Banco Bilbao Vizcaya Argentaria SA

MAD:BBVA

Earnings Call Transcript 2018-Q2

[Gloria Couceiro Justo, Global Head of Shareholder & IR]

Good morning, everyone, and welcome to the Second Quarter 2018 Results Presentation of BBVA. I am Gloria Couceiro, Head of Investor Relations. And here with me today is Carlos Torres Vila, Chief Executive Officer of the group; and Jaime Sáenz de Tejada, BBVA Group CFO. As usual, Carlos will begin with a presentation of group's results, and then Jaime will review the business areas. We will move straight to the live Q&A session after that. As always, we would appreciate all the participants to try to make the calls from their land lines and avoid using the speaker phone. Now I will hand over the call to Carlos.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, Gloria. Good morning, everyone, and welcome to BBVA's Second Quarter 2018 Results Audio Webcast. We started the year with very strong first quarter. And now again, we continue with very strong results in the second despite all that has been happening, the turmoil that we have seen in the global markets, lots of political changes, uncertainties around the world in many countries, starting in Europe with the events in Italy, the impact they have had on the periphery spreads and many other places in Argentina, changes in government in Spain itself, in Peru, recent elections in Mexico, in Turkey, in Colombia, many events. But once again, the resilience of our diversified portfolio has helped us outperform in this environment. We have recorded a net attributable profit of EUR 1,309 million in the quarter, posting an 18% increase versus the second quarter of last year. In parallel, we continue to maintain solid capital position. Our fully loaded core equity Tier 1 ratio this time decreased by 7 basis points, impacted by the volatility in the markets, but stands at 11.4%, well above our target. This figure includes, of course, the full impact of IFRS 9, first time implementation as well as the updated impact of 55 basis points of corporate operations. Both the disposal of BBVA Chile, which is not yet booked, but the transaction has already closed July 6; and also the sale of the real estate assets to Cerberus, which is to close in the coming quarter, the third quarter.The key highlights for the second quarter, firstly, the strong growth in core revenues. NII plus fees are growing above 10% versus the same quarter last year. Secondly, continued improvement in efficiency. This is on the back of cost-control efforts. Our efficiency ratio once again improved this time by more than 80 basis points in the year to 49.2%. And we have, again, positive jaws in all of our businesses.Third, the trend in digital sales and digital customers, once again, outstanding. Digital sales were 39% of the total units we sold year-to-date. That was 22% a year ago. And this 39% of units represents 29% in terms of value. The number of mobile active customers exceeded 20 million, with yearly growth rate of 43%. We have sustained rates of growth in excess of 40% for many years, and it just continues at the same rate.Risk indicators, they continue to be very sound. NPL ratio of 4.4%, that's down 47 basis points versus the second quarter of '17. Coverage ratio, stable at 71%, actually, it's up by 19 basis points. And a very low cost of risk of 82 basis points, down another 11% versus 1 year ago.In terms of capital, I already mentioned our strong position, 11.4%, above our target, despite the 7 bps decrease in the quarter. By the way, 5 bps of those 7 are truly from the quarterly evolution. The other 2 come from an update on the impact of the corporate transactions in the pro forma calculation.Finally, we maintained our focus on creating value for the shareholder. ROE in the quarter was 11.7%; return on tangible equity, 14.3%; and our tangible book value per share increased in the quarter despite quite adverse market movements and has increased by 4.2% year-to-date, including dividends.As mentioned, results were strong in the quarter, with net interest income and fees and commissions growing at 10% or more in constant euros. NTI contribution, on the other hand, was lower this quarter, as was other income, which includes a higher contribution than last year to the Single Resolution Fund. In aggregate, gross income grows 5.8%; while costs, once again, were contained, increasing 2.7%, well below the growth in revenues, also well below the growth in inflation -- I mean, the inflation rate in our footprint. As a result of this, pre-provision profit was EUR 3 billion, growing at a rate of 9%. Below that, impairments were quite low this quarter, 12% lower than last year. And provisions also came down very significantly, both because of lower restructuring costs in Spain and also some capital gains we booked in Chile -- in Mexico, sorry, in Mexico, in the sale of a building, nearly EUR 40 million coming from that. Net attributable profit, as I mentioned before, grew 18% versus the second quarter of '17, in current year result, 38% in constant euros.In the first 6 months, similarly, strong set of results. Net profit, EUR 2.6 billion, growing 15%; 30% growth in constant euros. Excellent trends in core revenues, growing year-on-year in all of the countries, with NTI growth impacted by the evolution of the markets, also because last year, we had the gains of the sale of CNCB. But the jaws are positive. Costs growth contained at 2.9%, below inflation. And finally, lower impairments as an important lever of earnings growth.Looking at the breakdown of our revenues. NII growth accelerated, up 9.6% versus a year ago to EUR 4.4 billion. We have an impressive evolution in net fees and commissions, plus 13.1% versus the same quarter last year, mainly driven by Spain, but also Turkey and Mexico. NTI, on the other hand, was lower in the quarter due to lower sales from the ALCO portfolio and also due to worse performance in our global markets results because of the market movement. In total, revenues are up 5.8%. And they're flat versus the first quarter as we had the Single Resolution Fund contribution this quarter, and that was only partially offset by the dividends coming from Telefónica. In summary, strong core revenues in the quarter but with lower NTI.One more quarter we maintained positive operating jaws. It is very satisfying indeed to see how our expenses are growing well below the growth rate in revenues for so many quarters now, and that's despite the high inflation, despite the currency devaluations that have a pass-through effect on costs. So far, in 2018, costs grew 2.9% versus last year. That's well below the 9.8% growth in core revenues, also below the inflation rate in our footprint, which was 5.1% in the last 12 months ex Venezuela. And if we looked at the figures on a quarterly basis, they look even better than this. The efficiency ratio improves year-to-date by 82 basis points to 49.2%. And if we were to track the cost to income without NTI, the improvement is more than 210 basis points.I have often reiterated our commitment to improving efficiency in the context of our transformation. And once again, I believe our track record shows well how high this stands as a priority for management across the group.The improvement in efficiency is common to all business areas, with costs growing well below core revenues in all of the countries, also below or near inflation except in South America. I would highlight particularly the case of Spain where costs continue to go down, 4.6% drop year-on-year. Also, Mexico, costs are growing well below inflation there, 4.4% growth versus 5.7% inflation the last 12 months.In summary, we have maintained our focus on efficiency and being more efficient. And we are seeing the positive impact of our transformation efforts, our push to digital. We had an excellent quarter in this respect and I'm very happy with the effort and the commitment across the group.And we have been mentioning this, I made a point of it last quarter. You might recall that a large part of our efforts and our improvement in efficiency have to do with our push to digitize the business, not only to drive efficiency, but also to increase sales. Digital sales keep growing at a fast space in all of the geographies to very significant levels. Almost 39% of all the units sold in the first half were sold digitally. That is up from 22.4% a year ago and up from a level of 14.6% in 2016. For the first time, as you can see this quarter, we're including what we call internally the PRV, the product relative value, which is a proxy for the economic value measured as a percentage of digital sales over total sales. And as you can see, this metric shows the same outstanding trend going up, showing that we are pushing digital sales very successfully everywhere.The strong growth is consistent across markets. Digital sales represent, for example, in Spain, 42% of units; 33% in PRV, in value. In Mexico, for example, in units, 33%; in value, 26%. And in some places, it's quite remarkable, like in Turkey, also in the U.S., where the percentage of PRV is actually above the percentage of units sold. In South America, we have also more than doubled the percentage or the weight of digital sales in units with a high 51%. But in this case, the figure is very influenced by the high growth in units sold of very small ticket -- micro-insurance products, not only in Colombia, but also in Peru. If we look at the PRV, the percentage of 20% reflects -- better reflects the economics of the products that we sell digitally in that region. Overall, very good news everywhere.And this is -- this exponential growth in digital sales has a lot to do with us actively promoting that all of our products are available DIY for purchase through digital for our customers. Every quarter, I share with you on this call some examples of the impact of our work in this regard. You might recall the last time I talked about the express personal loan in the U.S. that had 50% increases in total production that, by the way, have been sustained, actually increased further in the second quarter. I also talked about the Click and Pay in Spain for small businesses that had 33% growth. Now this time, I'm showing the digital account opening in Mexico where we have multiplied the accounts opened by 3x the accounts in just 1 year, as we have improved the funnel and the on-boarding experience. In addition to that active promotion of DIY, we're also driving sales through acquiring new customers and growing in the open market, which is a big opportunity for us. So through simple, end-to-end, fully digital processes in various products, we can capture that opportunity. One good example here is the recent launch in mid-June of an online scoring tool in Peru, which allows BBVA to acquire credit card customers in the open market and soon also consumer loans. The number of clients that we have acquired digitally has multiplied by 2 in less than a month. And once again, we see how enabling and promoting digital sales drives significant added volumes to the traditional business.Finally, we're putting value-added solutions in the hands of our customers every quarter with the focus on advice, on smart interactions, with tools and solutions to help our customers achieve peace of mind; to achieve their life goals, proactively offering them content -- more personalized content, better-suited products to them, better-suited experiences. And we have many examples every quarter, some recent ones are the BBVA One View in Spain, which is a digital advisory banking solutions for companies. So basically, we're offering a multibank account information for companies, payment initiation services as well from one single point of access.BBVA Valora View, also in Spain. With it, this is an app with which you can search for a home, either you want to buy or rent. So you can see properties for sale or for rent as you're walking in the street just by pointing the phone to the buildings, so as if you were fetching Pokémons, and you can access all the info on the properties as you walk the street. Or the Payroll Advance [ to learn ] in Colombia, helping customers avoid overdrafts and many other such examples.In addition to higher sales volumes, digital also drives increased customer engagement. It drives migration to more efficient channels. Over the last 2 years, we have seen how transactions through the mobile phone have grown very significantly, even doubling in many regions, like in Spain, as a result of the higher engagement and the added convenience to our customers. So total customer transactions are growing there. But on the other hand, total customer transactions in branches are declining, and they're declining at double-digit rates in that period. Overall, the transaction numbers do grow, which is we think a good thing. It's reflective of more customer interactions. So while a branch customer might visit the branch once a month, a mobile customer uses the app every couple of days or even more. And the cost to serve the mobile transactionality is, of course, extremely low, particularly as we process most of the volume in the cloud so we get the best of both worlds.I said earlier that we are putting new solutions in our customers' hands every quarter. To achieve this fast cycle, we have embraced Agile at scale. We have now more than 7,000 people working this way in Agile, and this is growing by the week.And we have built and are deploying a global software development platform that allows global delivery of solutions. So our different banks in the various countries can quickly create their own apps, their own local apps, by reusing components from a global library. An example of how this works in practice, which we presented a couple of months ago to the press, is our new global mobile banking application, GloMo, with 75% reutilization of components. And that has allowed half the time to market, 30% less FTEs in development, 40% lower development costs. We have just launched the new apps this way in Mexico and Uruguay, Peru will be coming soon. And they have all benefited from each other's developments. In the case of Uruguay, particularly, we didn't even have a mobile app before nor a very significant engineering team there. And we were able to create one app in record time just by reusing what had been developed elsewhere. This is really the way that big technology work -- companies work. They develop the best solutions for the clients at a global scale, and we believe that this will differentiate us versus local competitors in each of our markets. We're also working on developing tools for our relationship managers that will help them understand the needs of the clients better. We'll make them more productive by freeing them up from administrative tasks. This is what we call the Digital Workplace, which includes functionalities such as a complete view, a 360 view of the client, the ability to communicate with clients digitally to send them business proposals or signing documents. And this Digital Workplace has already allowed us to increase the number of leads that are managed by relationship managers by 29% in Mexico and in Spain.Underpinning the growth in digital businesses and sales is the continuing digitization of our customer base. Digital customers are up 26% versus a year ago to 25 million clients. You can notice the accelerated growth rate. This represents a 46% penetration. We expect to reach the 50% tipping point over the course of the next few months. So this is our goal for 2018. We have already reached the 50% tipping point in 6 of the countries: Spain, Turkey, U.S., Argentina, Venezuela and Chile. On the mobile side, mobile active customers grew more than 6 million, up by 14 -- 43%, sorry. And we have a penetration of 38%. So you can see here also an accelerated growth rate. And here also, we expect to reach the tipping point, the 50% penetration sometime next year, in 2019.We have maintained leading positions in the Net Promoter Score across our footprint, #1 positions in 6 countries, #2 in 2 others. We continue to invest in delivering the best solutions to our customers. Clear example of this is our mobile banking app in Spain, rated #1 in the world by Forrester last -- in the last global report that they have published. Forrester has also considered our app in Spain as the best in Europe for -- in 2018, and this is for the second consecutive year. And then, by the way, the app of Garanti Bank, our bank in Turkey, is in the #2 European position.So as you can see from the last few slides, our push to digital continues strong. It's having a big positive impact on our costs, on our revenues and also on the appreciation of our customers, which will drive further business. Now moving back to the rest of the quarterly numbers. Our risk indicators continue to be very sound. We have seen lower impairments. Impairments are down 12% -- 12.2% versus last year. They're also decreasing 2.3% in the quarter, with sustained low cost of risk of 0.82%; also, lower NPLs by EUR 2.8 billion less versus last year. And we have other operations that we have announced and not booked, like another EUR 1 billion gross book value property development portfolio, a loan portfolio that will close in the third quarter and will reduce NPLs by a further EUR 600 million. Our NPL ratio decreased to 4.4%, down 47 basis points; coverage at 71%. So overall, excellent and improving risk profile and asset quality.Capital position is also strong, well above our target. Core equity Tier 1 fully loaded ratio pro forma reaches 11.4%, including the impacts of the sale of Chile that the -- and the real estate as well as the full impact of IFRS 9, as I said. In the quarter, our results added 36 basis points. We reserved 18 for dividends and AT1 coupons. We have seen an increase in risk-weighted assets measured in constant euros, so that detracts 5 basis points.And finally, the quarter has been negatively affected by market-related impacts that are included in the Others bucket for a total of minus 18 there. This includes the mark-to-market of the Telefónica stake. In the quarter, the Telefónica share fell by 9%. Also, the mark-to-market of the fixed income portfolios that helped collect and sell portfolios because of the movement in sovereign spreads. Also, the FX impact, with the major effect coming from the appreciation of the U.S. dollar due to our exposure to risk-weighted assets in dollars. The depreciation on the other side of the emerging market currencies, the effect has been limited because of our prudent FX policy. The sensitivity of our ratio -- our capital ratio to a 10% depreciation of the lira in Turkey or the peso in Mexico, it's quite limited, wherein it's quite limited at around 2 basis points for that 10% depreciation. And in the case of the Argentine pesos, it's less than 1 basis point.All in all, the ratio, the fully loaded ratio has slightly decreased by 5 basis points during the quarter. And then on top of that, we have updated the impact from corporate transactions from 57, which we had estimated last quarter, to 55 now. So this explains a further 2 basis points decrease in the pro forma that we reported a quarter ago. I would once again like to highlight the high quality of our capital. You know well we remain as the bank with the highest density of risk-weighted assets, 52%; the highest fully loaded leverage ratio, 6.4%, among our European peer group. Also, we have already covered the AT1 and T2 buckets on a fully loaded and phased-in basis. And lastly, we received our MREL requirement last May from the Single Resolution Board, and this will be binding from January of 2020. We would already comply with the requirement. Our funding plan also ensures fulfillment in 2020. Finally, I'd like to highlight that during the second quarter, we have successfully issued our inaugural green bond, EUR 1 billion of senior non-preferred. This was the largest financial green bond in the Eurozone and the first senior non-preferred green bond issued by a Spanish bank.Chile, although not registered this quarter, I'd like to briefly comment on the sale of the bank there in Chile. This closed July 6, so it will be recorded in the third quarter. Total consideration was $2.2 billion with impressive ratios of 2.3x book value and 20.7x earnings. Capital gain, EUR 640 million; significant positive impact on core equity, 50 basis points. The sale, by the way, excludes the auto financing business, so Forum -- Grupo Forum, which is the leading company in the country, which generates 36% of our total unit results in Chile, with outstanding evolution growing 19% net profit year-on-year in the first half.To close off the quarterly overview, our return metrics. Our tangible book value per share increased by 4.2% in the first half of the year, including dividends. And this was despite market conditions, which took their toll on some of our assets. Profitability ratios also improved in the year. ROE in the semester was 11.7%; and return on tangible equity, 14.3%. So we remain focused on creating value for the shareholder with good performance in a difficult environment, but we have higher aspirations.Now let me turn it over to Jaime for an overview of the business areas. Jaime?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Thank you, Carlos, and good morning, everybody. Let's start with Spain. We remain confident on the macro outlook, and we expect the GDP to grow close to 3% in 2018 and around 2.5% next year. In the first half, net attributable profit grew over 19% versus last year, driven by core revenue growth, cost reductions and lower impairments. Core revenue grew by 1.5% on a year-on-year basis, accelerating the trend initiated at the end of last year. Thanks to the excellent evolution of fees, that grow over 8% and above our guidance of mid-single-digit growth. This growth rate is supported by the increase in mutual fund volumes and retail banking fees. Costs continue to behave well. They go down by over 4%, further improving the efficiency ratio in the first half of the year to 53.9% as of June. Impairments are decreasing by over 40% on a year-on-year basis. As asset quality metrics continue to improve, NPLs are down by close to EUR 700 million during the first half, and cost of risk stands at 21 basis points as of June, evolving better-than-expected. We now expect 2018 cost of risk to be clearly below 30 basis points.Regarding NII, in the first 6 months of the year, it decreased by EUR 28 million, explained by the lower contribution from the TLTRO. As you already know, in 2017, we accrue for 18 months, that was about EUR 36 million per quarter, versus 12 months in 2018, equivalent to EUR 24 million per quarter, because the underlying business remains stable versus last year in a context of a subdued loan growth, where interest rate hikes have been postponed, but also with lower wholesale funding costs than expected. As of June, loans continue to go down by 1.5% versus last year, given the continued deleverage in the residential mortgage and public sector portfolios. However, total loans grew in the quarter by 1.6%, driven by loans to consumers and very small businesses, the most profitable segments. On the other hand, commercial loan growth remains subdued. This better mix allows for the lending deal and the customer spread to remain flat.Let's turn now to real estate. Regarding our exposure to the real estate sector, as you already know, the agreement with Cerberus signed last November will allow us to reduce almost entirely our exposure to real estate owned assets. We continue to expect the closing of this transaction to take place at the end of Q3. Regarding developer loans, we expect to continue reducing our exposure further through portfolio sales. Another example is the sale of the Sintra developer loan portfolio, a EUR 1 billion gross exposure transaction. This transaction was announced last June. But as Carlos has already mentioned, its impact will be accounted for in the second half after the closing.Regarding the P&L, net losses continue to decrease. They were only EUR 9 million in Q2, and now expect to beat our guidance of EUR 100 million net losses for 2018, which compares with a net loss of over EUR 0.5 billion in 2017, helping to boost BBVA's profitability in Spain.Let's now turn to the U.S. We continue to have sound macro expectations for the Sunbelt. GDP will grow by 3.8% in 2018 and by 3.7% in 2019. That's again a 1 full percentage point above the U.S. as a whole. In the first half, net attributable profit grows by over 50% versus last year in constant terms. The main driver is the NII that grows at double digits, in line with guidance, and supported by an acceleration of loan growth and a continued improvement in the customer spread. The loan book rebounds by 4% versus last year. And we keep on progressing towards a more profitable loan mix as our focus continues to be the consumer book, which grows close to 18% on a year-on-year basis.The customer spread continues to increase, 11 basis points this quarter, benefiting from the better loan mix and higher rates, offsetting the increase in the cost of deposits as competition intensifies. As you know, we continue to have a positive sensitivity to higher rates as NII goes up by 6% for every parallel increase in the curve of 100 basis points. We continue to enjoy positive operating jaws and widening...[Technical Difficulty]

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay, I have to apologize for this interruption. Let's continue with the U.S. In terms of expenses, we continue to enjoy positive operating jaws and widening, with revenues growing at 10.7% and expenses at 5.6% and efficiency improving by 240 basis points in the last 6 months. Loan loss provisions are down by over 38% on a year-on-year basis, positively impacted by the recovery of provisions from Hurricanes Harvey and Irma and in the commercial portfolios and a positive IFRS 9 macro adjustment. Therefore, our cost of risk remains at low levels, 23 basis points year-to-date. That leads us to improve our cost of risk guidance that we now expect to be in the low 40s.All in all, very strong numbers, generating double-digit returns in the U.S. as we continue to advance in the transformation of our retail franchise.Let's move now to Mexico. In Mexico, BBVA Research has revised upwards the GDP growth forecast for the country to 2.6% in 2018, thanks to a stronger-than-expected incoming data, mainly driven by manufacturing and services. For 2019, we expect Mexico to grow at around 2%.Once again and despite uncertainties related to NAFTA and the general elections that took place in July, Bancomer results continued to show sustained growth in all P&L lines, with the bottom line growing at over 20%. If we exclude the capital gains from some real estate assets in the first half that Carlos has already mentioned, that generated around EUR 60 million in the first half. The bottom line growth would have been 15% on a year-on-year basis, clearly, above our guidance, supported by the good performance of the core revenues, controlled expenses and significantly lower impairments.NII growth, around 8%, in line with our expectations, supported by activity and higher contributions from the securities portfolios. Loan growth accelerated to 8.6% on a year-on-year basis, thanks to the stronger performance of the commercial segments. This quarter, there were large tickets from both corporates and mid-sized companies, anticipating rollovers from the second half.Additionally, retail loans continue to show a solid and stable growth, 6% in the case of the consumer book and 7% in the case of the mortgage portfolio. This loan growth, biased to commercial segments, in addition to higher cost of deposit, explains a slight decrease in the customer spread quarter-on-quarter.We have strong growth in fee and commissions in Mexico, over 8% versus the first half of last year and above our mid-single-digit guidance and supported both by the CIB and Asset Management businesses. Operating jaws continues to improve, with OpEx growing below inflation. This reflects our success in implementing the digital strategy in Mexico. The cost-to-income ratio continues to improve, now at 33% despite already being best-in-class. Impairments on financial assets decreased by over 6% as loan growth has been higher in the commercial portfolios that have lower provisioning requirements, but also better retail NPL dynamics.The cost of risk decreased to 293 basis points as of June, which makes us believe that we will finish the year with a cost of risk below 320 basis points, better than initially expected. These solid results leads us to also review upwards our bottom line growth guidance. We now expect the net attributable profit to grow at double digits in 2019 -- '18, sorry. Let's focus now in Turkey. BBVA Research expects growth to moderate to levels between 3.5% and 4% in 2018 after growing above 7% in 2017 due to tighter monetary conditions. After the elections, we believe that controlling inflation should be the top priority of the new administration and the anti-inflationary strategy should be comprehensive, including tighter monetary and fiscal policies.In the current volatile environment, once again, Garanti continues to show its resiliency, with net attributable profit in the first half growing at over 25% versus last year in constant euros, thanks to strong core revenue growth and the focus on cost controls. NII is up by 18% versus last year, mainly explained by loan growth and a successful customer spread management. Loan growth was supported by the Turkish lira loan portfolio that grows at double digits, while the foreign currency loan book decreased -- accelerated to minus 8.4% on a year-on-year basis. We expect a slowdown in the Turkish lira loan book growth in the second half and further reductions in the FX loan book.The excellent price management allows the customer spread to go up by 26 basis points in the quarter despite higher funding cost. Having said these, we expect it to decrease in the second half of 2018. This will be offset by higher CPI linkers income as the reference rate used to calculate its contribution to NII will increase to 14% from July 1. It's was 10% in June. Net fees are up by over 30% on a year-on-year basis, showing solid growth across the board.Good evolution of expenses, growing below average inflation. Garanti continues implementing its new service model, Garanti Plus, now in over 600 branches. That is bearing fruit, improving efficiency, customer experience and employee satisfaction. And finally, in terms of asset quality, the NPL ratio increased by 75 basis points quarter-on-quarter to 4.5% due to some large tickets in the commercial portfolio and the lack of NPA sales in the quarter. The NPL ratio in retail portfolios remain stable. Cost of risk went up to 123 basis points year-to-date, above our initial expectations, impacted by the negative macro adjustments and some large ticket provisions. We now expect cost of risk to be around 150 basis points at the end of the year with quarterly volatility linked to the macro.And finally, South America, growth evolves unevenly across the region. Chile, Colombia and Peru GDP growth estimates are revised upwards, while Argentina is reduced. All in all, GDP growth forecast for BBVA's footprint in the region is revised to 1.8% for 2018.The bottom line grows by over 30% on a year-on-year basis, driven mainly by Colombia and Argentina. Core revenues are growing in the mid-teens, supported by double-digit growth in lending, with retail segments as the main growth driver.Customer spreads are improving across the board, especially in Argentina on the back of the increase in interest rates. Fees are also behaving well, growing at over 12% versus last year. We continue to have positive jaws in the region, with efficiency improving by more than 200 basis points in the last 6 months to 43%. Finally, loan loss provision in the first half were better than expected due to the positive IFRS macro adjustment and some releases in Peru. The year-on-year comparison, if you remember, is impacted by a provision from a big ticket in Colombia that we did in the first half of last year.Cost of risk is better than initially expected, decreasing to 130 basis points in the first half of 2018. For the second half of the year, and after closing the sale of BBVA Chile, we now expect cost of risk to increase to around 160 basis points as Chile had a lower cost of risk than the region average. And now back to Carlos for some final remarks.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, Jaime. My final remarks are just to reiterate the high quality set of results this quarter, supported by core revenues, supported by lower impairments. We are seeing the clear impact of our push to digital, both on revenue growth, also on cost efficiency improvements. And that we deliver on profitability and value creation despite the market uncertainties. Overall, we continue to be focused on shareholder value. Thank you very much for your attention. Now I give the floor to Gloria for the Q&A.

[Gloria Couceiro Justo, Global Head of Shareholder & IR]

Thank you, Carlos. We are now ready to move into the live Q&A session. So first question, please?

[Operator]

[Operator Instructions] So our first question, Gloria, comes from Alvaro Serrano of Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Thanks for doing the call early and putting out the results early, first of all. And second, 2 questions. First of all, on NII in Spain, you've seen better loan growth, but I wondered if that loan growth if we look over the next few quarters and into next year, is that loan growth and the mix change going to be enough to grow the NII with -- given there's not going to be any rate hikes most likely this year or next year? Is -- are you going to be able to grow the NII in Spain, is the first question. And the second question is on Turkey. Could you maybe just talk us through how you see the general environment there and, in particular, the outlook on provisions? In the quarter, if you look at Garanti, the local disclosure, it looks like provisions were up more than what you've reported, so maybe a clarification there. And also, your partners until now, Dogus Group, are restructuring their debt, apparently. So could you reassure us that there's no material exposures or what the exposures of the group are to Dogus?

[Carlos Torres Vila, CEO & Executive Director]

Thank you. Thank you, Alvaro. On NII in Spain, as you say, rates have not been coming up. And given the environment we have right now, what we expect for the second half is to have an NII which will be around the same levels as what we have seen in the first quarter. Loan growth will depend on the evolution mostly of the corporate and CIB portfolios, which has been muted in the first half. And after the last meeting of the ECB, we no longer expect the EURIBOR rates to rise in the second half. We have had good new production in many segments, including mortgage, consumer, very small business. But really, the evolution of the overall loan portfolio will depend more on the corporate and CIB, which is more uncertain. Now in Turkey, we mentioned in the past that the economy was growing too much, was growing -- it was the fastest-growing economy last year and it was growing quite a bit at the beginning of this year as well, 7%, 7.5% growth rates. Given some of the imbalances having to do with the current account deficit that has continued to grow, that really was asking for tighter policy on the fiscal and the monetary side. You have to recall, though, that this was coming from the events in '16 and the need to fight potential recession. But really, the economy overheated given the stimulus. And really, what's required is what Jaime said, strong focus on inflation so that it can be really reconduced to a situation in which Turkey can bring out its full potential, which is it's a large one, given how vibrant that economy is, how young, dynamic. And really, what we require right now is tighter policies on both sides. That's what we expect will be happening. As it regards to our position there, well, we have taken already many measures in the past quarters and are really very, very well prepared for the situation. We have done many things, reduce the weight of our foreign currency loan portfolio. It represents now about 22% of the total asset side -- asset size. We have increased also the weight over the linkers, the CPI linkers in the portfolio, the ALCO portfolio to 50% from 37% 3, 4 years ago. And this is, as we have seen this quarter, a very natural hedge. We will continue to see that hedge in our NIMs in the coming quarters. We have diversified our funding sources. We have extended maturities of those funding sources, especially in the foreign currency side. And we have applied provisioning levels that have been very prudent, anticipating many of the effects that are now passing through, including the exposures to the corporates, including the names that you mentioned, which are not very significant in our case, although we don't want to comment on particular names. So overall, provisioning levels, Jaime mentioned, will be coming up, certainly given the situation in Turkey. They will be coming up from the current levels of 120, 123 basis points. They will be coming up more to 150 for the year as NPLs continue to grow in the situation, but we're, as I say, well prepared. The economy should be redirected to lower growth levels, more the 3%, 3.5% levels. That should tame inflation, that should tame the current account deficit and that should provide a more sustainable growth later on.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Sir, and you're increasing the CPI assumption to 14% from July, did I understand correctly during the call?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Yes, Alvaro, that's the case. And the difference between the cost of risk in local terms versus consol, it's only the FX hedging of the U.S. dollar provisions that, in the case of Garanti, is accounted in the provision line, while, in the case of the group, is accounted on the net trading income line. I just want to clarify the guidance. What we expect of NII in Spain, what we expect is as -- an NII in the second half that will be more or less the same as what we were able to obtain in Spain in the first half.

[Operator]

Next on the question queue is from Sofie Peterzens of JPMorgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

Here is Sofie Peterzens from JPMorgan. So I had a question on your excess capital, 11.4% [ pro forma ] now very strong organic capital generation. How should we think about kind of excess capital going forward, given that now you start to be properly above 11%? How do you plan to deploy it, increase kind of payout or M&A or how should we think about it? And my second question would be around the Forum in Chile. You still have the consumer bank in Chile, but what are your plans going forward? Should we expect over time that this business will be sold as well? And do you think you can achieve better valuation multiples for this business given that it is a more profitable business?

[Carlos Torres Vila, CEO & Executive Director]

Thank you. Thank you for your questions. Regarding the capital position, I would summarize it as I did in prior quarters. We are in a good place here. And what we strive to do and will continue to strive to do is to finance our profitable growth going forward, the profitable growth of our balance sheet, while providing attractive remuneration to our shareholders. And that's really the guide we will continue to follow. This quarter, the ratio came down for the effects that I mentioned, so 7 bps decrease. But going forward, this is how we will continue to manage. And as I say, we are in a good place. Regarding Chile, there is no changes with regards to our plans with Forum. So we have sold the bank. We have sold it for what we believe are attractive multiples for us, given how the -- yes, given what I mentioned. And then for Forum, we continue to own that asset, continue to manage it and continues to provide the profits that I mentioned.

[Operator]

Our next question on the line, Gloria, comes from Andrea Filtri of Mediobanca.

[Andrea Filtri, Research Analyst]

You have revised the loan loss provision guidance in a number of geographies. Could you update it also for the group? And when you're looking to 2019 and 2020, how much of the 2018 changes would you carry forward?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

As you know, we don't give guidance beyond the year. So I'm afraid you're going to have to wait a couple of quarters before getting more info on that, sorry.

[Operator]

Our next question on the line comes from Marta Sánchez of Bank of America Merrill Lynch.

[Marta Sánchez Romero, Director and Analyst]

I've got a couple of questions on volumes in Spain and Mexico. In Mexico, we see an acceleration in local currency to just about 7%, if I'm not wrong. How much of that is because of the dollar effect? So -- and what's the size of your dollar book in Mexico? And in Spain, how much of the volumes that we've seen in the quarter are one-offs, so stuff that is purely driven by seasonality, public sector commitment and so on?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay. The -- as you say, the loan growth accelerated significantly in Mexico in the quarter, especially driven by some commercial transactions. We believe that we will continue to behave well in the second half of the year, especially in the retail portfolios, not necessarily the commercial book will behave as it had in the second quarter. There were some transactions that were brought forward that I don't think will be repeated. In the case of Spain, loan growth was very strong in the second quarter. There was one particular one-off transaction with the social security that always takes place in the second quarter of the year. We see strong dynamics in the retail portfolios, as Carlos has mentioned. Loan production in mortgages, almost 37% on a quarter-on-quarter basis. Very good performance also on the consumer and very small companies segment. And what -- where we have a little bit more volatility is in the public sector. That behaved well in the second quarter, but on a year-on-year basis, it's clearly deleveraging a lot. So with the caveat of both the public sector and the corporate segment, we think that we could be very close to our guidance here. I forgot to answer on the percentage of U.S. dollar loans in Mexico, they represent 16% of the overall loan portfolio in the country.

[Operator]

Our next question on the line comes from Carlos Peixoto of CaixaBank.

[Carlos Peixoto, Analyst]

My first question was -- would be on the evolution of cost of risk for Mexico, and my apologies if you have already mentioned this before. But I was wondering, how do you see the second half of the year evolving, particularly considering some of the challenges that NAFTA -- that the NAFTA agreement might still pose and so on? At the same time, I was wondering, on the same chapter, I was wondering if you could comment on how you're seeing activity on lending volumes and so on evolving, whether you're witnessing some postponements of the investments, given some of the political uncertainty and these NAFTA events. Or basically, how do you see this first phase of the new -- after the elections evolving business-wise?

[Carlos Torres Vila, CEO & Executive Director]

Well, Jaime alluded to the activity in lending volumes in Mexico already. Regarding the cost of risk, we have seen great performance the first half of the year with a very low cost of risk in this first half, below 300 basis points. And that implies that we have lower provisioning expectations for the entire year. So we expect the cost of risk for Mexico to be below the 320 basis points. And this comes from lower provisioning needs, both from the mix but also lower provisioning needs in retail. So we have better consumer NPL dynamics in Mexico. And really, the situation now is one of high confidence. We noticed that as well. Jaime mentioned that we had some good growth in commercial portfolios. And really, the lower growth we have seen the first couple of -- the first few months of the year has picked up a bit in May and June. And regarding the outcome of the elections, well, it seems that the uncertainties that we had coming into them have cleared, which is really what we expected after July 1, independent of who would have won. And with this clear win by the new President-elect and the policies that are coming out of the new future government of Mexico, confidence is growing in the country. And we are looking quite good, I think, in Mexico.

[Operator]

Our next question on the line, Gloria, comes from Carlos Cobo of Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

Just a couple of questions on Turkey. First of -- well, it's kind of the same thing. On the first hand, we've seen other peers in Turkey kind of breaking a little bit more on Turkish lira and the loan book being more flattish in the quarter. Where you keep kind of a nice growth trend, that means that -- or kind of infers that you are comfortable with the macro dynamics despite the uncertainties. So in terms of your strategy for the subsidiary, I mean, if you remain committed with Turkey, could you consider buying out the minorities at this level? Because I mean, obviously, if you are comfortable with revenue prospects and cost of risk resiliency, this target is probably at a -- [ achieved to know valuation ]. Obviously, the macro uncertainty is high, but the opportunity for you over the long term could be there. So I would like to understand your view there. And the second one, on the CPI linkers. Could you elaborate on the long-term risk to roll those linkers? I mean, is there any chance that it could affect fiscal deficit in the country and the government would be forced to stop issuing this type of debt? Or do you see that as kind of an instrument that will be there for you to continue rolling that portfolio?

[Carlos Torres Vila, CEO & Executive Director]

Thank you. So just to be clear, in Turkey, we have been [ very ] prudent in our loan growth, especially in the foreign currency loan growth, which carries now, I think, it's an 8% drop from a year ago and about a 6% drop or almost a 6% drop since the beginning of the year in foreign currency loan, as I say. Although, of course, you might see the nominal growth because of the devaluation of the lira, so you have a revaluation of the exposures in foreign currency. The lira book had been growing and is growing at about 15%, and that had to do with the credit guarantee fund. But our overall position in Turkey has been, for a while now, quite prudent and continues to be quite prudent, seeing what the macro was doing. Regarding the linkers, it is very effective hedging strategy to maintain good NII in the context of inflation that have -- has had some volatility, and we don't see any long-term risks to that. Regarding our exposure to Turkey, we are comfortable with our stake right now, which, as you know, is 49.85% with a book value of EUR 4.4 billion.

[Operator]

Our next question comes from Britta Schmidt of Autonomous Research.

[Britta Schmidt, Partner, Spanish and German Banks]

I also have a question with regards to Turkey. Could you give us any indication or do you have any feeling for what the sensitivity of the provisions would be to changes in the macro assumptions under IFRS 9 to give us an idea as to what the volatility could look like? And maybe you can also remind us of what the workings are with regards to RWA changes in case of a sovereign downgrade. And then just one clarification, if you could give us the amount of the one-off in Mexico from what I believe was a real estate sale.

[Carlos Torres Vila, CEO & Executive Director]

So the guidance, in terms of cost of risk, to be around 150 basis points in Turkey for 2018, that includes the IFRS 9 macro adjustments that we foresee right now. But we don't provide sensitivity around those numbers. The -- but you can guess, given what has happened and the impact that we're incorporating for the second half, you can find a bit what the impact of the macro has been on our estimates for the cost of risk. Regarding risk-weighted assets and the one-off on Mexico, I give it back to Jaime.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay. On sovereign ratings, it will not have any further downgrades, will not have any impacts on our Turkish lira sovereign portfolio. As you know, we have the regulatory equivalence. Turkey has a regulatory equivalence with the SSM, so it will not have any impact. In the case of the dollar exposure, we will need to be impacted a further rating reduction of between 4 and 5 notches in order to be impacted. Our current weighting is 100% of all U.S. dollar foreign sovereign exposure, and it will go to 150% in case of that 4- or 5-notch downgrade. In the case of the one-off, as Carlos mentioned, the positive impact in Mexico was EUR 40 million from the sale of a building, Montes Urales. And in the half, it was EUR 60 million.

[Operator]

Our next question online comes from Ignacio Ulargui from Deutsche Bank.

[Ignacio Ulargui, Research Analyst]

I just have 2 questions. One, on costs in Mexico, you have done a very good performance in the first half of the year. How do you see that going forward into the second half? And what could be the benefits that you get out of the investments going in the past few years there? And regarding fees in Spain, whether you could provide us an update on the outlook for fees in Spain.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay, cost in Mexico. As you say, it's performing extremely well, clearly growing below inflation, as opposed to many other competitors which are just starting an investment phase. We did so, 4 years ago, we completely refurnished all our branch network. We invested in technology, and that has been paying off. So we truly believe that we can continue to sustain a growth rate below inflation, growing -- going forward, even if [ bank ] recession levels continue to increase and we continue to see a very strong top line growth. In the case of fee in Spain, fee in Spain have behaved very well during the half. I think that's a trend that already started last year that we are accelerating this year. Clearly, mutual and pension funds asset volumes are a key component of this good behavior. We've been growing our market share here for the last almost 1.5 years. It's true that entries in the second quarter were not as positive as they were in previous quarter. But even so, we were able to gain market share in the second quarter alone. We were also very good at defending the average fee, which actually went up by 1 basis point. If volatility of market is allowing -- well, I truly believe that, that good behavior will continue going forward. But what is even more impressive, I think, is the good behavior of services fees in Spain, especially account maintenance, fees that are behaving extremely well. That all these has allowed us to offset a first half of the year which has not been as positive in the CIB side. So all in all, a good strong behavior across the board with mainly -- with maybe the only exception of the CIB business.

[Carlos Torres Vila, CEO & Executive Director]

I would like to add on the Mexico evolution of costs. I think Jaime has been very clear that we will continue to have good news regarding cost containment versus inflation because of the investment we've done, because of technology, because of the push to digital and also because we continue to find opportunity to improve our operations there, as we, in fact, are doing everywhere. So I mentioned last quarter that we have the TMP, the transformation of our production model, which is quite a significant project that, in Mexico, has already identified significant initiatives to further reduce costs by streamlining processes, basically. So all of those are the reasons why we're able to sustain this lower cost versus inflation, and we will continue to do that even as inflation continues to come down in Mexico.

[Operator]

Our next question comes from Mario Ropero of Fidentiis.

[Mario Ropero, Research Analyst]

My first question is on the mortgage book. You seem to continue underperforming peers here, pretty much everybody in Spain. So I wonder whether you think that your peers may be taking too much risk on board in this product line. And also, when do you expect this book to stabilize? And then my second question is, given the fact that you're increasing again a lot demand accounts in Spain this quarter, if you could please again update the NII sensitivity to rates in Spain.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay. On the mortgage portfolio, it is true that we lost some market share in -- on a year-on-year basis in Spain in this product, around 30 basis points. But you must not forget that we are the leader in the market with a market share of 15.6%. We try to be conservative in terms of spreads. Our front book deals have remained way above our back book spreads, and that has been our strategy. It's true that we implemented a new methodology to price loans, especially to low-risk clients. This has allowed new production to increase by 37% this quarter, still not able to offset maturities, and that means that we still believe that this portfolio will continue to deleverage during the rest of the year, but at lower rates that -- from the ones we saw last year. Hopefully, this portfolio will stop deleveraging next year. But it's been a difficult call the past few years to guesstimate how this portfolio was going to behave.

[Carlos Torres Vila, CEO & Executive Director]

Yes, I think the math has a lot to do with it, and the fact -- because what we are seeing is record production since the last few quarters, and it continues to go up very significantly quarter-on-quarter, as you say, 37% in this quarter. And we have more than a 50% increase in the average of the '18 versus '17 so far. But then we have still very high levels of repayment. And as Jaime was mentioning, we have a high share in mortgages. Our share of repayments is larger than the newcomers, the other players that are growing fast in mortgages. So it's just the math that we are producing at very high levels with good market share, but our customers are also repaying their loans. Given the low interest rate environment, they don't have much place to put their money, so they repay their mortgage. That will be continuing with low rates, but we will continue to produce as we're doing. So at some point, that will turn.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

And following on what Carlos has said, you can see that also on the DDA amounts. They increased significantly this quarter by over 5%, which now represent a huge proportion of our retail funding sources. Our NII sensitivity remains more or less the same in Spain. We do believe that a 100 basis points increase in the curve will allow our NII to grow on a 12-months forward-looking basis around 15%. It's true that as DDA balances increase, probably, betas will also. And we currently expect that around 40% of these balances would probably move over to time deposits as rates go up. I think the sensitivity will be small in the first 25, 50 basis points, and it will increase further as rates go up.

[Gloria Couceiro Justo, Global Head of Shareholder & IR]

Thank you, Mario. I think there are no more questions, so thank you very much for joining this call. And as you know, the entire IR team will remain available in case you have further questions.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, everyone. And for those of you going on vacation, have a good holiday. Thank you. Bye-bye.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Thank you.