Caixabank SA

MAD:CABK

Earnings Call Transcript 2018-Q1

[Edward Michel O’Loghlen, Division Head of Investor Relations]

Good morning, and welcome to CaixaBank's results presentation for the first quarter of 2018. Presenting today is our CEO, Gonzalo Gortázar; and our CFO Javier Pano. Please note for comparison purposes that this quarter includes 3 full months of BPI versus Q1 '17, where only 2 months were included, and that we have also changed our segment reporting to include BPI's investees within the investments segment.Also just a brief reminder of our format for first-time viewers, we plan to spend around 30 minutes presenting, that's slightly less than in the past, leaving more time for Q&A, around 45 minutes. And you should have instructions to participate in the live Q&A on your screen. Let me end with reiteration that my team and I are at your full disposal after this event. And without further ado, let me hand it over to our CEO.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, Eddie. Good morning, everybody. Summary of the quarter obviously is bottom line in terms of ROTE at 9.8%, in line with our targets for 2018, a very significant improvement in net income as you have seen. How do we see it? And how has it happened? Core revenues and lower impairments are the drivers. You can see how NII and also fees on insurance have done fairly well. Year-on-year, obviously, you have the impact that Eddie mentioned on the 2 months versus 3 months on BPI, so you can also look at the quarter-on-quarter where that impact disappears. So comparison is positive on both sides. Core revenues, up 6.5% year-on-year, 1.8% quarter-on-quarter, and a significant fall in provisions as well. In terms of the business, we have had a good quarter both on the liability and on the asset side. AUM and insurance funds, up almost 1% despite the negative market evolution. In -- consumer lending, in particular, up 5.3% and as always, strong discipline on the way we are conducting our lending, 13 basis points of uptick in from both -- in the quarter compared to last year. And nonperforming assets, we had a meaningful reduction of nonperforming loans, 21 basis points year-to-date, from 6% to 5.8%. Continuing -- we'll continue along this road. Cost of risk, up 29 basis points from the last 12-month basis. And we'll continue to sell actively our real estate with significant capital gains. You can see that 16% number is the result on average for the quarter. Coverage has gone up mostly as a result of IFRS 9 as you would have expected. Solvency and liquidity maintained at very high levels. I would particularly highlight the LCR, the 12-month average of 194%, which is a good indication of our always liquid position.Getting to some of the details on customer funds, it's again a similar story to what we have seen in the past. Time deposits reduction, increase in demand deposits and increase in insurance and assets under management. Again in this quarter, we have had negative market impact on this part of the business EUR 1.1 billion. So the growth of EUR 1.3 billion, I think, has to be seen as particularly positive because it's despite this negative EUR 1.1 billion. We'll see how the market evolves. During the year, April looks certainly better than the previous months in terms of market impact. All in all, that 0.6% growth in customer funds, and I would also highlight that the end of the year is seasonally high for us, December. So the fact that we are growing in the comparison March versus December, it's quite a good indication that the business is firing on all cylinders.Long-term savings, up 5% compared to last year, EUR 148 billion where we include both insurance pensions and mutual funds with good level of net inflows and market share that is, as you know, very high at 21%. Life-risk has been particularly brilliant, I would say. And with this increase of 24% in premia compared to the same quarter of last year, production and market share are moving in the right direction, again, one fairly important driver of profits for the insurance business. And the nonlife business continues to grow nicely, 26%, if you look at how premia has evolved over the last 3 years versus the sector. And obviously, this is largely due to the branch network of CaixaBank, which is responsible for 70% of the new production. Technology, just a brief note. In the quarter, we've launched Smart Money, our roboadvisory service. And obviously, it's early days, but it's another indication that we continue to be at the forefront of developments in -- on the technology side. In Spain, we have 56% of our clients now that are digital. A very, I think, visible, imaginBank, our mobile-only bank, has now crossed the 1 million client line. We have 120,000 clients active every day. The average age of people using imaginBank is 26, so that targeting to particularly millennials has been quite effective. And certainly is, I would say, an extraordinary lot for us not only to provide service to this client base but also to test a number of initiatives that we can then export very quickly to the rest of the CaixaBank digital offering. We have also started a new virtual assistant for employees based on IBM Watson on IA (sic) [ AI ], which is already solving 80% of the questions that our employees ask, used to have to use the call center obviously. Significant improvement in terms of efficiency and also agility for our people to have their problems sorted out.On the loan side, stable portfolio, which in the current context in Spain and Portugal, I think, it's a good achievement. As you can see, mortgage has continued to come down as per the existing trends. Very good show in consumer lending, up 5%, EUR 500 million. In the quarter some reduction, which reflects some seasonality as well on the business side and which has been offset by some higher level of activity in the short-term lending side for the public sector administration. If we include the nonperforming loans, then there's a reduction of 0.3%. But obviously, the performing loan, which is what we are trying to manage and grow, is stable. And in the current context, we are happy with that development. We'll see how we can get this loan book to perform on a positive side during the rest of the year. The first quarter has been, I think, reasonably good for what we were expecting. New lending, the dynamics are very strong on the consumer lending. As you can see, EUR 2.1 billion in the quarter. We are producing significantly more, it already happened in 2017 on the consumer lending and on the residential mortgage side. The residential mortgage new lending is stable, in line with our market share. And here, what we see is a higher emphasis on our side on the fixed rate production, where we're producing 60% of our new mortgages is something that the market is actively doing in a fairly different form because the majority of the other institutions still have a floating rate offering mostly. We think our proposal makes more sense for consumers, and that is most important. And also, I think it provides also a better result for the bank both in terms of margins and also particularly for future asset quality issues when rate rise. Consumer lending, we continue to make progress on the various initiatives that you know. During the quarter we announced the JV with the supermarket chain, DIA, which we will develop during the year. But we have continued to make strong growth on funding the consumption of products that are commercialized through us like Samsung, the newest line, TVs, et cetera, et cetera.The results, as you see, are dominated by that strong increase in terms of net attributable profit to the group, that round number 75%. We're showing in this slide both year-on-year and quarter-on-quarter and in CaixaBank only mostly because the year-on-year has that difference between 3 months for BPI in 2018 versus just 2 in '17. But you can see particularly on core revenues that the evolution is pretty positive on all fronts. We look at the CaixaBank itself to avoid this comparison impact. NII fees and particularly insurance are significantly up versus last year. So is the case for the group, and quarter-on-quarter is the same story with the exception of fees where we have had less activity on the CIB side on this first quarter. The other revenues are up strongly, boosted by some one-offs that you know well because BPI published their results last week both on BFA at Angola and Viacer, the sale of our stake in the peer company in Portugal. Both figures, you can see EUR 60 million for BFA and EUR 54 million for Viacer. The impact on the net attributable profit of those 2 items, we have also generated some capital gains in the ALCO level, which I'm sure Javier will go through. Costs, up 1.8% for CaixaBank, in line with what we expected. As you know, in the first quarter, we also have the property taxes, and all matters from this front are developing in line with the guidance we provided at the year-end results presentation. Return on tangible equity, as discussed, very close now to 10%. Core revenues sort of for the longer trend, we continue to see improvements in both at the group level and at the CaixaBank level, up 6% in one case and 15% on the other. The proportion of core revenues of -- as a percentage of the total gross income increasing to 93%. And the core operating income, when we deduct recurring costs from core revenues, continue to grow in a very solid and positive manner. So I think the substance of our model continues to show it is working, and the numbers are improving quarter-after-quarter.Looking at the segment reporting and reemphasizing what Eddie said at the beginning, we have made some changes to make sure that this represents more the reality of the group. So all investments that should be in the investment segment are there, whether they come from CaixaBank or BPI, and that includes Viacer and BFA as the most 2 relevant investments in the quarter. That means that BPI contributes EUR 40 million from their sort of recurring banking business in Portugal, up until the EUR 169 million total contribution, we have the impact of BFA, Viacer and some smaller items. Total investments are 211, very high contribution for this quarter, which explains the very sharp increase in the bottom line. The real estate noncore items are still contributing negatively but much less than they used to in the past, and bancassurance at EUR 520 million is actually providing a return on tangible equity of 12%, which is obviously quite relevant. The comparison with last year is negative because we actually included the badwill from the BPI acquisition, which was EUR 256 million. Once you exclude that, the actual trend -- or the actual increase rather than trend is 84%. Obviously, a very relevant number. Banking and insurance asset management are contributing basically same 40% in the quarter with the rest being mostly payments and some contribution from our specialized consumer finance subsidiary. Obviously, there's more of the consumer business than we do directly within the banking business.To finalize on my side, just a reminder, BPI and -- figures as per the consolidation into CaixaBank's account. As I said, EUR 40 million in the quarter compared to EUR 22 million last year. The comparison here in -- has the problem of 3 months versus 2 months, so it's not obvious to spot the trend. But you can see that in a better way in terms of activity. Basically, every category in the -- on the lending side is up and in a meaningful way: 3.5%, businesses; consumer lending, 4%; mortgage lending, 0.4%. Gives you an indication that BPI is already capturing the opportunity that we think we have in [indiscernible]. Client deposits are also up 3.1%. The economy continues to help. We have I think, a solid environment for this year and on the coming months. And with that, Javier, the floor is yours.

[Javier Pano Riera, Chief Financial Officer]

Thank you. Thank you very much, and well, good morning to you all. Briefly, I will make some comments on the P&L before shifting to the balance sheet. On the P&L, first on net interest income, we see that it is up quarter-on-quarter by 0.6%. The main drivers being on the positive side higher loan yields, helped by a front book that is accretive compared to the back book and that clearly helps to offset lower Euribor resets, and on top of this, this quarter, also higher NPL accrual. Also, on the positive side, I would remark lower wholesale funding costs despite intense activity on that front, and lower average loan volumes although by the end of the quarter, we had a much upbeat tone. We have negative contribution from BPI of minus EUR 13 million, in this case due to the fourth quarter sale of businesses to CaixaBank and also some changes in accounting criteria being mainly the reclassification of some interest rate hedges from NII to trading results.If we look at the client activity that impacts net interest income. First on the liability side, on time deposits, we see that we are repricing those deposits in euros at ultralow levels, just 1 basis point last quarter. The back book has impacted this quarter at worse by a strong foreign exchange deposit impact. But this is absolutely not neutral and adverse, and with this front book in euros at those low levels, we should keep the back book at better low levels . Loan yields, as commented, front book, that is now -- this quarter has yielded 324 basis points. Clearly accretive compared to the back book. As you may see, for many quarters in a row with a front book over 3%. In this case, this quarter, there is always the mix of the new production that affects positively. But also on SMEs, we have had good quarters in prices. Now the back book yield goes up by -- to 228 basis points by 9 basis points, also impacted by this higher NPL accrual. Lower loan balances during the quarter slightly is impacting a little bit, on average, net interest income. But as I say, more a bit on -- even on the mortgage segment by the end of the quarter.If we look at the impact of our wholesale activities on net interest income, despite intense issuance activity during the quarter, we have a lower funding cost. 120 basis points over 6 months Euribor, 6 basis points less. So this, as I mentioned before, has been helping NII improvement during the quarter. Some comments from the ALCO portfolio. On the structural ALCO portfolio, we have taken advantage of the sovereign spread compression to dispose and crystalize some profits on some long-term bonds that were asset swapped. As a result of this, we have made a trading gain of close to EUR 60 million, and this has resulted into -- now a portfolio with a slightly higher duration as we remove this short-duration part of the portfolio, as I mentioned, as it was swapped into floating.The comment going forward, of our activity on this portfolio will depend on market circumstances. But anyhow, we don't see current levels as ones to what match to this structural portfolio. On the liquidity portfolio, we have been buying some short-term and medium-term notes, matching the maturity around the TLTRO disposal. And what this portfolio is set to grow. As you know, we are accumulating cash in order to phrase the TLTRO redemption in 2020. As a result of all these, the spreads improved, both customer -- customer spread goes up by 8 basis points as a result of a much better back book yield on the loan book. And net interest margin also improved by 7 basis points as we overcome the small setback we had on that front during the fourth quarter of last year as we accumulated extra cash balances.Now we come to fees. On fees, I would say that we are down quarter-on-quarter by 0.9%. If we compare with -- compare CaixaBank with the first quarter of last year, we are slightly upwards. The first quarter always being more slow on fees. I could mention here that BPI is down on fees for the first quarter, but this has more to do with the fact that during the fourth quarter of last year, BPI was positively impacted by the distribution of retail sovereign bonds. So this was a distribution on revenue. And at CaixaBank, we are flat as the CEO was commenting, we have had this lower CIB activity during this first quarter compared to what is usually the case in a first quarter of the year. Volatility of -- from markets has affected somehow. This in any case has affected assets under management fee revenue as we have had EUR 1.1 billion mark to market impact on our asset under management balances. But also in the first quarter, we have to remember that there is always, while comparing with the fourth quarter of the year, the impact in the fourth quarter of success fees. All in all, we have not beat view on our fee revenues going forward, and we reiterate our guidance for the year. A focus, as always, on our insurance and asset management activities, you see that revenues continue to improve steadily year-on-year up by 22% at the group level, at 20% at CaixaBank. Those revenues are, every quarter, more important for us. This now representing 25% of our total revenues on our bancassurance business, 3 percentage points up in a year. This time, we take the opportunity to further disclose information about our insurance activities. Here, you may see the complete P&L account of our insurance business. You may see that the improvement is across all lines on -- from NII to all revenue lines. And for a final net attributed profit for our insurance business of EUR 144 million, up 17.1% year-on-year. And that represents already slightly more than a quarter of our bancassurance business.I turn to costs. On costs, we don't have much news, we'd say that everything is going as expected. Quarter-on-quarter costs up by 2.3%. As you may see, personnel costs broadly stable. As cost synergies offset wage inflation, we have extra costs on general expenses and amortizations mainly reflecting the seasonal property tax that is [ persistent ] in the first quarter and also expenditure as commented the previous quarter on revenue opportunities. All in all, positive jaws. As a result of this, our recurring cost to income ratio improved to 52.7% down by 1.6 percentage points in the quarter. A few comments on loan-loss provisions, continue to do well. On a 12-month trailing basis, the cost of risk is already at 29 basis points, already below our guidance for the year. Remember guidance to be below 50 bps. 2 quarters in a row with cost of risk on an annualized basis at 24 basis points, within that in this front, everything is going as expected and on track.Some final comments on the P&L for our real estate disposals. We continue to make profits from disposals. 16% over the cost price during this first quarter of the year. That sharply contrasts with the situation of 2 or 3 years ago, and you know that we have made profit of EUR 40 million. As much as it is possible, we have been providing further for this portfolio to make a net real estate result of EUR 2 million in order to smooth disposals in coming quarters as much as possible.And now some comments on the balance sheet. First, starting with our nonperforming loan exposures. We have reduced NPLs by around EUR 600 million. The NPL ratio, down by 20 basis points to 5.8%, and well, after IFRS 9, sound coverage ratio of 55% at group level. And I would remark that the coverage ratio for the uncollateralized part of the nonperforming loan portfolio, standing at a very sound level at 80%. Some comments on our real estate exposures that are gradually trending down. The OREO book coverage ratio is stable at 58%. The pace of inflows into this portfolio gradually trends down. 11% down this quarter compared to the first quarter of last year. The pace of sales in any case, only organic disposals this first quarter, EUR 306 million, up by 3.4% compared to the first quarter of the year or with the third quarter of the year, slightly more slow during the year. But remember that we have already reached an agreement for a portfolio sale to Testa of a portfolio of EUR 228 million to be executed from this second quarter. Finally, on liquidity and solvency. Liquidity, not much to comment. Continue to have really sound liquidity position. EUR 73 billion of liquid assets at group level, EUR 65 billion at CaixaBank level. Our liquidity coverage ratio is standing at 206% by the end of the period at CaixaBank. And as you know, intense activity in wholesale markets with 2 covered bond issued 5-year senior preferred. And I would remark EUR 1.25 billion AT1, that already fills our AT1 bucket together with the issue we did last year.And finally on solvency, we closed the quarter with a CET1 ratio at 11.6%. We have had this quarter the well-flagged impact of IFRS 9, minus 15 bps. Positive organic capital generation, 24 bps. And other value adjustments, minus 17. Amongst them, I would remark the impact from the evaluation of the Angolan kwanza that has obviously had an impact on this. Improved credit ratings, well known, and also I would remark here a total capital position that is now already over 16%, standing at 16.1%.I would make some final remarks from my side. We feel that we are moving with confidence towards our targets with a return on tangible equity that is already at 9.8%, within our targets. This is supported by high core revenues that results into positive jaws. That result also into an efficiency improvement. A cost-to-income ratio that is down by 1.6 percentage points. Thanks to a good business mix with higher margins that reflect the strength of our franchise. And this, together with a continued decline in NPAs, as always with the DNA of CaixaBank, which is strong solvency and liquidity metrics. And with this, I think that we are ready for Q&A. Thank you very much.

[Edward Michel O’Loghlen, Division Head of Investor Relations]

Okay. Thank you, Javier. As you rightly pointed out, it's time to move to Q&A. Operator, can we please have the first call, including the name and company of the caller.

[Operator]

[Operator Instructions] Your first question today comes from the line of José Abad from Goldman Sachs.

[José Maria Abad Hernandez, Executive Director]

I have a question on consumer lending. I think maybe you could give us some detail on the deal of the consumer lending in Spain and how that has evolved over the last few quarters. Maybe 2 data points would be enough, like Q1 '18 and Q1 '17. We've seen that once again, I mean, the NPL ratio has increased to 4.4%. This is for the ninth quarter in a row. This is not a CaixaBank-specific issue. This is a system issue. But -- so the question is beyond which NPL ratio would you consider to a slowdown the origination of NPLs? My second question is on -- if maybe you could give us an update on your strategy for real estate asset disposals, given there's been a lot of noise in the press about the potential large [indiscernible] transaction down the road.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, José. I'll take the second part of the question on the NPLs and asset quality and maybe let Javier give any figure on the lending. The NPL obviously has been slightly increasing in customer lending associated to a very significant increase in the activity. We have a policy in which we look at every vintage that we produce, and we see what is working and what is not working well, and we adjust immediately. So this is not a process in which we wait until NPLs reach a certain level, and then we change. It is obviously every action that we take, after we start doing it because the portfolio is obviously very granular, we have the appropriate monitor and follow up, we fine tune. We stop certain actions. We emphasize others. We move the scoring line at which we would produce new lending. We will change the terms. We would emphasize certain channels or others. And this is a constant development. And what you see in the evolution of the NPLs is obviously with some lag effect, earlier vintages. We are actually very satisfied of the, course that we are following here. We have found plenty of very attractive activities that are, obviously given the margins that are above 9%, are always contributing to shareholder value. But we are also actively learning from what we do. There's a lot of tests and learn, particularly when we look at new initiatives, new digitalization, et cetera. And we're actually quite happy, and we feel the NPLs on the consumer lending portfolio are completely under our control. And we'll continue to feel the significant growth, and we plan to exploit it without an impact on NPLs that would be not bearable. So there is no limit, I think, at this stage. It will obviously more depend on what is the market demand, consumption growth in the economy, which continues to be positive, particularly the evolution. Over the next 3 years, it may suggest that the overall demand from consumer lending will continue to grow maybe at a slower pace than it has been lately. And maybe, Javier, you want to add something on the margins.

[Javier Pano Riera, Chief Financial Officer]

Hi, José. Well, I was looking to the figures, and actually, there are not much changes. The latest figure for our front book on that one is around 9%, 9% yield. And if I look to the different vintages in recent quarters, I would say that it's somewhere between 9% and 9.5% depending on the quarter. So it's true that it is more and more focused from our peers on this segment. But so far, we are being able to defend our position, our margins, and you know that we are making new or reaching new initiatives with different vendors, et cetera, so no doubt that this is helping on that front.

[José Maria Abad Hernandez, Executive Director]

If I may very quickly, if you could remind us the contribution to NII from consumer lending.

[Javier Pano Riera, Chief Financial Officer]

Well, it's around about EUR 10 billion booked, and with those yields, you can make the numbers pretty easily. As well the back book yield is, as I say, more or less at the same level, around 9%.

[Operator]

Your next question comes from...

[Edward Michel O’Loghlen, Division Head of Investor Relations]

Operator, can you please hold? We had one question pending on José on the real estate strategy.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Well, on real estate, we have not any change to explain. We continue with our strategy. We want to reduce our burden of nonperforming assets. We want to do it in -- as we have been doing in the past, selling organically and complementing that with some smaller portfolio transactions like we announced earlier in the quarter. We have sold approximately 3.4% more than the same quarter last year, as Javier explained, and we have also announced this portfolio sale of another EUR 228 million. Javier, anything you would like to add on this front? Does that cover your question, José? Or was there any specific...

[José Maria Abad Hernandez, Executive Director]

It's clear.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Okay, thank you.

[Operator]

Your next question comes from the line of Alvaro Serrano from Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Two questions, on NII first. I think you were very clear at the end of Q4 that NII should recover already in the first quarter, and you've delivered. When I think about your targets for the full year, you need further growth in NII. Just if you can give us some commentary if this is going to be a linear process or should be back-end loaded depending on rates. Something along those lines. So can you link that answer to comments from -- Gonzalo, I think you said at the beginning that loan growth are flat year-to-date given seasonality's off to a better start than you expected. It feels like you're more positive on loan growth. Does that change any of your -- or is anything you can add on your NII guidance given the better loan growth? And second, similarly on fees. They were a bit lighter than consensus in the quarter. Understandably, it's quite difficult in banking as you've mentioned. And you've also mentioned the market impacting the asset management business. I just wanted to -- and also Easter fell in Q1 this year. Can you also give us some color given the pipeline, given the market volatility in the last couple of months, is that going to affect the fee line in the short term? Or just give us a sense of how the markets are affecting because Q2 last year was also very strong. So I just want to get a feel for development during the year.

[Javier Pano Riera, Chief Financial Officer]

Hi, Alvaro. I'll take the NII question. Well, we guided for NII to grow between 2 and 3. Obviously, we confirm this guidance for the year. If you look at the -- to the ladder of the NII evolution, you may see that during this first quarter, we had a small negative impact coming from lower average loan volumes. But I said also that we had a more upbeat tone as the quarter progressed and also on the mortgage segment. So I would say that, obviously, we expect that this negative average impact will not happen again, and this obviously will support NII going forward. When I gave guidance last year for this, I said, look, if rates do not go up, we have sensitivity on this, on NII, of around 50 basis, 5-0. What -- we gave you a range between 2 and 3. We think that it's early days in the year, we'll see -- but we are confident that we will be there. And obviously, loan growth, if it happens or if it helps, will be good news. And obviously, the fact, which is mainly the driver for NII in our case, the fact that the front book is clearly, on a sustained basis, accretive compared to the back book, once Euribor resets fade, negative Euribor resets fade, that has an immediate positive impact into NII. Hopefully, this would be the case from midyear on. So those are the main drivers. And together with trying to manage our cash balances, obviously, on a smart way in order to have the smallest impact possible of the minus 40 bps from the ECB. So I would say that this is -- those are the main levels for NII management for the rest of the year.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

On fees, I don't know...

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Javier, just is it -- Javier, just a follow-up. Is it fair to say that at the beginning of the year, you were not factoring loan growth and now loan growth is coming better than expected? Is that a fair comment?

[Javier Pano Riera, Chief Financial Officer]

Well, if it's better than expected or not, we will have to confirm. What I say is that we had a small negative impact from average loan volumes. And -- but that by the end of the quarter, we have a more positive tone. So it has to be confirmed that this positive tone continues during the year. But obviously, our initial guidance was made on the assumption that we had stable loan growth. That's right.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Okay. Sorry, on the fees, I interrupted you.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

No, no, no problem, Alvaro. On fees, I think we are on the right track in terms of what we are doing with respect to our guidance. I would highlight particularly in the insurance front, we have been actually doing very well. On AM fees, we have had the impact of negative market development, and that has also had some impact on our CIB business. For the rest of the year, I think the quarter indicates that we will be meeting our guidance, but obviously, the market may help us or not depending on what happens in the next few months. As I said, April, in terms of AUMs market valuation, is quite positive. But it's very difficult to make a judgment on the full year that from nothing of what we have seen both in NII and fees, some things are slightly better than what we expected, as you were indicating. Others are slightly worse. All in all, I think we are in good -- making good progression towards meeting our guidance. But we will have to obviously monitor how the developments go during the year.

[Operator]

Your next question comes from the line of Sofie Peterzens from JPMorgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

Sofie Peterzens from JPMorgan. I was just wondering if you could share with us your plans for BFA in the future and also [ Red Stall ]. How should we think about the equity method contribution from these holdings? Are they long-term holdings? Or should we expect potentially lever ownership in future? That would be my first question. My second question is around the real estate division. The pretax loss was almost EUR 100 million this quarter. What kind of loss should we expect in this division going forward? And could you elaborate if you plan to do slightly bigger portfolio sales than the EUR 228 million that you have already announced? And then just if you could give details on IFRS 9. Provisions went up by almost EUR 760 million, but the correct -- we did year one impact was only 15 basis points. Could you just give details what explains the delta?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, Sofie. I'll try and deal with the first 2 questions, and Javier can give the details on IFRS 9. With BFA and Repsol, there's -- there are no news in terms of our strategy. We have been quite clear with respect to BFA that our interest would be to reduce our investments in BFA, and at the same time that we do not have a certain deadline to do it because we obviously, depend on the environment. BFA's a fantastic bank, and we want to make sure that we do this at the right time, in the right conditions. Angola is going through a period of change. Angola has recently requested, as you well know, to the IMF, the implementation of the program of the policy coordination initiative, with basically without asking or getting money from the IMF, Angola is offering or trying to comply with the certain policies that are I think orthodox from a macro point of view which is I think very good news. Then, I think these will be followed by further openness of Angola to the international capital markets, plenty of good developments. This is what is most relevant. Obviously, the oil prices also helping the situation of the country, and we are cautiously optimistic and certainly willing to work with our partners there in order to find a solution at the right time. In the meantime as we have 48% where we'll be, receiving the 48% of the income from the bank. The bank continues to do well. Obviously, there's change now in terms of accounting for high inflation which is reducing the bottom line. We show that in the last quarter. And that continues to impact our current profitability which is significant but less than it used to be. And then, we have these particularly high result this year associated to the hedges on devaluation that has taken place with the kwanza but no change in plans really here. Our long-term expectations is certainly, to be at a lower level but we depend on some of the circumstances. These circumstances are clearly evolving in the right direction. With respect to Repsol, there's absolutely no change. We have a significant hedge, aimed at reducing concentration risk and 1 given investment which we think is sensible as a bank to do. There are no further plans. We have protected value. We continue to believe that there is significant upside in the company particularly now that the oil price is going up quickly. Javier?

[Javier Pano Riera, Chief Financial Officer]

Yes. On the IFRS 9 impact of minus 15 bps, this was very well disclosed a couple of quarters ago, but I summarize the key numbers. There is an increase of provisions of around EUR 750 million. I am giving you round numbers. Net, it's around EUR 460 million. That would be the impact on our regulatory capital. You have to consider that before these, we already had a deficit of provisions that was already deducted on our CET1 [indiscernible] capital ratios of around EUR 400 million. So the net impact is the difference between the new provisioning levels and this deficit that we already had on our capital ratios. Together with this, this was a negative impact on this RWAs, and what if you put together, there is the impact of minus 15 bps but this is the only impact which we have not taking our decisions related to our bond portfolios, et cetera the valuation of bond portfolios other than the pure impact of the increase of provisions that, by the way, have resulted into a [ core ] ratio that goes up by 5 basis points to 55%.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

And coming back to your second question, Sofie. On real estate, you asked whether we couldn't be such further portfolio sales. We're going to be opportunistic. The environment is one in which more and more people are quite keen to get into. We have plenty of real estate. We have strategy to dispose of it. We're always open to hear, to people who want to invest in the market. If at some point, someone comes with attractive proposals, then we will react positively. This is the case with Testa, and I obviously do not discuss that we will have some others that will come and where we will find some point at which we will trade larger portfolio like in the case of Testa, but we are clearly going to be considering at all times these [indiscernible] granular one of continuing our sales through mostly our branch network, in order to evaluate whether it makes sense or not. But if you ask me, it's more likely than not that we will find further pockets of money interested in buying some of our assets. And if that happens, in attractive terms, we would obviously communicate that in due course.

[Operator]

Your next question today comes from the line of Javier Echanove from Santander.

[Javier Echanove, Analyst]

I have 2. First one is. Well, you could quantify the impact of NPL recoveries in the NII in the quarter. And what would have been the yield on the loan book not taking into account these NPL recoveries? And would you expect to see coming in future quarters from NPL recoveries? That's one. Second one is on capital. Taking out the IFRS 9 impact, the capital Core Tier 1 generation in the quarter has been about 7 basis points. I was wondering whether you think that is a good run rate for the rest of the year or expect more or less and on what basis from and what factors?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Javier?

[Javier Pano Riera, Chief Financial Officer]

Well, the NPL, the Accrual of NPLs has had an impact this quarter close to EUR 20 million. Thus, here, I want to highlight the following. With IFRS 9 enforce from earlier in the year, we are required to accrue interest on net stage 3 past due balances, but the same amount is being provided as loan-loss provisions, thus resulting into an offsetting amount with no impact on net income. So there is like a re-class from NII to loan-loss provisions, And also, as we have already guided for cost of risk, lower, by the way. So everything is in the pack. But the impact this first quarter is around EUR 20 million. Within that, this is more or less sustainable, and this has had an impact on our back book yield of around 4 basis points. So I would say that this is 4, 5 basis points is the impact we have had. I don't know if you want to comment maybe on capital?

[Unknown Executive]

Sure. Well, on capital, I would know that we have a lot explaining different impacts, organic, inorganic. On the inorganic front, I would remark that the devaluation of Angolan kwanza. This has had impact on OCI of around EUR 130 million. So that explains close to 8 basis points of our -- of this impact. We have further impacts amongst them. We have the IFRS 9 impact of Erste Bank into -- which is 2 basis points, so there is always some noise here and there. But on our recurrent organic capital generation, I would say that without there's still the noise because obviously this quarter is affected by so much noise , I would say that fewer between 15 and 20 basis points can be with a good run rate.

[Operator]

Your next question comes from the line of Marta Sánchez From BAML.

[Marta Luisa Sánchez Romero, Director and Analyst]

First one is on [ AS ] quality. The work out of your mortgage NPL remains very slow. Why is that? When do you expect to see a significant reduction in the mortgage NPLs. And the second question is more on strategy. You're the masters of cross-selling. Do you think rising regulatory and supervisory scrutiny could have a negative impact on the revenue power of your franchise? Do you think we'll see rising conduct risk provisions, and that will become structural as we've seen in other countries like the U.K.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

On the second point, we are spending a lot of time in making sure that what we do we is properly done. And I think a clear example is our focus on advisory in the selling of mid- and long-term advisory products, but obviously, we do cross-selling of many other things. And we are, I think at this stage quite comfortable that the conduct that we are following here is appropriate and is certainly a big priority for me. These -- actually I made organizational changes around 3 years ago to have all of the conduct compliance reporting to me directly and making this a top priority for the organization, because as you say, we are very successful commercially. We just want to make not only we very successful commercially, but also make sure that every part of the process is appropriately managed and appropriately done. And at this stage, I'm very comfortable. And I'm very comfortable compared to what I see is market standards. In Spain, I'm convinced that these regulations will sort of raise the bar. I have no doubt, and we want to be ahead of the regulations. And so far, we are. We have, at this stage, all reasons to believe that we'll continue to develop our activity quite successfully and compliant with applicable regulations and regulatory standards, and also even the demands from society which are significant in that front. So I'm saying, I do not think this is going to be an issue mid- to long term, but not because we're -- we have an easier road, it's because we're taking these things extremely seriously, and we have now a way of conducting ourselves, which is actually very, very strict. I will continue to invest on that front. With respect to NPLs, mortgage NPLs. Obviously, yes, you are right. The NPL ratio for mortgages is not coming down as we would like it to come down. Obviously, the mortgage portfolio is coming down. On the other hand, so there's question also of the denominator. What is -- what's happening? Well, there is a new mortgage law in Spain that is going through parliament that hopefully should be approved and will certainly have an impact. While that mortgage law is not approved, what we have had is a situation in which most courts throughout Spain have really stopped executive procedures on mortgages, because there are a number of questions that are pending, sort of the term European Court of justice decisions. And that means that the reduction, the portfolio is improving, but the reduction is very slow, and I think it's going to take some time. We have not been active in selling NPL mortgage portfolios because there are substantial issues when you're talking about doing this. People, first residents et cetera, it's -- from a reputational point of view is complex. We're analyzing some portfolios that are actually not focused on first residents, and we'll clean out that portfolio to see whether we can through wholesale markets, accelerate the reduction on that front. There's a significant element also here of, let's say, likely to pay is subjective NPLs that are still paying. We have a portfolio of a significant size which has been subject to the last changes on the good practice code as we say in Spanish. [Foreign Language] That is basically allowing people to have a 5-year extension of their loan with just paying a small interest amount. And obviously, that immediately becomes as a subjective NPL, and it has to stay that way for 5 years. So there's a lot of things that are just happening to which we have no room for action. This being one example. The portfolio will come down, but will come down slowly.

[Operator]

Your next question today comes from the line of Ignacio Ulargui from Deutsche Bank.

[Ignacio Ulargui, Research Analyst]

I just have 2 questions. Could you comment a bit on how do you see that competitive pressure with some of your competitors, lowering mortgage yields...

[Edward Michel O’Loghlen, Division Head of Investor Relations]

Sorry, Ignacio, could you speak up? We have a hard time hearing you.

[Ignacio Ulargui, Research Analyst]

The first one is on the competitive pressure of -- in Spain whether you see a lot of pressure coming from competitors lowering lending yields in mortgages, whether this might have an impact on your customers per assumptions. And the second one is on [growth entries] in the quarter. You have seen almost 50% decline Q -- year-on-year in terms of [growth entries]. Do you think this might be extrapolated to the year that was anything particular or yes, the [ NPL ] formation is improving materially which underlines the improvement in credit quality.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Two very relevant questions from the mortgage side. And generally, the competition is stronger in Spain. I think you might remember, we had this discussion at year-end results, and I was quite clear that I continue to see a very competitive environment into 2018. And this is what we are seeing. On the mortgage side I think it's a fact that the competition is actually strengthening and being very aggressive. You can see that actually our results for this quarter, new [ protection ] for us is stable versus last year. And actually, we're defending very nicely our front book, to a large extent, thanks to our focus on fixed-rate mortgages, but there is no question that market is becoming more competitive. And at the same time it is also true that we are not competing on price. We continue to think that the best advice for clients for most clients is to at these levels get a fixed rate mortgage, which we normally or tend to manage through ALCO and swap into floating, so that we can obviously manage the interest rate risk better than the man on the street. And hence, this strategy for us continues to be to protect value and not to enter into a price aggressive strategy to react to others and we are willing if need be to sacrifice volume growth. For us to be stable in new production is a good indication of our discipline on that front. And the second point in terms of entries into NPLs, I think we will be having good news on this front, on the NPL side in particular. And obviously, we were also going to be seeing lower entries into real estate assets because we have a lower stock of NPLs. We have made changes later or the second half of 2017, we reorganized our recovery teams grouped under 1 head, around 600 people also directly reporting to me, and we have put in place many, many, small but very relevant initiatives when taken as a whole, and what we have seen in the first quarter is pretty good results in terms of lower new entries. Obviously, the comparison with last year is a bit more complex, because you also have sort of large items here and there. But the only the specific numbers, the actions that we are taking, suggest to us that we are going to go to an increase of sort of -- increase the low level of new entries which will obviously be very helpful for NPL evolution going forward. And the least costly way to reduce NPLs obviously is not to have them become NPLs in the first place. The effort of this 600 people team that exists today. The effort of this 600 people team that existed before but was directly reporting to the various directors at [indiscernible], there is various regional managers but now they have 1 single sort of management line, I think is going to, yield good results for us this year and contribute to a good reduction of nonperforming loans. We're expecting to be around 5% by year-end. That's our target, and this is a critical part of it.

[Operator]

Your next question today comes from the line of Britta Schmidt from Autonomous Research.

[Britta Schmidt, Partner, Spanish and German Banks]

I've got 2 quick questions, please. One is on the insurance business, which had a very good quarter in Q1 both in the other income contribution as well as the fees. Is there any sort of seasonality that we should bear in mind when we model this out or are you confident that these lines can go from here throughout the year? And then, the second question can you just update us on the swaps that you've taken out on Telefónica & Repsol. I think the Telefónica swap has been closed. Is there any sort of impact that we should expect in the trading income? And then Repsol, I think you might have increased your swap, maybe you can update us on this and any potential plans to further hedge some of these things.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Well starting with the first question and subject to, Javier, maybe you add something at the end. I'm at least, I cannot think of seasonality in this line at this stage, but if there's any other reason you will -- we will let you know. But on that line, I don't see where we have seasonality positive is in the equity accounted income coming from SegurCaixa Adeslas in the third quarter because, the month of August is particularly low in terms of claims. As people go on holiday, they do not get sick. One of its marvels. And seasonally, we have higher contribution on the third quarter. But I don't think that the first quarter has been pushed by any particular seasonal factor. It's been a pretty good quarter in a solid trend line, nothing comes to mind on other would suggest seasonality that may be corrected later on. On Telefónica & Repsol, we had put a hedge on Telefónica around EUR 10.5. We obviously have a significant investment in Telefónica. And with other 4 concentration risks it was right to take a hedge, at a point where we saw -- that value was attractive. And that hedge proved effective, not only as an instrument per se, but also, obviously, unfortunately, market price for Telefónica came down and came down to a very low level. After which we decided at those levels, it was the right thing to unwind the hedge. And we did that -- was finalized during this quarter at somewhere just below EUR 8 per share. Obviously, that makes us economic capital gain, but the way we account for that is against shareholders equity, so nothing is going to accrue through the P&L, but we have that EUR 115 million. We basically hedged EUR 10.5 and bought back EUR 8. And that has made us that economic capital gain over EUR 100 million but it will not go through trading income. In the case of Repsol, we have also very large position, and we decided to hedge approximately half of our stake, which we have done at around EUR 15.5. There is no further plans with respect to more or less hedges or any of the decision around Repsol. What will happen is that when Repsol pays dividends, we will for these portions that we hedge just below 5%. We will pass on these dividends to the hedge counterparty. And hence, we will have for the size of that payment, we will have a negative impact on trading income according to the current rules, but there's no, as I mentioned before, no other implication or change. We are -- we think we have the duty to manage these positions, and particularly the concentration risk associated with it, but the concentration risk is not the only dimension. The value is obviously very relevant as well. And as a result of combining these 2 concentration risk and valuation, we will continue to when we file appropriate, manage proactively our position.

[Operator]

Your next question comes from the line of Benjie Creelan from Jeffries.

[Benjie Creelan-Sandford]

I guess just wanted to follow up on that other question around the investments division, perhaps just a little bit more broadly. Can you give us an indication of how you as a management team assess or weigh the benefit of the earning stream from those investment stakes versus the potential to free up capital and redeploy it into the core banking business. I'm just wondering how you measure the risk/reward or ultimately, what would lead you to think about reducing those holdings? The second question is just on the -- just a technical point. I know there seems to be a restatement this quarter which [ is reaches ] losses in the real estate division, but it increased the drag on the core banking division. I just wonder if you could explain what was behind that this quarter.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

On the first point, we have been for some years now saying that, while we like and we used to have a lot of minority investment, we like them each of them individually, we have a core business which is our bancassurance business in Spain and Portugal, and we wanted to make sure that our results were a consequence of our core business and not of extraordinaries or one-offs coming from these investments. And hence, we embarked on a program to reduce the weight of these investments. 5, 6 years ago was 1/4 of our capital to the levels today where it's more 5% to 6% of the capital. And from that point of view, we were prepared to reduce earnings coming from these investments in exchange for having a clear equity story. I think a lower risk profile or a risk profile at least that is very well known to our shareholders because it's the business they are investing in what we do in Spain and now also in Portugal. This is the conceptual framework, that does not mean the fact that they are noncore business. That does not mean that we cannot own them. That does not mean that we can have some of these investments for a certain time. And at this stage, we feel that the best way to serve our shareholders is to keep these investments in -- with the appropriate management of value through the instrument we have. Normally when -- or what has happened in the last quarters through derivatives, and we'll continue to do so. The way that the evolution of our bank is going, these investments weighed less and less in our equity story, in our capital, in our earnings, and I think that is going to continue to be the case going forward. Beyond that, obviously, we have also to keep some of our cards close to our chest as we are talking about very relevant and listed [ parent ] companies and I continue to emphasize that we have a positive view on the upside on both Telefónica & Repsol.

[Edward Michel O’Loghlen, Division Head of Investor Relations]

There is -- we have a question on the real estate division. Yes, Benji, I mean, basically what we had is around EUR 25 million net per quarter being transferred in terms of analytical, commission being paid from the real estate segments to the bancassurance segment that given that was a noncash item. We've decided to discontinue that. And as a result of that, the real estate segments will have EUR 100 million roughly less of net expenses in 2018. And what we've done is restate 2017 accordingly.

[Operator]

Your next question comes from the line of Carlos Cobo from SG.

[Carlos Cobo Catena, Equity Analyst]

Yes, a couple questions quickly. One is on BFA again but more about BPI's capacity to upstream dividend given that in Angola, they have some restrictions on U.S. dollars. So when we think about -- when you think about the payout of the whole group, do you account with this cash or should we kind of adjust that, which makes sense? And then lastly, you've already touched on this but quickly how is your approach to asset disposals moving in the context of the IFRS 9 adjustment. So now coverage looks sounder, higher. Are you going to use that to accelerate the asset disposal leaving the retail segment being a bit more, let's say, aggressive on prices or are you still plan to retain as much value as possible? So I understand this is a moving thing. But how is your mind evolving in this topic?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

On the second point, obviously, IFRS 9 has had an impact on provisions for non-performing loans not on real estate assets, foreclosed assets. And somehow the -- I'm not sure the question, you're linking to our assets, of foreclosed assets, IFRS 9 will not have an impact on that front. It has had an impact on non-performing loans. We have been selling also non-performing loans portfolios in the past. I think with fairly good impact. I think during discussions done over 11 or 12 portfolio transactions, and we expect to have a few portfolio transactions during this year as well. And clearly, from that point of view, IFRS 9 is, I guess, helpful but is not going to alter what we have already been doing which is where we see non-performing loans that we can sell, and where reputational impacts or other considerations do not constitute a problem, then we go, because we do not want to own non-performing loans. The exception is when we see a market that values non-performing loans well below where we see the value. This particularly happens with large tickets where there is also a market. And when we actually see an opportunity when we hit the market, but sometimes we have a view that the recoveries will ultimately going to be much higher. And because we know quite well these situations, in those cases, we keep that. But our strategy will continue to be one in which we want to accelerate the disposal of non-performing assets. Our budget for this year is in foreclosed assets now is 2.3 billion compared to the 1.6 billion that we did last year. So it's a very significant, almost 50% improvement, and where we are going to include some portfolio sales. An example is the agreement we reached with Testa, and where we will probably as I was mentioning before, find the occasions to do some other similar transactions. Certainly, there's a lot of interest in the market, and we think it makes sense, for us to explore it and continue on this basis. Javier, you may want to answer the first question.

[Javier Pano Riera, Chief Financial Officer]

Yes, on the Angolan dividend, the administrative process for payment of the 2016 dividend is progressing. One news from Angola, as you know, is that the government has presented micro stabilization plan, that we think and set a good foundation for medium-term growth and also the Angolan authorities have requested non-financial assistance from the IMF, thus giving [ visibility ] to all the problems. And also I think that in due time the Angolan central bank will authorize this payment into hard currency. While to your question, if this is to consider it on our payout or not, I would say that we have guided clearly for dividends. And we have clearly said that you should expect payout ratio and cash over 50%. From here, obviously, there is not a mechanistical approach. And while deciding the management proposing to the Board, the dividend policy obviously many things have to be considered, not only just one, so I would say that there is not as I say a mechanistic approach related to this. So this is the news that we might have on this.

[Operator]

I believe we have time for one more. And luckily enough, there's one more person on the line. So could we please have that call, operator?

[Operator]

Your next question comes from the line of Ignacio Cerezo from UBS.

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

A couple of quick ones for me. Follow up on the consumer lending business. If you can sort of tell us actually how the customer acquisition has changed since you started pushing that business more decisively. And what are the cost of risk actually you're having on that business today? And then, just a number, basically, on which is the updated book value of BFA.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, Ignacio. Updated book value of BFA is [ 530 ]. That is the easiest one of all of the questions that you have. The first one is obviously one that is very relevant, it's difficult to summarize, but I will try. We continue -- we have a 2 ways to acquire customers. One is through our JVs, Telefónica consumer finance be it hard or virtual JV. The case of Telefónica is a hard JV where we're funding clients of Telefónica that wants to buy their mobile phone. And this is obviously working quite nicely for us both in terms of misses and in terms of cost of risk. We have similar agreement with [indiscernible] and with [ indiscernible ]. Now we have reached one with Mediamarkt. And we will be launching also with this agreement we've closed with the supermarket DIA. In this case, there's obviously, we have the advantage that when new client is acquired, 30% of the cases it's our client, because we have a 30% market share in Spain, so it's -- even when we're talking about point of sale lending, the information that we have is a very significant. And when we're not talking about our clients, then we have basically information on every other client because they have actually purchased at our sort of establishments where we are the merchant acquirer. And one of client will give us enough detail, we have very quickly the ability to model and understand their payment profile and provide new lending to non-clients which is all this part with competitive advantage because we actually have a lot of information. 30% of them our clients are the one, that are not our clients. We have plenty of information, whence they allow us, they give us permission to access that data, because they would have been purchasing at establishment where we are the merchant acquirer. Again, we have 26% market share in merchant acquirer in Spain. So the power of data here is quite significant for consumer lending. We're using technology and information and agility to serve all this part of the business. Having said that, the majority of the growth is coming from lending to our own business -- our own clients. And what we are doing is providing for more pre-granted credit limits. We have over 4 million clients with pre-granted credit limits. Some of them [indiscernible] because we have their payroll. We know what income they have, and we can fairly accurately establish a scoring. In other cases, we may not have the payroll, but thanks to our efforts in advanced analytics and big data, we have been able to now create scoring models that are equivalent to those including again, our knowledge of payments made throughout the entire commercial or merchant acquiring network. So a lot of the business that we are doing is business with our own clients where we have a lot of information. What we're doing is they now know, they have that great preapproved. They have it in 1 click and they have it through -- they can go to the branch network, obviously, but they can also get it through the other channels. And this is making a difference. So I just want to be very quick, very fast, very convenient and at the same time have the necessary information to make sure we're making sound, great decision. The progress that we have made in these area is tremendous. Again, this is related to big data. We actually put all our information data pools into one integrated data pool 3.5 years ago. And during this 3.5 years, we have had a lot of progress in treating this information to our advantage. And one of the most obvious places is precisely consumer lending. This is what is working, at this stage very, very nicely for us. There was another part of the question, Javier.

[Javier Pano Riera, Chief Financial Officer]

Yes, you had that question on cost of risk. Well, this is a business that is evolving really fast. And as previously commented with different initiatives that we try one way or another, but anyhow, for this year we are considering a cost of risk for this business around 60 basis points, but obviously, we are perhaps in the good part of the cycle. Through the cycle, maybe higher than this if you are -- give you a figure. But obviously, more close to probably 100 basis points than those 60 basis points that are now being considered. Anyhow, you see that the yield on this portfolio is sustained at over 9%. So that's making really a good profitability.

[Edward Michel O’Loghlen, Division Head of Investor Relations]

Okay, thank you very much. That's all we have time for today. Thank you for watching, and I guess we'll reconvene in Q2. Thank you, everybody.

[Javier Pano Riera, Chief Financial Officer]

Thank you.