, the organization has delivered very nicely in having the best quarter in terms of revenues and a very strong September because, obviously, this quarter is not usually done in August when -- for seasonal reasons. Business is slow. So I take part of your comment very positive is -- the organization is in great shape and has been able to deliver a great quarter and September, despite all these changes. And with this inertia, I'm confident for what is ahead this quarter, next quarter, doesn't mean that it's not a difficult environment, it's an extremely challenging environment. That well. But I think we're going to be up to the challenge. And certainly, the third quarter helps us and hopefully also gives you financial community, some data to support that, actually, we have a model that can do well in this environment. So yes, we expect third quarter to be more representative of the future in terms of activity. What it is true is we have negative rates, and we have a negative repricing on [indiscernible] on the mortgage on the ALCO, etcetera. So those headwinds are there, and they're going to be felt progressively during the next quarter. Also, we're going to need to work harder and harder to offset that. At this stage, with respect to 2020, we can not, I love to say something to both help your analysis and also, obviously, to say something that we can deliver on.
It's too early. We are working, as Javier said, on the details of the budget for next year. We certainly are working. And I've said, it's not a natural state of things to have negative, like we're having actually, this year for the first time in 10 years, and we're working to return to positive as soon as possible. When is that, at this stage, is not something I'm comfortable in making a comment on generally because we want to provide guidance on 2020 at the end of the year and be more comprehensive and also make sure that whatever we say, we feel we can actually deliver and we can not just actually deliver, but also explain to you why this is going to be that way. And on that front, we're not yet done. We, hopefully, will be soon and certainly expect that all things being equal, we can have this discussion next results presentation.
Your next question comes from the line Andrea Unzueta from Credit Suisse.
The first one is a bit more specific on insurance revenues and specifically on protection. The numbers have improved significantly in the quarter. But on aggregate, the revenue from protection insurance is still declining year-on-year by roughly 1.5%.
Is it fair to assume that you finished the year with slight growth? Or how big is the seasonality of Q4 on production? And then my second question is on Portugal, and specifically, on NII, which was up 7% Q-on-Q. I think it comes from a lower cost of funding mostly. Could you give us a bit of color on the trends in Portugal.
And also, sorry, the last one, if I understood correctly, are you planning to move the risk-weighted assets of Portugal to the IRB? And if so, when and what would be the impact?
Well on insurance revenues, clearly, we're on an upward trend. It's something that, in this case, I'm back to the question from Alvaro, no? Yes, we were working on reshaping our commercial offer on this with MyBox. This is doing better than, I would say, even than expected initially.
So our view is that, yes, we can deliver more positive performance quarter-by-quarter. To what extent, to your question, very specific, if we may see a slight growth this year, let's see what happens during the fourth quarter. But let me say that the trend is there and trend that is expected to continue to be better. On Portugal, you have a specific question on NII. Portugal has done very well. And I would say that here it's more or less 50-50, two main reasons, which is, first, good performance from a commercial point of view. And here you have loan growth. You have a good performance in terms of spreads, as you said, on the liability side. But other than this, there's also a standardization of asset and liability management practices at group level. And also this have resulted in better performance, let's say, at ALCO level from BPI. And on IRB, yes, at some point, we will roll out, but we still don't have an impact on this, no? It's something that probably into next year, we can be more specific. But as a group, we should be within the same parameters and the same models and apply IRB to BPI also.
Your next question comes from the line of Stefan Nedialkov from Citi.
It's Stefan from Citi. So two questions on my side. Firstly, to come back to IRPH and to understand a little bit better in terms of how you guys are managing that exposure. Can you share with us, out of 100 IRPH mortgages, for example, what is the percent that you approach the customer and it ends up being converted into a regular Euribor mortgage or a fixed rate mortgage? And of the remaining proportion, how much goes to court? And how much you end up winning versus losing? Any color, obviously, numbers would be amazing. But if you don't want to give specific numbers, just give us some color in terms of how you're approaching the issue overall?
And then secondly, a bit more of a sort of strategy question on insurance. When I look at your market shares and long-term savings, life insurance, pension plans, payrolls, those have been doing amazingly well for the past 4, 5 years. It looks like you might be plateauing in terms of the sort of second derivative, so to say, of the increase. Do you see reaching a natural ceiling at some point in the next x years on insurance and on long-term savings more generally as well as pension plans? Any color around that would be very interesting.
Okay, Stefan, let me give you some color. As you said, I don't have the figures, and I'm not sure listing it would be proactive to get into too much detail on this front when we have a few months before we have final outcome on these. But generally, we have not renegotiated IRPH. So our exposure is what we had, and it's reduced by maturities. And obviously, if a client comes to us and says they want to change the mortgage in one way or another, whether it's IRPH or something else, we always listen. And we try and find an accommodation, if it makes sense for both the client and ourselves, but we have not engaged into an active restructuring of negotiating with clients on that book. We've said that we're winning the vast majority of cases in Spanish court so far on IRPH, meaning the vast majority, so a very high number. And for this reason and for the content of what the AG has said, I think, to maintain our base case is what is reasonable, but there's nothing new from what we have discussed in the past on this front.
In terms of market share development. Obviously, market shares evolve overtime. I don't have the feeling that we're plateauing, but obviously, depending on which sort of numbers or a series of numbers you look, you may at some point say that long-term savings, in particular, is now facing a big challenge, which is that -- obviously, in Spain we have negative rates for a few years, but we had a steeper yield curve than everywhere else. We have some sort of yields on the 10-year bond and the longer-term maturities that now has gone close to zero. So a typical long-term saving product based on just fixed income is very difficult to construe today and offer some positive returns.
It means that we have to develop a new generation of products that is combining other exposures, obviously, to equities and other underlyings that are not just sort of long-term government bonds or high-quality corporates. In order for this to work, we need to also provide to clients some certainty there. They are not going to suffer losses in the short term, combined with particular people that are retiring or that have the net worth and they do not want to accept market volatility. If they feel that actually 75 what if something happens in next year and I pass over, and at the same time, markets are down, and I have a big loss. So we are working in building a series of products that combine biometrics protection with long-term accumulation. These are more complex products. But because of our market share and expertise, we now have a full range of alternatives. We're seeing those work nicely. In the month of September, and actually, now in October. And I think there's higher value-add in our offering, not just in the product, but also in the suitability of a product for a given client as our over 16,000 people with financial advisory degrees, which no one has to that extent, are critical. And this construction of value-add advisory and value-add products is quite unique, I think, now in Spain. And hence, my feeling is that we actually can have a higher degree of differentiation in terms of market share increases than in the past. It's certainly a challenge. But I will not at all give up on the idea that we can continue gaining market share, particularly, long-term savings. Obviously, there'll be quarters up and down and maybe one competitor comes with a very special sort of push offer or something under a campaign, you'll have a quarter where things change. But over time, I think in this environment, where sort of simple products do not work, it's going to play to our advantage. And it's not just a thesis of the future, it's a reality today because we have an offering that is absolutely differential. And whether in the end, given product is sold to a client because it fits or not, in any case, we have a different dialogue with the clients where we can really offer a full range of solutions for long-term savings even if rates are not above 0 in the long term. So we feel good.
Okay. Thank you, Gonzalo. That's very interesting context. So from what I understand, you basically are starting to offer more capital protected products with more sophistication and customization around it, which is really the name of the game in asset management going forward and that carries over to your insurance offering.
Next question comes from the line of Andrea Filtri from Mediobanca.
One question on capital and regulation and the other on other provisions. We have heard from one of your competitors that EBA guidelines should be included within the TRIM process. Do you feel the same about it? And what would you expect from the new definition of default in future years? And if this were the case, would you not then have to progressively reduce and update the market on your 1 percentage point CET1 buffer as these hurdles actually hit your capital ratio? Secondly, on the other provisions. They looked surprising high this quarter. I've heard your answer to the previous colleagues, but could you elaborate a little bit on these trends and how we should model them going forward? And just finally, have you done any repricing on banking fees?
The last one, the repricing on banking fees?
On banking fees.
The answer to the latter is not in a meaningful way, no. On the first point, I'll just like to say the new definition of default is not going to have a material impact for us. And with respect to updating the market as we go through the TRIM, Basel IV, etc cetera, Javier?
Well, as long as we have news on the development that [indiscernible] that may impact our capital base, and this is for what we have built this buffer of 1 percentage point. We may be able to update on the position. But remember that when we placed this buffer 1 year ago was for Basel IV. TRIM-plus EBA guidelines in time in terms of the change of parameters that will happen because of this. And I will in our view. This 1 percentage point buffer is what is needed to face all those regulatory headwinds. In terms of other provisions, well, remember that we gave a soft guidance of the, those other provisions to be around €50 million per quarter, no? And we're in an environment where we should think that this is, this will continue to be the case. And some quarters may be slightly down and some quarters slightly up. This has been the case, but we don't see that because this third quarter has been slightly higher number, this is a trend upwards, no? So I think that this is the expected evolution.
Just one clarification then. With regards to the buffer, are we then allowed to deduct from the 1% the basis points that you take from TRIM quarter-after-quarter and have, do you have the feeling that EBA guidelines are included in the TRIM exercise?
If we have further information about the final TRIM exercise, which is about the loan default portfolio, if there is an impact, this will lower in the 100 basis points. So at that point in time, we will be able to update you on the remaining buffer. So yes.
And the guidelines are included in this exercise.
And I'd like to say, there's no additional impact from that. It's all together.
Next question comes from the line of Ignacio Cerezo from UBS.
Couple of quick ones on cost of risk from me and one on costs. When it comes to risk, if you can update us on the provisions you're currently charging on the consumer lending? And the second one is how long do you think BPI can go for before you actually start providing normally in the P&L? And on the costs, you kind of hinted in Q2 that you were looking at new cost initiatives to reduce the cost growth, you're still forecasting for '20 and '21. I don't have seen, haven't seen anything actually in the presentation. I don't think you have mentioned anything in this direction in the call. So if you can update us on that as well.
If I may start with BPI and leave the rest, I think we, every year, are quite conservative in assuming that BPI needs to go to normalized cost of risk. BPI has had extraordinary low-cost of risk relative to the cycle. In the past, I will continue to be surprised on the positive, no? We also have, obviously, provisions at the consolidated level. So we have a very good position on this aspect of BPI, but I'm able to say how long, and I just see that we have seen quite a lot of upside beyond what we were thinking and we also have this additional cash at CaixaBank level.
And then you had, well, just to complement on this, the PPA related to BPI stands to €298 million right now. So just to complement the information with this. You asked about cost of risk of consumer lending...
On the consumer revenue?
Yes, on consumer revenue. Of our provisioning levels, right now, rough numbers, but probably between 1/3 and 50% is precisely due to the consumer loan portfolio. And as commented before, no, but we feel really comfortable with this position with this portfolio. We're monitoring it very closely. In terms of vintages, every quarter, I would say, that the performance of recent vintages are doing well, even better than previous ones. So we're not seeing deterioration at all from recent developments in terms of macro. I would add to this that the new production, you know that we have a part of the new production that is coming from those agreements we have with major vendors like IKEA, [indiscernible] etcetera. And so those digital production might even more closely monitoring, and we're extremely happy to see that are doing really well and in line, if not even better than the new production of loans from, let's say, the CaixaBank or BPI clients, no? So it's a portfolio that is profitable, nice returns. Provisioning levels that as the rest of the loan book does not require right now high provisioning levels makes around 1/3 of the provisioning right now. But on a very sound trend and no major worries or no worries at all from our side. Although, obviously, monitoring it closely. I think that this answers your third question. And what's the second question about costs that I missed? I don't know.
Yes, on the cost -- on the operating cost. I think you hinted in the second quarter that you were looking at new initiatives to reduce the cost growth in '20 and '21. If you can give us an update on this.
It's -- this what we're working on right now, no? As we're working on the budgeting process for next year. It's about reviewing general expenses in -- broadly, no? There are key areas of focus in marketing, in terms of sponsorships, in terms of many areas, where you can rethink again and again about what really makes sense for us. And on top of this, obviously, reviewing all investment initiatives in terms of IT investment. Obviously, never -- trying at least not to put into any difficulty, the initiatives for, let's say, evolving the buying or changing the bank compared to the initiatives for running the bank. But in terms of costs and with a large cost base, you can always do things and this time, again, despite having done many times, we review everything again. And as I say, working on it, no? So this is the main -- this will be the main contributor to any effort -- additional effort for next year. Something that we think, at the end of the day, we can deliver.
Your next question comes from the line of Fernando Gil from Barclays.
Just a question on mortgage market. Can you hear me well? Okay. So mortgage, have you seen any change in mix from fixed mortgages production in quarter 3 from quarter 2? And if you can update what is the mix of new production from fixed to variable mortgages.
No, the short answer is no. We're making around 60-something percent at fixed of the new production of mortgages to individuals. And we're between 60%, 65%.
I would say, that is a number that we're having every quarter and this is not changing. What we see is that, also, there is a more broad-based trend towards fixed mortgages across the industry. And if I remember well industry-wise, the weight of the new production, not fixed is getting closer to 40%. So we're not alone on this. We were the first ones, but we're no longer alone. So this is also, in our view, a positive development.
Your next question comes from the line of Benjie Creelan from Jefferies.
I just had a question on fees. Do you still expect to get back to positive year-on-year growth for full year '19 on the fee line and perhaps more specifically on the CIB fees. I mean, you mentioned earlier the domestic political situation.
Do you think that's having any material impact in terms of holding back CIBC growth? Or how do you see the outlook there? And the second question, just a quick one on Angola and BFA. Are there any live discussions ongoing? Or is there any update around the potential to exit that holding?
Yes, start with the second one. And the answer is simple, no. No update. Nothing going on. And obviously, there is a discussion around the ownership structure of our partner and for one party to sell there, which is the only news. But we're not part of that, so we can only follow the news of the apparent interest of the telecom Brazilian to sell their stake, no? But nothing on that front. On fees, you want to comment.
Yes, on fee performance into year-end. Well, we'll see. So I will not commit here. It's what you say, no, CIB is more volatile for fees to do really well into fourth quarter. We would need the contribution from CIB, we'll see. On the other front, on fee revenues, we have a more big view on everything related to AUMs as inflows into AUMs have resumed. Always we need to see markets permitting, no? But so far, it looks that may be the case on this front. And in terms of all the businesses that impact on fees, like payments and all are general more broad fee-based. I would say that performance is as expected, no?
So, I would say that towards more positive progression. We expect that we can do well into fourth quarter. But as to whether I commit to what to your question, not able to show at this stage.
Our next question comes from the line of Gonzalo Lopez from Redburn.
A quick question on Portugal's tax rate. You reported a positive tax rate this quarter, and therefore, growth rate is somewhere close to 18%. I was wondering if you could please elaborate what happened this quarter in Portugal. And also, if there's something that we can extrapolate going forward?
Okay. Well, we have had the reversion of provisions previously set aside to cover tax liability for an oversea investment. And this is no longer expected to be required, so this is the reason of this. And, but this is a one-off, so to make it clear.
Your next question comes from the line of Britta Schmidt from Autonomous.
I have two quick questions for me, please. You already discussed the CIB volatility in fees. But regarding the structural fees on the insurance side, we see the insurance results life risk doing better, unit-linked doing well, the [indiscernible] well, but we don't see an increase really in insurance distribution fees. Maybe you could just explain as to what will be driving that? Are there, is there any pricing pressure? Are you offering lower prices to customers? And then the second question would be, where are we on the debate regarding negative rates on deposits, including deposits for high net worth retail customers? Maybe you can give us an idea as to where you see the outlook for that?
Thank you, Britta. On negative rates, we continue to believe on not having any negative rates passed on to retail customers, but do it gradually onto our corporate client base and we are in that process, right, is a process that is obviously important. At the same time, it's delicate. And we need to go case-by-case and make sure that what we're doing, we're measuring appropriately the overall profitability of the relationship and making sure that we can get those costs reimbursed, either through a specific fee or cost or through an increase in the overall relationship. In essence, when we look at our retail clients we look at it a bit the same.
Whether we like it or not, today to provide basic banking services has a cost and clients do not like to pay for that cost. The way we're getting paid is by having a very wide relationship with a client that brings us quite a lot of business. So that overall, we can offer the daily banking services, the branches, the people, the systems and get the profitability because they bring many products. And all in all, it works.
So, and obviously, with corporates, we've been doing that at the very top in the past with negative rates. So we need to do it in a more generalized basis. We're working on that. Obviously, it's very relevant for you. So what is the impact on that? And unfortunately, this stage, we're not in a position because it's too early to give you a figure or an indication. And certainly, we'll incorporate it into our guidance for next year. With respect to the other, I'd like to say one thing, and Javier will, I'm sure, elaborate. But bear in mind that the third quarter is quite seasonal and it's not the best quarter to sell new products, right? And hence, we typically have -- obviously, for the distribution fees and insurance, it should be a worse quarter on that front. We have the summer season. The summer season helps us on the equity accounted results from Adeslas because they're seasonal and the claims come down drastically in August as people tend not to go to hospitals or to the doctor unless they have a real issue in August and they try and relax and do something else. That's a behavior. But in order to sell new products, it's not easy.
On the life risk, we have been quite also clear that it will have a good typical sort of periodic premium accumulation and the success of what we've done in the past, moving from single to sort of monthly premiums, was going to have some sort of impact -- gradual impact, positive roll on building up gradually. And we're clearly seeing some of that. And obviously, that is good news. This is coming because once we've sold one of these new products, we're going to see more and more positive results in the future as we build on what we've all sold plus the new production. So I would say it's not that surprising what we said. Javier, maybe you want to add something more specific on the numbers or...
Yes. Well, only that if you look at one of the charts I explained, no, you may track here the performance in recent quarters this year, no. You may see that -- precisely those insurance or fees related to nonlife insurance, no. Although during this third quarter, still slightly down compared to the third quarter of last year. We're much less down than in the previous quarter. So progressing as long as all those products are being incorporated into the MyBox commercial offer. We expect that we will get traction gradually. So we expect that this is going to improve in coming quarters.
I think, we have time for one more and I believe there's only one more on the line. So what a happy coincidence. Let's have the last one then.
Sure. Your last question comes from the line of Marta Sanchez Romero from Bank of America Merrill Lynch.
Marta Sanchez Romero
The first question is on NII. Does it make sense to take your full allotment of TLTRO III, so adding roughly 15 billion to what you have today and invest it in 3 year European sovereign debt? Or you think you don't need to prop up your NII with low quality, short-term fixes? How advanced are you in passing through negative rates to your nonoperational corporate deposit base? And can you remind us about volumes there? We haven't seen any deposit cost savings this quarter and the cost of time deposits is actually up in Spain. The second question is on your EUR 2.2 billion rental portfolio. If you were to sell it all today in wholesale transaction, do you think it would be breakeven? Or do you think you need to bring the net book value of that portfolio down to be closer to market prices?
Well, on the second one, Marta, I don't know. We're not trying to sell out only one goal. We're gradually improving the quality of this portfolio. It's coming down. Yield is increasing. And we actually want to manage it for value. I think we have it conservatively in our books. But certainly, I cannot elaborate on what will happen if we try to sell altogether because that's not what we're pursuing, no? Maybe Javier you can take on the...
On the question on TLTRO III, well, I said before that we have not made a final decision on this now. But I don't feel that we will take full TLTRO to invest into short-term bonds because mainly because the spread is not that high. If you invest into Spanish government bond, for example, you have a few basis points only. And I don't think this will be our plan. Although, as I said, we're working on our budget, cash balances, so there are many moving parts here and it's part of the process, no?
You had a question on nonoperational deposits. So I think that the number has been disclosed sometimes. First thing is, those are more nonoperational deposits, wholesale deposits from a regulatory point of view in terms of the calculation of the liquidity ratios, no? And this figure stands around 35. If I remember, 35 was slightly higher than € 35 million. But this does not mean that, as Gonzalo was explaining, that we're planning to charge unilaterally to those deposits. Because at the end of the day, one thing is the regulatory treatment and the other thing is the commercial relationship you have with those clients, what kind of business and how much business you have with them, no? And this is going to be a process that will take care of and be available in a case-by-case basis and what we are working. And for sure, we will update you on our views on this in the next call.
Thank you, everyone. And we will reconvene in 3 months' time.