Caixabank SA

MAD:CABK

Earnings Call Transcript 2018-Q2

[Edward O'Loghlen, Director of Investor Relations]

Hello. Good morning. And welcome to CaixaBank's results presentation for the second quarter of 2018. Presenting today is our CEO, Gonzalo Gortázar; and our CFO, Javier Pano. Please note that figures for the quarter are now fully comparable both quarter-on-quarter and year-on-year. Also, just a brief reminder of the format for our first-time viewers. We plan to spend around 30 minutes presenting with 45 minutes available after that for live Q&A for which you should have received instructions on the screen. And with that, let me hand it over to our CEO, Mr. Gortázar.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, Eddie. Thank you very much and good morning everybody. Thank you for taking the time to be with us. I will start with, as always, highlights for the quarter. You've seen the figures. But I would say the results very satisfactory. We actually reached the double-digit return on tangible equity for the first time, and we reach it, as you can see, with significant growth both year-on-year and quarter-and-quarter from our core revenues, be it NII, fees, other insurance revenues. So net income is up year-on-year, 36.1%.Volumes varies from quarter, as you will see in some detail later on. Across the board, I would say both on the asset side and the liability side it's been a very good quarter. Second quarter is usually seasonally positive, but this one being -- this one has been particularly positive I would say.Asset quality, highlights were no doubt the agreement to sell our real estate business to Lone Star. But as you can see, the reduction in NPL ratio has been very significant in the quarter and year-to-date, standing now at 5.3%, which is also very encouraging. And the cost of risk is lower than what we had been forecasting for the year so far.The liquidity and solvency remains strong. Obviously on the solvency side, we are at 11.4%, which is down from the first quarter due to mark-to-market as Javier will elaborate later. But pro forma for the real estate sales actually were back at 11.7% and in a very comfortable position.Starting giving you some color on commercial activity. I think the chart is quite telling. Second quarter is always very strong. You can see that 2018 is particularly strong, almost EUR 15 billion of new -- actually we have a problem now with the presentation, it's now back, so no problem. But anyhow EUR 14.7 billion of additional customer funds gather in the quarters. You can see heavily weighted towards, on balance sheet, particularly [ time ] deposits, but also I think quite relevant EUR 3.3 billion of additional funds in insurance and AuM despite the, I would say, volatility in the market, is a good indicator certainly of the strength of the franchise. It's, as you can see, as strong or stronger than ever.Some details on the deposits on the savings products. You can see net inflows on the saving products, EUR 3.9 billion in the first half of the year, up 5% from last year. Very strong quarter and semester in terms of life-risk with 26% growth and EUR 611 million in premia. And a continuation of the sort of preannual growth trend that we have in nonlife insurance where we have grown by 6% over premiums and reach a 28.5% market share in health insurance.So I would say trends that we have been seeing for actually a good number of years continue during the quarter and the semester. On the lending side, I would say a very positive quarter. You see the highlights for performing loans, a growth of 1.6% both year-to-date and quarter-on-quarter. As you remember, we tend to adjust these for seasonal impacts, particularly approximately EUR 1.6 billion of lending to individuals associated to payments and advances of pensions at the end of the quarter which just last a few days. Once we take away that impact we still see some growth around 1%, just south of 1% in the quarter and year -- and year-to-date.And if we look at segments, I would say pretty positive figure as well. Mortgages will obviously continue to come down. But quarter-on-quarter you can see that the second quarter has been very positive relative to other quarters. Second quarter again seasonally is strong. You could -- you can see how the third and fourth quarter of last year were actually more negative than the second quarter. So we cannot expect a continuation of this trend line between the fourth quarter of last year and the second quarter of 2018. But clearly what we see is a much better environment and now also on the mortgage side.It's early to tell, it's 1 quarter, but it's building on an improvement in the first quarter, and hence we'll have to watch closely how the market continues to perform on these fronts. Besides mortgages, strong growth on consumer lending, 5% in the quarter. Similar level in the first quarter, so year-to-date is 10.6%.We grew businesses after a sort of weaker first quarter. Second quarter has been much stronger. And public sector has been flat in the quarter after a very strong quarter -- very strong first quarter. So all in all, loan growth is certainly experiencing good trends across the board, but I would say it's fairly early days and we still want to remain cautious. But certainly figures from the second quarter are encouraging on these fronts.New production continues to grow, whether it's consumer lending, residential mortgages or businesses. In the case of businesses, we had a very strong first half last year, and we've actually managed to slightly grow from that level which is pretty good after a weaker first quarter. I would say the strategy we follow in this segment is working nicely.On the consumer lending, again very strong growth over very strong growth over very strong growth as you can see these 3 years. We still feel that the dynamics are positive. We are I think managing well the risk in this area and we continue to invest in the business with new commercial agreements with lenders. And Javier, our CFO will show that actually in the short term, it's actually costly to the P&L. But it is very important to ensure mid- and long-term growth, which we expect to have in this area.Javier will discuss the good trends in residential mortgages, so I will not extent myself on that one. In terms of transformation of the business, we now started few weeks ago the reorganization of a very large area, global customer experience which including people that work with us, affects over a 1,200 people into a new team which is basically aiming at being faster in the way we bring new developments to clients, we'll respond to their needs, working on a more agile way from that form and ensuring that we actually maintain our long-term leadership in this area and certainly very much having our people focused on clients. The new organization is based around client experiences. And obviously we expect that that will result in even better outcomes.We had recently recognition from Euromoney as the best digital bank in Western Europe which pleases us, but obviously we're going to continue to invest heavily in this area.We have among the largest banks in Spain, the highest level of digital clients, the highest level of digital penetration. And internally we have transformed already the bank in terms of all our employees operating with smart PCs, all our processes being digital. And our physical brands has been more and more levered on technology as per our new store branches which already give service to 15% of our clients and even a higher proportion of our business volume.We have reached agreements with fintechs and other companies to offer services to our clients. We had a few examples there. And we certainly continue to invest for the future and explore new areas of activity.On the mobile side, we actually have a very large lead in the Spanish market. We had 10 million payment, mobile payments in the first half of the year, over 2.2 million just in June. And continue to actually lead the payment market in Spain and expect to continue doing so in the future.Moving on to financial results. Again obviously the highlights is the strong increase in year-on-year profits. The most important factor behind those or the one that I would like at least to highlight is that our core revenues are supporting this trend. NII, fees and insurance grow whether it's quarter-on-quarter or year-on-year in a good pace. We have on top of that some seasonal positive impacts from noncore revenues in terms of the dividend from Telefónica and the income from associates. But we also had this quarter to offset that the resolution fund charge and the EUR 204 million of loss that we have recorded for the repurchase of ServiHabitat which was a necessary action in order to sell the real estate business. So very strong growth in net income, but at the same time not dependent on seasonal impacts but on recurrent core revenues, and return on tangible equity reaching finally the double-digit figure.Looking at it by segments. I think the picture also looks nice. Bancassurance with very strong growth, 12% now return on tangible equity of which approximately half comes from nonpure banking business, being insurance and asset management the most relevant one, but also payments and the point of sale consumer finance being helpful there.On the noncore real estate, we have negative result due to the ServiHabitat acquisition. As I mentioned, if we exclude that one-off the losses were actually 33% lower than last year, so good trends. Investments up 20% and BPI presented actually in its results on Tuesday with very solid numbers as we will discuss later on.In fact, you have some detail here on BPI. The numbers are obviously public. I think to highlight the strong commercial trends, the growth in mortgage lending and then in particularly in consumer and in business lending. Very strong growth in Portugal, gain in market share. Also on the client deposit side 7.5%. And the bank reaching already a 9% return on tangible acuity in Portugal. Obviously this is excluding the investments in African business, particularly in Angola.We are in the process of acquiring 100% of BPI. We have both the stake from Allianz. And we are now actually moving ahead in the process of delisting and then squeezing out minorities, which we are looking to finalize before year end, but we obviously depend on the timing from supervisors. We also announced our reorganization or BPI announced the reorganization of their alliance with Allianz in Portugal. And the future alliance they will have with BPI Vida e Pensoes for the life risk business. So I would say BPI is moving very nicely and I would say ahead of what we expected both in terms of commercial success and in terms of financial results.Javier, maybe now it's your turn. Thank you.

[Javier Pano Riera, Chief Financial Officer]

Thank you, Gonzalo. And well, good morning to all of you. As usual, I will continue making some brief comments on different lines of the P&L and then the balance sheet. Starting as always with net interest income where we have had strong quarter. It is up by 2.3%. There are a number of different factors supporting net interest income. Client yields first, mainly due in this case to the early redemption of expensive retails subordinated bond, also we have had larger asset volumes this quarter.As commented, loan growth is doing better probably than expected on that front. And on wholesale activities, I would mention also lower average funding costs and also slightly larger ALCO portfolio. And on top of this, very good performance coming from Portugal with BPI, that has loan book that is growing at 4% year-to-date, and that is also supporting on that front. So all in all, we reconfirm our guidance on NII and we think that we may be at the upper bound of that 2% to 3% we guided 1 quarter ago.Looking into further details, on time deposits we see that in euros we are rolling those almost at 0. When looking to the back book yield we have to consider that this includes our foreign exchange deposits. And as U.S. dollars yields are going up, this has an impact on our back book yield. Otherwise thus back book yield would be almost flat.On the loan book, this quarter we have very strong production, more than EUR 10 billion of new production of loans. And of those, 1/3 coming from CIB, from corporate banking. Thus you may see that the front book yield comes down to 262 basis points, but this is due mainly to this mix effect. While looking to different segments on a like-for-like basis, I would say that the performance is in line with recent quarters. The back book yield stands at 231 basis points after a sharp step up when we introduced the impact of IFRS9 in the first quarter of last year.And this back book yield is set to gradually trend upwards as negative for Euribor resets keep fading. As commented, loan volumes is slightly up during the quarter.Turning to the our wholesale activities, funding costs. That we have an uptick to 122 basis points on our wholesale funding, but this is mainly due to a new issue of wholesale subordinated bond during the quarter. But on average those costs have been lower than the previous quarter.On the ALCO portfolio, on the structural portfolio, we have taken profits on some long-term Spanish bonds swapped into floating earlier in the quarter, crystallizing from trading profits around EUR 66 million of trading profits from this. And well, as a result of this you may see that the average life of the portfolio comes down, but the average duration as those bonds [indiscernible] come slightly up. The yield is mostly unchanged.And on the liquidity management portfolio, we have taken advantage of some market volatility at some point to try to drain our excess cash reserves [indiscernible] making some investments into short-term bonds. All in all, stability while you analyze the portfolio globally. As a result of all this, both customer spread and net interest margin remain broadly stable, just down by 1 basis point. But as I recommended before, we expect that this will gradually trend upwards in coming quarters as Euribor resets fade.Now we turn to fees where we have had strong quarter really. Fees up by 6.7%, even overperforming the second quarter of last year. I would say that the second quarter is always the strong one, but in this second quarter we have had strong contribution on banking fees from CIB during the quarter. Also recurring banking fees have been -- have done really well during second quarter. Year-on-year you have the impact, as was commenting previously, the CEO, of -- the impact of investments in consumer lending distribution agreements.Otherwise, those recurring banking fees would have been almost stable. On mutual funds where we have had around 2 billion of inflows continues to do well despite market volatility. Nonlife insurance, it's an engine for growth. And on pension plans, you have slight negative impact, but this is because as you know well, a new cap on fees was introduced from mid-April. And in BPI, you have a slight impact because there is the transfer of some business, the asset management business of BPI to CaixaBank asset management.With all this, our -- what we call our long-term savings business continues to do well with revenues from our insurance and asset management business up by close to 10% year-on-year. Now those revenues represent almost -- well, represent 25% of our bancassurance. Revenues up by 3 percentage points from a year ago. And as in recent quarters, we disclose details on the P&L account of our insurance company. And as you may see, the improvement is across the board to different lines and reflecting solid activity trends.I turn to costs. Cost grow as we continue to support the business. You see that quarter-on-quarter costs go up by 0.5%, personnel costs almost flat. We have EUR 5 million more of cost on general expenses and amortizations. And well on costs you know that we are always looking for opportunities, for business opportunities, looking for wider jaws in the future, this is the way we are planning to run the business for the future. And as you may see in past years, we have been able to deliver on that front and we think that we'll continue to do so.On -- well summarizing all this, I would say that the core revenue is doing well, up by 10% at the Group level, at 4% at CaixaBank, and we think that we are fully on track to reach our guidance. Remember, we guided for our core revenues to grow around 4% for this year. Our core operating income also doing pretty well.Some comments now on loan loss provisions that have clear reduction this quarter. On annualized basis our cost of risk would be -- has been, sorry, 18 basis point this second quarter on a 12-month trailing month -- 12-month trailing basis [indiscernible] 24 basis points, so clearly well ahead of our guidance. Remember, we guide for cost of risk to be below 30 basis point for the year.A look at our real estate activities. It has been a really strong second quarter. The second quarter is always seasonally strong but his time even more. We have sold EUR 611 million of real estate. On top of this, we have sold portfolio to Testa of rented real estate assets. Thus you may see that sharp increase.Capital gains on disposals continue to do well, 17% over the cost price. And while looking to our gains and losses on asset disposals if it not were for the before-mentioned fair value adjustment on the ServiHabitat servicer we would have been flat.Now a few comments on the balance sheet and first with our nonperforming loan exposures. That clearly are trending down this quarter, down by EUR 1 billion, maintaining more or less the same coverage, actually it's up by 1 percentage point. This reduction is clearly consistent with a clear inflow reduction. And on top of this that you know that year-to-date we have sold EUR 470 million of nonperforming loans. And as a result of all this, we make a strong push downwards to our nonperforming loan ratio, down to 5.3% and set to trend downwards in coming quarters.And on NPAs, comment on our recent agreement with Lone Star. As you know well, we have reached an agreement to dispose to a new company all our available for sale assets as of, real estate assets as of October last year together with some other real estate assets plus 100% of ServiHabitat. As I said, to sell all those assets to a new company that will be held 80% by -- to Lone Star funds and 20% by CaixaBank. The initial valuation of all those assets is EUR 7 billion, but this figure will be adjusted according to disposals from October last year to the closing of the transaction that is expected to be or late this year or early next year.As commented, this transaction is expected to be P&L-neutral and to have positive impact on our fully loaded CET1 ratio of around 30 basis points. On top of this, we are estimating cumulative cost savings for the 3-year period for -- from 2019 to 2021 of around EUR 550 million.As commented before, organically our real estate exposure is already being reduced by the close of the second quarter standing at EUR 5.6 billion, but on a pro forma basis while including the real estate transaction with Lone Star our real estate exposure available for sale of real estate assets would be only EUR 500 million now.On liquidity, a few comments. Record liquidity levels. EUR 80 billion of liquid assets. At CaixaBank level EUR 71 billion -- sorry, EUR 71 billion, I said well. And a liquidity coverage ratio that is well above 200%.We have been active in wholesale markets, issuing different instruments. We are done with AT1s and Tier 2s. And going forward, probably we'll tap senior nonpreferred as we build our MREL requirements.And finally on capital. We have many one-offs this quarter but the big picture is that the pro forma figure for our CET1 fully loaded ratio after the real asset transaction is 11.7%.We have 14 basis points of organic capital generation during the quarter, then we have 23 negative basis points due to the transactions on BPI, the minorities that we are purchasing and also the ServiHabitat acquisition.And then we value adjustments for 9 basis point mainly due to the poor performance of Telefónica in the stock market. And as commented, that would lead to 11.4% and as commented 30 basis points more coming from the real estate business sale up to 11.7%.It's a quarter where we also issued wholesale subordinated bond and also as commented we early called retail subordinated bond also. Our total capital standing at 15.7% on a fully loaded basis.To wrap up, some final remarks from my side. We feel that we continue to move with confidence towards our strategic targets, mainly on profitability with -- and are already -- already we're seen our long-term range, our long-term target between 9% and 11%, now standing at 10.4%, this is thanks to a continued improvement in our core operating income and also this year a sharp reduction on our cost of risk, all these based on volume growth and a stable customer spread.I would remark also what we consider a landmark transaction on our real estate disposal that drastically reduces our NPA exposure, and all these together with strong liquidity and solvency metrics, just commented.And before ending, please save the date. All of you are invited to our incoming Investor Day to be held in London, November the 27th. So I think that with this we may be ready to take questions. Thank you very much.

[Edward O'Loghlen, Director of Investor Relations]

Okay. Thanks. Thanks, Javier. Operator, can you please proceed with the first question, including the name and the company of the caller.

[Operator]

Your first question comes from the line of Carlos Cobo, Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

A quick comment on Portugal, if I may, and you're spot-on on the market there. It looks I mean interesting that with similar private sector leverage levels and [indiscernible] I mean, you're managing to get some more traction in lending volumes than in the Spain and it's also something at system level. So is it why -- why do you see that more positive or easier to lend in Portugal? Is it because peers there are in weaker shape? Or what are your view there? And then secondly, but I guess that you'll address that in the Investor Day, regarding your 9% to 11% ROTE target, I would like to confirm that's your latest number and if you feel confident to be towards the high end of that range towards year-end due to lower cost of risk below your kind of guidance and stronger volumes on BPI?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, Carlos. If I may comment, obviously the numbers for Portugal are very promising, it's very good. The market is certainly experiencing a rebound there. And what we have is a bank like BPI that now has all the enablers to grow, has a very good, comfortable capital position, liquidity position, stability around it, and that has not been necessarily the case in the past. And what is been able now in BPI is to play with all its strength in the Portuguese market. I am convinced having followed the Portuguese market for over 25 years it is the best bank in Portugal. And I hope that the numbers here are the beginning of a very positive road in which the bank will gain market share because it has an edge and now has all the necessary tailwinds to capture that rebound in Portugal. Obviously the difference with CaixaBank, those are different markets and CaixaBank has not had that process and has been trying at its full strength to capture the opportunity for now many years. I think BPI has untapped potential and they are showing it very, very quickly. We continue to build on the future capabilities that BPI will have, above and beyond the ones that they have already and hence we are optimistic of that long-term trajectory for BPI. With respect to guidance on those [indiscernible] 9% to 11%. At this stage, we maintain that guidance 9% to 11%. And I think it's premature to be more specific than that. This is the guidance we gave some years ago. We're obviously very well positioned to be comfortable in that range.

[Carlos Cobo Catena, Equity Analyst]

Okay. I'm sorry, what do you see BPI as a [ provision ] of the whole group contribution normalizing over the next 1 or 2 years?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Well, I would like to say and certainly my expectation for BPI is that they compete with CaixaBank in Spain to show higher level of return on tangible equity. As you know, BPI is approximately 10%, 11% of the group. I would like to make sure that over time they actually contribute that proportion of profitability or more.

[Operator]

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

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Just on -- the first question is on the general environment. You've obviously had a very strong quarter and fees in particularly in banking, but the market activity or market environment has deteriorated during the quarter. We now -- it's difficult to expect higher rates any time soon, probably not this year or next. So could you maybe give us some color on revenue growth expectations? And is that recovery in loan growth that you're pointing out enough to grow revenues? Just a general comment on activity and ability to grow revenues in the new environment. And the second question is around costs. You've obviously sold the portfolio, the entire basically noncore to Lone Star. You've given EUR 550 million cost savings, but my understanding that's related to the direct cost of like taxes of -- to real estate. But there's about EUR 120 million operating costs in that real estate division. Is there real ability to cut that down? And when we look forward, what should we be looking forward to in terms of cost growth or cost reduction in the business? The reason why I'm asking is because you're now a relatively clean bank, should we expect any more restructuring costs to get the cost base down? Is that not going to happen? Just a general commentary of cost.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you very much, Alvaro, if I may, and I'm sure Javier will be able to complement some of these topics. In terms of trends and revenue, we obviously had a very strong quarter, satisfied with the quarter. A quarter doesn't make a year and doesn't make a trend, so as always we want to be cautious. But certainly, we have given some guidance for quarter revenue growth for 2018. We are comfortably reconfirming that guidance. We expect that growth of - in core revenues 4% to be something that we can meet. And the reality, as you say the year is not easy in terms of the environment but we continue to think that our model is a model that provides with higher potential in terms of capturing market share and more revenues than our competitors and continue to invest and plan for the future on that basis that we can grow faster than the market. And certainly for this year, what is -- was ambitious in the beginning I would say the market circumstances are making it a bit more difficult but our results are showing that even if it's more difficult we can actually get there. In terms of lending activity you saw, I think, the segment that is most promising based on the second quarter figures, certainly the residential mortgage area, but it's just one quarter. And we know and we've seen in this crisis that at some point in time we had various strong quarters and they didn't necessarily create a trend. So we'll have to see how things develop on that front. On the real estate, obviously we disclose what our savings should be, EUR 550 million as you saw a few weeks ago when we published. And anyhow, whether they are recorded in one line or another of the income statement, this is a very significant amount of savings going forward. In terms of how we manage the cost base, we will have an Investor Day, as Javier mentioned at the end of the presentation, giving some details of what we plan to do in the next 3 years. And we are actively working on that. And certainly managing the cost base is one of the most important tasks that management has these days and always. And hence we're going to need some time until we can provide you with some more details. But generally what I would say is we're going to continue to be obsessed with being efficient in what we do. But this obsession of being efficient in what we do which should result in cost savings at the same time needs to live with inflation expectations on salaries which certainly are going to be present for all our competitors. Our [indiscernible] company certainly in Spain as the economy has been on a run, positive path for 4 years, 3% growth, clearly society expect salaries to grow certainly in nominal terms but also possibly in real terms. So this is going to be a fact which we cannot avoid. It should be positive on the other hand, general salary increases for our business when we look at the cost base of all those. They are our clients as well. And then we'll continue to make efficiencies but that will need to leave also with investments we are making, we have been making and will continue to be making in making sure that we continue to build a delta, positive delta when we speak about revenues versus our competitors. Anyhow how does all this add up is something that we are working on and we will certainly be in a position to give some detail or a good level of detail when we present our 3-year plan where we expect cost inflation but cost inflation based on cost reduction and running the bank to fund cost increase in changing and growing the bank. And I think those are the general lines, the more detailed view will obviously be updated on that Investor Day in November.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

But when we look at the bank it is relatively clean and from a sort of kind of one-off, top-ups and things like that should we expect restructuring costs as here to stay as you try to sort of be more efficient while you invest in other areas?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Again, the details we will certainly provide in due course. But while this year we have not -- we're talking about restructuring costs associated to people and you look at our history, we have had a number of instances in which we have done specific actions, early retirements and others in order to reduce costs. And I think if you think of us longer term, you could expect that we will find opportunities to do so again. But it's early to speculate on exactly what and when. We will certainly not rule out further actions, certainly don't expect them this year, but over the long term, this is something that is part of the management of our business.

[Operator]

Your next question comes from the line of José Abad of Goldman Sachs.

[José Maria Abad Hernandez, Executive Director]

I have 2 questions. The first one is on -- is a follow up for a previous question, in particular on loan growth. I guess we can conclude that this is one of the key takeaways from this result season that loan growth seems to be back. So I mean I was wondering whether you could actually provide us on some visibility of what is actually driving growth in this quarter, is it actually a bit of seasonality, is it a change in price in policies by yourself and competitors given that we also see some compression in -- from [ both ] deals or it is actually genuine demand? And based on these whether you could give us on some visibility or you could share with us your expectations with regard to loan growth for the second half of the year. My second question is on the bank tax. I'm sure you are involved in conversations with the government. So I am not sure whether you could give us some visibility here as well on -- in which direction this debate is heading, this tax could take many forms with different impact depending on the form, so not sure whether you could comment anything here. And a related subquestion here is whether regardless of the final form of this tax do you think that you could pass it through in the form of higher fee income interest rates or rather in the form of higher efficiency gains.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, José. Maybe I will give you a response on the second question. Javier can elaborate further on the first one because I already gave some views there. We obviously do not know what, if anything, will eventually happen with respect to a potential tax, whether it will affect banks in particular or corporates in general. This is a decision for the new government to propose and obviously for the parliament to support or not in due course. And we are -- there is nothing much we can do obviously. We've been vocal that we do not think it's appropriate to have a specific tax on banks. We don't see that there is a specific reason for doing that. And in any case, it's not in our hands. We do not control it. And it's very difficult for that reason to make any projection or prediction. Depending on what happens, if anything, I think the ability for us to pass that cost will be different and we have -- it's obviously unfortunate having at this point this uncertainty. But we have to continue our focus on running the business, doing what we're doing nicely. And as long as we become more and more profitable, if there is an adverse event we will have obviously a higher degree of cash to compensate for it. Sorry to not be able to be more specific but there's nothing more I can really say on that topic at this moment in time.

[Javier Pano Riera, Chief Financial Officer]

Hi, José. Just to give you some more color on loan growth. It's still what you say, we have had a good quarter. Its early days to tell you if this is sustainable at the same pace for the rest of the year and for the years to come, but you are right that we are a little bit more upbeat than earlier in the year. It's a combination of from the many little things I would say, but clearly we have shown figures on new production across different segments, it has been improving across all segments I would say this quarter and year-to-date on mortgages also, on consumer loans, on SMEs, and this second quarter especially on corporate banking. There is another factor you should consider while analyzing all these, which is the steady and consistent reduction of NPL inflows, and that means that the performing loan book has much more support in volume because there is much less -- much less loans going into nonperforming, and this is happening across all sectors, even on mortgages, that partially also the improvement on the leveraging process is done precisely thanks to a slower pace of inflows into nonperformance. On prices, I would say that we are not changing things. It's extremely competitive environment across all segments, on mortgages, mainly on SMEs as has been since many years ago as you can imagine also on corporate banking with all players willing to lend to large Spanish corporates. So far we have been able to maintain our margins. It may be up or down a few basis points one quarter versus the other. But generally speaking, the second quarter nothing much different to something that we had seen in previous quarters. So let's see, positive -- more positive than probably than what we were a couple of quarter ago but still early days, but anyhow encouraging.

[Operator]

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

[Sofie Caroline Elisabet Peterzens, Analyst]

Yes, it's Sofie Peterzens from JPMorgan. I had a couple of questions. First of all, you mentioned on one of the slides that you have FX deposits, can you just remind us how much FX deposits and FX loans you have and also in which currencies and if you see any potential for additional provisions for these loans in particular given that one of your competitors did quite big provisions this quarter? And the second question is around BFA. Could you just update us on your strategy around BFA and how we should think about the contribution going forward?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, Sofie, and I'll answer the second question. There is nothing new on BFA. I only see good things happening around Angola in terms of the I think orthodox economic policy they are undertaking, the agreement with IMF, the fact that they tapped the capital markets for over USD 3 billion in terms of foreign currency. And obviously the oil price is also helping the country. So I am fundamentally optimistic that the country is moving a very -- along a solid path. BFA continues to do in a country very well. In terms of their indicators for BFA whether it's efficiency, solvency, margins, nonperforming loans, it's by far the best bank in the country. And with those ingredients we are happy, we are obviously interested in due course in reducing our stake, but with no urgency. And we will continue to see when and how that makes sense without any other pressure. The bank is obviously showing results that are volatile, particularly because of the impact of devaluation which as you know when the [indiscernible] comes down we have an adjustment for that devaluation against shareholders' equity, but the bank itself has appropriate hedges which create actually the symmetry because the value from these hedges is reflected in the P&L. You have all that detail in the presentation. We have to -- we'll continue to be very transparent of the contribution both in terms of P&L and book value to our results. Obviously there will be some quarters where the contribution will be particularly higher, [indiscernible] it would be lower, we had a very significant contribution in the first quarter as you know. But when you look at what has been this quarter, the recurring contribution has been lower, it's been EUR 27 million in the quarter of which EUR 13 million are negative, associated to hyperinflation [indiscernible] 29. And I think it's probably, the better way to look at these as taking these kind of results as the recurring levels and sort of isolating the impacts from devaluation which I think it has largely run its course in any case but it's difficult to forecast.

[Javier Pano Riera, Chief Financial Officer]

Hi, Sofie [indiscernible] on -- for any change deposits. Well, the size of our balance sheet in following a change currency is small, sort of less than EUR 10 billion. The main part, I would say around half of this is U.S. dollar and the rest are other currencies like British pound, Japanese yen, Swiss franc, et cetera. On time deposits we have a small part that is deposits in mainly in U.S. dollars. If I remember well it's less than EUR 1 billion. And thus as the U.S. dollar has a yield of around 100% or close to 2% when this compares to 0 that leads to an increase of the back book yield, so that's it. So it's that -- nothing important. And we fund all our activities in foreign exchange with customer deposits or wholesale funding and everything is much assets and liabilities with no foreign exchange risk open.

[Operator]

Your next question comes from the line of Ben Toms of RBC.

[Benjamin Toms, Analyst]

How do you see your CET1 ratio progressing for the rest of the year? And can you just remind us of the guidance you had previously given on the potential for buybacks or special dividend and the timing of when this guidance could apply from?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Benjamin, in terms of CET1 we expect to be close to 12% or around that figure at the end of the year. We had to set up this level in our previous [indiscernible] plan as the level with -- after reaching this level we had said that we will look to return capital to shareholders. Given that this is going to be unlikely before year-end and that in November we will present the new 3-year plan we will obviously update on our capital plans in the context of the 3-year plan. I think obviously when we look at the next 3 years we'll have to take into account the levels of profitability that we have already achieved, that are obviously much more attractive than they used to be, and what we can do to improve those levels in the next 3 years. And then on the negative side also the need to start planning for the impact of all the things like Basel IV in particular. Because, as you know Basel IV will start in January 20, 2022. Our next strategic plan will finish in December 2021. So certainly upfront in those impact during the next 3 years will also be needed. But all in all, we continue to see a story of, I would say, generosity in terms of returning capital to our shareholders based on a combination certainly of an attractive payout ratio. And if appropriate, other means of returning capital. Nothing in the second half of this year being practical. And an update on what our strategy should be for the next 3 years during November.

[Operator]

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

[Britta Schmidt, Partner, Spanish and German Banks]

I have got 2 questions, please. One is, apologies if I've missed it, but there seems to be some reference to a one-off regarding Repsol in the equity line in the quarter, maybe you can just clarify what that is and how much it is? And then I'd also like to have your view on the Repsol stake, at a price of 1,680 I think we are beyond the kind of breakeven price in capital terms. How do you think about the future of this? And maybe you can also confirm that it's still about 50% hedged? And my second question would be on the securities yields. According to your yield and cost table, it has gone up again in the second quarter, after being up in the first quarter as well. And in the presentation I can see that on part of your ALCO portfolio the yield has increased on the structural ALCO the portfolio but not on the liquidity management portfolio, so maybe you can just explain the kind of technical details behind why the securities yield has gone up.

[Javier Pano Riera, Chief Financial Officer]

On the structural, on the last question on the structural portfolio. Well as commented, we took profits on some long-term bonds that were swapped into floating, and this has resulted into a trading profit close to EUR 70 million this second quarter. This was done early in the quarter before, all the sovereign spreads started to widen, were Spanish sovereign bonds. And well as a result of this, as you remove this part from the portfolio, this had low yield, then the overall or the remaining part average goes up, this is just if I remember what, it's just the same from 2% to 2.1% as you keep the legacy portfolio with higher yields. I hope that this answers your question. On the management portfolio, the ALCO liquidity management portfolio, sorry, well, you know that we have a lot of cash, record-high liquidity metrics. We are trying to find opportunities to deploy this cash into, let's say, short- to medium-term securities. In order to reduce or to drain cash balance, we are parking at the severe minus 40 bps. And well, this is why this portfolio has increased by more or less EUR 1 billion. On Repsol, if I may, there are not more news. So we are where we were. We did some hedges, those hedges as you know well there is a pass-through effect through trading profit, and we have an impact this quarter on this of around EUR 40-something million. And there are no further plans with this hedge when Repsol was trading around EUR 15.5. And now we don't have further plans, we are managing now all those stakes for value. And we see those hedges as part of the normal course of business in order to try to protect value as the way to manage those positions. So I will not add much to this, if I may. And your other question, the first one on the equity line. I think that you were asking about perhaps something you are missing on our CET1 ratio?

[Britta Schmidt, Partner, Spanish and German Banks]

Yes. My questions was referring to the footnote on Page 11, saying there was nonrecurring impacts in interest in BFA which we know, but also in Repsol which contribute to the equity accounted income?

[Javier Pano Riera, Chief Financial Officer]

No, actually that is not this -- there are not much news, so I think that I gave --

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

This is I think the impact of the sale of Gas Natural and Repsol.

[Javier Pano Riera, Chief Financial Officer]

Okay. So you're asking about the equity -- the equity -- the income from associates. Okay. This comes from, well, Repsol had all these results now we can comment. And this had a positive impact, what the CEO was commenting, this disposal of Gas Natural. And then as commented also on BFA there were some extraordinaries due to a structural position that BFA has long U.S. dollars that at the end of the results in -- from an accounting point of view, trading profits. And this is an extraordinary that also rose on this line.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

It's EUR 39 million, the impact of the sale of Gas Natural in our income -- in our income statement [indiscernible].

[Operator]

Your next question comes from the line of Andrea Filtri of Mediobanca.

[Andrea Filtri, Research Analyst]

Two questions. One on cost of the risk and one on insurance. What is your updated cost of risk guidance following the sale of the real estate portfolio? And what would be the new normalized run rate in light of a cleaner balance sheet? And on insurance, what is the right way of looking at the return of your insurance operations in your view? And what is the rebated placement fees cost for VidaCaixa for selling products via CaixaBank branches?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

I'm not sure I understood the second question.

[Edward O'Loghlen, Director of Investor Relations]

The second question is how much is VidaCaixa paying CaixaBank for the distribution agreement? Which is --

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Right. Which is not relevant because it is an --

[Edward O'Loghlen, Director of Investor Relations]

It's an inter-company --

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

It's an inter-company transaction.

[Edward O'Loghlen, Director of Investor Relations]

And you can see it in the -- Andrea, you can see it in the VidaCaixa accounts. But from a group perspective or a CaixaBank shareholder perspective, it's irrelevant since we own 100% of the company. But I guess beyond that Gonzalo his question is asking how should they look at the profitability of the insurance company in isolation? And --

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Obviously the figures are public for the insurance company. And we have even added in our presentation here what the quarter is. It's a very profitable activity. But obviously, it's difficult to think of the insurance company in isolation because it's an entire, an integral part of CaixaBank Group. The main distribution channel by far is the branch network. And even though there's obviously the separation of what the profitability is of each of the two units, what is clear if they were not together, there would be significant negative synergies and value distraction. Contribution to revenues, and you can see this in the presentation. It has moved from 22% last year to 25% percent in the second quarter of this year. So we continue to grow EUR 146 million of net attributable profit in either quarter. And one of our or probably the most important engine of growth for us, we're talking about -- now you're simplifying it. This is one of very large markets. Second, a market in which we are by far the leader. And third, it's a structurally growing market, even the trends in terms of ageing and the need for protection. So it's a great opportunity that we are exploiting. And it's a great opportunity that we will continue to exploit in the next years. And we're certainly planning to provide further detail on what we're doing on insurance, both savings and protection, during our next 3-year plan. If you see when we -- I explained in the beginning how we have reorganized the bank. And we said we are reorganizing this area of global customer experience around the clients. One of the 4 client experiences or the key client experiences under which we have organized is protect. We already had identified one-off savings which is led by our private banking and premier banking unit. But we wanted also to put a lot more focus on protection where the opportunity is very significant.

[Javier Pano Riera, Chief Financial Officer]

[indiscernible] another question on cost of risk. Just to clarify that real estate provisions are registered in other gains and losses on disposal of assets. Thus this disposal will not affect much our cost of risk guidance. That only affects our provisions to our loan book.

[Operator]

Your next question comes from Marta Sánchez of BAML.

[Marta Sánchez Romero, Director and Analyst]

I've got a couple of follow-up questions on your bond portfolio. The first one is about size. In the past you've said, you've mentioned that you were targeting to be at around EUR 30 billion in Spain, and then you've got a EUR 3 billion -- EUR 3.8 billion in Portugal. Is that still the target given that you keep accumulating liquidity and that's penalizing your P&L? Are you willing to increase the size of that portfolio? And more or less, again what's the average life of new bonds that you are buying? There's a second one on -- of your 11.39% fully loaded core equity Tier 1 how much is coming from unrealized gains in that AFS portfolio? And then finally, it's more a -- it's a general question, I'm trying to understand. So under IFRS 9 are banks fully free to sell their bond portfolios that are at amortized cost or is there a penalty if you decide to change your strategy and sell before the maturity as we've seen in other banks?

[Javier Pano Riera, Chief Financial Officer]

Well, on the many questions on the bond portfolio. On the size, would we like to increase the size? The answer is yes. The problem is that the market is not there to show. We don't think that structurally it's good time to increase the size of the portfolio. Long-term yields are, we think, too low AND hopefully said to be higher in, I don't know when, but at some point. So yes, we are being penalized because we are holding cash and parking this cash every day at ECV at minus 40 bps. And -- but this is something that is suffering all the sector, I would say. No so difficult to tell you which is our target, but no doubt that as we will hold cash we'll have to think about TLTRO redemption in 2020, but even despite this we'll hold cash in all banks. We need to hold cash for regulatory purposes and just for products. So yes, we should have a higher portfolio, but I don't know when. So this is my short answer. Our exposure is mainly on Spanish government bonds but also there's opportunity to clarify that. At group level we only have -- well, have less than EUR 2 billion in Italian bond, EUR 1.1 billion in CaixaBank and around EUR 700 million in BPI. Thus the sensitivity to Italy has not affected us much during this quarter. And so far this is the position. Unrealized profits on this portfolio are around EUR 300 million. So I think that this was your second topic. And on the IFRS 9, we did not change anything on our portfolio on IFRS 9. I know that other banks took the opportunity to account things differently but it was not our case. We have, let's say, our hold-to-maturity portfolio, and then we have a portfolio what was formally the available for sale portfolio that is now fair value with impacts in OCI. And I think that you have a detailed breakdown of our exposures and all the information, so no major changes expected from IFRS 9 on that front.

[Marta Sánchez Romero, Director and Analyst]

Thank you, Javier. My question was more like are you free to move your portfolios around without no consequences? Because in the past once you reclassified a portfolio from held-to-maturity back into AFS you couldn't reclassify it back again for a number of years. So do we have the same now or is?

[Javier Pano Riera, Chief Financial Officer]

No, it's true what you say. You have little bit more freedom to do so. But you have to justify those circumstances, as far as I know, with auditors. And so far we have not used this option. So this has not been the case in our base.

[Operator]

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

[Ignacio Ulargui, Research Analyst]

Just have 1 question on the cost of risk guidance. I mean, given the performance that we have seen in new NPL inflows which keeps on going and recoveries which are going better in 2Q versus 1Q. I mean, do you think that -- I mean you're still confident that you can be below 30 and not farther down given the performance that we have seen in 2Q? Or you see scope to deteriorate in the second half [indiscernible]?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Ignacio, I think in a nutshell we did say less than 30 basis points because we anticipated that it could be clearly less than 30 basis points. This guidance we obviously maintained how below 30 basis points we'll see, but certainly obviously the figure so far are encouraging, but we're not moving our guidance yet.

[Ignacio Ulargui, Research Analyst]

If I just may, a follow up on the net inflows, you change a lot the recovery process. Do you think that the cruise speed has been achieved or there is a scope to keep on improving in terms of the recovery phase of NPLs?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

It's a very good question. We have, as you can see in our report, approximately EUR 400 million less of net entries, both first quarter, second quarter and even the fourth quarter of last year than what it used to be, and that is not a coincidence. It's obviously reflective of a better economic environment but of a new push that we have made to the whole process. We continue to make changes and add initiatives. Every time we do something it's more difficult obviously because there is a limit to how much we can reduce, but we're going to keep working on trying to make that number even more attractive.

[Operator]

The last question comes from the line of Javier Echanove of Santander.

[Javier Francisco Echanove, Analyst]

Couple of very quick questions. First one, you have a 14 basis points organic capital generation in the quarter. Could you give us an idea of what is the nature of that organic capital generation? Is this retained earnings or is there any element of risk-weighted asset optimization within it. I just want to get an idea of how sustainable this is. And second question is, after the sale of your -- most of your real estate assets I think that you still keep a substantial portfolio of rental assets. I'm not sure what the size of that is now, but I don't know if you could tell us what were your plans with that specific portfolio. Thank you.

[Javier Pano Riera, Chief Financial Officer]

On capital. Well, organically what we do is the pro rata of our -- the payout is deducted from what we consider are organic capital generation. And this quarter on RWAs, I could say that from an organical point of view actually have gone up slightly because you know that we have had loan growth, thus we have had small uptick on risk-weighted assets related to our organic capital generation. You may see that risk-weighted assets are fairly stable, slightly down quarter-on-quarter, but the -- I would say that the reduction we have had due to, let's say, our impacts coming from stakes here during the quarter we have deducted the risk-weighted assets from the disposal of [indiscernible] and of the stake that was holding BPI and also as Telefónica has corrected in markets, risk-weighted assets from Telefónica also have come down. And this I would say that has more or less been compensated by risk-weighted asset growth on more organical -- coming from organical concepts, the main one being the growth of the business.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

In terms of the rental portfolio, the book value, net book value is currently EUR 2.8 billion, gross yield is around 5%. We're going to continue to manage this portfolio. Therefore value is not a problem portfolio. We have the opportunity given the environment in the market to optimize that portfolio sometimes by increasing yields where appropriate, sometimes by -- when rentals expire actually moving on and selling those in the market.

[Edward O'Loghlen, Director of Investor Relations]

Okay. I think that's all we have time for today. Thank you all very much. We see you next quarter and hope that you enjoy the summer break for those of you that are taking it now.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you. And have a good summer.

[Javier Pano Riera, Chief Financial Officer]

Thank you.