Bankinter SA

MAD:BKT

Earnings Call Transcript 2019-Q1

[David López Finistrosa, Director of Investor Relations]

Good morning, and welcome to Bankinter First Quarter Results Presentation. Our CFO, Jacobo Diaz, will guide you through the results, and we will follow up with a Q&A session afterwards. Thank you.

[Jacobo Díaz Garcia]

Good morning, and welcome to the presentation of Bankinter's First Quarter Earnings in 2019. My name is Jacobo Diaz, and I have been acting as a group CFO since January 25. Firstly, I would like to take a minute to thank my predecessor, Gloria Hernandez, who, as you know, retired from the bank last January after a long intense and successful professional career. It was a pleasure to work with Gloria in the last 8 years on the executive committee of the bank. As some of you already know, I also act as CFO from 2000 to 2008. It has been a long time. I hope I can catch up for the last 10 years pretty soon. The related financial statements were posted on the website on the CNMV a few minutes ago prior to market opening. All related documents can also be found at this time on the Bankinter corporate website. Now as always, I will start with a summary of the main financial indicator from the quarter compared with the same period last year. First of all, our loan book shows an additional period of growth, 5% year-on-year growth, while domestic lending has continued to shrink by 2.1%. Our gross operating income also shows quarterly growth of 8% and 1% with respect to last year, setting a new quarterly record high for total income. Banking efficiency remains at outstanding level below 47%, which is an improvement over last year. Our NPL ratio continues on a downward trend. It has fallen by 3 basis point quarter-on-quarter and by 53 basis points year-on-year to a record low of 2.87%. Consequently, our net profit of EUR 145 million indicate increases of 18% from last quarter and 1.4% from last year. This figure sets again a new record high for our quarterly recurring income. More significantly, our CET1 fully loaded capital ratio stands at 11.8%, which is comfortably above our guidance of 11.5%. As you can see, growth in commercial operations shows a very positive trend, which fuels all of our sources of revenue. Before we look at our financial performance in the quarter and go over our quality of assets, liquidity, solvency and group's various strategic business, I would like to start with return on equity, a very significant financial indicator for us. The group's ROE has grown steadily over recent year and now stands at a solid 12.6%. I should note our last year ROE is lower than previous year, included an equity adjustment of EUR 170 million stemming from IFRS 9. Without that impact, the ROE from the previous year would have stood at 12.9%. Bankinter continues to post one of the best ROEs among its European peers. This quarter ROE is clearly above over cost of equity. Our aim is still to improve ROE and total return to shareholders in the future. Based on our income statement performance, we feel quite comfortable with our guidance for the year. Our income statement for the first quarter of 2019 suggest positive trends in our most significant sources of revenue, net interest income and net fee income. On the one hand, net interest income is up by 1.3%, while net fee income has risen by more than 5%. Other operating income is down by less than 2% year-on-year due to decrease in insurance income. Also trading profits have fallen by EUR 2.6 million, in an exceptionally high first quarter 2018.3 important things to remember. First, the figures from the first quarter of 2018 are partially restated because of IFRS 16, particularly in terms of expenses. Second, since IFRS 9 took effect in 2018, extraordinary revenues from recovered NPLs in Portugal are now being recorded under separate items on the income statement, small portion under the net interest income and the rest under NPL provision. This shows a positive effect on cost of risk. This past quarter, only EUR 1.4 million in extraordinary recoveries are recognized as net interest income as opposed to EUR 7 million in the first quarter of 2018. With this in mind, our interest -- our net interest income continues to reveal remarkable resilience as like-for-like growth would be 3.5% on the back of our lending growth and our continued asset mix and customer margin management. Our net interest income remains strong despite ongoing interest rate. It is up by EUR 3.5 million or 1% from previous year. Nonetheless, the first quarter of the year is 2 day shorter than the previous quarter and always shows some negative seasonality. Seasonality effect also -- seasonality also affects commercial operations despite market shifts. We can see this in fee income, which is down by EUR 2.8 million with respect to the fourth quarter last year. Year-on-year, fee income went solid, this up by 5%, owing to a strong commercial activity overall. Other operating income and expenses shows slight 1.8% decrease compared to last year. This is mainly due to the performance of our insurance, Línea Directa, which I will discuss later. Gains on financial transactions are EUR 4 million higher than in 4Q '18 but still remain very low. It has contributed EUR 17 million to earnings, 13% less than in the previous year, exceptionally high first quarter. Our total gross operating income sets a new record high in our quarterly series with EUR 505.4 million up 1% from 2018. Income quality remains the same as weight from extraordinary revenues is minimal. Our operating cost remained flat year-on-year and decreased by 0.4% with respect to the previous quarter mainly driven by a 3% reduction in Línea Directa's insurance cost. Our positive cost performance has allowed preprovision in profit to increase by 2% with respect to the first quarter of last year. This sets, again, a new high record figure for our quarterly preprovision profit. Loan loss and other provisions are up by only 3.4% in the quarter due to continuous efforts to enhance our provision buffer for legal contingencies. By March 2019, after the quarterly provisions is recognized, our balance sheet shows a total amount of close to EUR 270 million, which can certainly cover all risk at this time. Finally, net profit has grown by 18% to EUR 145 million in the quarter and by 1.4% year-on-year as part of the continuing trend of increasing quarterly earnings as we can see in the chart that you have on your right. Just a reminder, quarter second and quarter 4, their single resolution fund and deposit guarantee fund payments for year -- last year of EUR 27.7 million and EUR 39.2 million. Having say that, overall, we think that this is a good set of result in a very challenging environment. The group's loan book has grown by 5.4% year-on-year. In Spain, we have EUR 2.2 billion in net new lending from the last 12 months. Net lending growth in corporate banking stands at EUR 900 million year-on-year, despite a nearly EUR 1 billion supplier payments facility that was fully repaid in the last day of November 2018. We honestly believe this performance is outstanding. Meanwhile, new mortgages account for an additional EUR 300 million net in the last 12 months. In Spain, we are still an outlier since lending is down by 2.5% across the sector, decreasing 1.1% in new mortgages and by 5% in corporate lending, according to Bank of España (sic) [ Bank of Spain ] figures from February 2019. Our market sharing lending keeps growing and now stands at 3.9%. In Portugal, lending is up by 12% or an additional EUR 600 million. This validates our ongoing business plan for Bankinter Portugal where our market shares now stand at 2.8% in lending and 1.5% in deposit. I will discuss again this performance in a greater detail later on. On the right side, retail deposits across both geographies are growing, in particular are up by a remarkable 9.6% in Spain from a year ago, in contrast with sector growth is at 6.1% according to data from February 2019. In the first quarter of 2019, we have an additional EUR 1 billion in customer deposits and related costs remained flat and under control. Our market share in retail deposits stand at 4%. We are growing from the 3.6% level from the past year. Net interest income continues to show strong resilience, despite the 0 rate environment. This trend is due to loan book growth and sound customer margin management. Net interest income in Spain just stable quarterly performance. Growth is close to 3% with respect to the same quarter last year and only EUR 3 million less than the previous quarter, which is 2 days longer, which is a significant figure. In Portugal, net interest income remains flat compared to the previous quarter. It is down by EUR 3 million year-on-year due to a EUR 6 million decline in extraordinary NPLs recoveries. Nonetheless, recurrent net interest income in Portugal is up by over 15% year-on-year. On the right side, you can see our customer margin. Our customer margin is improving quarter-on-quarter. As of March, it stands at 1.98%, up by 5 basis points, mainly owing to increasing yields with no variation in deposit cost. Still it has increased by 4 basis point year-on-year due to the gradual loan yield recoveries up 1% -- 1 basis point and falling deposit cost, which are down by 3 basis points. Even though, deposit reprising have hit bottom, we expect that our customer margin will remain resilient in the coming quarters, given the positive delta between our mortgage front and back books and improve asset mix of our total loan book. Based on these trends, we maintain our net interest income guidance for the group in 2019 at low single digit. The size and composition of the ALCO portfolio has barely changed with respect to last December with a slightly lower contribution to net interest income. The average duration of entire portfolio is 3.4 years, average yield stand at 2.7% and unrealized gains on entire portfolio amount approximately EUR 390 million. The second most important income line, fee income has performed quite well in the quarter. It is fueled by the growth of business operation and is up by over 5% year-on-year. It still accounts for 23% of gross operating income, even though collected fees are down from the previous quarter. Ultimately, this is no different from any other year. The largest contributor to fee income is asset management, representing 32% of total fees. It amounts to EUR 36 million down by 14% with respect to previous year. Despite the market's recovery in Q1 this year, it is difficult to compare properly with the previous year due to the robustness of the first quarter performance a year ago. The second largest contributor is fees from payments and collections with corporate and SMEs. They continue to grow steadily having added EUR 25 million, a solid 11% increase. This slightly offsets our more volatile sources of fee income, such as our brokerage and custody business, which have fallen by 20% due to market trends and the like-for-like comparison with last year. As half of this reduction is related to the new investment vehicles last -- launched last year. We expect that we will see some of these fees in the second quarter. Life insurance, risk-related transactions and other fees from business are also better with respect to a year ago. These attest to the soundness of our business model. Fees on foreign exchange are flat to market volatility. Furthermore, other fees, including fees on overdue loans and others are down by 5%, while fees on restructured deals, mainly related to our investment banking operations, are up by an outstanding 97%. After these quarters fee income performance, we are sticking to our guidance of repeated mid-single-digit growth for 2019, assuming the market environment remains stable throughout the rest of the year. In operating income and expenses, the contribution from Línea Directa's insurance margin is 2% smaller. Línea Directa has seen greater competition in premiums as in the prior quarter with some extraordinary claims. Without any negative effects from regulatory charges, its year-on-year growth amount to 20% with other income from various small items. Nonetheless, the quarterly increase in this line is minor, and we expect the 2% year-on-year decreased rebound by the end of this year. Overall, our gross operating income stands at a record high of EUR 505 million, an increase of 1% from a year ago and over 8% from previous quarter. In Portugal, the EUR 4 million drop in gross operating income from last year only relates to the EUR 5.6 million decrease in the contribution from extraordinary recoveries for NPLs. Like-for-like, gross operating income would be EUR 26.7 million versus EUR 28.6 million this year. The graph on the right shows the contribution to gross operating income from our different sources of revenues. It indicates good diversification to counter the ongoing extremely low interest rate environment and a very small contribution from noncustomer business. Net interest income accounts for 54% and fee income has increased to 23% of total. The contribution from other income and expenses, mainly Línea Directa makes up 20%, and the contribution from noncustomer operation has fallen to nearly 3%. I will now go through operating expenses. Total operating cost amount to EUR 251 million this past quarter, down by 0.4% from previous quarter. Only 63% of operating cost corresponds to banking, while the rest is from Línea Directa insurance business. There are some clear difference in growth rates, while Línea Directa's costs this time are down by 3% from last quarter as well as last year. Still the growth rate of banking cost is a modest 1% compared to the same quarter last year and declined in the amount of EUR 1 million from last quarter. By tightening control in our expense or general expenses, we expect we will end the year within our low single-digit guidance with the aim of keeping expenses below income and maintaining or improving efficiency in banking operations. We keep managing to show positive jobs, despite our ongoing increase in expenses and investments due to our focus on our technological and digital transformation. Our banking cost-to-income ratio of 46.5% remains well below the industry average. The first quarter cost of risk continues to fall to 16 basis points of total credit risk. Quarter-on-quarter, cost of risk stands at EUR 27 million and it also includes a positive cost of risk in our business in Portugal. By the end of 2019, we expect that total provisionary cost of doing business that means including credit-related cost as well as all other provision, our litigations costs will be in line with 2018 at a rate similar to this quarter's of 35 basis points approximately. I will go over our management of credit risk, liquidity and solvency. Nonperforming loans are in decline once again. They have fallen by 11% year-on-year across the groups and almost 50% in Portugal after the year-end sale of EUR 128 million in NPLs. The group's quarterly NPL stands at 2.87%. It split into 2.81% in Spain, and in Portugal, which stands at 3.4%, down from 6.8% a year ago. Total provisions amounted to EUR 1.02 billion, only down by 1% since December 2018. We have maintained our coverage this past quarter at the level similar to our peers. Coverage for foreclosed assets is up by 116 basis point in the quarter, well above the average discount on sold assets as you will see in the next slide that you have right in front of you now. The group's foreclosed assets portfolio is 17% smaller since March 2018, having decreased by only EUR 70 million year-on-year. It now amounts to EUR 329 million. Total sales in the quarter amounts for 9.5% of the start from the start of 2019. We have sold most of these assets through our commercial network. The average discount on sales is now below our provision coverage rate with a minor impact on earnings. Our fully loaded capital is 11.8% at the end of the quarter, which is 5 basis points more than in December. Compared with December figure, the small negative impact of loan growth on risk-weighted assets in Spain and Portugal of 1 and 4 basis points, respectively is more than offset by organic capital generation of 22 basis points. On the other hand, the negative impact of 5 basis points owing to the new IFRS 16 standard and other charges related to IRB shortfall insurance business and valuation adjustments that overall accounts for 7 basis points negative. Both our total capital ratio and our leverage ratio remained fairly stable 14.3% and 5.1%, respectively from previous quarter as well within our guidance. On your right and with regard to the new 2019 SREP requirement, our ratio is the lowest among all quoted peers in Spain, standing at 8.20%. This speaks clearly about Bankinter's asset quality and a strong business model. Our gap of 360 basis points between current CET1 and the regulatory requirement in addition to the quality of our capital with negligible DTAs make us feel very comfortable with the group solvency going forward. Therefore, we are reiterating our medium-term guidance of a ratio of CET1 ratio of 11.5%. Continued balance sheet increase in both deposits and loans ultimately improve our funding gap, now clearly below EUR 4 billion. In Portugal, it is also steadily decreasing. Our loan-to-deposit ratio has again performed better. It now stand at its highest level in years as a result of retail deposit growth. The maturity structure of our wholesale funding remains unchanged. We can easily assume these amounts over the next 2 years with well over EUR 2.5 billion in liquid assets and our capacity to issue up to EUR 6.9 billion in covered bonds. In the first quarter of 2019, the MREL with eligible senior preferred debt, we issue amount to EUR 500 million in order to begin to offset maturity funding and TLTRO funding starting in June 2020. Furthermore, by year-end, we may carry out a small senior nonpreferred bond issue around EUR 500 million to fulfill future MREL requirements. However, we have not yet received the formal MREL requirement letter. Let's talk now about our business lines. Let's discuss the performance or our 5 main strategic business lines starting with the most significant contributors to income from our customer business. Corporate Banking and Commercial Banking equally account for 53% of our recurrent income. Insurance contributes a very significant 20%, follow by consumer lending by 12%. Bankinter Portugal's contribution now stand at 6%. Lastly, the contribution from our noncustomer business trading ALCO and other amounts to only 8% of our total operating income. The largest contributor to operating income is corporate and SME banking. It remains virtually on the same growth trend from 2010. Its loan book now amounts to EUR 23.9 billion. This is a 4.3% year-on-year increase in Spain, while the sector has shrunk by 5.7% as of February 2019. Thus, we continue to be an outlier here, which is crucial to income growth. In Portugal, where we still have a small market share, new lending is up by 41%, reaching EUR 1.4 billion. If we look to -- if we look at our corporate loan book for Spain, half of it consists of loans to large enterprises. Its growth rate is 1% in the year due to deleveraging and disintermediation in the segment. The rest is almost split by loans to medium-size enterprise of 27% with strong 8% increase in the last year. And in small and medium enterprises, at 23%, which is up again by 8% year-on-year. These improved asset mix preserves, our average asset yield despite increasing competition in all 3 segments. And by the way, number of uptick -- active customers has climbed organically by 4% in Spain from a year ago, our market share in new lending continues to be above our natural market share, therefore, we are gaining market share in this strategic segment the corporate SME banking. On the left, our corporate international business again shows significant growth, particularly in trade, supply chain and export finance activity. Its income is up by 16% and represents 28% of operating income for the entire segment. This very profitable business is on a clear upward trend as evidenced by its quarterly performance and 25% growth in loan book year-on-year. Moreover, almost half of this business revenues are from fees rather than interest. On the right side of your slide, in investment banking, new products and services have made both its corporate loan book and operating income to increase by 20% and 31%, respectively from the same quarter last year. Also the corporate fees collected in the quarter have increased by 75% with respect to the year before. Private banking. In private banking, customer wealth grew by EUR 1.8 billion in this first quarter with a positive market effect of nearly EUR 1.2 billion. It has resulted in a 5% increase in managed wealth during the quarter and from a year ago. More significantly, we are collecting fees in more value-added managed funds now at EUR 15.6 billion or 42% of our managed assets, EUR 0.7 billion more than in December 2018. In personal banking, assets under management are also up by 5% from last quarter and last year. Customer wealth is up by EUR 0.8 billion in the quarter with positive market effect of EUR 0.5 billion. Our delegated and advised assets, including mutual funds represent close to 29% of total managed assets in this segment where fees are more sizeable than in the rest of assets under management. In Commercial Banking, retail banking, we continue to perform really well in our 2 main products. On the left, on the one hand, payroll accounts balances are up by 23%. On the other hand, new mortgages totaling EUR 621 million in the quarter have climbed 8% from the same quarter last year, 30% of which are fixed rate mortgages. Our market share in new mortgages stands at 5.8% from the last 12 months ended in January. As a result, the mortgage back book keeps leading the growth in both the Spanish and Portuguese markets with good quality indicators. Loan to value stands at 59%, and 7% of total loan books already at fixed rates. Assets under management. Our balance sheet funds are growing again after a very difficult market environment in the last 2 quarters of 2018. As of March, total assets amount to EUR 27.9 billions, 3.8% increase with respect to same quarter last year and even more since December 2018. This related mainly to pension funds at close to 20% and with 17% growth in other managed assets such as our vehicles for private banking customers. Our mix of funds with 57% of funds managed by third parties and 43% of our own funds continued to increase into more value-added funds, which are helping to sustain fees. Average fees on own funds, managed as of March, stands just over 70 basis points, down from 6 basis point a year ago with an improved asset mix. And average balances where fees or charges declined by close to a EUR 1 billion from year ago. Now I would talk about Línea Directa's first quarter result. It continues to perform well. Insured risk have increased by close to 8%. Línea Directa maintains a market share in motor insurance of over 7% and close to 3% in home insurance. The 7.7% increase in new policies and 7.2% more premiums reflect growing pricing pressures from peers, especially in motor insurance. This is evident in the insurance technical result in the income statement. LDA Línea Directa group's combined ratio of 87.6%, continues to outperform the industry. Its claim ratio has jumped to 67.7% in the quarter and is slightly offset by a decrease of its expense ratio, again below 20%. It remains well below the industrial average. In our new health insurance business, Vivaz, the first 42,000 policies sold have had no negative impact on this combined ratio but rather a small impact on expenses. Lastly, if we look at the quarterly income statement, net profit is down by 2.9% from last year first quarter. This is due to the cost increase from net claims, which exceed the increase in the outstanding net earned premiums. This brings its technical insurance result to EUR 34 million, a 3.4% decrease from a year ago or EUR 1.2 million less. This quarterly earnings performance still translates into a very high ROE of 38% with a high Solvency II ratio of 209%. In consumer finance, our loan book continues to grow along with the number of customers, which is now well over 1.3 million. The lending front book is up by 196 million in the quarter or 35% year-on-year, and credit quality ratios remain reasonable. NPL stands at 8.6% on cost of risk of 3.6%. The risk-adjusted return of 8.2% continues to be favorable particularly if we consider that almost 40% of our current business is with existing Bankinter customers who have much better risk profile and somewhat lower spreads. Moreover, all the growth in this quarter was accounted for by the personal loans yields. In Portugal, consumer lending accounts for already 7.8% of total portfolio of EUR 2.1 billion. Once the Avantcard deal is finalized next quarter, it will represent approximately an additional 16% of the total loan book in Irish assets, better diversifying our consumer finance exposure geographically. Let's move into Bankinter Portugal figures. Balance sheet growth is in line with our expectation. Our loan book in Portugal increased by a strong 12% with respect to the first quarter in 2018. Concentration in corporate loans is positive, having grown by 41% to EUR 1.4 billion. In Commercial Banking, both mortgages and consumer lending are up by 4%, accounting to EUR 4.2 million. Customer deposits are also up by a solid 12% year-on-year, while off-balance sheet funds, mostly unit link and mutual funds have increased by 8% with respect to the first quarter of 2018. As for earnings, the EUR 3 million declining net interest income is only due to the EUR 5.6 million decrease in extraordinary NPL recoveries, which is basically EUR 1.4 million in 2019 versus EUR 7 million in 2018. Otherwise, growth in recurrent net interest income would be 15% and 17% in fee income. This positive performance will bring a 3.3% increase in total operating income from 2018. At the same time, strong cost control and positive cost of risk have led to a strong increase of 16% in profit before taxes. Recover NPLs and the sale of an NPL portfolio have freed up credit provisions, which have more than double the positive effect from last year. Recurrent business trends in Portugal continue to improve. Here you can see our quarterly performance in recurrent net interest income and fee income, up by more than 15% and 17% with respect to the same quarter last year. On the other hand, Bankinter Portugal cost performance is more constrained, dropping by 1% from the same quarter last year. Its pretax profit is still volatile due to NPL recoveries but it's clearly showing improvement from last year, despite fewer extraordinary recoveries in 2019. In summary, this last slide shows a brief recap of what we have seen to highlight from the strong set of results we have presented today, even if the comparison with the same quarter last year is not an exact equivalent. Let me just summarize this. In our opinion, this figure shows a very solid balance sheet growth rate, increased 5% lending and 10% retail deposit. Our figure shows customer margin at record highs. A strong growth of recurrent core banking fee income. A cost-to-income ratio that shows positive jaws due to good expense income management. Total risk -- total cost of risk of doing business in the range of 30 to 35 basis points and a capital CET1 ratio at 11.8% above our guidance. And now we are very happy to take all the questions that you might have. Thank you.

[David López Finistrosa, Director of Investor Relations]

Thank you, Jacobo, for that highlighting all the details of the presentation. We now move on to the Q&A. Let's start with loan growth. Given our recent performance there. Can you comment on what your statistics are now for next -- for the rest of the year?

[Jacobo Díaz Garcia]

For the rest of the year in loan growth, we are maintaining our guidance. And I think the results we've seen this quarter should be the same trend over the next quarter. We have seen this 5% increase in loan growth in the first quarter, and we've seen this EUR 2.8 billion growth, EUR 2.3 billion more or less from Spain and almost EUR 600 million from Bankinter Portugal. And this growth has been also quite diversified between Corporate Banking and the Commercial Banking. So we don't see why we shouldn't keep this loan growth rate.

[David López Finistrosa, Director of Investor Relations]

Thank you. We now move onto the P&L items. Let's start with the NII and customer margins. Can you give us our view there for the rest of the year?

[Jacobo Díaz Garcia]

In terms of net interest income, once again, we are maintaining our guidance. We think that the customer margin is something that we might see with a very strong resilience at the levels that we have now. Cost of liabilities maybe -- will stay stable because it's quite difficult to reduce them again. However, the yield of the asset side, we think there is still room for improvement and hopefully, there's still a little bit of repricing from the Euribor 12 months' recovery that we've seen over the past year. So we can expect still some performance similar to the figure that we've seen in this first quarter.

[David López Finistrosa, Director of Investor Relations]

Okay. And in terms of customer margins?

[Jacobo Díaz Garcia]

Yes, again. I mean in terms of customer margin, I think it's -- we have a quite resilience customer margin. We think we can -- probably, it's going to be difficult to reduce the cost of liabilities but if that -- we think there is room to increase the yield of the asset side. We expect some help from repricing of Euribor in our mortgage book, which has not fully applied to go to the whole portfolio. And overall, we are positive on that side.

[David López Finistrosa, Director of Investor Relations]

Okay. We have received on the same topic regarding NII. We have received a few questions regarding impacts that we might have seen in terms of IFRS 16 in our NII and also in terms of ALCO impacts. So what's our strategy in terms of TLTROs?

[Jacobo Díaz Garcia]

Okay. We have too many topics here. IFRS 16, regarding our figures, for us it's almost negligible the amount that will impact in our net interest margin. It can give us guidance that this figure is close to EUR 0.5 million in the entire year. So for us, it's overall, this is no impact.

[David López Finistrosa, Director of Investor Relations]

Okay. And then ALCO, how [indiscernible].

[Jacobo Díaz Garcia]

Yes, in terms of ALCO, as we mentioned before, the contribution to net interest margin from the ALCO portfolio is lower and is lower. This year was slight reduction and this is something that we'll see in the in the next quarter.

[David López Finistrosa, Director of Investor Relations]

And the strategy regarding the TLTROs?

[Jacobo Díaz Garcia]

The strategy relating to TLTROs for the time being, as you know, we have EUR 6.5 billion in TLTROs facility. We are expecting some details of the new TLTRO program, of course. I think this is a positive news. However, we don't have any indication about what the facility is going to be about and what will be the criteria to fulfill in order to apply to this TLTROs. So in one hand, I think this is a good news. In the other hand, we still some details to exactly provide you a better insight about this topic.

[David López Finistrosa, Director of Investor Relations]

Okay. That was clear. Moving now onto the fee income. What are we seeing there? And specifically, in terms of fee generating business, such as AUMs and other business?

[Jacobo Díaz Garcia]

You mean in this quarter or the event?

[David López Finistrosa, Director of Investor Relations]

In the quarter and going forward.

[Jacobo Díaz Garcia]

Okay. In this quarter, what we've seen is a very good commercial activity. Commercial activity in payment and collections, commercial activity in fees related to risk transactions in a suture finance operations, in syndicated loans, so anything related to international commerce, international business. So from the activity -- from the commercial activity, I think the fees had had a very, very good behavior in this quarter. And this has compensated the negative behavior of all the fees related to market valuation. So we've seen that the year-versus-year comparison in terms of asset management funds have been negative and this is due to the difference in the average volume of mutual funds that we have this first quarter this year versus the last -- first quarter of last year. In addition to that we have a lower average commission fee due to different mix of the mutual funds. Customers have been more conservative this year than they were last year. So there's an additional difference in fees -- in average fees from the mutual funds. That's from the assets under management funds -- fees, sorry. Related to the brokerage and custody fees, also we've seen some sort of deterioration, basically to market valuation but also because last year we had a fee related to some investment banking products related to private banking clients. So those fees that were recorded in the previous quarter last year of EUR 2.5 million are not -- have not been in these for questions this year. We will see in the second quarter a good recovery in this type of fees.

[David López Finistrosa, Director of Investor Relations]

Okay. Can you just remind us of the guidance for fee income this year?

[Jacobo Díaz Garcia]

Yes I think we remain our guidance of mid-single-digit growth for the rest of the year. I think we are positive on this topic. We've seen a good recovery of market in the first quarter of the year. So we will see the benefit of it in the second quarter and hopefully and let's cross fingers, markets will stay or will remain as positive as they've been in this first quarter.

[David López Finistrosa, Director of Investor Relations]

Okay. What shall we expect in terms of cost for the year? We have seen more conservative evolution this quarter.

[Jacobo Díaz Garcia]

I think we should expect a similar trend this year. I think for us the most important, let's say, issue is to keep a positive jaws. So for us, we need to -- and now this is the trend and the guidance, we need to maintain positive jaws. The expenses are quite under control and this is something that should stay stable around the year.

[David López Finistrosa, Director of Investor Relations]

Okay. Still on the P&Ls, cost of risk. What shall we expect for the rest of the year given the current levels?

[Jacobo Díaz Garcia]

In terms of cost of risk, we do not expect any relevant changes, neither in the credit risk, neither in the litigation risk. As we mentioned before, the overall cost of doing business, including both type of risk should be around 35 basis points, and we do not foresee any changes in this topic.

[David López Finistrosa, Director of Investor Relations]

Okay. We are also getting questions on -- about updates on the litigation risk. Whether you can -- are there any news there?

[Jacobo Díaz Garcia]

There is no special news in this litigation risk. As you know, we provide a guidance of EUR 20 million to EUR 25 million cost of litigation risk every quarter. This, of course, as you can imagine, might be a little bit higher or little bit lower, considering the FX volatility. But overall the -- we expect some sort of stable cost of litigation risk over the next quarters.

[David López Finistrosa, Director of Investor Relations]

Okay. Moving onto the business. Could you please comment on the performance of Línea Directa in the quarter? And what shall we expect for the rest of the year again?

[Jacobo Díaz Garcia]

Yes, again Linea Directa. Linea Directa is performing pretty well. Just a quick reminder of the ROE of 38% and the solvency ratio of almost 210%. This quarter is comparing with a very strong first quarter of last year. And basically the difference in the figures that we've shared with you today are in the claims' cost. So the claim costs of the first quarter of last year were extremely low, and this first quarter, we've seen cost of claims is slightly higher than, I would say, normal. This is something that we do not expect to see in the following quarters. So this first quarter, we've seen, let's say, not recurrent cost of claims. Anyway, the business is performing well. It's growing well. As we've mentioned, there's still some pricing pressures in the market, especially in the motor industry. However, we are growing quite above the industry average. So from that point of view, business is performing well, and we feel quite comfortable with it.

[David López Finistrosa, Director of Investor Relations]

Okay. Moving now onto capital. Can you please comment on the performance of the quarter on -- specifically on the minus 7 points -- basis points that we highlight as other?

[Jacobo Díaz Garcia]

Yes. Once again, of the quarter, we have increased around 5 basis points the level of our ratio. And as I mentioned before, we have a couple of impacts. We have the IFRS 16 that reduce around 5 basis points. And then we have other impacts that I will mention, basically the IRB shortfall and with increase in the insurance consumption and basically that's it. There's no specific or no -- not relevant situation.

[David López Finistrosa, Director of Investor Relations]

Okay. Are we expecting any regulatory impact for the rest of the year? In the capital, in the capital, sorry, still -- any further?

[Jacobo Díaz Garcia]

We do not expect any additional impact on capital. I mean if your question is related to any potential, again, increase in SREP requirements, no. No, no, we do not expect anything. We are at 8.20% right now, which is something that occurred not too long ago. And there is -- I mean we are not expecting any changes in this requirement.

[David López Finistrosa, Director of Investor Relations]

Okay. To finish off with capital, what is our target for CET1 ratio?

[Jacobo Díaz Garcia]

Yes, again our target is 11.5%.

[David López Finistrosa, Director of Investor Relations]

Okay. And final question really on the M&A front. Any updates on the EVO deal?

[Jacobo Díaz Garcia]

On the EVO deal, we're still working on it. As you know, we are expecting on this special approval from the authorities. And as we mentioned in the previous conversations, we are expecting that over this second quarter. We should finish this deal.

[David López Finistrosa, Director of Investor Relations]

Thank you, everyone, for joining the call today. As usual, for any further questions, please contact our Investor Relations teams. Goodbye.

[Jacobo Díaz Garcia]

Thank you very much, and goodbye.