Banco Bilbao Vizcaya Argentaria SA

MAD:BBVA

Earnings Call Transcript 2018-Q3

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

Good morning, everyone, and welcome to the Third 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 results and then Jaime will review the business areas. We will move straight to the live Q&A session after all. [Operator Instructions] And now, I'll hand over the call to Carlos.

[Carlos Torres Vila, CEO & Executive Director]

Thank you. Thank you, Gloria. Good morning, everyone. Welcome to the presentation of BBVA's third quarter results. Once again, we have a strong quarter, strong results this quarter. It's one in which we have undoubtedly faced difficulties in Turkey and Argentina because of the events, mostly in August, but also a quarter in which we have seen the strength of our diversified portfolio. Our net attributable profit has been EUR 1,674 million in the quarter. And that represents an increase of 46% versus the third quarter of last year. We have 2 significant elements included in our results this quarter. Those are the capital gain from the sale of BBVA Chile, which we closed in July, and that amounts to a EUR 633 million capital gain; and the negative impact from the hyperinflation adjustment in Argentina, which was EUR 190 million, a negative impact, that is. On capital, our fully loaded Core Equity Tier 1 ratio decreased by 6 basis points this quarter, impacted by market volatility, but stands at a solid 11.34%, well above our target. Key highlights in the quarter are the strong growth in core revenues, with NII plus fees growing almost 12% versus the third quarter of '17, despite the sale of Chile, which meant a drop in this magnitude. Secondly, the continued improvement in efficiency on the back of excellent evolution of costs. Our efficiency ratio improved by more than 50 basis points in the year to 49.6%, with positive jaws in all of our businesses.We have accelerated our transformation. The trend in digital sales and customers is once again an outstanding trend, with digital sales amounting to 39.5% of total units sold year-to-date. That number was 25% a year ago. And this in terms of value would be a 31% ratio, this 39.5% units is 31% in terms of value. Also, the number of mobile active customers exceeded 21 million, with yearly growth rates in this number of 37%. Risk indicators continue to be solid, with an NPL ratio of 4.1%, dropping 46 bps versus the third quarter of last year. We have an increased coverage ratio of 73% and cost of risk remains low at 90 basis points, down 4 bps versus 1 year ago. I already mentioned the strength of capital position, 11.34%, despite the drop of 6 bps in the quarter. And then finally, we maintained our focus on return and on creating value for the shareholder. Return on equity in the quarter was 12.2% up to September and return on tangible equity, 14.8%. And if we look at the evolution of our tangible book value per share, that increased in the quarter despite quite adverse market movements. And if we look at the year-to-date, the tangible book value per share has increased by 7.2%, including the dividends that we have paid to our shareholders. As mentioned, the results were strong, with net interest income and fees and commissions growing at a rate of around 12% combined in constant euros. NTI contribution, on the other hand, continues to be lower, as in prior quarters. The other income line is negative, because this is where the hyperinflation adjustment in Argentina is included. But in aggregate, we have a gross income growing 4.8%, while costs, once again, are contained, increasing 3.3%, which is 1 more quarter well below the growth in revenues, also well below the inflation rate in our footprint. As a result, pre-provision profit was EUR 2.7 billion, growing at a rate of 6.4%. We have a quarter in which impairments have increased, driven by Turkey. They have increased by 16.5%. And the bottom line net attributable profit, as I mentioned before, grew 46% versus the same quarter of last year in current euros or 71% in constant euros. Excluding the corporate operations, that would have meant a decrease of 9% in current euros because of the impact of the Argentina adjustment, but an increase of 8.3% in constant euros. In the first 9 months accumulated, the profit amounts to EUR 4,323 million. That's a growth of 25% or 43% in constant euros. And if we exclude the corporate operations, the growth of 7% in current euros, 22% in constant euros, with similar trends in terms of core revenue growth around double-digit and growing in all geographies. NTI, on the other hand, has been significantly lower this year than prior year, impacted by market evolution. Also, we had less sales of ALCO portfolio on the sale of CNCB in 2017, which affects the comparison. I would highlight the jaws that are very positive, 4.3% versus 2.7%. And finally, the impairments and provisions this year are lower. And those are important levers for earnings as well, for earnings growth. So if we look at the breakdown of revenues, net interest income growth, 13.3%, EUR 4.5 billion. They're up -- it's up 6% in the quarter. Here, we benefit from the positive impact of the CPI linkers in Turkey. We also have a positive evolution of the net fees and commissions, growing 6.8%. And that's driven by Spain, by Turkey. And that's despite the seasonality that we have always in the third quarter. Net trading income, on the other hand, was lower in the quarter due to the lower sales of ALCO portfolio holdings. Also, we had a bad quarter in results of Global Markets because of the adverse market movements in our positions. Total revenues, which are highly impacted by the hyperinflation adjustment, as I said, the main impact is in the other income line, are up 4.8% versus the third quarter of last year. And they are growing, the revenues are growing 1%, almost 1% in the quarter. So in summary, strong core revenues in the quarter. They are partially offset by the lower NTI and by the hyperinflation adjustment. Moving down to efficiency. One more quarter we maintained a very positive and widening jaws. I really love this picture, which I have been showing now for some time and in which you can see that our core revenues grew by 10% in the first 9 months versus the first 9 months of last year. And our costs were growing at 2.7%, well below the inflation, which is 5.5% in the last 12 months. So our efficiency continues to improve. And that was the case as well a year earlier. So we have quite a sustained trend here of showing commitment to efficiency, stands now at 49.6%, with an improvement year-to-date of 52 bps. And if we track the efficiency without the hyperinflation adjustment, the improvement is more than 100 bps. So in the context of our transformation, this is clearly one of our priorities. And our track record, I think, shows how well we're delivering and how high it really stands as a priority for all of us across the group. In fact, the improvement in efficiency is common to all business areas. As you can see here, costs are growing below core revenues everywhere. I would highlight Spain, where once again, we see operating expenses dropping by more than 4% versus a year ago, 4.4%. Mexico, with costs growing at 3.7%, clearly below the inflation rate. In Turkey, in which we have, of course, strong depreciation and high inflation, we're also containing the growth of costs. Those are some of the highlights. But in summary, we have maintained our focus everywhere. We will continue along this path. We have many initiatives -- to continue the initiatives really to transform our production model in all areas, in the areas that are dedicated to sales, the areas that are dedicated to operations as well as in the support areas across all countries. So what we're doing is we're leveraging technology to streamline our processes. One example of that on the sales side is how we continue to digitalize our business with impact on efficiency and also on sales themselves. I mentioned earlier, more than 39% of all units sold in the year up to September were digitally sold. That is up from 25% a year ago and up from 15% 2 years ago. And the weight of digital sales of our total sales is 31% if we measure them by their economic value. That's what's labeled PRV in the chart. And as you can see, that was below 12% 2 years ago. The growth in digital sales, it's really an exponential dynamic as we promote actively that all of our products are available in a DIY way, so do-it-yourself, self-service, for purchase through the digital channels. As you can see on the right side, this is true for many product categories. So digital sales are already relevant and they're growing in importance across various products, such as consumer loans or SME loans, also deposits or insurance. The strong growth is consistent across markets. As you can see, with digital sales representing 34% of the value sold in Spain, 25% of the value sold in U.S.A, 27% in Mexico, or 45% in Turkey, or 17% in South America. And just 2 years ago, these numbers were around 10% or lower, except in Turkey, so very strong growth and importance in the weight of digital. Some examples how this availability of the product to be purchased DIY and the improved experience drive the growth of digital sales. Every quarter, I show some examples drawn from our various geographies. This time, I'm showing, for example, the digitization of our global FX business. This has allowed availability 24/7 for not only enterprise clients but also for the retail clients. So they have the possibility of doing FX trades any time through the app, through the web, the Net Cash channel. This has meant an increase of 60% of trades in hours in which the branch network is closed. And more than 50% of retail, more than 30% of enterprise clients that hadn't worked with us in FX before are doing it now after this DIY implementation. And as you can see, the impact of that is that while the traditional channels have grown, because it has been a good year in terms of the FX business, they have grown 23%, the booster has really been on the digital side, where revenues increased 70%. So DIY also helped us to acquire new customers for the FX platforms and growing the open market. So the users of FX digital platforms have multiplied, as you can see on the right: In Turkey, by 1.4x; Peru, 10x almost; Colombia, 3x almost. So these are some of the examples of how that impacts. And an additional example would be how digital drives engagement, not only sales. And this is an example drawn from our business in Spain. So we see how clients that embrace digital show a faster engagement and higher revenue growth. So customers that were showing similar trends prior to becoming digital, we see how they drift apart in just a few months afterwards, with the gross margin of those that digitize growing 22% on average, while the non-digitized decreased 5%. And this is across various client segments. So it's controlling also for differences in the profile of the customers that digitize and that do not digitize. The difference comes actually from higher engagement and willingness to purchase more products from digital customers. So as you can see on the right, 4.7 products for the digital customer versus 3.4 products for the non-digital customer. Not only does digital drive total sales, it also helps to increase the contribution from higher-value sales, measured by PRV. And we do that with lower efforts from our commercial networks, as the digital sales are performed DIY by our customers. For example, here we can see in the case of Mexico, the value of sales has increased by 32% the last 2.5 years, since the first quarter of '16. And you can see how digitalization has had a big impact here, with digital sales growing by 282%, whereas traditional levers account only for 20% of the growth, with a 7% growth of those levers.And in order to achieve this growth, if we look below the glass on the efficiency, in order to achieve this growth through traditional channels, we estimate that we would have needed to increase the number of reps by 26% during this period. But in fact, we only increased them by 4%. So that's a savings of more than 1,000 additional sales representatives. And as you can see, the total number of FTEs to support this growing business has in fact decreased by 3%. We're also putting new solutions -- we continue to put new solutions in the hands of our customers every quarter. And we're doing that at an ever faster pace. To achieve a fast cycle, we have embraced Agile, as we have shared before. And we have embraced Agile at scale. Now we have more than 12,000 professionals working at BBVA with Agile methodologies and that's growing by the week. With Agile, some examples of the impact, we're accelerating our pace of delivery, with faster time to market. The features, for example, per developer per month have multiplied by almost by 7 in 2 years in Spain. We're also increasing the reusability of the components that are developed in any one of our markets by our teams. So we are ensuring that reutilization of those components from one country to another through a co-creation model of global and local teams that develop for each other, leveraging our global software development platform that we have talked about in the past as well. An example of how this works is precisely the FX DIY program I was talking about earlier, for which various countries benefited from each other's work and development, significantly accelerating time to market. So for example, after the first implementation in Mexico, in Peru, we compressed times by 20 -- they were down 25% and in Colombia, 50%. And we believe that this model of developing the best solutions for clients at a global scale with reutilization will differentiate us increasingly from local competitors in each one of our markets. Underpinning the growth of digital business, of course, is the continued digitization of our customer base. Digital customers are up 23% versus a year ago to 26 million clients, 49% penetration, very close to the 50% tipping point we will be crossing soon. Our mobile active customers grew 37%, with a 41% penetration, so continued sustained high growth rates near 40% and we'll reach the tipping point there sometime next year. And if we look at comparison with peers, it is hard to come by with consistent data among competitors, because different banks use different definitions of what is digital and mobile customer. So that is possible when we have some industry benchmarking exercises, like the one published by comScore on mobile financial services in the U.S. Well, in that one, BBVA Compass ranked #1 in mobile banking penetration in the U.S. market. And that confirms our view that we are leading digitalization of customers in our footprint. Another example is the global mobile banking app ranking recently published by Forrester Research. And in this global ranking, our mobile banking app in Spain came on top of the ranking as the world's #1 and that is for the second consecutive year. And this year, we're also very happy that our app in Turkey was #2 in this worldwide ranking by Forrester. So having 2 of BBVA's banking apps as #1 and #2 in the world is truly remarkable. And that's something we feel very proud, quite an achievement. So we see as the world is embracing digital, you can see how we continue to push to digital as strong as ever. And that has a noticeable impact on growth, also on costs and finally, on the appreciation of our customers, and that will itself drive further business. Going back now to risk indicators. This quarter, we have seen high impairments. They're up 16.5% versus last year, 36% up in the quarter. I mentioned earlier, driven mostly by Turkey, both by the macro update in Turkey as well as by provisioning for large tickets. This has resulted in a slight increase in the group's cost of risk from 0.82% to 0.90%, as you can see on the bottom. And then we have a positive evolution of NPLs, significant reduction this quarter, in fact, down EUR 2 billion in 1 quarter. We're down EUR 3.2 billion over the last 12 months. Our NPL ratio is down as a consequence from 4.4% to 4.1%, good coverage, 73%. So overall, we maintain good risk indicators and good asset quality. On capital, we also have a solid position. We have proven to be quite resilient, even in adverse market environment. We remain well above our target, with a ratio of 11.34%. And that includes all of the impacts associated with the sale of Chile and that was closed in July 6. In the quarter, we have positive impact of results, 35 bps. We reserved 13 for dividend payments and AT1 coupon payments. We have a negative impact of 11 because of the increase in risk-weighted assets in constant euro terms. That's mainly driven by activities in the U.S. and in South America, also in Mexico, where we have increased risk-weighted asset weights because of the change in mix. And we have other impacts that are quite significant this quarter. And they impact in 17 basis points. This bucket includes some market-related impacts, such as the FX impact from Turkish and Argentine peso depreciation. The Turkish lira was down 23% this quarter; the peso, 29% this quarter. Our hedging policy mitigates the impact of that. You know our sensitivity to every 10% depreciation of the lira remains low at around 2 bps, and 1 bp in the case of Argentine peso. But nonetheless, 23% and 29% have meant a drop in our ratio. Also, we have included there the mark-to-market of our available-for-sale portfolios. All in all, the ratio has decreased by 6 bps during the quarter. Once again, I always remind you of the high quality of our capital. We remain as the bank with the highest density and also the highest fully-loaded leverage ratio of our European peer group. We also have covered the AT1 and Tier 2 buckets on a fully-loaded and also on a phased-in basis, of course. And we have recently, in September, September 18, successfully issued EUR 1 billion of AT1s with a coupon of 5 7/8%. And the impact of that issuance have not yet been included in the ratios. We will do that in coming quarters as we receive the regulatory authorizations. To close off this section in the quarterly overview, our return metrics, our tangible book value per share increased 7.2% in the first 9 months of the year, including dividends, despite market conditions which took their toll on some of our assets. Profitability ratios increased and they improved in the year. ROE in the 9 months was 12.2%. That would have been 10.8% without the profit from Chile. And return on tangible equity, 14.8% or 13.1% without the corporate operation of Chile. Let me turn it now to Jaime for an overview of the business areas.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Thank you, Carlos, and good morning, everyone. Let me start again with Spain. In terms of macro, Spain will continue to grow above the eurozone and above its potential growth, with an expected GDP growth rate of 2.6% for 2018 and 2.4% for 2019. Net attributable profit in the first 9 months grew by over 10% year-on-year. And that's despite net trading income decreasing by 19% on lower portfolio sales. The main P&L drivers continue to be core revenue growth, cost reductions and lower impairments and provisions. Core revenue grew by 1.3%, consolidating the positive growth trend initiated at the end of last year. And that is thanks to the excellent performance of fee income that grew over 8%, coming mainly from asset management and retail banking services. This outstanding evolution makes us believe that we can beat our mid-single-digit growth guidance for the year. Costs continue to surprise, they're down by over 4% year-on-year, further improving the efficiency ratio to 54.4%. Impairments decreased by 35% year-on-year, as asset quality metrics continued to improve. NPLs decreased by more than EUR 500 million in the quarter. And cost of risk stands at 22 basis points as of September. And we expect 2018 cost of risk to remain below 30 bps. Provisions and other gains and losses also decreased by almost 30% year-on-year, mainly explained by lower restructuring charges. Regarding NII, it's down by EUR 43 million year-on-year in the first 9 months, explained by the lower contribution from the TLTRO. Last year, we accrued EUR 36 million per quarter while this year, we're only accruing EUR 24 million. The underlying business remains stable versus last year in a worse-than-expected environment, with subdued loan growth and where interest rate hikes have been postponed, but also with lower wholesale funding cost than expected. As of September, loans continued to go down by 1.5%, given lower growth, especially in the corporate and CIB portfolios, and in the ongoing deleverage in public sector loans. In the case of retail, the continued deleverage in residential mortgages has been fully offset by growth in the most profitable segments, both consumers and very small businesses. This better mix has allowed customer spread to remain flat. In summary, we continue to increase the profitability of the Spanish business despite the rate environment. Turning now to real estate. Our exposure to the real estate sector has decreased by 7% in this quarter alone, mainly thanks to the sale in July of our developer loan portfolio, called Sintra, that we've already commented before the summer. And as we've also have shared through our relevant event, the transfer of the real estate business in Spain to Cerberus has been closed October 10, selling 80% of the shared capital of Divarian, so not impacting yet the evolution in Q3. Regarding the P&L, year-to-date net losses amount to EUR 60 million. And that's almost an 80% reduction versus last year. And we remain committed to our guidance of EUR 100 million less net losses for 2018, which compares with the EUR 0.5 billion that we lost last year. This will clearly help to boost BBVA's profitability in Spain. Let's move now to the U.S. We continue to have a good macro expectation for the Sunbelt. GDP will grow by 3.7% in 2018 and by 3.8% next year, well above the U.S. as a whole. In the first 9 months, net attributable in the U.S. is up by 43% versus last year, with NII being the main P&L driver, growing by 12%, in line with our double-digit growth guidance, supported by higher volumes, a more profitable loan mix and higher customer spreads. Loan growth accelerates to over 6% versus a year ago, with an improving trend across the most profitable portfolios. It is worth mentioning the impressive growth in the consumer loan book, that also includes credit cards, mainly boosted by digital loans. For 2018, we continue to expect loan growth at mid-single digits, with a clear focus on improving the loan mix. The customer spread continues to increase, positively impacted by the rate environment, a more profitable lending mix and a successful strategy to contain the increase in the cost of redeposit, which is becoming more challenging as competition intensifies. Expenses are up by 6% versus last year due to higher marketing activity in order to expand our consumer lending business. Operating jaws, though, they remained positive, with efficiency improving 150 basis points in the last 9 months. Impairments are down by 25% versus last year. Remember that 2017 numbers included a one-off provision for both Hurricanes Harvey and Irma, while in the first half of 2018, we've recovered some of these provisions and we had also positive IFRS 9 macro adjustments. This means that Q3 provisioning level might be considered as a more normalized one as it was not impacted by any one-off. Year-to-date cost of risk stands at 33 basis points and remains below our low 40s guidance for year-end. Coverage increases in the quarter and again is up above 100%. So one more quarter of strong results as we continue to advance in the transformation of our retail franchise. Moving to Mexico. After July's election and the trade agreement with the U.S. and Canada, Research maintains its GDP growth estimates of 2% for 2018, a similar rate to the one expected this year. Once again, Bancomer continues to surprise positively, with sustained growth in all P&L lines. In the first 9 months, net attributable profit increased by 22% versus than our year-end guidance of double-digit growth, supported by good performance of revenues, expense control and a significantly lower impairment. NII continues to grow at around 8%, in line with our guidance and above activity, supported by the contribution of the securities portfolio. Loans are up by 6.5% versus last year. With quite a balanced growth between retail and commercial portfolios, mortgages and consumer loans benefited in the quarter from the increasing consumer confidence while commercial loan growth rates decreased after a very strong second quarter. Customer spreads decreased after higher deposit costs and a larger time deposit weight in our funding profile. The strong growth in fee and commission income continues, growing over 7% year-on-year. And that's above our guidance, mostly driven by investment banking, mutual funds and electronic banking fees. Our cost controls efforts further improved operating jaws, with gross revenue growing at 8% year-on-year, where our costs are growing below 4%, and as Carlos said, well below inflation. Despite being best-in-class, we continue to improve our cost-to-income ratio, which is down to 32.9%. Impairments decreased over 10% year-on-year, explained by better retail NPL dynamics. Year-to-date cost of risk stands at 282 basis points. That's 11 basis points below June levels, which makes us improve again our 2018 cost of risk guidance to around 300 basis points versus 320 previously. These solid results show again BBVA's leadership position in Mexico, both in terms of market share and profitability. Let's focus now in Turkey. After a significant tightening in monetary and fiscal policies, the rebalancing of the economy is already underway. BBVA Research expects GDP growth to moderate around the 3% level in 2018 and around 1% next year. We expect the current account deficit to adjust rapidly while inflation will gradually decrease over next year. In the current volatile environment, Garanti continues to show its resiliency, with net attributable profit growing over 18% versus last year in constant terms, thanks to strong revenue growth and a focus on cost control. NII is up by 26% versus last year, supported by a higher contribution from the CPI linkers and lending growth, especially in the TL portfolios, that are more than offsetting the contraction in the Turkish lira customer spreads and lower foreign currency loan volumes. CPI linkers contributions increased by EUR 160 million versus last year as a consequence of the higher inflation reference rate used. TL loan growth has decelerated to 9% year-to-date due to the slowdown in the economy and the increase in interest rates. We now expect Turkish lira loans to grow at single digits by year-end. The foreign currency portfolio will continue to deleverage, already down 12% year-to-date. Customer spread in TLs contracted 116 basis points in Q3, mainly explained by the significant increase in the cost of funding due to the higher rates in the system and the 19% increase in TL deposit volumes year-to-date, in addition to lower loan demand. For the full year, we continue to expect the NII, including the linkers, to grow at double digits. And although TL spreads will continue to go down in Q4, it will be offset by higher CPI linkers income, as the reference rate for the whole year is expected to be around 23%. Net fees continue to grow, over 30%, with the strong performance across the board. Good evolution of expenses, growing 11%, well below inflation, absorbing the negative impact of the depreciation of the Turkish lira on U.S. dollar-denominated expenses. Garanti continues implementing its new service model at branch level, now in over 800 branches, improving efficiency, customer experience and employee satisfaction. Operating income increased by almost 40% versus last year, showing Garanti's ability to generate pre-provision profit. This pre-provision profit has allowed impairments to increase by over 150% versus last year, driven by the negative macro and additional provisions in some large tickets, mostly U.S. dollar-denominated, without deteriorating the bottom line. The NPL ratio stands at 5.2%, increasing 68 bps versus June. Cost of risk year-to-date is up to 172 basis points versus 123 in June. And although it's difficult to provide a forecast in the current environment, cost of risk by year-end should be around 200 basis points, while large-ticket items might increase the number by between 30 and 40 basis points. And finally, South America. The macro continues to evolve unevenly across the region. On the one hand, we have growth in Colombia and Peru that will continue strong on the back of increased domestic demand and higher commodity prices. While on the other hand, Argentina is falling into recession, with a contraction of minus 2.4% expected for 2018. September numbers in South America are impacted by the sale of BBVA Chile in Q3, and as Carlos already mentioned, the hyperinflation accounting in Argentina, which impacts all P&L lines and makes comparisons difficult. Let me provide some more color on the evolution in the 3 main countries in the region. In Colombia, net attributable as of September grows by over 40% versus last year, supported by strong NII growth and lower impairments. NII is up by almost 10% versus last year and above loan growth. Loans increased by over 6% year-on-year, with growth biased to retail portfolios, while customer spreads also increased by 33 basis points versus last year, thanks to lower deposit cost. Provision decreased by 23%, as last year, we included a provision for a large ticket. In Peru, net attributable is up by 5.7% supported by NII growing at above 8%, also above activity, thanks to lower funding cost and demand deposit volumes growing at double digits. Lending growth stands at 3%, and as in the case of Colombia, retail segments continue to be the main driver, growing at 14% year-on-year, especially in consumer loans that are growing at 27%, where we are gaining close to 2 full percentage points in market share over the last 12 months. And finally, Argentina. In Argentina, hyperinflation accounting has reduced year-to-date results by EUR 190 million to near 0. NII benefits from high rates and better customer spreads and our positions in short-term government bonds. The NPL ratio remains at very low levels at 1.1% and much better than peers. And now back to Carlos for some final remarks.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, Jaime. My final remarks briefly are just to reiterate the solid set of results that we are presenting today for the third quarter, supported, as you have seen, by core revenues. Secondly, we are seeing how digital leads to growth and how digital leads to efficiency gains. We maintain our solid and resilient capital position above target. And we are delivering on profitability and tangible book value growth despite the difficult market environment. Thank you very much for listening. And now we turn to Q&A. Gloria?

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

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

[Operator]

Our first question today comes from José Abad, calling from Goldman Sachs.

[José Maria Abad Hernandez, Executive Director]

Congratulations, Carlos, for your new appointment. I guess this will be the last results call with us. So my first 2 questions from my side, the first one on Turkey. I mean, a bit on credit quality, obviously, I mean, if you could give us some color on how Stage 2 loans have evolved in the quarter and maybe your expectations for Stage 2 and Stage 3 into Q4 and maybe '19 as well. My second question is on Spain. We had this agreement between PSOE and Podemos on October 11. One of the proposals or the agreements they reached is actually a 5% reduction in the exemption for dividends and profits generated in foreign subsidiaries. So I was wondering how is this going to impact you? And maybe if I can, a third question is when will you be in a position actually to disclose your digital P&L and balance sheet as opposed to your non-digital P&L and balance sheet, so that we can actually move the discussion from the pure descriptive space into the valuation space?

[Carlos Torres Vila, CEO & Executive Director]

Thank you, José. I think on cost of risk and the NPL dynamics in Turkey, Jaime has given quite a bit of detail. But I'll turn it over to him after. But on the tax, really, this is one area where there has been a lot of talk. What we have seen so far, it's not much detail. And yes, what has transpired is this idea that we might need to be paying a tax of 5% on the dividends that have already paid tax in our subsidiaries. We are lacking details. If that was to be the case, then depending on what our payout policy is from our subsidiaries to BBVA back here in Spain, we would need to be paying tax, or incorporating a tax base, I should say, those dividends and then -- 5% of those dividends, the other 95% would be exempt. In any event, this would represent not a material amount for the size of the group. Regarding the digital P&L, we don't like to talk about the digital P&L and digital balance sheet, because we do consider our business as one. This is very important. Digital is really a booster to the business. So in fact, the impact of digital on the business you're seeing every quarter, you're seeing in this quarter, you're seeing in that nice chart I like, where you see growth of revenues of 10% or more, core revenues, and costs growing less than 3%, 2.7%. And this has been sustained quarter-after-quarter for 3 years now. And we will continue showing that. And I think that's the best way to see where digital shows up in the P&L. That notwithstanding, we will try in the future to go beyond the examples that we're sharing every 3 months to provide a more comprehensive set of metrics so you can track that impact. But again, it will not be a digital P&L separated from the entire P&L of the bank. Jaime, do you want to comment on Turkey NPLs?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Yes, sure. NPLs in Turkey in current terms are more or less flat. They stand at around EUR 2.8 billion. And that's mainly Stage 3 loans. In constant terms, which is probably a better guidance of -- a better reflection of the evolution of the underlying credit risk, they get up in the quarter by almost 20% from EUR 2.3 billion to EUR 2.8 billion. What we've done, as we've guided that we were going to do, is to increase our provisioning over the last -- over the second half of the year. In the case of -- in this quarter, cost of risk has almost doubled to 2.79 basis points. That generates that cumulative cost of risk of 172 basis points. This number includes macro adjustment of EUR 125 million on top of the EUR 20 million that we did in the second quarter. In local terms, the Stage 2 loans remained more or less flat, so it hasn't changed this quarter.

[Operator]

Our next question is from Alvaro Serrano calling from Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

First of all, on Turkey, on the visibility you have in Turkey at the moment. First of all, if you could comment on this contribution of the CPI linkers. You mentioned 23% expected inflation by year-end. But just if you can walk us through what the contribution in Q3 was versus Q2, just to understand what the underlying NII dynamics there and how resilient the business is. And also, just a follow-up on the provisioning, do you -- I think you were guiding to around 200 basis points. With the large tickets, you're now saying 230 to 240, if I understood. If you can give us any color on the visibility of the business, if on your monthly checks, on your weekly checks, how's asset quality deteriorating versus your expectations? And then on the other question is on Mexico, numbers seemed better than expected. If you can comment on overall loan growth and now that the change in guidance has taken place, how do you think things are going to evolve going forward? And in particular, if you think things like the cancellation of the airport in Mexico are going to have -- how do you think that might impact confidence and the way you look at the growth of Mexico?

[Carlos Torres Vila, CEO & Executive Director]

So starting with that one, and then I'll turn it over to Jaime for some more details, but starting with the Mexico question, we're seeing quite strong growth in Mexico, and as you have seen, very strong results one more quarter. So here we have gone through periods of lots of uncertainty over the last 1.5 years in the period leading to the elections, with all the discussion around NAFTA, immigration, the wall and the uncertainty of the election itself. Most of those have been cleared, one way or the other, and mostly on the positive side with -- we're still expecting for the U.S., Canada, Mexico agreement to be passed. But that's going in the right direction. It's a good agreement and provides certainty. Also, the relations among the various parties there are going in the right direction. And yes, we have some decisions, like the one yesterday on the airport, that might have some impact. But overall, we continue to see quite strong loan growth, high single digits as you have seen, it's 6% growth year-to-date. And what we expect is that strength to continue as the new government takes office, which hasn't happened yet. Regarding Turkey, Jaime can provide more details, but basically, the linkers is very important to understand that those are hedged. So certainly, the rising rates in Turkey, which is absolutely what's needed for that economy, so we're happy to see since our last call that the government and the central bank and so on have really taken policy decisions that are going absolutely in the right direction of slowing down the economy and rebalancing it to a current account deficit that was very high and actually turning it around. Also on the fiscal side, which is a strong position that they have in terms of debt, but to incorporate some savings there and really slowing down. The slowdown is very evident in loan production, which is quite low over the month of September, October as well. So we will be seeing loan volumes tapering off completely in Turkey, which is exactly what's needed, as I'm saying. But with the rising rates, with not new production, certainly our NIMs are compressing and they're compressing fast. And we will see that in the fourth quarter. It'll be very tough on the customer spread side, but the linkers are precisely the hedge for that. And that's why we have them. So in the third quarter, we had a significant increase in the contribution that Jaime laid out. In the fourth quarter, we'll see that. Probably the linkers are going to contribute double the amount in euro or in lira, I should say, than they have contributed in the third quarter. That's roughly number, if you'll do the math, of going from the inflation that's now in the numbers, which is roughly 14% year-to-date, to the 23% that we expect to finish the year off. So that will compensate, maybe not completely, but it will compensate quite a lot of the impact of the NIM compression. And on the cost of risk, I shouldn't say much more. I think the macro adjustment that Jaime referred to twice already for the third quarter and the one that we will have in the fourth quarter is the IFRS provisioning that really it's front-loaded in a way. So looking forward, we are seeing deteriorated macro environment in Turkey. And we have seen that in the third quarter. We will see that more in the fourth quarter. So we're provisioning for that deteriorating environment now. That's what IFRS 9 requires and that's what -- why the cost of risk has gone up and will continue to go up. Now, will it be 200, will it be 230, will it be 240? We don't know. It really depends on the large-ticket items beyond the 200. So I don't -- Jaime, I don't know if you want to add anything?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Maybe just the numbers, because you said it all. And the CPI contribution in the third quarter, Alvaro, was EUR 245 million. That's EUR 139 million more than what we obtained in the second quarter. Regarding cost of risk, the only thing to add is that we're not seeing deterioration in the retail portfolios. And all provisioning increases are in the large-ticket foreign currency book.

[Operator]

Our next question today comes from Sofie Peterzens, calling from JPMorgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

Here is Sofie from JPMorgan. So just going back to Turkey. Could you just remind us what the book value minority interests or the value of your minority interests in Turkey are at the moment? And could you also just confirm that you don't have any intra-group credit lines or other kind of credit support lines to Garanti in Turkey? That would be my first question. My second question would be if you could also remind us on your sensitivity to higher interest rates and FX movements in Spain, Turkey, U.S. and Mexico and Argentina. I recognize that you gave a couple already earlier on, but if you can give for all these countries. And just lastly, how should we think about Trim? Have you taken the Trim impact already?

[Carlos Torres Vila, CEO & Executive Director]

So on Turkey, as you know, we -- not only in Turkey but everywhere, we follow a multiple point of entry strategy. So the exposure that BBVA has to any one of our subsidiaries is limited to the book value of our equity. And I can confirm, to your question, that there's no intra-group lending to Turkey or to any one of the other subsidiaries for that matter. The book value stands at EUR 3.5 billion in September. So that's quite a drop from June because of the lower value of the lira. That's EUR 3.5 billion, as I say. You're also asking about minority holdings. Our minority interests would be EUR 2.9 billion, yes. And just to finish off, maybe it's interesting that the risk-weighted assets that we incorporate in the group numbers for the Garanti, 100% of Garanti, which is what we consolidate, amount to EUR 52.8 billion. I think those are the basic numbers for Turkey. On Trim, we have only received the qualitative results so far. So there hasn't been any impact because we're still waiting for the letters. But from what we have received so far, we don't expect any material impact coming from Trim. And do you want to comment on the sensitivities to interest rates?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Yes, sensitivities remain quite stable versus last quarter. In Spain, activating management levers, we continue to believe that for every 100 basis points increase in rates, our NII will grow roughly 15%. In the case of the U.S., it's down below 6% at -- and currently stands at 5.6%. Mexico is positive, 3.5%, for every 100 basis points increase. In general in South America, it's around 2 percentage points for every 100 basis points increase in the curve. And Turkey, it's more or less flat. We have a negative sensitivity to Turkish lira rate rises of above -- to 1%. And it's positive also of around 1% for the U.S. dollar. So overall, pretty much neutral. This is, of course, 12 forward -- 12 months forward view, okay, as always.

[Operator]

Andrea Unzueta from Crédit Suisse is our next question.

[Andrea Unzueta, Vice President]

I have 2 questions. The first one is on Mexico. If you could give us more color on how you expect NII to develop. Your loan book is growing by 6%, but the sector is growing at 11%. You seem to be more active on corporate loans, which are, according to the regulators' data, the ones where pricing is becoming more of an issue. I know interest rates are going up as well, and so if you could give us your expectations for the line into 2019. And my second question is on costs in Spain. I mean, you're declining by 4% year-on-year, but how should we see that line going forward? Is Q3 the new level? Should we see more declines? And that's it.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, Andrea. So in Mexico, regarding growth in comparison with competitors, I think you should look for -- at the whole picture, meaning not only the growth of the loan book but also the cost of risk. So we have purposefully shied away from the riskier segments on credit cards and consumer side, for example. That shows up in better risk metrics. Probably also shows up in less growth. But we're very happy with our 6% growth year-to-date. And in terms of NII going forward, we're expecting high single digits for this year. We're not providing guidance for '19 yet. Costs in Spain, we're expecting to continue this 4-ish percent down in '18. So we should see similar numbers, I think, I hope, in the fourth quarter. Surely, we are working hard on maintaining our cost discipline. And again, we're not providing guidance for '19 yet, but I would just give the general comment that I gave already in the presentation that we will strive to be more efficient everywhere, and if there's one place where that continues to be very important, it's in Spain, where the top line still hard to grow it with the negative interest rates.

[Operator]

Our next question is from Carlos Catena calling from Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

A quick one on cost in Turkey, which, obviously, you are doing very well in containing costs and inflation pressures. Could you elaborate a little bit on the measures you've been taking to contain cost growth in the inflationary environment? And the other one is NII in Spain. In the past, you discussed flat NII for second half '18 on the back of some rate hikes, and this hasn't much relied on and that seems to be 240 for 2019. So not asking for your outlook for the whole 2019, but the evolution of NII over the coming quarters. In the absence of rate hikes, should we continue to expect more declines in the top line? Or how do you position yourself? Yes.

[Carlos Torres Vila, CEO & Executive Director]

So on cost cutting in Turkey, cost containment, I should say, it's been a variety of things. One of the things, for example, just to give you a glimpse, is the Garanti Plus program, where we have completely redefined the roles of the branch and really going from separated figures of sellers and tellers to the seller/teller. And this Garanti Plus project, which was -- started implementation late last year, has been rolled out to all branches, has had a significant impact on productivity, allowing us to have more sales with less people, put it simply. Other ideas like improving our back-end processes and driving digitization continue also to support that. So it's -- those types of things that are driving efficiency is really rethinking our sales processes, our operations processes and our support area processes. On NII, Jaime, do you want to comment on that one?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Yes, sure, Carlos. It's been -- Carlos, it's been quite difficult to understand you, so I'll try to guess a little bit what the question was. On NII in Spain, it's quite flat versus Q2. It's flat, the average volumes. They're flat, the customer spreads. And on a year-on-year basis, the main explanation is then the lower accrual coming from the TLTRO. On the underlying dynamics, it's complicated to grow the loan portfolio. The deleveraging of the mortgage book continues through at lower rates than last year, 3.7% versus 5.3% in 2007 -- in 2017, sorry, and the public sector book continues to deleverage. What I think is important is the significant change in mix that Spain is achieving, thanks to very good behavior of both consumer loans and very small businesses’ portfolios. The 12-month EURIBOR has started to slowly inch up. We are not at the minimum levels that we've had 2, 3 months ago. Let's hope that this is the beginning of something that I think should materialize in a more tangible fashion, probably in the second half of 2019.

[Operator]

Our next question today comes from Stefan Nedialkov calling from Citigroup.

[Stefan Rosenov Nedialkov, Director]

It's Stefan from Citi. A couple of questions on my end. When it comes to Mexico, the AMLO referendum and the decision on the airport, that is sending a message about investment. And given your strategy in growing corporate lending more in Mexico, how do you see the interaction between the new AMLO administration from the 1st of December and corporate loan growth going forward? In addition, do you expect any regulatory caps on rates on the consumer side of things in Mexico going forward? My second question is on digital. And specifically, when I look at the U.S., costs seem to be having a step-up. It was in the fourth quarter of last year, and this year, it's in the third quarter. Could you give us some color on what's causing the step-up? Is it your investment in Compass on the digital side or Simple? And a broader request beyond that, if you could at some point start disclosing investment in digital versus realized cost saves, and that goes back to Jose's request. It would really help us understand how your progress on the digital front and how that actually affects the bottom line.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, Stefan. I think on Mexico, I already commented as much as I could comment. So we have had a string of uncertainties over the last 2 years. Those have been resolved mostly to the positive side, and that's why sentiment has also been improving towards Mexico on the market versus what had been the case quarters past. Now we have this news from yesterday, and I think it's really early to say what impact this might have on confidence. We hope it doesn't have a negative impact. We will need to see. And we don't have any indication or news that there might be any regulatory action of the one that you suggest, regulatory caps, et cetera. On digital and the U.S. costs, it is true that we have had an increase of 6% in the U.S. expenses. That has been due to higher commercial activity. So it's really investing in the growth. So we have, as you know, a franchise that we want to grow because we have less than the critical size that we would like to have in the U.S., primarily in the footprint where we're present. So we're not talking out-of-footprint investment, but we are growing our headcount. We're also investing in marketing to expand our business, our consumer lending business, for example. But also in the U.S., where we do see that trend, which is wanted, so we are investing in growing the business. We're seeing positive jaws with revenues growing 9% and the expenses, as I say, 3%. Regarding the digital equation, I agree and as I said earlier, we will strive to provide better metrics and a more comprehensive picture for everyone to understand the positive impact that -- what we're doing has on the business. I would say, however, that it's not that we are investing in digital additional amounts versus what would be the run rate. What we're doing is really redirecting our resources in a dynamic way to different things. So I would say that the total cash out hasn't increased because of digital. What we have done really is, dedicate resources to things that have impact, and those things are mostly bringing our products to DIY, working on better advice-based products, leveraging data. It's really smart interactions. So those are the things that drive more engagement, more sales and better satisfaction. And I think we have shared in some meetings the mechanisms through which we do the dynamic allocation of resources every quarter to ensure that we are dedicating the cash out to the things that matter strategically and financially. And that's the best summary I can give you now, but we will, as I say, strive to provide better metrics for you and all to understand the impact of what we're doing.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Carlos, let me clarify one thing because Stefan as well as Andrea has mentioned it, and I already shared this in the speech, that the balanced growth that we've achieved in Mexico over the last year is quite astonishing. The retail portfolios have grown by 6%, exactly the same rate as the commercial portfolios, 6.0%. So it is not true that we're growing faster than the commercial portfolios. That was true in the second quarter, but that has been significantly corrected in Q3.

[Operator]

We now have a question from Martin Romero (sic) [ Marta Romero ] calling from Bank of America Merrill Lynch.

[Marta Sánchez Romero, Director and Analyst]

Following quickly on the U.S., are you not worried that we may be a bit late cycle and you're pushing for growth in consumer lending? Your cost of risk is already at 52 basis points. Where do you see the structural cost of risk going forward given the mix of your portfolio? And then 2 quick questions, one in -- on taxes. The tax rate in Spain was very low this quarter. I don't know if there's anything extraordinary. And at the same time, it looks like at the Corporate Center, the tax credits have been increasing. So it would be great to have a little bit of visibility on taxes going forward. And lastly, on capital, do you think we could see the SREP buffers widening given pricing risks in Turkey?

[Carlos Torres Vila, CEO & Executive Director]

Well, on SREP, we're waiting for the exercise to conclude, so we couldn't comment on that until we get some feedback. Certainly, we have conducted our stress tests. And last time around, we came very strong. And given that, that has quite an impact and given also how well we have withstood what has happened this quarter, I think is the best indication of the resilience of our diversified business model. So even with very, very vertical line depreciation in 2 of our markets, our capital has sustained very well. So all that, I think, gives us confidence that we are where we should be, very strong position in capital, and that the requirements shouldn't change. But again, we will see what happens when the SREP feedback comes. U.S., are we in late cycle? I think that's a great question. We're absolutely looking at when -- the cycle indicators that might point to the cycle turning. We don't think there's a probability of recession in the next 24 months, but we're certainly looking at those indicators. We're focusing our growth in the consumer side. It's in the -- on the less risky segments. So we're focusing mostly in-footprint and mostly in quite high FICO scores. We're tracking, of course, the risk metrics on all vintages as we originate, and we adjust our policy accordingly. And in the big scheme of things, we're not talking about a portfolio that has a size that will have a significant impact on the overall cost of risk, which, as you point out, in the U.S. has been quite low. Jaime commented we had some extraordinary write-backs and positive recoveries this year, which will not repeat. So we'll probably be in the low 40s cost of risk. And then, of course, if and when the cycle turns, that would change. That would change to be higher. And then there were some questions that I wouldn't know on tax rates and Corporate Center tax credits, Jaime?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Yes, on tax rate. First of all, the overall tax rate is exactly the same as it's been over the last 2 quarters, it stands at 27.2%. What we've had this quarter are some changes between Spain banking activities and the real estate portfolio. But overall, they are more or less the same in Spain. And then as you know, the Corporate Center is always used to adjust the group global tax rate. And as a result of the hyperinflation adjustment in Argentina, we've had also to adjust the relative rates in South America, mainly because of Argentina and the Corporate Center. That's -- those are the only changes.

[Operator]

Our next question today is from Ignacio Ulargui calling from Deutsche Bank.

[Ignacio Ulargui, Research Analyst]

I just have one question. If you could just elaborate a bit on what would be your TLTRO exit strategy. So what has been the takeup? How do you think or you're planning to replace that, particularly looking to the potential impact on the net stable funding ratios?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay, our takeup, it's EUR 23.7 billion. We currently have a very high cash position that, together with the high-quality liquid asset portfolio that we've already have prepared in order to meet this payment, will more or less allow us to fully pay that amount. It is true that we're seeing already discussions been happening over the last 2 months on a potential TLTRO extension, which is clearly something that we did not completely rule out. As you say, 12 months before maturity, the NSFR will be affected. We have a very higher net stable funding ratio, well above regulatory requirements. So that will not be a significant impact on us. But we will be forced to issue longer term during 2019. But that is completely consistent with the -- of issuing the funding plan that we have in order to meet our annual requirement. So nothing that is going to change, as I've always said, structurally, the funding structure of the bank.

[Operator]

Our next question is from Ignacio Cerezo, calling from UBS.

[Ignacio Cerezo Olmos, Executive Director & Equity Research Analyst]

Just a couple of things from me. One is on Turkey. If you can give us your best approximation of when the large tickets on the macro adjustments are going to start fading in terms of provisions. And then the second one, I understand the hyperinflation adjustment has also had a retroactive impact line by line in Argentina. So if you can give us color in terms of the new run rate, actually, of profits in the country.

[Carlos Torres Vila, CEO & Executive Director]

So hyperinflation, yes, there is a restatement of all the lines, but with a 0 effect, and that restatement has a 0 effect on the bottom line. It's really taking all the past pesos and bringing them forward to today's pesos. So it sort of inflates the local account in pesos to reflect that. But then, when we bring that to the group, it has 2 negative effects like we explained, which are recorded then in the other income line and basically mean that a lot of the profits that we make in Argentina are directly taken into the book equity without going through the P&L. So we do increase our book, but they -- we don't call it a P&L because it's a reflection of the higher inflation. I think that’s the sense in which you should think about the hyperinflation. And that diminishes our profits in Argentina in a very significant way as we consider most of the profits really just inflation adjustment. Jaime?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Yes, completely. At the end of the process, yes, the hyperinflation adjustment is neutral in CET1 ratios. It's more or less neutral in terms of book value, and what we reduce is the monetary illusion in the P&L. So going forward, it is true that the real contribution in P&L terms of Argentina will be greatly diminished. But on the other hand, the depreciation of the currency will not affect negatively our tangible book value. In the case of Turkey, clearly IFRS 9 front-loads negative impacts. We will probably see very high cost of risks for the whole 2019. That's probably our expectation today. As the macro keeps deteriorating, that is something that will be recognized faster than before. It's a lot more complicated on how large tickets will behave. But again, I think that 2018 and 2019 will be 2 high cost of risk years in Turkey.

[Operator]

Our next question is from Mario Ropero from Fidentiis.

[Mario Ropero, Research Analyst]

My first question is on some indications of the risk in the euro area ALCO portfolio. Maybe you can give us the duration of the book, also the duration of the unhedged fair value portion and perhaps the exposure to Italy. And then my second question is if you can disclose the amount of legal provisions in Spain, how much is mortgage floors and how much is everything else?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay, on the structure of the ALCO portfolio. The overall size of the ALCO book in Spain remains quite stable versus Q2, around EUR 28.5 billion. And the duration is very small, 3.3 years, and that is because we have very significant maturities at the end of this year. The exposure in Italy, it's EUR 7.5 billion, almost half of it matures before December -- before year-end. On the case of legal provisions, the only one that we've shared is the mortgage floor provision. Remember that we accounted EUR 577 million at the end of last year, and that provision has remained more or less enough. So we don't think that there's anything particularly relevant along those lines.

[Carlos Torres Vila, CEO & Executive Director]

But I'd like to comment here on the recent discussions around the Supreme Court ruling that we saw October 16 and the upcoming meeting that's set out for November 5, because the question, Mario, that you ask might be prompted by those news. Here we should say that first of all, in terms of the tax, this sort of stamp duty tax we could call it, [Foreign Language] is a tax that, of course, has been paid to the state, so we have not received any amount from clients for this concept. And the reason why the clients have been paying this and not the bank has been because the regulations established so. So this is not the fact that the customers paid is not a result of contractual clause with them, it's a result of a regulation, a regulation that has been in place for more than 23 years. And before that, the situation was actually the same actually since 1980 at least when the prior law was there. This tax has always been paid by the client, as is the case everywhere else. It's the case in the U.K., in France, in Italy, in Portugal, even in some regions in Spain that have their own fiscal rules, it's so as well. So we don't know what's going to happen November 5. But you should all be very clear that we have been applying a regulation, and therefore, we should not be penalized by applying a regulation. Going forward, there might be a change in the rule, and we will, of course, accept that and continue our business with changed rules on who pays the tax, no problem. But looking back, there is absolutely no way that we can be penalized for applying a regulation. That's why we have no provisions for that, and we have no likelihood in our mind that we should be liable for anything other than what happens going forward.

[Operator]

Our next question is from Britta Schmidt calling from Autonomous Research.

[Britta Schmidt, Partner, Spanish and German Banks]

I've got 2 questions, please. Just coming back to Mexico. Looking at the constant euro numbers, the loans were flat in local currency Q-on-Q. Well, maybe you can break that down a little bit in terms of what was seasonality, what were the FX impacts? And also explain why despite this, we saw the net interest income increase 5% Q-on-Q? Well, maybe you can go a little bit into the drivers here. And then on Spain, a question on NII. The loan yield has been flat for over the last kind of 6 quarters, more or less. Obviously, we've had negative EURIBOR resets play a role, but can you give us an idea as to what the accretion to the loan yield is from adding more consumer and very small business customer loans on a quarterly basis, let's say? And maybe you can also give us an indication as to what you expect versus your prior guidance of the second half being similar to the first half in terms of NII.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay, I didn't understand you well, Britta, but I'll try to do my best on the first question. I think you were asking on quarter-on-quarter P&L evolution in Bancomer. Okay, if that was...

[Carlos Torres Vila, CEO & Executive Director]

No, no. Loan, loan.

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

Loan.

[Carlos Torres Vila, CEO & Executive Director]

She was asking loans.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Oh, loans.

[Carlos Torres Vila, CEO & Executive Director]

Yes, yes.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay, the reason why -- oh, loans.

[Carlos Torres Vila, CEO & Executive Director]

How FX affects the growth rate.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Oh, okay, okay, okay. Now, okay. Perfect. The loans. The loans in the quarter were affected by the decrease in the wholesale portfolio, as I've been mentioning now for quite some time on the call. They went down by 3.6%. Clearly, this was affected by the fact that the peso behaved very well over the course of the quarter, appreciating 5%. And that's a portfolio which is mainly foreign currency denominated. Excluding the FX impact, quarter-on-quarter growth would have been 1%. What I think is more important than loan volumes is the fact that top line growth in the quarter was very strong. NII grew by 5% over Q2. Provisioning requirements are flat, EUR 337 million. And the biggest difference, it's in the provisions and other results line in which we have a negative this quarter and was a positive in Q2 because we sold some real estate assets at a very significant profit. And that's what I think explains the P&L in my comment.

[Carlos Torres Vila, CEO & Executive Director]

Now there was another question on Spain NII. But before you answer that, just to complement, NII was also supported this quarter by a contribution from Global Markets and from the ALCO portfolio as well, which behaved well. So that supported the NII growth beyond the growth in loans that Jaime just commented. And there was another question from Britta, Jaime, on the NII dynamics. I didn't follow very well because it was quite a detailed question.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Yes, I think I already tried to answer that. Clearly, loan growth is not easy to achieve. I don't think we'll be able to grow our loan portfolio in 2018. It will start growing in 2019. Customer spreads have been flat for 2 years, almost 2 years. Hopefully, higher EURIBOR rates, especially in the second half of next year, will allow the positive sensitivity to start to materialize in our NII line. But clearly, NII in 2019 will still be quite challenging, especially on the first half.

[Operator]

Our final question today comes from Carlos Peixoto calling from CaixaBank.

[Carlos Peixoto, Analyst]

First of all, I would just apologize if I might be repeating any questions because I was cut off for a moment. But I was wondering if you could give us some color on how do you see cost of risk in Mexico for the full year. And also in Spain, on NII, your previous guidance, or last quarter, you were giving us a guidance that the second Q -- second half will be more or less at the same levels as the first half, which basically meant something in the area of EUR 3.7 billion -- EUR 3.67 billion in the second half. Do you maintain the -- sorry, in the full year, do you maintain that guidance for the full year? Or does it seem a bit -- is difficult to reach at this point?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay. As I think we said over the presentation, cost of risk in Bancomer keeps surprising on the positive side. We are guiding down again this quarter, and we now expect cost of risk at the end of the year to be around 300 basis points. Cost of risk as of September, it's a little over 280 basis points, when at the beginning of the year, were expecting something around 350. The very good behavior of the real -- retail portfolios and the credit policy decisions that Carlos has mentioned before has clearly benefit the franchise significantly. And as you say, regarding NII in Spain, the guidance remains the same. Second half NII will more or less be the same as in the first half.

[Operator]

Our last question today is from Francisco Riquel calling from Alantra.

[Francisco Riquel, Head of Research]

Yes. Just a follow-up on the mortgage litigation issue. If you can please update your exposure to IRPH mortgages and multicurrency mortgages?

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Okay. Our current exposure to IRPH mortgages are EUR 4 billion. It is EUR 4 billion. And our current exposure to multicurrency loans, mainly in Japanese and in Swiss francs, is EUR 450 million.

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

Okay, thank you. Thank you, Paco. Thank you all for joining this call. As you know, the entire IR team will remain available to answer any further questions you may have. Thank you very much, and have a good day.

[Carlos Torres Vila, CEO & Executive Director]

Thank you. Bye-bye.

[Jaime Saenz de Tejada Pulido, Chief Financial Officer]

Thank you.