Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2018-Q1

[Jaime Hernandez Marcos]

Good morning to everyone, and welcome to Unicaja Banco First Quarter 2018 Results Presentation. I am Jaime Hernandez, the Head of IR, and first of all, please let me [confirm you] that we have published the first quarter results documentation, including the quarterly financial report and this presentation, this morning before market open in both the CNMV and our corporate website. Today, our Chief Financial Officer, Pablo Gonzalez, will go through the slides to review with you the main trends of the quarter, and after the presentation, we will answer the questions received through the Webcast and the IR inbox. As always, for further info, the IR team will be available after the Webcast. So Pablo, whenever you want.

[Pablo González Martín, CFO & GM]

Thank you, Jaime, and thank you all for attending this presentation. As we usually do, we have split the presentation in four sections. I will start summarizing the key highlights of the quarter, then we will review the results and main business trends. We will continue reviewing the asset quality, liquidity and solvency, and we will finish with some final remarks.So let me start in Page 4 summarizing the main trends of the quarter. First of all, let me confirm that, in first quarter '18, we have received the formal authorization for the acquisition [indiscernible] of the 50% stake that we didn't own of Union del Duero Vida y Pensiones. So this is the first quarter that we book 100% of the business compared to the previous 50%. As we will see later, the acquisition had an impact close to 30 basis point in CET1 and explains some minor changes in our financial statements, as for example in fee income and other operating income.Regarding the business, in first quarter '18, we saw some positive trends on volumes. On one hand, performing loans grew quarter-on-quarter slightly below 1%, which is quite a positive considering the [deleverage] we saw in the previous quarters. Such a trend was supported in additional increase of new loan production. That continued to improve a significant 55% in corporates and 31% in individuals compared with the first quarter of last year. On the other hand, customer funds also grew close to 3% year-on-year, with off-balance sheet funds increasing above 8%. Also, although at a slower pace, the mix between sight and term deposits continued to improve this quarter.Moving to results, net income reached EUR57 million in this first quarter, which is 13% above last year, and net attributable income grew 12% year-on-year to EUR58 million. Net interest income continues to grow for second consecutive quarter following the repayment of CoCos FROB in August of 2017. Total costs fell 2% year-on-year, and finally, I could highlight the significant improvement of impairments, although partially explained by some specific issues that we will explain later.Finally, on asset quality, liquidity, and solvency, I would like to highlight that we continued to reduce NPAs one more quarter. Gross nonperforming assets fell 5% in the quarter and almost EUR1.2 billion year-on-year. The nonperforming assets coverage also improved in first quarter from the previous 56% to the current 59%. On liquidity, we continue to have a very comfortable position, with net liquid assets representing slightly more than 23% of total assets.In terms of solvency, despite a negative impact of around 30 basis point owing to the acquisition of Union del Duero, which was fully integrated for the first time this quarter, our regulatory CET1 grew from 14.6% to 15.4%. In fully loaded terms, the CET1 improved more than 70 basis point to 13.5%. It is worth noting that these ratios are not considering close to 20 basis point of organic capital generation related to the first quarter '18 retained earnings. As you probably know, we do not include in our solvency ratios retained earning until they are audited. However, as we will see later, such a significant improvement, despite not considering first quarter '18 retained earnings, was benefited by the positive mark-to-market of the unrealized gains in the fair value to other comprehensive income portfolio.Moving to results and business, I will start with the P&L in Slide 6. Net interest income grew 1% quarter-on-quarter in first quarter '18. As we will see later, the improvement was explained by stable interest income from launch and a slightly higher contribution of the debt portfolio, but also owing to additional improvement in the cost of funding. Fee income fell 6% quarter-on-quarter and was pretty flattish compared with the previous year. However, if we adjust the impact from the full consolidation of Union del Duero, fees were 3.5% above first quarter last year. Associates grew 20% compared with fourth quarter '17 despite not including Union del Duero for first time this quarter. The year-on-year increase is much higher because we formalized the reorganization of the insurance business in the second quarter of last year. Trading income was slightly below the previous quarter and do not include gains to compensate the expected provision for restructuring costs. That, as you know, will be booked in the coming quarters. Other operating income and expenses include EUR6 million from Union del Duero and other EUR14 million from our real estate servicer, something that, together with the charge of EUR4 million related to the DTAs levy, explains the EUR17 million booked this quarter. It is worth noting that, in the first quarter '17, other operating income was high, among others, owing to EUR21 million income from the real estate servicer book that quarter.All in all, gross margin reached EUR250 million in first quarter '18, slightly below 2017 mainly owing to the mention extraordinary gains and lower trading income. Total costs were pretty stable in the quarter, although decreasing 2.5% compared with last year. Total impairments were slightly below the previous quarter, although significantly lower than the previous year. It is worth noting that the cost of [risks] includes EUR9 million release from a disposal of a small written-off portfolio. However, despite such disposal, total impairments were well below the previous year. Such trends left the profit before taxes at EUR78 million and net attributable income at EUR58 million, 12% above the previous year.If we move to customer funds in Slide 7, you can see that the total consumer funds grew 3% year-on-year. On balance sheet, funds were pretty stable, growing 1% year-on-year, and off-balance sheet funds growing above 8% in that same period. Regarding on-balance sheet funds, as you can see in the right-hand side of the slide, sight deposits were stable this quarter and represented 75% of total private sector deposits, which compares with 68% one year before. On the other hand, term deposits went from 32% of total deposits to the current 25%.In Slide 8, we have the credit and loss trends, which were more positive this quarter than in previous quarters. As you can see in the top left of the slide, total gross loans were stable compared with the balance at the end of the year. The 5% decrease in nonperforming loans balances was compensated with the stable private sector loans and a 7% increase in public sector loans. In the left-bottom, we show private sector gross loans by segment. While individuals gross loans fell [plus] to 1% in the quarter, corporates grew 1% and SMEs close to 2%. In the right-hand side, we have the performing loans details. As I said before, total performing loans grew 0.5% quarter-on-quarter, helped by a 7% increase in public sector loans. Private sector loans were more stable in the quarter, as you can see in the bottom. If we look at the segment breakdown, you will see that corporate loans compensated the still decrease in mortgages. Corporate loans grew 3% quarter-on-quarter, while mortgages, consumer and other loans, fell by 1%, slightly better trends compared with the previous quarters.All in all, loans were stable this quarter, and such a trend was mainly explained by the continued increase in new lending that you can see in the next slide. In this slide, we can see that private sector new lending grew by 45% in first quarter '18 compared with the previous quarter. Individual new loans, in the bottom-left, grew more than 30% to EUR304 million this quarter. The average yield was 15 basis point higher compared with last quarter, mainly to a significant increase in non-mortgage lending, which grew from 500 basis point to almost 570 basis point.Regarding corporates, the increase was even higher. The EUR528 million of new loans was more than 50% above the previous quarter. In terms of yield, new corporates loans were formalized at an average yield slightly below the previous quarter owing to the relative higher weight of corporates versus SMEs. However, while corporates yield was stable, SMEs new lending yield grew 15 basis point compared with fourth quarter '17.In the next slide, Slide number 10, we start to review the P&L. As you can see, despite the calendar effect, the top line increased in the first quarter by 1%, or 5% compared with the first quarter of 2017. Net interest margin improved a couple basis points quarter-on-quarter to 108 basis point and almost 10 basis point in the last two quarters. In the right top side of the slide, as we usually do, we have included the detailed bridge with the quarterly evolution. On one side, we have a negative impact from mortgage floors of around EUR3 million, and other EUR3 million of lower nonperforming loans recoveries compared with fourth quarter '17. However, performing loans, excluding the impact from mortgage floors, improved by EUR2 million, which are very positive news supported by a four basis point increase in lending yields this quarter.On the liabilities, we also had some positive news, with the overall cost decreasing by EUR2 million. Regarding the debt portfolio, its contribution increased EUR3 million this quarter. Bear in mind that we have not realized most of the capital gains from the fair value to other comprehensive income portfolio yet, partially explaining such improvement, and that will be a headwind in the coming quarters.If we look the customer spread in the bottom of the slide, this quarter, the trends were also positive. Starting with the back book, the lending yield grew for first time in many quarters to 209 basis points, which are really good news. Such trend, together with a slightly lower cost of deposits, lead a customer spread quarterly increase of 4 basis point to 188 basis points. On the right-hand side, we have the customer spread of new production. As you can see, it was slightly below the previous quarter owing to a small decrease in new lending yields. However, both lending yields and customer spread of new loans is above the back book, which is quite positive for NII trends.In Slide 11, we have updated the details of our debt portfolio for first time under IFRS-9 rules. Total balance grew to EUR16.2 billion in first quarter '18, as we explain in the previous quarters, despite increasing the structural excess of retail funding owning to the deleverage. We did not increase the size of the portfolio until now. Among others, this decision was taken because we wanted to take advantage of the higher flexibility under IFRS-9 in the amortized cost portfolio because, as you know, under IFRS-9, we can hedge this portfolio and position ourself to what we expect in terms of interest rates evolution.The big bulk of the portfolios are sovereign bonds, almost 80%. Regarding its breakdown, we have two-thirds of the portfolio under the amortized cost, and the other third split between the fair value to other comprehensive income and the SAREB bonds. The overall debt portfolio grew EUR1.3 billion in the first quarter '18, with the following breakdown. The fair value to other comprehensive income grew by EUR1 billion. The structural portfolio in amortized cost grew by another EUR0.5 billion. And finally, the SAREB bonds fell slightly by EUR0.2 billion. As a result of these changes and the actively management on hedging of the portfolio, the overall yield improved to 1.38%.Regarding its contribution to net interest income, it was slightly higher this quarter. It grew from EUR56 million to EUR59 million. However, once we'd realized the latent capital gains of the fair value to other comprehensive income, the previous available [for-sale] portfolio, its contribution will go back to levels more close to the ones of the previous years and the one that we have guideline.If we move to Slide 12, you can see fee income evolution in the quarter. Total fee income was pretty stable compared with last year. However, it is worth noting that, from first quarter '18 onwards, fee income is not included, including Union del Duero fees, which last year represented around EUR8 million, and in the first quarter it had a negative impact of around EUR2 million. If we adjust the evolution of fees by the contribution of Union del Duero, fees grew almost 4% year-on-year, although they decrease by 3% quarter-on-quarter. Bear in mind that this impact will be reflected through the whole year.Now, moving to costs in Slide 13, operating expenses fell 2.5% year-on-year, driven by lower personal expenses. That decreased by 4% in the period. As we anticipated last quarter, we expect to continue to reduce personal costs in 2018, although this will be probably compensated by higher general expenses. Also, as you all know, we are reviewing the potential synergies coming from the legal integration of Espana Duero, and we will give you the details in the coming quarters. As a reminder, the restructuring cost needed to crystallize further synergies will be compensated in P&L by trading income, as we explained in the fourth quarter '17 result presentation.Now, moving to Slide 14, we have included the details of first quarter '18 impairments. As you can see, total impairments improved significantly in the quarter to EUR60 million. For second consecutive quarter, we released some credit provisions. However, in this quarter, this was explained by the disposal of a small written-off portfolio that enabled us to release EUR9 million of loan loss charges, explaining the EUR5 million reported release in the quarter. However, even adjusting the cost of risk for such disposal, the trend continues to be quite positive and well below the medium-term target of 30 basis point.As you can see in the right-hand side of the slide, the annualized cost of risk in first quarter '18, excluding this disposal of written-off loans, was 8 basis points, slightly below the 15 basis points booked in 2017 and well below the 25 basis points of 2016. Such a positive trend is a result, among others, to the relatively higher coverage level.Finally, foreclosed assets impairments were EUR4 million in the quarter compared with the EUR20 million in first quarter '17. As we discussed in previous occasions, in 2017, foreclosed assets provisions were higher owing to the impact of updating the foreclosed assets appraisals. But now, that appraisals are already updated, so the additional provisions required are relatively lower.If we move now to the asset quality section, we have in Slide 16 details on the evolution of our nonperforming loans, where you can see that nonperforming loans positive trends are even improving. On the top of the slide, you can see the continued reduction of nonperforming loan balances and the nonperforming loan ratio. The nonperforming loans fell 5% quarter-on-quarter and 15% year-on-year. In the bottom of the slide, you have the details of the quarterly nonperforming loan variation, showing that the pace of reduction has accelerated farther this quarter. Gross entries continued to decrease during the first quarter '18, something that, together with the stable recoveries, led to a positive quarterly reduction of EUR141 million.In Slide 17, we updated the nonperforming loan coverage. That, following IFRS-9 provisions, grew from the previous 50% to the current 55%, a very comfortable coverage considering the high level of collateralization, and that the original appraisal of collaterals represents two times the current nonperforming loan balances.Now, if we move to foreclosed assets in Slide 18, you will see that the trend remained positive, too. As we usually do, in the table on the top left, we showed the details and results of the real estate assets disposals. Since last quarter, we have included aligning the bottom of the table to show other portfolio sales formalized with third parties that also enable us to de-consolidate part of the real estate assets. In first quarter '18, we sold and de-consolidated EUR178 million of gross foreclosed assets, and we released EUR14 million of provisions. The percentage of provision released over the book value, excluding the deals classifies as other portfolio sales, continued to grow slightly above 30% in first quarter '18, although we don't expect it to improve farther, going forward. In the chart on the top-right of the slide, we show the quarterly evolution of net foreclosed assets. In the last 12 months, we have reduced the net exposure by 32%, leaving total foreclosed assets at EUR631 million, representing 1% of our total assets. These are the net exposure. We have also updated the chart in the bottom-right, where we show the quarterly gross outflows, which is the amount of foreclosed assets sold and rented. During the first quarter '18, gross outflows, including disposals and rentals, reached EUR187 million, of which 22% were land assets.On Slide 19, we show you the coverage ratio of our foreclosed assets by type. Land continues to have the highest coverage ratio, above 80%. However, land assets only represent EUR129 million in the first quarter '18. The overall coverage remains close to 64%, a coverage level that, as it happens with nonperforming loans, makes us feel very comfortable, among others because the updated appraisal value of our foreclosed assets represents almost two times their book value, their net book value.All in all, in Slide 20, we sum up the NPA trends. As you can see, we have reduced by 5% quarter-on-quarter the nonperforming assets balance, and almost 22% on a yearly basis. The outstanding amount [on] nonperforming assets in net terms represents now 3% of total assets. The coverage ratio grew from previous 56% in fourth quarter '17 to 59% in the first quarter '18. These coverage levels, as I said before, make us feel quite comfortable and reflect the prudent approach of the bank regarding its problematic exposure, something that is also reflected in the continued decrease of our Texas ratio that, in the first quarter '18, further improved to below 68%.In terms of liquidity, you have the details in Slide 21. Our loan to deposit ratio remains low at 77%, and our net stable funding ratio and liquidity coverage ratio continued to be well above the requirements. In terms of wholesale funding maturities, it won't be something significant this year. However, between 2019 and 2020, almost EUR1 billion of covered bonds at an average cost of 2.5% will mature, something that will continue to reduce the medium-term cost of funding. Finally, regarding the amount of liquid assets, as you can see in the bottom-left, they represent close to 23% of our total assets.Now, moving to solvency in Slide 22, we show the quarterly evolution of the CET1. We decided to include a detailed explanation this quarter following the significant improvement of the reported ratios owing to different factors. On the top, we have the CET1 fully loaded details, where you can see that grew from 12.8% to 13.5%. On one hand, we have a 40 basis point negative impact from the higher deductions related to the acquisition of Union del Duero Vida y Pensiones. However, this was more than compensated by the 30 basis point positive impact of IFRS-9 and the 20 basis point from the decrease in risk weighted assets, mainly explained by the reduction of nonperforming assets and other positive impacts of 60 basis points that includes the mark-to-market of fair value to other comprehensive income portfolio during the quarter and other positive effects, mainly lower to DTAs deductions explained by these higher deferred tax liabilities as a result of the higher unrealized capital gains. All these impacts left the reported CET1 fully loaded ratio at 13.5%. However, as you probably know, we don't include retained earnings in the solvency ratios if the results are not audited. If we consider these retained earnings of the first quarter, the CET1 fully loaded increased to 13.7%. However, it is worth noting that this is including 90 basis point from the impact of the unrealized capital gains. Excluding such impact, the CET1 fully loaded was 12.8%, which is pretty stable compared with the fourth quarter '17.At the bottom of the slide, we have the same details but for the phase-in ratio, where you can see that, on top of the already-mentioned impact, we have a positive phase-in effect from the IFRS-9 and a negative phase-in effect from Basel 3 deductions. Putting all together, the regulatory CET1 ratio grew to 15.4% in the first quarter, or 15.6% when considering the return earnings. Again, if we exclude the impact from the unrealized capital gains consider in the ratio, it goes to 14.7%, slightly above the 14.6% of the end of 2017.In Slide 23, we include some more details on the solvency position. As you can see in the top-left, current regulatory capital ratios are well above the SREP requirements, with a EUR1.7 billion buffer over CET1 and slightly above EUR1 billion buffer in total capital. All these buffers are under standard approach that, as you can see in the bottom-left side of the slide, are considering quite conservative credit risk weights.Finally, as we usually do, let me finish the presentation with some final remarks that you have in Page 25. One more quarter we have showed resilient result generation capacity, with quite positive NII trends, cost control, and much lower impairments. From a commercial point of view, credit volumes are starting to improve, with [NII] production increasing further. Mortgage loans are still decreasing, but we are in the right path, and with the right pricing policies.Nonperforming assets continued to decrease at a very positive pace, and, more important, we are doing it with a positive impact in P&L. Such trends is supported and explained by very ample coverage levels, as we discuss. And finally, all this is achieved generating organic capital and keeping a very comfortable solvency and liquidity position. Thank you very much. We will now answer your questions. Jaime?

[Jaime Hernandez Marcos]

Starting with the integration [of] the acquisition of Union del Duero Vida y Pensiones, we got some questions asking [as] if we can explain, since when would be fully accounted Union del Duero, can we explain the main P&L and balance sheet impacts of the full integration.

[Pablo González Martín, CFO & GM]

This is the first quarter that we accounted for 100% of Union del Duero. Although its acquisition is very straightforward and impacts are not really material, it does explain some of the trends and changes in the quarter.Starting with the solvency, as you probably know, it has a negative impact in regulatory CET1 of close to 30 basis point owing to higher deductions from insurance [stakes]. Regarding the balance sheet, the consolidated liabilities will now include slightly more than EUR700 million related to the insurance contracts. And on the asset side, it will be reflected in an increase in the debt exposure in a similar amount of the liabilities. It is also worth noting that goodwill will increase by EUR63 million. In terms of the P&L, from now onwards, we will book at EUR6 million charge per annum for the amortization of the mentioned goodwill. On top of that, gross margin will have a negative impact in fees and associates, and a positive impact in other operating income. And finally, it is worth noting that the NII, the interest income of the insurance company, that portfolio is not included in our net interest income. It is consolidated, as I mentioned before, in other operating income.

[Jaime Hernandez Marcos]

There is one more on Union del Duero Vida y Pensiones related to the first quarter, is what is the contribution of Union del Duero to P&L in the first quarter?

[Pablo González Martín, CFO & GM]

As I mentioned, it is not really material, the net effect, [because] in fee income, as I said, we have EUR2 million lower fee income, and we have other operating income of EUR6 million, which is higher. The rest of the impacts are very small. In net income, the impact is just EUR1 million, so as you can realize, there are some changes in the P&L classification structure, but in the bottom line, the quarterly impact is not a material one.

[Jaime Hernandez Marcos]

Let's move to the P&L, and we got lots of questions on NII on different topics, so let's just start with the portfolio, with the ALM portfolio, starting [indiscernible], if we can give some more color on what they can expect, going forward.

[Pablo González Martín, CFO & GM]

In order to sum up the [81 centers], we can say that our ALM strategy is to position the balance sheet towards a potential increase in the interest rate curve in the medium term without losing the short-term current income, and to use our structural excess liquidity. So the target is to keep a stable contribution to NII even if interest rates do not increase. So the idea is to keep this contribution stable if interest rates remain as they have been doing in the last few years, and take advantage of the potential increase in rates in the medium term. So that's why we're--[usually] hedge our debt portfolio with [forward-start] swaps starting in two, three years at a time where we think that rates will still be quite low. These forward start will allows us to maintain this income stable in the next quarters, and in case we perceive a change in the macro and rates projections, we can manage the current position, reversing this strategy. This strategy also enables us to protect the debt portfolio with a lower duration, from negative valuation that could arise from increasing long-term rates environment.And so, all in all, this contribution, as I said before, it's going to be higher in this quarter, and probably one, or even more than one quarter ahead. But going forward, the stable contribution should come down to what we have guided in the past, and it will depend on when we realize the unrealized capital gains on the former available for-sale portfolio.

[Jaime Hernandez Marcos]

There is one more on the size of the debt portfolio, why we decided to increase it now and not before.

[Pablo González Martín, CFO & GM]

I already mentioned some of the answer. I think the size of the debt portfolio, of the structure of portfolio depends on our excess liquidity, our structural excess liquidity and the different strategies that we adopt on the fair value through other income portfolio, which is, as you know, manage trying to keep advantage of changes in market conditions.In the last two years, the debt portfolio size has been quite stable, with a small difference at the end of each quarter as we have presenting in the different investor presentation. Having said that, in fourth quarter '17, we sold some positions, and we will analyze to buy again depending on the market conditions. We already bought some of the positions sold previously, but obviously we still have to realize and sell some of the former available for sale portfolio, going forward. So all in all, as I said, the strategy will be to maintain a stable contribution from the debt portfolio while maintaining a positive bias toward higher interest rate for the overall balance sheet.

[Jaime Hernandez Marcos]

There is one more, and I think with that we review [indiscernible] portfolio situation, [indiscernible] on the sights, if they're going to [spread] to see the sights growing, going forward.

[Pablo González Martín, CFO & GM]

I think I already mentioned this, but just to be clear, there's no specific right size for the portfolio. I think there is -- the size of the structural portfolio depends on the excess liquidity, as we said in the past, and I said before, and this portfolio could be higher on, as we mentioned before, in the last two quarterly presentation, this should be higher. But in the past, due to the incapacity, that we were unable to hedge the portfolio, so we prefer to wait for IFRS-9 to come to force this year. And now, because we have a very large fair value through other comprehensive portfolio, until we realize the capital gains, so the size of this portfolio is larger, and it should be, going forward, and the other, the structural portfolio, could be higher, going forward.

[Jaime Hernandez Marcos]

On [the strategy], there is one more on the [Latin] capital gains that we have in the [indiscernible], or the ALM portfolio, if we are expecting to realize all of them, or just one part.

[Pablo González Martín, CFO & GM]

As we already confirmed, a relevant part of our current capital gains will be used to compensate some extraordinary charges in P&L, mainly the ones related to expected restructuring costs. However, the current [Latin] gains are significant, so we will continue to manage actively those gains, but it will depend on the evolution of market conditions and P&L trends.

[Jaime Hernandez Marcos]

On net interest margin, let me put together some questions. NIM [grew for] second consecutive quarter. Do we expect such trend to further increase net interest margin, customer spread and lending yield [overview] in the quarter? Do we expect them to grow further?

[Pablo González Martín, CFO & GM]

All the metrics improve in the quarter. I think it's worth noting that the NIM grew relatively more because the average total assets didn't grow as much as total assets at the end of the quarter owing the integration of Union del Duero. So that will be a headwind of additional growth in the NIM in the second quarter '18. And we haven't provided a specific guidance on customer spread or lending yields.However, we expect some growth for 2018 net interest income compared with the 2017, but it is soon to be more specific than that. This quarter, we managed to compensate the lower contribution from the floors, from the mortgage floors, and lower nonperforming loans related to the income with higher interest from performing loans, and lower cost of the retail and wholesale funding above everything, that the EUR3 million of higher contribution from the debt portfolio, as I explained. So going forward, if interest rate income from performing loans does not increase, it will be difficult to improve the net interest income but, all in all, will be higher than last year, as we said.

[Jaime Hernandez Marcos]

There's some specific questions on the NII guidelines for this year. It is almost, I think, answered. Something related also to NII, on the mortgage floors, so if you can, Pablo, please update the situation on mortgage floors?

[Pablo González Martín, CFO & GM]

I think, as we anticipated, mortgage balances continued to decrease this quarter. The balance with active floors decreased to EUR2.5 billion from the previous EUR2.8 billion. As we explained in the presentation, this had an impact of close to EUR3 million in the quarter NII.So we still expect some mortgage balances to continue in decrease in the coming quarters, and that will continue to be one of the main headwinds for net interest income, going forward. So we will try to compensate it, but it will depend on the size, obviously, of the impact. There is always a lag effect, just to remind you, on this, so it won't probably change significantly in the next couple of quarters. That said, during the last two quarters, we have reported net interest income that is close to 10% per quarter above the average NII for the nine month of 2017. That is why we still expect some NII increase this year compared to the previous year.

[Jaime Hernandez Marcos]

On interest rate sensitivity, if we can update our sensitivity to interest rates, please?

[Pablo González Martín, CFO & GM]

We remain positively positioned towards an increasing interest rates, but, as we have always mentioned, this will be not in the first 12 months. It will be more in 2019, 2021, depending on when the rates are up, so that the impact [wouldn't] be in the short term. And you've seen our quite realistic assumptions, [or] within realistic. Obviously, this is always hard to come to a clear number, but in the numbers that we work, considering the changing that we expect in the mix between term and sight deposits when rates go up, and a constant balance sheet without any assumption of new business, an increase of 100 basis point will have a positive impact in NII from the 12th to the 24th months of around 13%, which is slightly above what we used to have in mid-2017, last year. And this is due to the hedging of the amortized cost portfolio that we have hedge after IFRS-9.So I think if we have a look on what we think on rates, we remain comfortable with the consensus, and we think the end of the QE in Europe will be at the end of this year. And the potential increase of the [REFI] rate will be more sometime in the second, third quarter of next year, which then should push the [indiscernible] up, but this whole scenario obviously is being carefully watched and followed by our [department].

[Jaime Hernandez Marcos]

Moving to loan growth, what is the guidance for loan growth? When do we expect to see clear lending growth?

[Pablo González Martín, CFO & GM]

As we said last quarter, I think we expect to see the inflection point this year, but we don't want to be very specific on saying that we already crossed that line. In the first quarter '18, the new production continues to improve, and lending balanced has stabilized further. But new production, although it grew, not enough to compensate the natural amortization, something that we will need to change in order to see the overall book growing on a stable manner.So corporate loans and individual secure loans trends are much better, but in order to see clear loan growth, we will need to stabilize further the mortgage book, something that could probably take some more quarters.

[Jaime Hernandez Marcos]

There is one very specific on the percentage of the new mortgages signed with fixed rates.

[Pablo González Martín, CFO & GM]

I think it's quite similar to the last quarter numbers. It's at slightly below 40% of the total new mortgage production in which it's actually done in fixed rate.

[Jaime Hernandez Marcos]

Moving on [indiscernible] through the P&L, on fee income, if we can explain the decrease of the fee income in the quarter. I think in the presentation we have explain it, but if you want to give [indiscernible] more color, and what we expect for the rest of the year?

[Pablo González Martín, CFO & GM]

The fee income has been, compared to the last year, quite flat, although growing 3.5% year-on-year if we exclude the impact from the integration of Union del Duero, as I mentioned before. However, on a quarterly basis, it was 3% below the previous quarter. When adjusted by the acquisition of the insurance, it's around EUR1.7 million.So we have room to further improve the fee income in the coming quarters, but you have to bear in mind that this year, for the whole year, we will have an impact of EUR8 million following the acquisition of Union del Duero, as we mentioned. So that's represent around 4% of fee income of last year, so this will be quite a headwind for the evolution of fee income this year. But we still are positive, especially on off-balance sheet and other banking products fees, going forward, and more flattish and conservative view on payments fees.

[Jaime Hernandez Marcos]

I think we explain it throughout the presentation, but we got several questions asking it. So probably to be a little more clear, if we can explain the other operating income and other operating expenses details?

[Pablo González Martín, CFO & GM]

I think I mentioned, but just to remind you, the EUR17 million are split. We have EUR14 million coming from our real estate servicer, and other EUR6 million coming from the contribution of Union del Duero. These are the positive ones. And on the negative side, we have the EUR4 million related to the DTAs levy, so that explained most of the numbers. So just to mention that this contribution from the real estate servicer in the last year was EUR21 million, which explained that we have a lower contribution compared to last year.

[Jaime Hernandez Marcos]

Very straightforward, on trading [games], what would be the [indiscernible] level of trading [games]?

[Pablo González Martín, CFO & GM]

We don't have a recurrent trading [game], so will depend on market condition. And obviously, as we mentioned, we will use them to compensate the [debt charge] [indiscernible] restructuring provision that we might do in the coming quarters.

[Jaime Hernandez Marcos]

Moving to costs, if we have identified additional capacity to [indiscernible] potential savings?

[Pablo González Martín, CFO & GM]

We have just approved the full integration of Espana Duero. It was one of the proposals approved in last week AGM. Now, we're working on identifying the final synergies to be implemented after the merger. And in the coming quarters, we will update the situation with more details. Now, we don't have specific details to give you now.

[Jaime Hernandez Marcos]

Moving to impairments and provisions, if we can explain the release of loan [load] charges and what expectation we have for the cost of [these], going forward.

[Pablo González Martín, CFO & GM]

As we explained in the presentation, we have sold a small written-off portfolio that had a positive impact of around EUR9 million this quarter. So if we exclude this impact, the annualized cost of risk was, as I said, eight basis points. We don't expect to report continued releases. It is true that, during the last two quarters, the cost of risk has been quite low, and that is very positive.However, we do expect to increase volume trends in the future, and if it happens, the cost [indiscernible] should be higher, going forward. So we continue to see the business plan guidance of below 30 basis point as a good reference for the medium term. There could be some quarters with much positive trends compared to our medium-term view, and similar to the last two quarters, but the medium term should be higher than this. So we have--I think the major reason is that the high level of nonperforming loans coverage, and especially if we consider, as we have said, high level of collateralized nonperforming loan, almost 90%. So for the back book, we feel quite comfortable with the level of provision. However, the new loans and the new rules of IFRS-9 make us to be more prudent on giving guidance on cost of risk, going forward.

[Jaime Hernandez Marcos]

And regarding real estate or foreclosed assets, [about how long are] the impairments, going forward?

[Pablo González Martín, CFO & GM]

I think as we said last year, we did what we think are the bulk of the provision for foreclosed assets, and this was due to the reappraisal of all of the assets. So now, with the current real estate prices trend on our coverage level, we don't expect to have large provision in the foreclosed assets.

[Jaime Hernandez Marcos]

We can, Pablo, please update the litigation risk provisions?

[Pablo González Martín, CFO & GM]

I think in the litigation risk provision, we have a general provision for different legal risk of EUR334 million, which obviously are mainly related to the mortgage floors, which remains our major contingence.

[Jaime Hernandez Marcos]

Moving to asset quality, Pablo, if we can -- after what we saw [indiscernible] quarter, and [indiscernible] I have the question in front of me, another [indiscernible] in terms of an [indiscernible] reduction, are you planning to continue selling at the same pace, or to accelerate throughout [indiscernible] transactions, Pablo?

[Pablo González Martín, CFO & GM]

We keep on selling, and we did on average above book value. But this is done on a asset-by-asset case. But when we do portfolio sales, obviously this is tougher, as we can see in the numbers. So although so far it has been similar, it will be difficult to repeat the positive numbers of last year, but however, we continue to analyze the different alternatives with the objective of reducing as many nonperforming assets as possible while preserving the value of our [insurance holder]. So we maintain with the same guideline that we have been giving.

[Jaime Hernandez Marcos]

There is one question on NPL disposals, if we plan to sell NPLs.

[Pablo González Martín, CFO & GM]

We have already said that we prefer to sell foreclosed assets and written-off loans, but nonperforming loans, we prefer to manage them ourself, especially the individuals on mortgage, nonperforming loans. But in the future, we could analyze different options regarding some small corporates portfolio or real estate-related portfolios, but nothing really relevant.

[Jaime Hernandez Marcos]

Moving to questions on funding liquidity and solvency, on [indiscernible], if we can update any potential issuance of hybrids, Pablo?

[Pablo González Martín, CFO & GM]

I think on [Embrel], we haven't been confirmed the level yet, so one more year to wait. So regarding the potential issuance of hybrids, our solvency position is very comfortable and enable us to have flexibility on the timing. We meet with all requirements, and we have [unpulled] management buffer, so nothing has been decided on the timing. But under our view, we have plenty of time to meet with the [Embrel] requirement. So it wouldn't be an issue at all. On the opposite, we believe that the final [Embrel] issuance could be cheaper than that that we have consider in our business plan, and that is good news.

[Jaime Hernandez Marcos]

On solvency, on the capital position, it has increase significantly in the [indiscernible] in the quarter in excess of the 12% target. They're asking us if we are planning, or what we are planning to do with the excess of capital.

[Pablo González Martín, CFO & GM]

The CET1 is well above the target, but we want you to bear in mind that the fully loaded number includes 90 basis point of unrealized capital gains that we will realize to mitigate some of the restructuring cost, going forward. So most of the gains currently consider in the CET1 are only temporary ones. So that said, even with that, it is true that our solvency position is above the target of our business plan. One of the reasons is that our loan book is not increasing significantly yet, but we continue to have ambitious plan, and I think it's too early to decide on what to do with the excess capacity. So we will look with excess solvency position.

[Jaime Hernandez Marcos]

The last one, Pablo, is our views on the sector consolidation and M&A.

[Pablo González Martín, CFO & GM]

We saw a lot of comments and research published related to consolidation during last months. We understand that is a sector topic, but for Unicaja, nothing has changed. We continue to have to execute our final integration of Espana Duero in the coming months, and that is how our priority, and that is Unicaja Banco consolidation deal. And it is important because we still have synergies to crystallize from such acquisition.And regarding other plans, I will answer again what we have said in the past. Sector consolidation or M&A is not a priority right now for us. We work every day to improve shareholder returns, taking conservative and prudent risks, with the idea of generating as much value as we can. We believe that we can do it in a standalone basis without acquiring or merging with other bank. However, I did in the past, and I understand that other banks do, we will analyze whatever opportunity appear, as we have always done. But at the moment, our priority, as I said, is to deliver on our business plan.

[Jaime Hernandez Marcos]

Thank you very much, Pablo. Thank you all for attending the presentation. As I reminded, the IR team is available at the phone for further follow-up questions. Thank you, [indiscernible], and see you next quarter.

[Pablo González Martín, CFO & GM]

Thank you very much.

[Jaime Hernandez Marcos]

Bye.

[Pablo González Martín, CFO & GM]

Bye.