Caixabank SA

MAD:CABK

Earnings Call Transcript 2018-Q3

[Edward O'Loghlen, Director of Investor Relations]

Good morning, and welcome to CaixaBank's results presentation for the third quarter of 2018. Presenting today is our CEO, Gonzalo Gortázar; and our CFO, Javier Pano.Just a brief reminder for our first-time viewers, we plan to spend around 30 minutes with a presentation and another 30 minutes after that for Q&A. You should have received instructions by email to participate in that. My team and I will be available after the call.And with that, let me hand it over to our CEO, Mr. Gortázar.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, Eddie. Good morning, everybody. We just published results, so a brief summary of the quarter. I think it's a good combination of core revenue growth and obviously, lower provisions that have helped the bottom line vis-à-vis expectations.Core revenue NII is up year-on-year, also quarter-on-quarter. In the case of fees, seasonally down, but I would say it's been a good quarter within that context, just down 3.3% quarter-on-quarter, and you can see that because year-on-year are up almost 5%. All the core revenues also in the right direction, so good performance in terms of core revenues, 4.7% year-on-year and on the quarter, 0.5%. I think it gives us good comfort that we are in the right direction vis-à-vis the guidance we gave for core revenues.Volumes and margins, good combination, again, taking into account this seasonality of the quarter. You can see how, in particular, AuM and insurance funds in this quarter and despite the volatility, are up 1% quarter-on-quarter and 3.3% year-on-year. Also, on the lending side, quarter is flat, if we seasonally adjusted for the pensions advance that we had in the second quarter and some small, yet positive, growth on the overall year-to-date of performing loans driven by consumer and business lending, which is the two areas we've been pushing for the last, certainly, in the last strategic plan and where results continue to come across quite nicely. As you can see, the funding spreads, which is not easy. Continued to see strong competitive market, but that is not new.Asset quality, good progress. So in the year and in the quarter, NPL ratio at 5.1%, confirms our ability to deliver on the target that we have internally to be below 5% by year-end, which given where we are, should be attainable. Although, obviously, we'll need to work on it during this quarter. Cost of risk at 8 basis points. 20 basis points, if we exclude the one-off that we had in the quarter, which has obviously helped the bottom line.On solvency, 11.4%, which becomes 11.7% once we pro forma it for the Lone Star disposal and the Repsol sale. And just as a reminder, as we announced the cost of disposal of Repsol and marking-to-market the rest of the stake, it's been EUR 453 million in the quarter.So again, I think good combination of core revenues, obviously helped by lower provisions, but also good performance on volumes, prices and nonperforming assets.The commercial activity, precisely the point I was making quarter-on-quarter, although customer funds are down 0.7%. Seasonally adjusted, the figure is 0.2%. And again, some good growth as you can see, both year-to-date, but also quarter-on-quarter on mutual pension plans and insurance. The overall trends are no different from what we've been seeing for the last years where site deposits continue to grow, off-balance sheet funds and insurance do grow as well but actually, in time deposits. But overall, the numbers are, I think, attractive and show their resilience and the good progress of the franchise.Some further examples on long-term savings. The strategic critical area for us, continued to do well with 5% year-on-year on savings insurance and AuM. Market share gains, significant gains over the life of the last 4 years, and we are giving some statistics on comparing 2014 and the current moment because that is the horizon of our strategic run, which we're about to finish. And I think it's quite remarkable the fact that we've been able to win 2.7 percentage points of market share in the aggregate of mutual pension and savings insurance. Yet, as you can see, on the right-hand side, we feel there's good potential structurally in this market for the future.Protection insurance, life-risk, in particular, with strong growth, 24%, but also on the non-life premia and again, good progress on market shares year-to-date for the 4 years -- or almost 4 years, starting from December 2014 and yet untapped potential because we still have relatively low penetration and hence, we still feel we can do better in this area.On the lending side, again, taking into account the seasonality of the quarters, been a good one, with a flat portfolio once we take away the seasonal factor, and where particularly consumer lending has done very well, up 4.5% and corporate and SMEs have some good growth, 1.4% in the quarter. The quarter has been somewhat less good in terms of overall numbers, but we had a reduction on the public sector, which is a less strategic and certainly less profitable area for us.When you see, on the right-hand side, a credit to the private sector, which is what we are focusing most on. You can see how year-to-date, we have 0.8% of growth and in the quarter also, 0.4% once adjusted for that seasonality. And again, consumer and business are the stars here. We continue to see deleveraging on the mortgage side. And I have to say, we'll continue to be very disciplined in terms of pricing on the mortgage side, that is why you're still seeing those red numbers on that part of the portfolio. Overall, a reasonable level of growth given what's happening in the market.In terms of new production, it's up across the three areas. In this case, also for residential mortgages, where it's up 4.9%, but also stronger in customer lending and business lending. I just want to make a zoom on the consumer lending, as it is generating increased attention and compare A with some of our peer countries, Italy, Germany and France, in terms of percentage of consumer lending as the total of the outstanding credit, it's remarkably alike. For us, as a bank, it's just 6%, showing that certainly, we have growth and particularly when you look at our market share of payroll deposits at 27.1%, we feel we still can do more and more in the consumer lending front. We obviously have to compete there not just with the banks but with all the specialized finance providers, but we think we can do it. And beyond or besides the comparison with other countries, it's also a historical one, where you can see what's been the production of consumer lending. We're 39% below the peak in 2007. And even though we have had good growth, historically, you feel that there's still more room to go in terms of outstanding consumer lending, it's also 20% below the peak. So we feel if the economy continues to go the way it's going, we feel that we would have further growth to capture in the next years to come. And as you can see, 70% of that consumer lending is focused on durable goods.Our digital strategy, we don't speak too much about it but we do a lot about it this quarter. Just a few headlines. The mortgage origination process has been completed online. We're including the budgeting up to the post sale and obviously, we want to make sure that our client feel they can do this online, but they can do this on physical channels and they can move across channels, making a truly omnichannel service in which we have, obviously, made a lot of advances, but we'll continue to work in that direction. We have 58% of our clients that use digital channels today. It's a significant increase year-on-year, 4.5%, but it's more or less what we've been seeing in the last few years. Certainly, more detailed plans in Spain than any other bank with 32% penetration, it's virtually 10 percentage points above our nearest competitor. We continue to explore and invest in open banking opportunities. And again, just to give you an objective data, which is the rating that we get on the stores for both CaixaBank and imaginBank and our main peers. And again, it's always nice to see that we're doing better than any of the rest, both imaginBank but also CaixaBank.Moving to results. The income statement is where we made EUR 470 million of reduction from last year, but where we had EUR 453 million of losses associated to Repsol. Excluding that, obviously, it would have been an absolutely record quarter. Core revenues, I discussed it at the beginning, do not want to repeat myself. That's a good performance across the board, taking into account in case of fees, the typical sort of seasonality reduction in the -- for the third quarter. Costs are up 3.2% year-on-year. We continue to invest in the business and that requires costs, unfortunately. We would like to see revenues going up and costs coming down, but that is not possible. And the reduction in provisions are related to a provision release from one large exposure that we do not expect to be repeated and hence, we have made it clear it's a one-off.Bancassurance continues to be very profitable. In the current context, there's 12% return on tangible equity, approximately half of that return on tangible equity coming from nonbanking business. Our model is working well from that point of view, despite the negative Euribor and negative rates. Bancassurance, once we adjust for the extraordinary one-offs of the quarter, is up double-digits. Obviously, even higher if we don't do it, but I guess, it's better indication of the trend, the 10.7%. We had good performance on the investment side other than by the fact of around -- because of the fact of the Repsol disposal. And BPI continues to provide significant improvement to our profits.That's all for me. Javier, all yours.

[Javier Pano Riera, Chief Financial Officer]

Thank you. Thank you, Gonzalo. Good morning, and here we have a slide with the P&L of BPI. It's -- BPI, as you know, has already released its numbers a few days ago and as commented, BPI is contributing markedly to CaixaBank profitability and you may see that in different performance metrics. BPI is doing extremely well both in mortgage lending, consumer lending, creditor businesses and also on the liability side, where we are planning more and more to deploy our business model. BPI is now having a return on tangible equity, only considering the domestic operations already at 8.6%.And with this, let me focus a little bit more on the different lines of the P&L account starting, as usually, with NII, that continues to progress steadily. You may see that it is up by 0.7% quarter-on-quarter and 3.1% year-on-year. It has been a quarter with broadly stable volumes. Also, the third quarter has some favorable calendar effects, and we have had the tailwind of lower funding costs after the redemption of written subordinated bond in June, all these offsetting what are still negative Euribor impacts. We are still repricing at lower levels, a negative impact that now, we really expect that will fade in very few quarters. Also please note that when comparing BPI, the impacts of NII from BPI, that is -- there are some changes in the scope and accounting criteria. All together, we think that we are on track to slightly overperform our NII guidance for the year. Remember that we guided for NII to grow between 2% and 3%, and with just one quarter left, we think that we may be slightly over this figure.Some more focus on assets and liabilities. On deposits, on euros, we continue to roll them at just 1 basis point, but book outstanding at 6 basis points. And on the loan book, this quarter again, on the front book yield, we have the impact of, I would say, an extraordinary contribution in the front book of CIB with lower yields, as always because CIB always has lower yields. And in this case also, this quarter affected by some large syndicated loans. As a result of this, the front book yield improves slightly only to 267 basis points from 262. But when looking to the performance of the different segments, I would say that we are in line with the performance of recent quarters, just a few basis points up or down, depending on the segment and the quarter despite intense competition. The back book yield at 230 basis points, down by 1 basis point as commented, affected by negative Euribor resets on loan volumes, as I said, stability in the quarter.And with this, I shift to our ALCO activities. The wholesale funding costs are stable at 123 basis points over 6 months of Euribor. On the ALCO portfolio, not much activity either. We have had few redemptions on our structural portfolio. We have not had the chance to add to the portfolio within the quarter. Something that in the future, we think that we have room to do -- to slightly increase the size of this structural portfolio that as you may see, is gradually trending down as we have some redemptions. On the contrary, on the liquidity management portfolio, we continue to accumulate cash, and you may expect that in coming quarters, we may have larger size on this part of the portfolio.On spreads, no news, just down by 1 basis point, both the customer spreads and net interest margin, as said, affected mainly by this tick down in our back book yield of the loan book.And with this, I shift to fees. On fees, I would say that the third quarter is always a seasonal one. We are down quarter-on-quarter to 3.3 -- minus 3.3 percentage points. But when we compare to last year, we are clearly -- have done better, we are up by 4.8%. I think that the best way this third quarter to look at the performance is to look at to the numbers year-on-year. You may see that on banking fees, we are doing well year-on-year, we are almost flat. In this case, also helped by low contribution from CIB during the third quarter of last year. Mutual funds and pension plans continue to do well. We have had the steady inflows on those asset classes year-to-date, around EUR 3 billion despite the market turbulences, and you may see that both are doing well, and I say in pension plans, despite the cap that entered into force last month of April. On non-life also is a clear engine for growth for us, and you may see that year-on-year, our non-life insurance revenues are up by 17%.And some more focus on our insurance and asset management activities. You may see that revenues continue to grow steadily, even on our like-for-like basis, only considering CaixaBank, we are up by 12% -- more than 12% year-on-year. Those revenues now already represent 27% of our bancassurance revenues, up by 3 percentage points in 1 year. And is in recent quarters, we displayed here a detailed P&L account of our insurance activity. You may see an improvement across the line, but I would remark that net attributed profit goes up by 21% year-on-year -- sorry, quarter-on-quarter.And on costs, not much news either. Remember that we guided for cost to roll in the 3% area. We continue to seize business opportunities, and the way we are trying to run the business is in order to deliver positive jaws. So far we have been able to do so, and this is what we are planning to do in the future, and we'll update you in a few weeks in our incoming strategic plan in London. Recurrent cost of income standing at 53.2%. With revenues -- core revenues doing well, you see that they're up by, on a like-for-like basis, close to 4% year-on-year. Our core operating income as a result of those positive jaws also continues to perform and up by 5.2% on a like-for-like basis and up to 6 -- 7.6%, sorry, when considering BPI.And finally, on the P&L, some final comment on our loan loss provisions. As commented, we have had the release of single -- the version of a single largest portion, it's a one-off, it's EUR 275 million release. If it were not for this, our loan loss provisions would have been EUR 77 million in the quarter. Now that our cost of risk on a 12-month trailing basis is standing at just 8 basis points, and if it were not for this extraordinary impact, it would be 20 basis points clearly below guidance we gave earlier in the year for cost of risk to be below 30%. So clearly, a positive evolution on our loan loss provisions recently.And now, I turn to the balance sheet, some comments on some key metrics. On NPLs, well, continue to trend down. NPL is down by EUR 600 million during this quarter. The pace of inflows continues to clearly abate this year compared to the previous year. And the pace of cures on disposals continues to do well. So as a result of all these, the stock of NPLs is relatively being reduced, our NPL ratio down by 20 basis points to 5.1% and on track to be below 5% before -- by the end of this year. On the coverage, I would only like to remark that the uncollateralized NPL coverage ratio stands at a sound level of 81%. And on real estate exposure, the pace of disposals has continued during the year. And you know that on top of this, we have the large disposal to Lone Star that is expected to be closed in coming weeks before year-end. And pro forma, this disposal, our stock of real estate available-for-sale is just at -- stands at EUR 600 million.On liquidity, no news. We continue to hold sound liquid metrics, EUR 76 billion of liquid assets, liquidity coverage ratio, close to 200%, at 193%. You may see in CaixaBank, a slight decrease of liquidity, this is also due because we try to manage our excess cash reserves, trying to avoid some large corporate deposits. And on issuance, you know that we have been quite active this year, again, issuing across all asset classes. Recently, just last week, we took advantage of narrow market opportunity in this difficult markets to issue a 5-year senior non-preferred at midswaps plus 145 basis points, continuing to build up our requirements. And you know that with progressive derisking that our bonds, it is experiencing after the real estate disposal and our plans to dispose Repsol, I could like also to remark that in recent months, the 4 main rating agencies have upgraded our senior ratings by 1 notch.And finally, on capital, a stable situation, but strong interesting developments. 11.4% is our fully loaded CET1 ratio by the close of the quarter. On a pro forma basis, after the real estate and Repsol disposals, 11.7%, we have had plus 16 basis points of organic capital generation and negative market and other impacts by 17 basis points. I would like to remark that these other impacts include an adjustment in our credit requirements for nonperforming mortgage -- in our nonperforming mortgage portfolio of 24 basis points derived from the TRIM process, and we think that with this, we are done on this mortgage review from the TRIM process. On our total capital, only to remark that it stands at 15.2% after the cancellation, recall that it is planned to be done in November of EUR 750 million subordinated bond. And I would like also to remark that our subordinated fully loaded MREL ratio pro forma, the real estate and Repsol sales and the recent senior nonpreferred issuance stands already at a sound 17.2%. Just to remind also that we have just announced the payment of an interim dividend of EUR 0.07 like last year.And to wrap up, some final remarks from my side. Only 1 month -- sorry, 1 quarter left to end our strategic plan, and we think that we have been moving with confidence towards our targets, continued core revenue growth recently, also supported by lower cost of risk that is clearly supporting the bottom line. The underlying volume trends in the asset side and also on the liability side on our long time savings business continues to remain unchanged. And this has been a year also with strong improvement in the pace of asset quality improvement, and all those solid balance sheet metrics have been confirmed by recent rating upgrades. Just to remind that we are hosting an Investor Day next November 27 in London. Very shortly, you will be sent an invite.With this, I think that we may be ready to take some questions. Thank you very much.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Yes. Thank you.

[Edward O'Loghlen, Director of Investor Relations]

Thank you, Javier and Gonzalo. I think it's time to move to Q&A. Operator, can you please proceed with the first question, including the name and company of the caller.

[Operator]

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

[José Maria Abad Hernandez, Executive Director]

I have two questions. First question is whether you could actually please remind us on the size of the IRPH mortgage portfolio? And maybe also on the judicial situation and your expectations with regard to this portfolio? And the second is on Repsol. So you booked Repsol at EUR 453 million provisions as you highlighted earlier in the year, and now the implied stock price at the time was north of EUR 16. Today, it's less than EUR 15. So I estimate that probably you will need an incremental provision of around EUR 100 million. So would you plan to book any additional provisions?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, José. On Repsol, it's counted as fair value, all the comprehensive income. So whatever the result is, it will not go against the P&L. It will go against equity. So neither profits nor losses would show on the P&L. Obviously, economically, that would be an impact. And on the IRPH, we -- Javier, do you want to take that one?

[Javier Pano Riera, Chief Financial Officer]

Absolutely. Well, now the stock of mortgages at -- with the IRPH index stands now in the EUR 7 billion area. Well, regarding the process, I think that everything is very well known, IRPH is an official index. It has been sanctioned by the Bank of Spain historically and published monthly in the Boletín Oficial del Estado, the official gazette. And now some consumers have complained that in the lower courts that what probably this index have not been adequately explained and well, as a result of this, well now there is a case that where the European Commission service has presented a report stating that the grounds for this ruling to be examined by the European Court of Justice. But well, we have to remind that the Spanish Supreme Court already ruled in November 2017 that this interest rate index was essential part of the contract and as a result of this was fully transparent. So it's early days to tell you how this will end. But we are completely confident that there's not a case of lack of transparency on this issue.

[José Maria Abad Hernandez, Executive Director]

May I ask one follow-up, Gonzalo? You've been, I think, very vocal on potential consolidation down the road over the last I think few months, including, I think, this morning. Do you think the increasing legal uncertainty in the sector and having, obviously, mortgage fees in mind and ADD could actually make this more unlikely, this has actually changed your views with regard to consolidation in the sector? Or do you think this will have no impact?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Well, may I just make sure what I believe is that there will be consolidation, but not necessarily in the short term? And this is more a question of the sustainable profitability of the sector being under pressure and hence, in due course, we will see some moves by some banks. That's my feeling. But obviously, I have no clue. I do not think that's likely to be in the short term. And again, I do not think that we are likely to participate a lot if there are opportunities where we'll analyze them, but we're going to be reactive rather than proactive. What is the impact of this sentence from the Supreme Court on the situation? It's a bit early for me to say. At least, I would like to see how things develop over the next few days. And I don't think that necessarily that's going to be affecting consolidation one way or the other, because I did not think that was something imminent. But we'll have to see it for certain.

[Operator]

Your next question is from Alvaro Serrano from Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

First of all, on mortgage, on the ruling, I apologize if you commented on this already, but I dialed in a bit later. In terms as we look at the 5th of November, I mean, we all have a view on how fair or unfair it might be, but when you discuss with your lawyers in terms of what the potential outcome could be, I'm interested to see your -- what have you heard from the administrative court, but how that would -- when we think about the retroactivity, my understanding is there's -- what really matters is what the civil court interpretation -- the civil court makes of that ruling. Can you just maybe talk us through what the different scenarios you see, and maybe put some kind of limits to how bad it could be or where you think it might be? Just to maybe handhold us a bit in how we think about that to the extent you have any ideas you can share? And my second question is just in general, in the global economy in Spain, we're seeing a slowdown in the growth. In Q2 results, you've been very vocal about how the recovering loan growth was coming through. As we look into next year or medium term, how confident do you think the loan growth recovery will be sustained? A lot of that is obviously mortgages sort of breakeven -- breaking even. But in general, how confident you are in loan growth accelerating even with the Spanish economy slowing down?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you, Alvaro. On the Supreme Court ruling, I am always cautious. We have a very close date, the 5th of November. We have a strong position that is we have acted in compliance with the law or with the regulation because this is a decree, as you know. We have acted in accordance with the regulation at all points and hence, it is not expected and not reasonable to think that for complying with the regulations there should be any damage to us, both reputation and certainly, economically. That is our position. It's a position that we have made with all due respect to everyone. If you comply with the regulation, there should be no penalty for doing that. And that's our position. What happens on the 5th of November, even the current ruling, we do not know. We'd rather not speculate at this point in time. Obviously, I know you will be interested in all our detailed views, the scenarios, et cetera, I do not think it's productive for us to get into the public domain having these discussions. There is certainly, and all you know that there is a 4-year statutory limitation on tax matters, which is, if you wish, a second line of defense for the industry. But clearly, again, the principle of complying with the norm hence not having negative economic consequence is the one we want to defend at this point in time. With respect to the...

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Gonzalo, just to clarify on that because the full year statutory limitations applies to tax matters, but the civil court given the annulment of the expense clause, does that not open up risk in your view?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

In our view, from a legal point of view, it does not. Obviously, I understand that investors and everyone is cautious in this environment because there was a negative surprise certainly for us and hence, I think to be cautious on what eventually comes out is a logical attitude, and I personally share it. But the legal advice we have is a different one. But again, I'd rather wait and see what happens and take it from there. With respect to your second question, we were expecting a slowdown in the Spanish GDP, and we were expecting a slowdown more or less in line with what's happening. Clearly, the risks are tilted to the downside, not just in Spain but generally at this stage, we will see. But this coming down from a 3% sort of cruise speed to a 2% cruise speed, not this year, but I guess, 2019 onwards, which is what we're expecting is not a surprise for us. So we have seen that with very strong credit -- sorry, with very strong GDP growth, 3% for 4 years, actually credit was coming down in terms -- not in terms of new production, but in terms of volumes. And the fact that it moves from 3% to 2%, I do not think is going to force credit to take another dip, quite the opposite. It is the accumulation of growth, whether it's a 3% or 2% after 4, 5, 6 years, which should, at some point, lead to a recovery in credit. And what we are seeing today, this year, is clearly positive. Now you saw the impact on new production, the growth of 9% for mortgage, 15% for businesses and for consumer lending. It's not slowing down in the third quarter. Obviously, do not know yet if it will at some point. But I have the sense is that our expectations for sort of volumes of credit growth for the stock have been so low that the slowdown from 3% to 2% is not a negative, and it's included in our view of the world. Obviously, when we look at the former 3 years, some market observers, analysts, investors may think that there's a substantial opportunity for loan growth, we do not. We think it's going to be a gradual recovery loan growth, following the trend that we have seen in the past. But at some point rather than moving from negative to less negative, it's becoming now neutral, and then would become slightly positive. So far that is what we see. We obviously will have the opportunity to update with detail on our views for the next 3 years a month from now.

[Operator]

Your next question is from Mario Ropero from Fidentiis.

[Mario Ropero, Research Analyst]

Two questions on capital. The first one is on the 24 basis points you said regarding TRIM. Just to make sure, does it mean that there is no further impact coming from TRIM going forward? Or in any case, can you give us an update on the possible capital impact you foresee due to this topic? Then the second question is on the unrealized ALCO gains of -- that you have. Please, could you update on the total gains you have and specifically on the gains you have included in your core capital ratio?

[Javier Pano Riera, Chief Financial Officer]

Mario, well, on the impact on TRIM. It's an impact related to the mortgage loan book, and it affects the parameters that we have been using to calculate our estimated loss for nonperforming exposures. And actually, it's not a change. That does not entail a substantive modification or increase of our estimated losses, but what happened is that there is a rebalancing of the components with the lower rate of the expected loss and a higher unexpected loss. And this expected loss, you know that is the one that is covered through capital. And as a result of this, we have an increase of the density of the risk-weighted assets on our nonperforming loan and mortgage exposures, and that results into an impact of minus 24 basis points. The TRIM process continues to -- it's ongoing, has different steps. First one was, let's say, a general topics exercise affecting mainly government’s issues about internal models, et cetera. We have had no issues on this. Now the mortgage loan book is the one that has already been finished and the impact for this analysis on the mortgage loan book is this one. We don't expect further impacts for the mortgage loan book. And now we have also concluded the market risk TRIM, it's not for us, we think, that it would not be an issue. And what has just started is the analysis of the large corporates and what -- and this is still ongoing. So different phases, I would say that for the mortgage portfolio, with this impact we are done. And you were asking about our ALCO portfolio. If I remember well, the figure that is now in our numbers is around EUR 200 million. And what you know that I take opportunity now to comment that we have low Italian exposure, around EUR 1 million in CaixaBank. It's short maturities, less than 3 years and also around EUR 700 million in BPI. So also short maturities.

[Operator]

Your next question is from Ignacio Ulargui from Deutsche Bank.

[Ignacio Ulargui, Research Analyst]

Ignacio from Deutsche. Just two questions on my side. One, which is very recurring, which is so far, we have seen a very good performance in terms of cost of risk and NPL exit. How do you see this will evolve going forward? The 20 basis point something that we can extrapolate for the future. And the second topic is if you could update us on your TLTRO exit strategy? What are you expecting to do? Is there any demand to accelerate that process or not?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

If I may on credit risk, you're going to need to wait for 4 weeks because we'll give you some further views. Sorry, for that. But I want to give you a full view of the next 3 years and longer perspective. But so far, the trends are encouraging. And maybe, Javier, you can get on to the TLTRO.

[Javier Pano Riera, Chief Financial Officer]

On TLTRO, you know that our main maturity is in June 2020. We are planning for this since long time ago. You see that we are accumulating cash. We have precisely set a separated ALCO portfolio for this. We are planning to continue issuing in wholesale markets mainly for MREL process from now on, mainly with the senior nonpreferred asset class and well, this together with the evolution of the business, et cetera, puts us into a comfortable position to redeem TLTRO rolling time in 2020. For us, that does not makes much sense to early redeem, although there are some windows because anyway, the cost for us is of the excess cash is minus 40 bps, which is the same that we pay on the liability side for TLTRO. So there is no positive impact early -- with an early redemption.

[Operator]

Your next question is from Benjamin Toms from RBC.

[Benjamin Toms, Analyst]

I have just one question, please. The insurance revenue line, it's been very strong for you this year so far. A caution quarter, it was down a little bit. Were there any particular drivers there? Or is it just seasonality?

[Javier Pano Riera, Chief Financial Officer]

Nothing specific. I would say that first, we had -- still we would results as we had a commercial campaign in the second quarter that entailed probably slightly higher production than expected, it was extremely successful. And also this third quarter, probably we have had a slight increase in some contingencies. So the net result is slightly down, but I will not read much into this. And as you see, the continued performance on that front is there and expected to continue.

[Operator]

Your next question is from Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

A couple of questions from me. The first one would be following up on what Alvaro touched before, lending outlook, and just a quick thought. I mean, in your previous business plan, and you weren't the only one, but you also consider lending was picking up 3 years ago and there has disappointed expectations yourself and probably most of us. I mean, when you analyze all that, what's happened that you weren't expecting at the time, the deleveraging of the private sector was stronger than anticipated? And now that the you're planning, are you comfortable that you have -- what the sector needs to grow? Or this continued political instability with elections here and there and different budgets could weigh on demand as we are seeing for the sector level? I mean, corporate loans are slowing down again. I would like to see your thoughts. I'm sure you're going to discuss it in the Investor Day. I'm not asking for your outlook, but your thoughts around the drivers of that growth because I mean you are also seeing how disposal income is not growing as fast, but consumer loans, saving ratio is at historical lows, our new coverage inflation are already quite high. So just your thoughts there. And the second one would be a more numeric one as some of the -- 17 basis point negative impact from markets and other on capital. You mentioned that you have 24 basis points from the TRIM review, and then say something around 7, 9 basis points from the Telefónica mark-to-market. So here, I would be missing like something around 15 basis point positive impact to reach that 17 basis points. Is it that correct? And where would be the positive impact?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Carlos, I will start with the first question, but let Javier elaborate because I'm going to repeat myself probably and so you have a richer background on volume. I think one important point when you look at some of the sector figures, they are affected by sales of NPLs. To some extent, the sector lending appears more disappointed than it really is. If you adjust for that for the sector, growth is at 0.4% year-on-year on households and corporates, and households is also 0.2% positive. This is very low for 4 years of 3% growth, but it's better. And that's what we have -- that is what we have seen. I think we've just thought that strong economic recovery would lead to more outstanding volumes of credit. We got it wrong. Obviously, capital markets were also a factor, at some point, for big corporates, but it's not just that. Generally, we've seen that the depth and the length of the crisis has been so marked that it's taken a much more time for credit to start to recover, and it's recovering at a much slower pace. That's why I said I'm projecting the past, that's what we are likely to do. Let's say, well, given that this is very slow -- it will continue to be very slow, but still moving into positive territory, which is clearly happening already. But Javier, you may want to give your own view, and then obviously get on with the rest of the second question.

[Javier Pano Riera, Chief Financial Officer]

Yes. On the second question. No, I would say that on the loan book, everything is going according to our expectations. I remember always guiding for a flattish to slightly positive loan book and actually, it's where we are. We have a performing loan book that is growing now at plus 0.8% year-to-date with a strong contribution from Portugal. There it's up by close to 6% year-to-date. Things are doing really well in Portugal. But the situation remains probably the same. Still the leveraging on our mortgage portfolio, and this being compensated with growth in consumer and SME lending. And the same picture is valid since at least 2 years old. And this, for the next few quarters, it's more of the same. I think that it's the same situation. The stock of mortgages is so large and well, it's a large part of the monthly installment that is the principal. So the velocity of prepayments is quite fast now, and I would say that, in this case, it's very difficult to compensate this natural tendency of the mortgage loan book with the new production, although that our new production year-to-date is up by close to 10% on mortgages. But even by doing so, it's difficult to balance to -- and as a consequence, we are doing our best to grow in other segments that by the way are more profitable and with a higher return on equity. And I think that, like it or not, from our side, is what we have for the next very few quarters. And you had a question, I'm sorry...

[Carlos Cobo Catena, Equity Analyst]

Just wanted to clarify. I just wanted to clarify that. I was referring to the assumptions in the business plan. Obviously, you've been very -- I mean, your colleague has been very diligent in toning down the expectations and everybody was already factoring in lower growth. But originally, when you plan, that was kind of maybe -- I think you've elaborated on that.

[Javier Pano Riera, Chief Financial Officer]

Okay. So may I move to the second question now? To the second question, I think that the piece that probably you are missing is that we have lower deductions from DTAs this quarter as we have set out the corporate tax, and there is a release of deductions there and that is an impact of around 10 basis points. And then you have some other small moving parts here and there.

[Operator]

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

[Marta Sánchez Romero, Director and Analyst]

I've got three quick questions. The first one is how much dividend accrual have you included in your capital ratio of 11.3%? And what's the implied payout relative to your EUR 1.8 billion reported earnings? The second question is what are your plans for your EUR 3 billion rental portfolio? And the third question is about Angola. In a recent interview, the Governor of the Central Bank mentioned he had given the country's banks a December deadline to raise their capital requirements. Is there a risk BFA needs to raise equity? And would you commit more capital to the country?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Marta, may I answer to in terms of the dividend expectations or included, it's in line with our policy of 50% plus. That's what is included in our capital ratios. With respect to Angola, BFA's capital ratio is 37.9%, that's the total capital. And the position of nonperforming loans, yet they have very limited loan-to-deposits because of the sector. The nonperforming loan ratio is 3.7%. BFA is extremely well provided for, extremely well capitalized. We expect absolutely no impact. That is not the case for our banks in the country. I will not elaborate more for obvious reasons. But certainly, BFA is in a very strong position, hence it will not need capital and certainly, we are not planning to contribute capital because there's no interest on our side, but also because there's no need for it. Javier, to you.

[Javier Pano Riera, Chief Financial Officer]

Only to emphasize on this, probably, Marta, is that I would like to highlight that BFA has already paid the dividend corresponding to 2016 in US dollars. BPI has already received the US dollars. So I would say that just to highlight that again, imagine that the Central Bank of Angola would not authorize this -- the payment of this dividend in US dollars if we are not quite comfortable with the situation of BFA. And on the rental portfolio, you had a question on this. Well now it's not actually EUR 3 billion, it's EUR 2.5 billion. And well, we'd see, in that we have already demonstrated that we were able to dispose our available-for-sale portfolio. We have to think about this over time. I think that is not such a large portion now, if you look at our nonperforming asset ratio, I think that you can calculate it in different ways. But I think that we are clearly not an outlier on that front. And anyway, it's, let's say, a profitable portfolio with a yield provision of 4%, and we'll have to think about it. But obviously, it's not our long-term business plan to be a land loss, but we'll see what comes in the future for this.

[Operator]

Your next question is from Sofie Peterzens from JPMorgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

Here is Sofie from JPMorgan. So I wanted to have a follow-up question on BFA. Given that you now are selling Repsol, how should we think about BFA and your other stakes? Should we expect that everything you have is that core, and we are not going to see any changes to these ownership stakes? Or should we expect to reduce our stake going forward? And my second question would be on trading income. It was a little bit delevered than what we had expected in the quarter. How should we think about trading income going forward? And what do you think is a normalized trading income level, especially considering that trades potentially go up? And my last question would be on the EBA stress test that we get next week. What are your expectations from the upcoming stress test?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Sofie, on the first one, I would separate Telefónica and Erste, where we have a stake. We are planning to keep those stocks, and I wouldn't expect activity in the future as long as I can see. We have now around 3% of our capital allocated to these stocks. We come from 24% in 2011 and 16% in 2014. So obviously, we've made a very, very significant progress, and we are at level where we are comfortable with these two stakes. With respect to BFA, the situation is different. First, the bank is doing well. Javier has mentioned that we've been paid the dividends in hard currency. The bank's very profitable. Obviously, kwanza has had a devaluation process, very significant one. At the same time, what has been result of, I think, the right economic policy from Angola. They continue to work closely with the IMF, moving into the right direction. Economically, I think, generally politically, the oil price has helped obviously as well the country and certainly, are less clouds in the horizon now than in the future. We are interested in the right time, reducing our stake because generally, it's all about the quality of the investment but for us, owning a minority stake of 48% makes not much sense. It's just too large for a minority stake. And I think in the next years, we will find the opportunity to reduce that stake in a cooperative manner with Angola with the rest of the shareholders and that BFA will continue to prosper, and that will also be done in a sort of a shareholder value-maximizing way. But we need to -- we need time for that to happen. And in the meantime, as we understand that shareholders and analysts are value Angola differently, which I have full respect for, we will continue to provide proper disclosure so that everyone can do it. But we are confident that the course of events is certainly putting us in a much better position to be able to reduce that stake when it is sensible, which still is not around the corner. And in the meantime, we'll continue to hold that stake, providing all the details.

[Javier Pano Riera, Chief Financial Officer]

On trading income, Sofie, while it's clearly a volatile line, I would like just to remind that the trading income line this year includes negative impact of around EUR 40 million due to the pass-through of the dividends on the equity swaps we have been holding during the year on mainly on Repsol. Just to take this also into account, also, on the other hand, had an extraordinary impact from the disposal of BFA stake that BPI was holding historically. But I think that it's difficult for me to give you a clear guidance. Somewhere between EUR 200 million, EUR 300 million is where we should be. No doubt that as yields -- long-term yields are no longer trending down and making trading profits is becoming more difficult, but so far we also have a recurring business with our CIB activities where we have some trading income derived from the distribution of derivatives with large corporates, et cetera. So also, clearly, it's also helping. So I think that between EUR 200 million and EUR 300 million, I understand that is quite wide, but this is where we may stand. And on EBA, unfortunately, I can say nothing. You know that we are strongly encouraged by the supervisor to not to say nothing, and you have only to wait slightly more than 1 week before knowing.

[Operator]

And your next question comes from the line of Andrea Unzueta from Crédit Suisse.

[Andrea Unzueta, Vice President]

I just want to better understand how I should be thinking about the cost of risk in the context of the increasing consumer book. So if I do a rough calculation, consumer loans are roughly 20% of your lending revenues. And what is the cost of risk for such loans? And today, what percentage of your 30 basis points guidance comes from consumer loans?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Javier, go ahead.

[Javier Pano Riera, Chief Financial Officer]

Well, a few comments on our consumer loan book. It's a loan book now standing around EUR 11 billion. Now the nonperforming loan ratio standing at 4.3%. And I would like to remark here that there are different, several subsegments within this consumer loan book. I would say that generally speaking, consumer loans for household needs or auto loans, even revolving credit, et cetera, is in the average or clearly below the average of this nonperforming loan ratio. It's only one subsegment, which is what we call Click & Go. This is less than 10% of our -- of the portfolio are those loans that are, in some cases, granted online, et cetera. Here we have done some changes on our internal policies also for grade scoring and in order to better assess the grade scoring of the borrowers, et cetera. And it's only in this subsegment where we have had a slightly worse performance, probably than expected initially. But the rest is doing extremely well, really sound. We are estimating a normalized cost of risk for our consumer loan book between 2% and 2.5%. I would say that this is the round numbers that we are using and with those numbers, the return on equity of this portfolio is extremely high, it's between 25% and 30%. So it's a business that if done properly, that is what we think that we are doing, and adjusting in due time for any changes that we may have to do is extremely profitable. So it's -- it will be -- it's only a part of our portfolio, so EUR 11 billion out of our loan book of more than EUR 220 billion is less than 5%. So it's not going to grow exponentially. So I think that not only that it is extremely profitable with strong contribution to NII, as you know. And this is one of the keys of our resilience on NII performance. I don't know, Andrea, if with this I have given you some color.

[Edward O'Loghlen, Director of Investor Relations]

Okay, Andrea. I think in the interest of time, we can only take one more. We will, of course, follow up with people who are still on the line. So operator, can you please take the last one?

[Operator]

We'll now take our last question from Andrea Filtri from London.

[Andrea Filtri, Research Analyst]

First question on VidaCaixa. Could you please give us more visibility on the Solvency II ratio in Q3? And if you could provide a sensitivity of this ratio to credit and some spreads, interest rates and markets? The second question is on TRIM. How much does the TRIM change to your model's overlap with EBA guidelines? And would you say that the change incorporates both TRIM and EBA guidelines at the same time then? And just finally, very quick one on Repsol. How should we expect the P&L contribution from Repsol to evolve in the coming quarters?

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

All yours, Javier.

[Javier Pano Riera, Chief Financial Officer]

All right. Well, on Solvency II, well, I will come back to you with the sensitivity because unfortunately, I don't have them with me. The Solvency II ratio of VidaCaixa is in the 140s area, as you know. And it's not expected to be materially impacted by those market moves that you are mentioning. But we can come back to you with this. And on TRIM and EBA guidelines, and I think that with those 24 basis points that I am already -- we are already impacting within that, we are including all those impacts. But well, this is my best estimate that I can give you. I'm sorry, but the last one on Repsol, I missed exactly what was your question?

[Andrea Filtri, Research Analyst]

Just what we should be expecting in terms of evolution of contribution to quarterly profits from Repsol in the coming 2 quarters?

[Javier Pano Riera, Chief Financial Officer]

Well, Repsol now, it's accounted as fair value with account that -- with impact in OCI. So the impacts will be the dividends paid by Repsol. According to that position, we may be holding at each moment that you know that we are in a plan to dispose.

[Edward O'Loghlen, Director of Investor Relations]

Thank you, Andrea. We'll follow up with the additional information we require. I think that's all we have time for today. So thank you very much, and we'll see you next quarter.

[Gonzalo Gortázar Rotaeche, CEO & Executive Director]

Thank you.