Banco Bilbao Vizcaya Argentaria SA

MAD:BBVA

Earnings Call Transcript 2017-Q4

[Gloria Couceiro]

Good morning, everyone, and welcome to the Fourth Quarter 2017 Results Presentation of BBVA. I'm Gloria Couceiro, Head of Investor Relations, and here with me today is Carlos Torres Vila, Chief Executive Officer of the Group; and Jaime Saenz 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. For the Q&A session, as always, we would appreciate all the participants to try to make their calls from their land lines and avoid using the speakerphone.And now I'll hand over the call to Carlos.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, Gloria. Good morning, everyone. Welcome to BBVA's Fourth Quarter and Full Year 2017 Results Audio Webcast. Net attributable profit for the quarter was EUR 70 million, including the EUR 1.1 billion noncash Telefónica one-off and EUR 1,193 million excluding that. In a quarter in which the positive trends of the previous quarters continue for the full year, the results were EUR 3,519 million, slightly higher than last year, and EUR 4,642 million, excluding the Telefónica one-off, which is a 20% increase versus 2016, excluding the mortgage floors in 2016.The key highlights continue to be our strong core revenue growth. You can see that net interest income plus fees are growing above 10%. Secondly, the excellent evolution of costs, once again, with our efficiency ratio significantly improving by 276 basis points in the year to 49.5%. Thirdly, the risk indicators continue to be sound, with a drop in NPLs of 47 basis points to 4.4% and a stable cost of risk of 0.87%. Our Common Equity Tier 1 fully loaded ratio is 11.1%, slightly above our 11% target, with an increase of 18 basis points in the year, even when we increased our stake in Garanti, which, net of the sale of CNCB, consumed an additional 13 basis points. So capital would have increased by around 30 basis points in the year without these transactions. We remain focused on creating value for the shareholder but significant negative FX movements mainly in the U.S. dollar, Mexican peso and Turkish lira significantly affected the net book value of our franchises in those countries. And as a result, the tangible book value per share plus dividends only grew by 3.2% in 2017.Finally, in the year, we have accelerated our transformation. We made good progress in our 6 strategic priorities with tangible results across the footprint. We increased the number of mobile active customers by 44% to nearly 18 million, almost double our digital sales in units from 7 million to 14 million. And in fact, 28% of the units we sold in the year were through digital versus 17% 1 year ago. That's for the whole year. And we also achieved excellent results in customer satisfaction, with NPS improvement and achieving the number -- or keeping the #1 position in 8 out of 11 of the countries where we operate.In a flash, the results were strong in '17 in the entire year with core revenues, net interest income and fees and commissions growing 11% while costs were contained and increased only 2.2%, resulting in a pre-provision profit of EUR 12.8 billion growing at an impressive 14.1%. Compared with what that growth of pre-provision profit, impairments were quite flat, growing 1.2%. And the bottom line net attributable profit, as I mentioned, was affected by Telefónica, but grew 19.7% in comparable terms versus '16 or 26.3% in constant euro basis. The fourth quarter itself was also strong with excellent trends in core revenues that grew even faster while the growth of costs remains more contained, leading to a pre-provision profit growing by 17.4% to EUR 3.3 billion. And the bottom line grew by 10.2% in comparable terms versus the fourth quarter of last year and 20.2% in constant euros. As usual, next, I'd like to go over our quarterly results in a bit more detail. Net interest income growth was good, in fact, accelerated. It's up 14.3% versus a year ago, and it's also up in the quarter by 8.4% for a total of EUR 4.8 billion in the quarter. We benefited from higher contribution of the linkers in Turkey, but we also had a remarkable growth of the NIMs in all the business units in the year leading to a yearly increase of 10.6%. Also good news in net fees and commissions that grew faster in the fourth quarter. They're up 13% versus a year ago with the growth across the board, and also in the year, it's almost double-digit, 9.4%. Net trading income in the fourth quarter was EUR 562 million. We had more sales in the ALCO portfolio and positive results as well from the FX hedges in the corporate center. In total, revenues are up 10.5% as I mentioned in the fourth quarter versus the same quarter last year and 7% versus the prior quarter. And core revenues, as mentioned, strong and recurrent in the year.Going down to the cost, operating expenses maintained as they have over the year, a good trend year-on-year growth of 2.2%, well below the 7.9% growth in revenues and also well below the 9.2% growth in revenues, excluding NTI. Therefore, our efficiency improves in the year by almost 300 basis points to 49.5%, clearly below the peer group average. The improvement in efficiency has been in all units with costs everywhere growing at or below inflation except in the U.S. where we're launching new digital businesses. So in summary, we have maintained our focus on efficiency with positive impact here of our efforts to transform and become more digital. We had an excellent year, I think, in this respect, and I'm very happy with the effort, commitment across the group in all areas, which, I'm sure, will continue in 2018 because efficiency continues to be a key strategic priority. Operating income grew significantly by 17.4% versus 2016, and 9.2% versus the third quarter with the total growth in the year of 14%. The rates of growth, as you can see, are outstanding, and we have a solid pre-provision profit because of our business model, which is also very diversified. Operating profit growth was high in all markets, except Spain, where also last year, we had higher NTI because of the VISA capital gains. And we had also higher sales in the ALCO portfolios last year -- I mean, in '16. But ex NTI, the operating income in Spain also grew by 9.5%. We had a particularly good growth in Turkey year-on-year, 28% almost; the U.S. is up 26%; strong growth also in South America, 15%; and Mexico, 9.5%. So at the end of the day, good numbers across the board. Risk indicators maintained sound strong levels. Loan loss provisions and real estate improvements were EUR 1.1 billion, growing in the quarter mainly due to provisions in the noncore real estate assets, mostly related to updated appraisal values and haircuts. But the cost of risk, including all that, remains flat in the quarter with a very good risk profile. We had a great year in terms of decreasing our nonperforming loans. They are down EUR 3.1 billion versus a year ago. That's a 13% drop, and the reduction is mainly related to the noncore real estate assets through wholesale transactions and also in the banking activity in Spain where NPLs came down. The NPL ratio decreased to 4.4%, and coverage is down to 65, but that has a lot to do with 2 things: write-offs in Spain and the entries of large-ticket items, which are highly collateralized and therefore, do not need coverage. Overall, we maintain the excellent risk profile of the group. Moving on to capital. We have been able to grow our fully loaded Common Equity Tier 1 ratio by 18 basis points in 2017, reaching 11.08% at year-end, which is in line, as you know, with our 11% target. And as I said earlier, excluding the corporate transactions, capital would have increased by almost -- by 30 basis points in the year. In the quarter, net earnings add 33 basis points without the impairment of Telefónica. Dividend uses up 10 of those 33, considering the proposed EUR 0.15 announced today, and the rest has been offset by the increase of risk-weighted assets in constant euro terms due mainly to higher activity in almost all of the units and to higher market risk-weighted assets as well. Other impacts mainly market-related, detract a further 11 basis points, and that all brings the ratio to 11.08%. At this time, we would also like to share with you a proforma calculation of our capital ratio, including the impact, estimated impact of IFRS 9, which now stands at 31 basis points, minus 31 basis points. And the positive impact of the sale of both BBVA Chile and the real estate unit, which is approximately 57 basis points on aggregate. So our proforma fully-loaded ratio incorporating those effects, which will be happening over the next few months, would be 11.34%. Once again, I'd like to remind you of the high quality of our capital. We remain as a bank with the highest fully-loaded leverage ratio 6.6% of our European peer group, and we are one of the few banks with AT1 and Tier 2 buckets already covered on a fully-loaded basis. We also successfully issued USD 1 billion AT1, which is not yet included in December numbers, but it will be considered in the ratios in March.Regarding our dividend, we will submit a proposal to the [ covered ] bodies to distribute a cash dividend, a gross cash dividend of EUR 0.15 per share to be paid in April of this year once approved by the AGM. And in a case of approval, this would mean a 38% cash payout, excluding the Telefónica stake impairment, which is in line with our shareholder remuneration policy which we announced a year ago. And the total cash dividend for 2017 would be 36% higher than in 2016. It is important to remind you going forward there will be 2 cash payments per year tentatively in October and in April.Now in addition to the good financial results in the quarter and the entire year, we have also progressed at a very good pace, I would say an accelerated pace in our journey, in our transformation with huge progress along our 6 strategic priorities. We continue to grow our digital customer base, which is up 25% versus last year, 22.6 million clients, which represents a 42% penetration. And this will exceed the 50% tipping point in 2018. We have already reached that tipping point in 6 countries in Spain, Turkey, U.S., Argentina, Venezuela and Chile. Our mobile customers are almost 18 million, up 44%, which means growing even more than the 37% growth they had had the year before. So this accelerated adoption will also lead us to the tipping point in mobile next year, soon next year. The interaction of our mobile banking customers with the bank is also accelerating as more and more services and products become available like we have been sharing with you over the last few quarters. Our digital sales are increasing everywhere to now very significant levels. We continue to make more products available DIY. We are nearly at 90% availability of products DIY. As a consequence of this work, now 28% in the entire year of all units sold in the 12 months were sold digitally, 28% again, and that was 17% in all of 2016. So this exponential growth continues. It was 34% in the fourth quarter. It was 37% in the month of December. The trend also has been consistent across geographies and, as I said, will continue everywhere. Customer experience is another one of our 6 priorities. We measure our performance here through the Net Promoter Score. We have maintained or improved our position in NPS across the footprint. We are now leaders in customer satisfaction versus our peer group in 8 out of 11 of our markets; in Spain, in Mexico, in Turkey, the 3 big ones; Argentina, Colombia, Paraguay, Peru and Venezuela, and we have improved this score by roughly 6 percentage points both in digital, online banking and the nondigital channels. These improvements lead to increased trust, engagement and really the sustainability and long-term profitability of the business.Let me now share some examples of how this is all happening, starting with one which is illustrated with what we're doing in Spain, for example, where we see how digital sales are driving the significant increase in total sales. Total sales up 31% mostly because of the growth, 120% growth in products sold digitally. The new channels, as you can see, increased the total rather than cannibalized. Part of the increase in digital sales comes from constantly improving our design. You might recall that Forrester rated our mobile banking app in Spain as #1 in the world this past July. We updated the design in September, and subsequently, we have seen sustained increases in the daily sales with credit card sales multiplying by 1.7x; mutual funds, 2.5x; deposits, 1.5x; current accounts, 1.3x from before to after the change. Also it's worth mentioning that Forrester's recognition extended to our online banking in Spain, which also was rated the best in Europe, and they have not issued a global benchmark, at least yet. By all accounts, in Spain, we had an excellent year in transformation with excellent delivery as these results attest. Another example is how digitization drives more revenues in Mexico. Customer groups that were showing similar results, similar trends prior to digitization drift apart in just a few months after the digitization event. With the gross margin of those digitized growing 10% while the control group stays flat. Beyond driving volumes, digital channels also enjoy higher levels of NPS with the mobile app having a 20 percentage points higher NPS than branches. And of course, selling digitally is more efficient. The cost of opening checking accounts in Mexico is 1/3 through digital versus the cost of doing so through a branch. And the volumes through digital are already relevant. The digital channel went from 1% to 35% of new account openings in Mexico. So the effect now becomes material. Other countries have similar patterns. For example, in Argentina, in '17, 42% of the new customers were acquired digitally with a much lower acquisition cost also, 66% less. Finally, we find that digital customers, which are also those more engaged, are more profitable than nondigital. In Turkey, for example, the operating income is 1.8x that of nondigital customers. They're also 1.5x more likely to recommend us. And again, as we transform the purchasing experience to DIY, total sales increase immediately as in the case of new investment accounts, which are up 153% in the span of just 2 months after being available digitally. Almost 100% of new equity investment accounts came through this channel in January. Other examples in the U.S., credit card sales times 5 since we launched it digitally, or in Peru consumer loan sales increased 35%, 100% through digital channels. In Colombia, increased sales of insurance through ATMs and so on. So in summary, we have made great strides in digitizing our business with great impact in sales, great impact in satisfaction and great impact in customer engagement. I turn it now to Jaime who is going to give us the overview of the business areas. Jaime?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Good morning to all. Let me start with Spain. According to BBVA Research, Spain has grown by over 3% in 2017, thanks to improved household consumption and increased investment and higher exports. Solid economic performance will continue into 2018 with an estimated GDP growth of around 2.5%. We've delivered on cost reductions and progressed significantly on our transformation journey. Net attributable profits, excluding mortgage -- the mortgage pro-provision in 2016, grows by 5.5% in 2017 impacted by lower NTIs as last year, we included EUR 138 million from the capital gains from Visa. The main drivers behind this growth continue to be the significant reduction of operating expenses that further improved this quarter, the lower impairments and a good growth in fees, thanks to the evolution of banking fees and mutual funds. NII decreased by 3.6% in 2017, in line with our expectations, explained by a lower contribution from CIB and the reduction of the securities portfolio. However, Q4 NII shows an increase over 2% versus Q3, thanks to higher commercial activity and lower wholesale funding cost. An excellent performance in consumer and SME loans growing by 37% and 10% year-on-year, respectively, have been offset by the deleveraging of the residential mortgage portfolio on the Public Sector book. We continue to improve our loan mix towards a more balanced and profitable portfolio. In customer funds, we also continue to improve the mix with demand deposit growing over 20% year-on-year and representing now 69% of our total deposit in Spain versus just 46% 2 years ago. We had another very good quarter in mutual and pension funds, growing over 10% year-on-year. Customer spreads remain flat in the quarter and increased by 6 basis points in 2017, thanks to our continued focus on profitable growth and lower funding costs.Let me remind you that our balance sheet is well positioned to benefit from future rate increases. NII should go up by more than 50% in the following 12 months in case of any parallel increase of 100 basis points in the curve. Expenses keep going down by 1% versus Q3, making total expenses in 2017 decrease by 5.6% meeting our 2017 guidance as a result of CatalunyaCaixa synergies and ongoing efficiency measures. Asset quality indicators also continue to improve. NPLs are down by EUR 1 billion year-on-year, and the NPL ratio decreases one more quarter to 5.2%. Year-to-date cost of risk reached 31 basis points, beating our year-end guidance. Moving now to real estate. As you already know, last November we announced an agreement with Cerberus to create a joint venture for our real estate owned assets in Spain. On the closing of this transaction that will likely take place in the third quarter, we will sell 80% of this joint venture to Cerberus and will allow us to reduce almost entirely our exposure to real estate assets ahead of our initial expectations. In Q4, we've continued to reduce our noncore exposure to EUR 6.4 billion. In the last quarter, the reduction is mainly explained by the transfer of EUR 800 million of performing developer loans to the Spain banking activity and the continuous reduction of REOs.Regarding the P&L, as Carlos mentioned, net losses in 2017 decreased by close to EUR 100 million versus last year even after the increase in real estate asset provisions in the fourth quarter of 2017, explained by the update of appraisal values and the higher haircut supply. For 2018, we expect real estate provisions to be negligible, and the total net losses of the noncore real estate unit should be below EUR 100 million. Let's move now to the U.S. GDP growth expectations for the Sunbelt have been revised upwards as a consequence of higher oil prices and the positive impact from the tax reform. GDP in 2017 is expected to grow by 2.9%, increasing to 3.6% in 2018, growing 1 full percentage point above the U.S. as a whole. [indiscernible] results are good as a result of our price discipline and the focus on increasing productivity on the retail franchise. The positive earnings momentum continues with bottom line growing by over 15% year-on-year in constant terms. The reduction of the corporate tax rate in the U.S. has required BBVA to write-down some of our [ DDAs ], resulting in a negative impact of 78 million in the quarter. Excluding this amount, the net attributable profit would have increased by 28% year-on-year in 2017. It's important to highlight that we expect to offset most of this one-off impact in 2018. The main growth driver in 2017 has been NII, growing at over 13% supported by the increase in the customer spread. Expenses grew significantly beyond revenues in 2017, and loan loss provisions increased by 11%, but this is mainly explained by the provisions related to the hurricanes. Even including this impact, impairments on financial assets have performed better than guided. In terms of activity, loan growth accelerated in the second half of the year. Actually, the loan portfolio is up by 1% versus Q3, and our main focus continues to be high-margin retail loans, especially consumer loans where we have grown by over 5% year-on-year. The deposit mix continues to improve, and customer spreads grew significantly in 2017, benefiting from rate hikes and our focus on deposit cost. Our NII will continue to benefit from further rate increases as the balance sheet is asset sensitive. NII should go up by over 6% for every parallel increase of 100 basis points in the curve. Efficiency improved versus 2016 as we continue to invest in improving the franchise and attracting the right talent. Asset quality shows stability in the NPL ratio in the quarter. Year-to-date cost of risk reached 42 basis points, 3 basis points below September and beating our year-end guidance of around 50 basis points even after the hurricane provisions charge in Q3.Let's move now to Mexico. BBVA Research continues to expect Mexican GDP to grow around 2% in 2017, and also in '18, in line with the average growth rate of the last years. Once again, Bancomer's 2017 results showed sustained growth in all P&L lines consistent with our guidance, maintaining its leadership in efficiency and profitability. NII keeps on growing in the high single-digit range year-on-year, in line with our year-end guidance and above loan growth. Fees are growing over 9% versus 2016, also in line with our year-end guidance. The main drivers continue to be larger volumes of credit card transactions and higher mutual funds and private banking fees. Operating Jaws remain positive as guided, and impairments are growing below activities, performing better-than-expected. The bottom line increases by over 12% year-on-year, above our initial expectations for the year. Once again, Bancomer surprising positively. Loans are growing at 5.5% in 2017. The growth slowdown is partly explained by the FX impact on the U.S. dollar loan book, which represents 15% of the portfolio. Excluding the currency impact, year-on-year growth rate stands at around 7%, closer to our high single-digit guidance. Additionally, commercial loan growth has been impacted at system level by high prepayments associated with the excess liquidity in the system at the end of the year. Retail deposits performed very well in the quarter, maintaining a very profitable funding mix. DDAs represents over 80% of total deposits. Customer spreads, both in U.S. dollars and pesos, behaved well in '17 and improved quarter-on-quarter in Q4. Rate hikes are translating into higher deals, especially in the commercial segments, more than offsetting the very small increase in the cost of deposits.Expenses continue to grow below inflation, maintaining positive Jaws and improving the cost-to-income ratio versus 2016. Bancomer continues to be best-in-class with a cost-to-income ratio significantly better than the system. Risk indicators remain solid and stable in the year. Year-to-date cost of risk reached 330 basis points, beating our stated guidance.Let's move now to Turkey. GDP growth accelerated in Q3 to 11% year-on-year, which led BBVA Research to once again increase its 2017 GDP estimate to 7% versus 6% previously. For 2018, we expect GDP to grow at around 4.5% in Turkey.Garanti continues to show outstanding results and improvement in Q4 as a consequence of an excellent price management and our transformation efforts bearing fruit. Net attributable profit in '17 is growing over 70%. It's 40% excluding the change in perimeter. Even if in 2016, we included EUR 86 million from the capital gain from the sale of Visa. Worth highlighting in Garanti NII growing over 20% year-on-year, mainly explained by significant Turkish lira loan growth, a successful NIM management, and in this quarter, a higher contribution from the CPI linkers as the inflation rating for the year has increased from 9% in September to 11.9% and resulted in a positive impact of EUR 141 million in the quarter. Net fees and commissions also behaved well, up by over 18% in 2017 with a good performance of both -- of most of the banking fees. Positive Jaws are widening, and impairments are performing better than expected, growing significantly below activity.We had a solid loan growth in 2017, in line with expectations, explained by the growth rates in the TL portfolio over 20%. It's true that partly supported by the credit guarantee fund, while in the case of the U.S. loan book, it went down by 8% year-on-year. In a higher interest rate environment, we've continued to grow our demand deposits, improving our funding mix and diversifying our funding sources. In 2017, we issued $750 million in Tier 2s, 0.5 billion in euro bonds, and we've accessed their securitization, the loan syndications and the corporate bonds market. TL customer spread has remained flat in the quarter, thanks to a successful price management strategy, offsetting the increase in the cost of deposits. In terms of efficiency, an impressive performance. The cost-to-income ratio continues to improve to 36.7% with costs growing only by 6.6% in 2017 that is significantly below inflation. Asset quality indicators have been impacted by some large tickets, highly collateralized moving into NPLs in Q4. That explains the increase in the NPL ratio and the decrease in the coverage in the quarter. As in the case of all business area, cost of risk has performed better than expected, only 82 basis points versus the 100 basis points expected at the beginning of the year.Let's now end with South America. For 2017, GDP is expected to grow at 2.2%, accelerating to levels close to 3% in 2018. 2017 results end the year in what I think is a very high note, showing resilient growth in a slower macro environment. Operating trends have improved quarter-over-quarter throughout the year. Top line growth has translated to the bottom line, growing by 14% year-on-year. The main growth drivers are a very good evolution of core revenues. NII is growing 15% versus 2016 explained by both healthy loan growth and wider spreads. Fee and commission income is also growing at very healthy ratios, 18% year-on-year, mainly explained by the credit card business in Argentina.Impairments ending the year better than expected despite the high-growth experienced during the first half of the year, mainly in Colombia. The loan growth is growing strongly, almost 10%, beating the high single-digit guidance and mainly explained by both Argentina and Colombia. Customer funds also grow, in this case above 10% year-on-year, more or less in line with loans. Customer spreads increased both in Colombia and Chile, offsetting the decrease in Argentina and Peru. We've had a good performance in terms of efficiency, the cost-to-income ratio improving versus 2016 to 50.6%, showing positive Jaws and costs growing in line with inflation, excluding Venezuela. And as expected, we've seen a slight deterioration in the NPL ratio and cost of risk in the year. This is mainly explained by Colombia. However, cost of risk has significantly improved in Q4. It's standing at 132 basis points year-to-date and beating our guidance, thanks mainly to lower provisioning needs in Argentina and Peru. And now back to Carlos for some final remarks.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, Jaime. Well, as you can see, 2017 has been a good year with solid results and significant progress in our transformation. Before concluding, I would like to give you a summary outlook for 2018. We expect an acceleration of the profitable growth across the board in Spain, we will continue to focus on fees and commission growth. We expect mid-single-digit here. Also on improving efficiency with cost slightly down in '18 and maintaining a strong risk profile with the sustainable cost of risk at around 30 basis points. We expect to complete the runoff of the real estate portfolio, like Jaime said, reducing our losses significantly here to sub EUR 100 million in 2018. In the U.S., NII will be the main growth driver. We expect double-digit growth, benefiting from rising rates, from growing volumes and from the change in mix with more focus on the unsecured market. In Mexico, we expect solid growth once again similar to 2017 with NII growing at high single digits, and that would be translated to the bottom line. In Turkey, the loan portfolio in lira should grow double digits. We'll maintain our focus on cost control after the excellent results we achieved in 2017. And in South America, the growth rates that we have seen in '17 will consolidate in '18 with loans growing double-digit. On capital, we are where we want to be above target and with a clearer regulatory context. And we will continue, of course, to deliver on our transformation, maintaining our efforts to be the best in customer experience with an added focus on the commercial side. We will cross the 50% tipping point of digital customers in 2018, and similarly for mobile customers in 2019. Digital sales will continue to grow exponentially with more focus on noncustomers, so it's a way of acquiring more customers. We will enhance the smart interactions with our customers leveraging data and leveraging AI, introducing faster developments through our global technological platforms and through agile organization. And finally, transforming our operating model, moving to DIY whenever possible and automating operations. Overall, we will work hard to earn returns above our cost of capital in each and every market, thereby creating value for our shareholders as we continue to support our clients in their life or in their business. Thank you very much. I give the floor back to Gloria for the Q&A.

[Gloria Couceiro]

Thank you, Carlos. We are now ready to move into the Q&A session. As always, I would like to ask you to limit yourself to 2 questions per caller so that we can attend to as many participants as possible. So first question, please?

[Operator]

The first question comes from Alvaro Serrano from Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Two questions on -- first of all on capital. Do you expect to build more capital? Or can you give us a guidance of how much capital you're going to build because you're 11.3 at the moment. It seems like Mexico and Spain won't be growing a lot at least in the short term in terms of capital demand there. So I wonder why not increase the payout to 50%? Or what are your plans to use that capital generation on? And the second question is around Mexico. Obviously, elections this year, loan growth seems to be slowing down. I know -- I think you've said double digits. But can you give us a bit more sense of how you're seeing the economy performing? Is it slowing down? And what are your expectations during the year? And sorry, can you repeat the guidance you've given on Spain? I missed it, sorry.

[Carlos Torres Vila, CEO & Executive Director]

Thank you. Thank you, Alvaro. So on capital, we repeat the same stories. It might be a bit boring, but we basically, we stick to our target of 11% core equity Tier 1, and that's really a target which we set a while ago, and it's a target for the medium term. So we are in a good place because it's 11.08%. Proforma, it's 11.34%. And during the year, we feel comfortable with that current level of capital, slightly above the target. Our aim is to, every year, generate enough capital to finance the growth in the balance sheet and to fulfill our dividend policy of paying out 35% to 40% in cash of our earnings. So nothing new there. On Mexico, do you want to comment, Jaime, on Mexico and Spain guidance?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Sure. On activity, we expect Mexico to grow in the high single-digit range in 2018. It's true that we've seen a slight slowdown in Q4. Year-on-year, loan growth has been 5.5%. But if we exclude FX impact, this is around 7%. But the mix is, I think, quite revealing. I think retail loan growth has more or less remained strong, growing in Q4 at similar rates as in previous quarter. And where we've seen a significant slowdown in the growth rates is in the commercial segment. We've seen amortizations in certain large clients over $650 million actually, and that is what has reduced loan growth in the system. Liquidity has been very high in Mexico at the end of the year. So the whole guidance for Mexico for 2018 is actually pretty similar to what we were expecting for 2017. In the case of Spain, we are expecting a slight loan growth in 2018. We expect good trends to continue, both in consumer and the commercial portfolios, but we also continue to expect mortgages to deleverage.

[Operator]

The next question comes from Francisco Riquel from Alantra.

[Francisco Riquel, Head of Research]

I wanted to ask you about your digital transformation strategy. You recently announced the plan to close 179 branches in Spain. The costs in Spain have fallen by mid-single digit in '17, so what shall we expect in terms of your cost base in Spain for 2018 in particular? And then also you want to elaborate on any other relevant cost initiatives in other geographies regarding your digital transformation strategy?

[Carlos Torres Vila, CEO & Executive Director]

Thank you, Francisco. As you have seen in the different regions that Jaime was explaining, everywhere, we have been containing costs in 2017 well below the growth of revenue and below inflation as well with the exception of the U.S. as I commented. That has also to do with the transformation because it is through digital that we can originate business at lower cost. Of course, there are some things that are very inertial. So it takes some time to reduce the cost base at the pace at which we would like. But we continue to work hard. And I think in 2018, we should continue to see improvements there, in particular in Spain. As you asked, we expect our expenses to be down slightly in 2018. Of course, remember that in '17, we also had the integration of CatalunyaCaixa. So it includes the full synergies in that reduction of 6%.

[Operator]

The next question comes from José Abad from Goldman Sachs.

[José Maria Abad Hernandez, Executive Director]

Two questions from my side. The first one on real estate in Spain. And probably the numbers in the noncore division in Spain were a bit worse than expected. So where do these -- were these additional impairments actually made before or after the deal with Cerberus was announced? I guess I'm just trying to see whether there was a change in the terms of the deal post all the noise that we had in Catalonia in October? And whether there is any risk at all to this deal happening or closing later in the year, if political risk resumes at some point over the coming weeks or months. And the second question is on Turkey. We see a combination of growth slowing down a bit. So you mentioned 4.5 versus 7 last year [ although it's not half ] it's significantly lower inflation to the growth rates. You had a one-off from the credit warranty fund last year, and NPLs are growing. So, I guess, I would appreciate if you could actually comment from a top level how you see things actually in Turkey going into '18.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, José. On real estate, absolutely no, no change in terms, and absolutely the provisioning levels in the fourth quarter are not because of any changes that might have taken place or any impact of Catalonia on that deal. The -- I think Jaime explained it quite well. So we have had higher losses than we expected in 2017. I think the summary is that this is a chapter that is over. We really accelerated our downsizing in 2017, and we reduced our NPLs by 37% down to 6 -- just in excess of EUR 6 billion. And given that we have agreed the deal with Cerberus, we should be closing that later this year, and therefore, it's really a marginal loss that we're looking at in 2018, sub EUR 100 million and immaterial thereafter, and it will disappear actually from my reporting most likely. On Turkey, the economy has grown really at levels that are not sustainable in 2017. That's why we do see that slowdown but still very strong growth, 4.5%, and that should be leading to double-digit growth in loans as well, driven mostly by Turkish lira and Turkish lira loans. NII might grow below activity because we expect lower contributions from the linkers, but the cost of risk and regarding the increase in NPLs, it does have to do with large-ticket items like we commented, which are collateralized and which are very specific one-offs. The cost of risk, we think, should continue to be around 100 basis points, but it does depend on the economy and the economic environment. I don't know, Jaime, if you want to add anything on Turkey?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Probably the only thing is we haven't factored in an additional credit guarantee fund in these numbers, although we do expect further support from the government during 2018, already TRY 50 million -- TRY 50 billion have been announced to -- for loans in specific sectors, and the total support could be in the range of 130, maybe 140. Although as we do not have details regarding timing and sectors, we want to be conservative here.

[Operator]

Your next question comes from Carlos Peixoto from CaixaBank.

[Carlos Peixoto, Analyst]

Just a couple of questions. The first one was actually has to do -- 1 second, sorry, I'm just having here some problem, sorry -- as I was saying, the first question was on the high level of NPL net new...

[Gloria Couceiro]

Sorry, Carlos. We couldn't hear you. Would you mind to repeat your question?

[Carlos Peixoto, Analyst]

[indiscernible] and you already said that it had to with some specific cases, but in any way, I was wondering if you could share some light on how do you see asset quality evolving in Turkey throughout the rest of the year? On the second question, the effective tax rate...

[Gloria Couceiro]

Carlos, I'm afraid we are having problems listening to you. So please, next question. And if you don't mind, please call us again.

[Operator]

Apologies. I've just unmuted Carlos' line. Carlos, your line is now open.

[Gloria Couceiro]

Carlos, are you there?

[Operator]

The next question comes from Ignacio Ulargui from Deutsche Bank.

[Ignacio Ulargui, Research Analyst]

I just have two questions on my side. One from [indiscernible], whether you consider just to use your bank's -- the bank's platform to prospect other markets where you are not present with a rated bank, such as Brazil or any other European market, just try to leverage on the strength of that platform, and whether that could be a way to expand the activity of the bank. And second point, in Mexico, I just wanted to see how do you see the competitive landscape in Mexico? Do you think there's going to be any type of increased competition? Or have you seen any type of increased competition in the last months? Or you think it's continued to be relatively benign?

[Carlos Torres Vila, CEO & Executive Director]

Thank you, Ignacio. Regarding the first question, it's certainly intriguing to consider that possibility. At the same time, starting up a business, it's not so easy as we see in this lower development of fintechs versus what they would expect. What we're doing is having some projects that are actually doing that in some ways. I think a good example is Atom in the U.K., where we do have a significant investment in a mobile-only bank that is successfully challenging the incumbents and is one way for us to participate in sort of a different model from what was the traditional expansion through acquisitions. We do have a strategic map of which areas of the world would be interesting for such place, but we are short, I think, of leveraging our platforms as they stand to really start up a business on our own in those geographies. Regarding Mexico's competitive landscape, well, I think we have shown over the years, including 2017, the strength of our franchise there. BBVA Mexico is really the leader by far. And it's really not very relevant what the competition is doing, I'm sorry to say and without wanting to be disrespectful to our competition. But I think the results speak for themselves, and we don't expect much change in that pattern in 2018. I think the question that Carlos was trying to ask, it was something about our NPLs in Turkey. I think we alluded to that; maybe that was a bit repetitive. And then there was a question on effective tax rate if I recall correctly. Of course, the tax rate this quarter has many effects, including the impact of the lowering rate in the U.S., which has had an impact in the value of our DTSs in the U.S. of roughly EUR 78 million, and that all shows up in the tax line. I don't know, Jaime, if there's anything else to add to that?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Well actually, maybe the numbers. Again, it's true that the actual tax rate in the quarter is down to 24.5% when we've been accruing 27.8% in previous quarters. So the effective tax rate for 2017 ends up being at 26.9%, so slightly lower than our initial expectations. You must remember that the impairment of Telefónica does not have tax implications.

[Operator]

The next question comes from Marta Sánchez Romero from Bank of America Merrill Lynch.

[Marta Luisa Sánchez Romero, Director and Analyst]

The first one is on the dividend. Excluding the paper loss in Telefónica, the payout ratio for the year is at the low end of your 35% to 40% target. Why so conservative, given that you've already reached your target for [ Core ] Tier 1? And the second one is more on strategy. Do you think you have the right geographic footprint? The bank is profitable but you struggle to build up NAV per share because you're too exposed to currency volatility. Do you think this needs to be addressed? Would you consider nonorganic growth opportunities to address this issue?

[Carlos Torres Vila, CEO & Executive Director]

Thank you. On the first one, I'm a bit puzzled. I think the payout, the cash payout is right dead on the middle of the range, so it's not on the low end. So I think that is what we think is appropriate at this stage, right in the middle of the range we guided to. 37.5% I think is the number.

[Jaime Saenz de Tejada Pulido, Head of Finance]

37.6%.

[Carlos Torres Vila, CEO & Executive Director]

Okay, so it's actually on the upper end. No, just kidding. So it's right there in the middle. On the right footprint, we do -- I understand the question because if we look at the evolution of our tangible book value in the quarter is down, and in the year with dividends, it only grew 3.2%, which is clearly not enough to earn our cost of capital on the aggregate. Now it will -- and of course, the way to solve that could be through changing our footprint. It could be through improving the performance of each and every one of the banks that we own to ensure that each and every one of them earns their cost of capital, taking into account the differential interest rates, which should drive further depreciation. That's really the way we look at it. If you look at the performance of our banks, it is actually above the cost of capital in those places where we have had devaluation, except in the U.S. And then, of course, we have lower returns than what we would like and lower returns on the cost of capital in Spain because of the negative rates in the euro and the diminished activity. Those are the places where we need to work hard to get our returns up. Everywhere, we're working to get returns to a better place, but those are the places where actually performance is not above the cost of capital. It's not so much in Turkey. It's not so much in Mexico, where yes, we had devaluations, but also, we had great operating performance that more than compensates that. So we believe we have a very well-diversified, very attractive set of regions, well compensated, developed and emerging, with a very nice growth profile looking forward and with returns that are above the cost of capital in the emerging markets and below the cost of capital in Spain and the U.S. And really, that's what we need to change.

[Operator]

The next question comes from Mario Ropero from Fidentiis.

[Mario Ropero]

I have two questions related to cost of risk. The first one is in South America. It's true that the fourth quarter was maybe too low in Argentina and Peru. So for 2018, would you maintain the 1.5% guidance? Could you comment on this, please? And second, and similar is in the U.S. Guidance was 50 basis points for this year, but you're growing a lot on consumer. So for 2018, should we expect a bit of an increase in this or not so much, considering that it was roughly 40 basis points, excluding the hurricane effects?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Okay, I'll address at least the first question.

[Carlos Torres Vila, CEO & Executive Director]

Yes.

[Jaime Saenz de Tejada Pulido, Head of Finance]

Okay. Asset quality in South America. Cost of risk for 2018, sorry, will be around 160 basis points. That represents a deterioration versus the 132 basis points that we had in 2017 of around 30 basis points. And that's mainly due to the acceleration of the loan growth, especially in the most-profitable segments, which is where we are focusing our activity the most. And as I said on the U.S., yes, we ended the year better than what we initially expected, even after the impacts of both Irma and Harvey, sorry. So even if the mix change in Compass is taking place and taking place at a fairly rapid speed, as I mentioned during the call, the consumer portfolio is growing by over 5% year-on-year. Growth rates are accelerating, and we expect total loan volumes to grow around mid-single digits in 2018. We feel very confident that this will not mean a significant increase in the cost of risk numbers. So we'll end the year around the 50 s , and that is our guidance for 2018.

[Operator]

The next question comes from Javier Echanove from Santander.

[Javier Echanove, Analyst]

I have one on net interest income in Spain. I know you might have called it during the presentation, but if you did, I missed it. The question is whether there was any one-off or nonrecurrent impact in the fourth quarter NII, and if not, whether that fourth quarter NII is a good run rate for 2018? My second question is, can you give us an idea of, or initial idea, what do you think the impact from the Basel IV or the changes to the Basel III framework announced in December could be for BBVA?

[Carlos Torres Vila, CEO & Executive Director]

Jaime, do you want to take the first one?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Yes. There are not particularly any one-off in the fourth quarter numbers in NII in Spain. Although, as is normally the case, the fourth quarter in Spain tends to be good in terms of recovery, and that has also happened this year. Apart from this, lower wholesale funding costs and underlying commercial strength, I think, is what justifies the good performance of NII in Spain. Whether that is a good guidance for 2018, what we've mentioned during the call is that we expect, more or less, a flattish NII in 2018. Two effects, ALCO -- the ALCO contribution will continue to decrease, and this will also be the case on TLTRO contributions. But that will be compensated by the slight growth in the loan portfolio, and also the expectation is that -- especially the 12-month EURIBOR, will start to increase during 2018.

[Carlos Torres Vila, CEO & Executive Director]

Right. Regarding Basel IV, we don't expect impact from the output floors as far as we have a high density ratio versus our peers and a very limited use of internal models. So the main impact for us would come from the changes in operational risk. But nevertheless, this could vary as it is, also subject to certain discretion at the national level. We could also see some impact, but lower from the fundamental review of the trading book, and from some of the proposals around credit risk. But in all, we believe that the impact of what was released after so much time waiting will be manageable for us. And in any event, there are very generous timelines for the implementation of most of the measures until 2022.

[Operator]

The next question comes from Benjamin Toms from RBC.

[Benjamin Toms, Analyst]

Two questions, please. What was the driver of the improvement in cost of risk of Mexico? And what do you expect for trend going forward? And secondly, how much of decline in the tangible value per share quarter-on-quarter was driven by FX?

[Carlos Torres Vila, CEO & Executive Director]

Okay, the first one was the driver of costs?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Cost of risk in Mexico.

[Gloria Couceiro]

In Mexico.

[Carlos Torres Vila, CEO & Executive Director]

You want to take that?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Actually, the performance of cost of risk in Mexico has been fairly good during the year. It's been especially true during the second half of the year. We've changed some of the parameters in some of our models, and this has helped improve the cost of risk for the year. For 2018, we don't expect any major changes versus what we have seen in 2017. GDP growth is going to be more or less the same. So if that is the case, the guidance, it remains at around 350 basis as we had for 2017.

[Carlos Torres Vila, CEO & Executive Director]

And then there was a question of the impact on tangible book value of the FX. So we had an impact coming from the available-for-sale portfolio, which was also very significant, so it was not only the FX. But the FX would represent, what? About 1.4 billion, and the available-for-sale and other effects, about 600 million. Yes.

[Jaime Saenz de Tejada Pulido, Head of Finance]

Yes, that's good. Yes.

[Carlos Torres Vila, CEO & Executive Director]

I'm looking.

[Operator]

The next question comes from Rohith Chandra-Rajan from Barclays.

[Rohith Chandra-Rajan]

I've got a couple, please. First one on digital. You mentioned quite a few times the 50% tipping point that you expect to reach in 2018 on digital and 2019 on mobile. I'd be really interested to hear you elaborate on that a little bit in terms of, particularly I guess, what you think the financial implication of that could be? And if there are any particular geographies where you see the greatest benefit? And then the second question was just on the U.S. and the margin outlook there or the NII outlook, I guess, more broadly. You've benefited clearly this year from margin expansion, as have a lot of other U.S. banks, and deposit costs have stayed low. Just wondering how you think about the deposit beater in 2018 versus the very low beater, I guess, in 2017, and your expectations on loan growth in the U.S., please.

[Carlos Torres Vila, CEO & Executive Director]

Thank you. I think on the first question, it is a hard exercise to tie the increased digital rates of our customers, increased digital sales to the bottom line. What we do have is some evidence that we've been sharing over the last quarters and also with a few of the examples that I shared on the presentation as to how digitization impacts engagement, how digitization impacts sales and how digitization impacts margins. Roughly speaking, on average, what we see today is that digital customers have more than doubled the contribution margin than nondigital customers. Although there is, of course, correlation that the most profitable customers are the ones that digitize, so I'm not implying causality there. We do have, though, some analysis to do imply causality, like what I shared in Mexico. 6 months after digitization, those customers that digitized have grown 10% versus the nondigitized, who stayed flat when those were 2 very similar cohorts. So what we expect is as this becomes mainstream, it becomes material, it's not 30% but 50-or-more percent of what we're doing that happens in those channels. There will come a discontinuity in which we will be able to transform our legacy and our cost base in a much more significant way. And that is when we will be looking at a really material impact in the bottom line. This is happening at a fast pace in places like Turkey, in places like Spain. But also, we have seen in 2017, also in '16, but '17 picking up even stronger pace, how in the emerging markets in Mexico and in South America also the rates of penetration are increasing at really very, very high rates. There was another question. Jaime, do you want to take that one?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Yes, on NII. Yes.

[Carlos Torres Vila, CEO & Executive Director]

NII.

[Jaime Saenz de Tejada Pulido, Head of Finance]

NII has been the main growth driver of the P&L in the U.S., as I mentioned during the call, 13% year-on-year increase. And as you mentioned, this has mainly had to do with the interest rate prices that has taken place during the year, taking into account the fact that we have a very asset-sensitive balance sheet. That remains to be true. We continue to expect rate rises during 2018. Internally, what we are also expecting is to have a much higher loan growth in 2018. We've had a very good second half of the year, and allow us to enter the year growing loans versus the third quarter. Overall, we expect loans to grow in the mid-single-digit range in 2018. And we should continue to expect NIM expansion and customer spread increases. We had a 43 basis point year-on-year customer spread increase. And thanks to our well-controlled funding cost, I believe that that should continue to expand further next year.

[Operator]

The next question comes from Andrea Unzueta from Credit Suisse.

[Andrea Unzueta, Vice President]

Most of my questions have been answered, to be honest, but just to double check, the tax rate in the Spanish banking division was 20%. I was wondering if there is any one-off in there? And also on Turkey, if you could give us a bit more color or details on the CPI-linked portfolio that you have. I seem to remember it was around TRY 15 billion. And what, more or less, is embedded in your budget for next year?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Okay, there's nothing in particular on the tax rate in Spain. In the fourth quarter, we always adjust the effective tax rate for the year, and that justifies changes across geographies as it has been the case in a number of them in the fourth quarter. On the CPI linkers, the total portfolio, it's around EUR 4 billion. It's true. It's the number that you said in lira terms. It's -- the right number, I think, is EUR 4.3 billion at the end of the year. The inflation reading that we've used in 2017 to [ pre-edify ] this revenue is 11.9%. And what we are going to use for 2018 is 9% -- is 8%, sorry. So that's what justifies NII in Garanti in 2018 to maybe grow below activity.

[Operator]

The next question comes from Andrea Filtri from Mediobanca.

[Andrea Filtri, Research Analyst]

Two questions, FX and regulation. On FX, could you please detail your sensitivity of capital and EPS for a 10% depreciation of the U.S. dollar, the Turkish lira and the Mexican peso versus the euro? And on regulation, you've commented already on IFRS 9 and on Basel IV, would you have anything to share with us on the implementation of EBA guidelines by any chance? And just as a follow-up, I think I missed the -- your guidance on the tax rate for 2018.

[Carlos Torres Vila, CEO & Executive Director]

Jaime, do you want to?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Yes.

[Carlos Torres Vila, CEO & Executive Director]

The sensitivities.

[Jaime Saenz de Tejada Pulido, Head of Finance]

Yes, sensitivities remain fairly similar to the ones we had in the previous quarter. To a 10% depreciation, it's around minus 1% for the Mexican, the Turkish lira and, more or less, the rest of Latin America. Our coverage levels remained more or less in line with what they were in -- at the end of September, so our CET1 ratio is hedged for both Mexico and Turkey at around 80%. Do you want to take or...?

[Carlos Torres Vila, CEO & Executive Director]

There was another question on the implementation of the EBA guidelines. So again, here, we expect a manageable impact to BBVA because of the limited use we have of advanced models, [ IOB ] models. And the trim -- the ECB's trim may have captured part of the elements of the EBA guidelines in risk-weighted assets, given that the guidelines feed into the -- EBA guidelines feed into the trim process. I think that's...

[Jaime Saenz de Tejada Pulido, Head of Finance]

And we don't expect any significant impact from the trim, okay?

[Operator]

The next question comes from Daragh Quinn from KBW.

[Daragh Joseph Quinn, Analyst]

Just a question on Turkey on the increase in NPLs, and just looking at Garanti's results, they seem to have taken extra provisions against [indiscernible] exposure and kept coverage levels stable whereas you seem to have seen a drop in coverage and reported about TRY 500 million more in net income in Turkish lira. So I was just curious about the differences there. And then just -- could you just remind us on the strategic rationale for holding onto the sizable stake in Telefónica?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Okay. On the first question, a lot of movements within the quarter. The NPL ratio has gone from 2.5% to 3.9% in the quarter, and coverage is down from 138% to 85%. This is, as Carlos mentioned in -- during the call, impacted by large tickets moving into NPLs, with no significant impact on provisions as you can see in the cost of risk number. And that is because these are very highly collateralized loans. Cost of risk remains stable in the year at around 82 basis points, and clearly, better than what we were expecting. So we are very comfortable about the quality in -- of the portfolios in Garanti. They've remained extremely resilient, especially the loan -- the U.S. dollar loan portfolio against FX volatility. And that portfolio continues to go down. It went down by 8% this year, and this has been even more if we look back. So -- and taking into account that we do expect, especially in the second half of the year, for inflation to go down and interest rate to go down, I think clearly justifies the cost of risk guidance for 2018 around 100 basis points.

[Carlos Torres Vila, CEO & Executive Director]

Yes, and regarding Telefónica, it's part of our available-for-sale portfolio. And really, the impairment that we registered in the fourth quarter doesn't change anything related to our the -- view of the company and its potential or holding onto it. So nothing changes, and it remains and will remain as an available-for-sale stake.

[Operator]

The next question comes from Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

Yes, well, most of my questions have been answered, but I have a couple, if I may. Regarding the stake to [indiscernible], a couple of questions just to understand better the rationale. So why only selling foreclosed assets, not adding NPLs to the deal? I guess that's the [ biased ] requirement, but just to have your view. And the rationale for keeping only a 20% stake rather than a higher that could give you more upside or exposure to a potential recovery in real estate. And lastly, we've seen some increases in the cost of risk of consumer loans in the U.S. only in CPI, nothing like changing the world churn. But do you think that you could be expanding in a sector that could deteriorate while you are growing the books there? Or not so concerned there because the factor remains is the affordability ratios?

[Carlos Torres Vila, CEO & Executive Director]

Yes. Well, thank you, Carlos. Regarding real estate, well, a deal is a deal. We think it's a great deal for both parties. And it is where we agreed, and not all buyers have the same appetite for all types of assets. Certainly, everything is noncore. I think we should be divesting the real estate developer portfolio pretty quickly. And as I said, this will be a chapter that will be closed in '18 as we close that transaction and sell the remainder of our exposures. Do you want to take the other question, Jaime?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Sure. It is true that, as I mentioned I think before, that we are having a good change in mix in Compass. And I think I've explained that that will probably lead to this 8 basis point increase in cost of risk for 2018. I think this is an immaterial increase even if the mix continues to change. Cost of risk needs to increase. I think it's a key priority for the bank in order to increase profitability of the franchise. We've had -- we continue to have a very different loan mix versus our competitors. And then again, you must remember that GDP growth in the Sunbelt is going to be much higher in 2018. In Texas itself, it's going to be around 4.8% in 2018. So that gives us a lot of comfort that the right -- that the strategy that we're following is the right strategy, and we don't -- will not lead to cost of risk increases.

[Operator]

The next question comes from Ignacio Cerezo from UBS.

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

A couple of very quick ones for me. If you can give us some color on the geographical breakdown of the IFRS 9 impact, the 30 basis points you have talked about, I mean, where basically you need to book and if you're releasing provision somewhere? And the second one is in terms of what kind of macro scenario would you need for Mexican asset quality to deteriorate? As you mentioned, I mean, in the past, actually, you have talked about 2% GDP growth as the mark beyond which things will start worsening a little bit. I mean, is it still in place? Or do you think, actually, the bank can sustain a lower growth than 2%?

[Carlos Torres Vila, CEO & Executive Director]

Okay. On IFRS 9, the impact is mostly in Spain. About 2/3 of that impact is Spain, and mostly the increase in stage 2. We do have also an impact in Mexico associated with a longer time period for calculating the expected loss, those would be the 2 main impacts. Regarding the Mexico growth, Jaime?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Yes, Ignacio, none of the numbers you've got, I don't think they're right. The average growth rate in Mexico in the last 3 presidential terms has been 2.1%. So when we expect Mexico to grow at around 2%, it means that this is the average growth rate that Mexico has experienced actually in decades. Under those assumptions, Bancomer performance will remain at similar levels in our opinion as what we've been able to deliver in the last few years. In order to have a sense on what type of a scenario will start to hurt, significantly, Mexico, we need to go back in history, and even then, impacts on Bancomer's P&L were always very minor. So start to think about something around minus 5% GDP growth rate when you will see Bancomer to be significantly hurt.

[Operator]

The next question comes from Britta Schmidt from Autonomous Research.

[Britta Schmidt, Partner, Spanish and German Banks]

Yes, I've got 3 questions, please. The first one, coming back to the Spanish net interest income, you said that this was driven by lower wholesale funding costs. Do you allude to the fact that the Central Bank and interbank funding has increased to offset the deposit decline that we're seeing? And is this something that is sustainable? Secondly, a question on the hedging policy. You've told us what it is in CET1 terms. Can you also tell us what your hedging policy is for the P&L? And what your expectations are for the average Mexican peso to euro and Turkish lira to euro for 2018? And then lastly, in your NPLs, the write-offs this quarter were a little bit more elevated as well, which, I guess, contributed to the lower coverage ratios. Can you give us an indication where the write-offs increased Q-on-Q?

[Carlos Torres Vila, CEO & Executive Director]

Jaime, do you want to take...?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Yes. I don't if I understood exactly what you said. I did say that we've had lower funding costs in 2017. That will continue to be the case in 2018, and that will partly allow us to maintain the flattish guidance that we've given. I also mentioned that the TLTRO will not have in 2018 as positive impact as the one we had in 2017. The TLTRO impact in 2017 has been EUR 144 million, and that is because we have accrued the 40 basis points for 18 months, okay? Since June 2016. And that explains the lower contribution that we expect from TLTRO next year, as we will only accrue 12 months. Hopefully, this is the questions that you've made. On hedging policy on P&L, the hedging policy remains the same between 30% and 60% -- 30%, 50%. On average, today, we have the Mexican peso covered at around 48%, 49%, and the Turkish lira at around 41%. Those are the 2 most important currencies for us and the ones that have higher hedges. On write-downs...

[Carlos Torres Vila, CEO & Executive Director]

Yes. On write-downs is pretty easy. It's mostly in Spain in real estate where we have written off the portfolio. And that, as you correctly point out, is one of the reasons why coverage goes down, the other being the large ticket items, which are collateralized.

[Operator]

The next question comes from Benjie Creelan-Sandford from Jefferies.

[Benjie Creelan-Sandford]

Just a couple of quick questions from me. Coming back to the IFRS 9. I mean, obviously, you've given the sort of the first-time impact. I was just wondering on a go-forward basis whether you expect any kind of material change or potential volatility in terms of cost of risks in any of the geographies as a result of IFRS 9 implementation. And then the second question, just a very quick fact check. Can you just update us on what the average yield and duration of the ALCO portfolio in Spain, please?

[Carlos Torres Vila, CEO & Executive Director]

So on -- thank you, Benjie. On IFRS 9, we don't expect over the cycle a change. Of course, it will depend on how the cycle moves because it's a different pattern of recognition. So there might be different volatility than what we have had in the past. And we will have to see that as the quarters evolve, what's the quarter-on-quarter impact. But looking at it from today forward, there is really no change in our guidance.

[Jaime Saenz de Tejada Pulido, Head of Finance]

On the ALCO portfolio, year-on-year, the size of the ALCO portfolio in Spain has gone down by 15%. It stands at EUR 26 billion at the end of the year. The average duration remains, more or less, what it was last quarter, slightly less. It's gone from 3.7 to 3.5 years. And the internal rate of return is 2.16%, 2.1% so more or less the same as it was in September.

[Operator]

The next question comes from Carlos Garcia from Kepler.

[Antonio Carlos Garcia-Gonzalez]

A couple of quick questions. On IFRS 9, the 31 basis points impact you mentioned is net of the gains that you will recognize on the held-to-maturity portfolios? Or if not, what are the potential impacts of those portfolios on capital? And secondly, whether you have any deposits on ECB of negative rates? If so, what is the volume of those deposits?

[Jaime Saenz de Tejada Pulido, Head of Finance]

Okay. Yes, the answer to your first question is yes. This is net, but the impact of movement is extremely small, it's completely immaterial. So in our case, it -- this is -- this does not move the needle. And on central banks, yes, we do have high levels of excess liquidity, both in the fed and in the ECB. In the case of the ECB, it's around EUR 10 billion; and in the case of the fed, it's around $11 billion in euros and in dollars. So clearly, excess liquidity. All banking businesses are generating liquidity, and this, clearly, is something that we try to minimize the cost of carrying this type of amount.

[Gloria Couceiro]

Thank you, Carlos. There's one final question from Carlos Peixoto. You mentioned a 21 basis points impact from risk-weighted assets, but risk-weighted assets were actually down quarter-on-quarter. What is driving the impact?

[Carlos Torres Vila, CEO & Executive Director]

Yes. Correctly, the risk-weighted assets were down quarter-on-quarter in nominal euro terms because of the FX devaluation. So in fact, that would have increased our capital. But at the same time, since the ratio is covered because it has also -- the equity goes down as the FX depreciates, what we're showing here is the risk-weighted asset effect net of the FX. That's why it's 24 basis points increase in risk-weighted assets if you would consider the risk-weighted assets in constant euro terms. And that is related, as we mentioned, to growth in the activity and mostly credit risk-weighted assets, also a bit of market-related risk-weighted assets in constant euro terms.

[Gloria Couceiro]

Okay. Thank you, Carlos. I think there are no more questions. So -- but in any case, the entire IR team will remain available to answer any questions you may have. Thank you very much for joining this call.

[Carlos Torres Vila, CEO & Executive Director]

Thank you, everybody.

[Jaime Saenz de Tejada Pulido, Head of Finance]

Thank you.