Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2018-Q2

[Jaime Hernández Marcos, Head of Investor Relations]

Good morning to everyone, and welcome to Unicaja Banco Second Quarter 2018 Results Presentation. First of all, as we always do, let me confirm you that we have published the quarterly results, including the financial report and this presentation, this morning before market opens in both the CNMV and our corporate website. Today, as we usually do in the first -- in the half year and final year results, our CEO, Enrique Sánchez Del Villar will join us together with our Chief Financial Officer, Pablo González. After the presentation, we will answer the questions received through the webcast and in the IR inbox. As always, for further info, the IR team will be available after the webcast. That said, I leave the room to -- the roof -- the floor to Enrique.

[Enrique Sánchez del Villar Boceta, Chief Executive Officer]

Thank you, Jamie. Good morning, and thank you, all for attending the presentation. Let me start in Page 4 with a summary of this quarter trends. Regarding the business, in the second quarter of '18, lending trends continued to improve. Performing loans showed a slightly increase for the second consecutive quarter. The growth is still limited, and this quarter reflects some seasonal advances that we have every second quarter. Performing loans grew almost 2% quarter-on-quarter or 0.4% when excluding the mentioned seasonal advances. So little by little, the trends are starting to improve as we have anticipated in previous quarters. As we will show later, such a trend has been supported by an improvement of the new loan production that grew above 40% in the first half of the year compared with the previous semester. New loan production in the individual segment grew by 36% and a strong 45% in corporates. On the other hand, total customer funds continue to grow close to 4% year-on-year with on-balance sheet funds up by 3%, especially in sight accounts, where balances grew 12%, and off-balance sheet funds growing above 7%. Regarding results, net interest income grew slightly above 4% in the first half of 2018 compared with the previous year. Fee income adjusted by the full acquisition of the insurance company, Union del Duero also grew by 2%. Total costs fell by 3% in the first 6 months of the year. Finally, loan loss charges foreclosed assets provision trends remained very positive for the third consecutive quarter and have decreased significantly. All these enable us to reporting attributable net income of EUR 105 million in the first half of 2018, 23% above 2017.Our asset quality, liquidity and solvency. I would like to highlight that NPAs fell by 10% year-to-date or above 23% year-on-year, representing a decrease above EUR 1.2 billion. On liquidity, as you all know, we continue to have a very comfortable position with net liquid assets representing 25% of total assets. And regarding our solvency position, the CET1 phase-in was 15.3%, and fully-loaded terms reached 13.5%, showing a significant improvement during the last quarter. Okay. Moving to Slide 5. I would like to review with you some important trends in our first year as a listed company. One year ago, we organized our first quarterly webcast to explain the second quarter '17 results. During these 12 months, there have been several improvements, but I would like to highlight the following 4: Firstly, since we became listed, we have increased the tangible book value of the group from EUR 3.6 billion to current EUR 3.8 billion. Such a rating becomes more important, if we take into account that during this period we have paid the highest dividend of the history of the bank. Despite of it and other issues charged against equity, like the IFRS 9 impact, we increased the book value of the group by 5% since the IPO. On the other hand, I'm partially explaining the mentioned rating, we have demonstrated a significant result generation capacity that has enabled us to increase by more than 20% our bottom line in the first half of 2018.Such an improvement came together with a significant reinforcement of our financial position. We show in the bottom left of the slide, the taxes ratio improvement. This figure summarizes pretty well the strong balance sheet fundamentals of Unicaja Banco and the improvement during the last year. The solvency position, together with our coverage levels, has enabled us to decrease this ratio from 82% in June 2017 to current 66%, among the lowest of the Spanish domestic listed banks. Last, but not the least, our CET1 fully-loaded ratio, excluding the unrealized gains from the debt portfolio has grew close to 100 basis points to 13% or to 13.5%, when considering the debt portfolio unrealized gains. The IPO was a milestone in the history of the group and now 1 year after, we continue to believe that there is still room to further increase shareholder returns, and we commit to continue delivering in the future to further improve it. I will leave the floor now to Pablo, our CFO, that will enter into the details of this quarter results.

[Pablo González Martín, CFO & GM]

Thank you, Enrique. Moving now to results and business. I will start, with the P&L in Slide 7. Net interest income fell 1% quarter-on-quarter in the second quarter '18 as we will see later. The big bulk of the quarterly decrease was explained by lower balances of mortgages with floors. However, in the first half of the year, net interest income was 4% above 2017. Fee income increased 5% quarter-on-quarter, although partially explained by some nonrecurring fees related to our insurance business. In the first half of 2018, fees decreased 1%, mainly because as we explained last quarter, one part of fee income from Union del Duero is not accounted in this P&L lines since last quarter. And this represents close to EUR 3 million in the first 2 quarters of 2018, excluding this impact, the like-for-like fee income grew 2% year-on-year. Regarding dividends, as you probably know, there is some seasonality every second quarter. Something that explains the improvement in the quarter. It is true that the EUR 13 million were above the previous year, but do not consider this quarter as a reference, because it should be lower going forward. In the past, the big bulk of our dividend income was explained by a single stake in Iberdrola that as you probably remember was sold in 2017. We have built a more diversified portfolio with a new seasonal pattern with most of the income concentrated in the second quarter. But in annual basis, overall dividend income in 2018 should be pretty flattish. The P&L contribution from associates was slightly below the first quarter '18. However, it is worth noting that it grew close to 2% in the first half of the year despite not considering the contribution of Union del Duero since the first quarter '18. Trading income in the second quarter was below the previous quarter. In year-to-date basis, the decrease is explained by the strong trading gains booked in 2017, mainly related to the disposal of Iberdrola equity stake, that among others enabled us to partially mitigate the impact from the reorganization of the life insurance business last year. In other operating income and expenses this quarter, we include EUR 5 million from Union del Duero and other EUR 8 million from our real estate business, compensating the contribution to the resolution fund of EUR 13 million booked this quarter. Regarding cost, they were pretty stable in the quarter, decreasing by 3% year-to-date -- on year-to-date basis. Total impairments reached EUR 25 million this quarter and both loan loss charges and provision for foreclosed assets continue to show very positive trends, something that enable us to further reinforce other provisions 1 more quarter. Total provisions in the first half of 2018 were significantly below the previous year. Among others, because in the second quarter '17 as we mentioned before, we booked the impact from the reorganization of the life insurance business, but also, owing to the mentioned positive trends in loans and foreclosed asset charges. All these left the profit before taxes at EUR 62 million in this quarter, reaching EUR 140 million in the first half of the year, which is almost twice the previous year. Attributable net income also grew from EUR 86 million in 2017 to current EUR 105 million, representing a significant improvement of 23%.If we move to customer funds in the Slide 8. You can see that total customer funds grew 4% year-on-year. On-balance sheet funds grew EUR 1 billion or 3% year-on-year and off-balance sheet funds grew by 7% in the same period. Regarding on-balance sheet funds as you can see in the right-hand side of the slide, sight deposits show a strong growth this quarter and the mix between sight and term deposits continuing a steady improvement. Sight deposits in the second quarter this year represents 77% of total private sector deposits, which compared with 70% 1 year before. In the Slide 9, we have the credit and loans trends, which for second consecutive quarter were quite positive. In the left part of the slide, we showed the gross loans and in the right hand the performing loans As you can see in the left side, total gross loans were stable this quarter, even increasing a little bit year-to-date. Total private sector loans grew 1.4% year-to-date and public sector gross loans increased by 8% in the same period, compensating the 14% decrease in nonperforming loans. These left, as you can see in the right side of the slide total performing loans growing close to 2% year-to-date. In the right bottom of the slide, we showed the private sector performing loans by segment. Consumer loans grew a significant 18% quarter-on-quarter owing to the EUR 367 million of seasonal advances that we have every second quarter. Excluding such advances, consumer loans grew 2.3% quarter-on-quarter or 4% when excluding employee loans and mortgage classified in this segment. Corporate loans also grew close to 1% quarter-on-quarter, compensating the decreasing mortgages. It is worth noting that every quarter, the mortgages trends looks more positive and despite still decreasing, as you can see in the chart, every quarter the decrease is slower. Something that confirms the expected positive trend that is explained by the continued improvement of the new production, as you see in the next slide. This slide, you can see the new loan production grew 42% in the first half of 2018 compared with the previous semester, reaching EUR 1.8 billion. New loans to individuals in the bottom left grew 36% to EUR 645 million year-to-date. And the average yield was 4 basis point above the second half of last year, mainly due to a significant increase in nonmortgage lending, which grew 43 basis points to 5.64%. Regarding corporates, the increase remain high. The EUR 1.1 billion of new loans was 45% above the previous semester. Regarding corporate yields, new corporate and SMEs loans were formalized at an average yield that was 8 basis point above the previous semester, while corporate yield was stable at 161 basis point, SME yield grew almost 20 basis points during the first 6 months of the year. In the Slide #11, we start to review the P&L. As you can see, net interest income fell 1% quarter-on-quarter and the net interest margin decreased 4 basis point. The lower income from the performing loans was close to EUR 3 million, partially compensated by a small improvement in the debt portfolio and the cost of liabilities. If we'll look to the customer spread in the bottoms of the slide, this quarter, we have 2 different trends. On one side, the back book decreased in the quarter, owing to the lower-performing loan yield, which was impacted by the seasonal advances at [ zero ] cost and the lower balances of mortgages with floors. On the other hand, the front-book customer spread grew 25 basis points, owing to the improvement of the new production yields, but also because we exclude from the front-book performance, the seasonal advances at [ zero ] cost.In the Slide 12, we have the regular info regarding our debt portfolio. Total balance fell almost EUR 1 billion to EUR 15.1 billion, mainly owing to additional forward sales. The big bulk of the portfolios are sovereign bonds. And if we include the SAREB bonds almost 84% is classified in the amortized cost portfolio. Something that is explained by our structural excess of retail funding. Regarding its contribution to net interest income, it was pretty stable this quarter at EUR 59 million. However, as we explained in the previous quarter, the contribution will remain at this level until we realize the [ latin ] capital gains of the fair value to other comprehensive income, the former available for sale by the end of the year. Once the gains are realized, the contribution will go back to levels closer to the ones we have during 2017 between EUR 50 million and EUR 55 million per quarter. If we move to Slide 13, you can see the fee income evolution in the quarter. Total fee income grew 5% quarter-on-quarter helped by seasonal factors, but also owing to close to EUR 3 million of nonrecurring fees booked this quarter. On top of this, as we explained last quarter, following the full acquisition of Union del Duero in the first quarter '18, there are some fees that are not considered in this P&L line anymore, representing more than EUR 3 million year-to-date.Reported fee income in the first half of 2018 fell 1% compared to 2017, but if we adjust this Union del Duero impact, fees grew more than 2% year-to-date. Moving to cost. As you can see, in Slide 14, operating expenses fell 3% in the first 6 months of 2018 compared with 2017 and almost 6% compared with 2016, driven mainly by lower personal expenses. As we said in previous occasions, we expect to continue to reduce personal cost, 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 EspañaDuero and analyzing additional potential cost savings. We will give you the details in the coming quarters, probably at 2018 final year results. So far we can just confirm that our idea is to mitigate the restructuring costs with the realization of gains from our debt portfolio.In the Slide 15, we have included the details of the impairments. As you can see, total impairments improved significantly compared with 2017. In the first 6 months of 2017, we booked EUR 165 million of provision, including the ones related to the reorganization of the life insurance business of the group. This has fallen to just EUR 41 million in 2018. It is worth noting that in this second quarter, we released some provision related to both loans and foreclosed assets. Such a positive trend has enabled us to further reinforce other type of provision during the quarter, mainly the legal provisions.On cost of risk for third consecutive quarter, we released some credit provisions. These were partially explained as it happened in the previous quarter by the disposal of a small written-off portfolio. In the first 6 months of 2018, we have released EUR 18 million following this written-off disposals. As you can see, in the right-hand side of the slide, the annualized cost of risk year-to-date, excluding such disposals was just 2 basis points, well below the 15 basis points booked in 2017 and the 25 basis points of 2016. Such a positive trend is a result among others to the relative higher coverage level, but also to the continuing improvement of the asset quality of the sector that is translated in higher recoveries. Finally, regarding foreclosed assets, we have also released EUR 7 million of provision this quarter, which is a very positive number. As we discussed in previous occasions and confirmed in previous quarters, in 2017 foreclosed assets provisions were higher, owing to the impact of updating foreclosed assets appraisals, but we don't expect these provisions to become material again in the coming quarters. If we move now to asset quality. In Slide 17, we have details on the evolution of our nonperforming loans. The trends remained positive, even more positive than in previous quarters. On the top of the slide, you can see the steady reduction of NPL balances, and the NPL ratio. In the second quarter NPLs fell 9% quarter-on-quarter or 14% year-to-date or an impressive 20% year-on-year. In the bottom of the slide, you have the details of the quarterly NPL variation where you can see that the pace of reduction has accelerated farther this quarter. Gross entries continued to decrease one more quarter, something that together with higher recoveries explained the positive trend of the quarter. In the Slide 18, we updated our NPL coverage position that remained pretty stable at 55% in the quarter. However, in some segment, coverage is even much higher like in developer loans, which is almost 78% or in other individual loans, which is 72%. It is worth noting that in this segment called other individual loans, 94% of the EUR 490 million of nonperforming loans are mortgages that are classified in this segment are not in mortgages, because we apply a prudent accounting approach. This also explains, as you can see in the right of the slide that 92% of our nonperforming loans balances are secured, of which 80% are secured by finish buildings. Something that leave us in a very comfortable coverage position. It is also worth noting that the original appraisal of collaterals represents 2x current NPL balances. Again, something that summarized pretty well the strong coverage levels of the group and the flexibility that this situation gives us. If we move now to foreclosed assets in the Slide 19, you will see an update of its situation and the main trends. In the left side of the slide, we have an update of the coverage ratio of our foreclosed assets by type. Overall coverage remains at 64% with loan having the highest coverage above 80%, although loan now only represent EUR 129 million. On the right side, we have included the trend and results of the real estate asset disposals. In the first semester, we have released EUR 46 million of provisions from disposals, representing 32% of the net book value of the assets sold. In the bottom right, we show the outflows. In the second half -- in the second quarter we haven't sold any portfolio, but outflows represented almost EUR 100 million. In the Slide 20, we summarize the nonperforming asset trends. As you can see, we have reduced by 10% year-to-date the nonperforming assets, gross balances to EUR 4.1 billion gross. NPA coverage remains stable at 59% and in net term foreclosed and NPL balances represents only 3% of total assets. As Enrique explained before, a figure that's summarized pretty well the progression of the asset quality of the group is the taxes ratio. Such ratio, as you can see in the bottom of the slide has decreased 1 more quarter to 66% among the lowest of the domestic-listed Spanish clients. In terms of liquidity, we update the details in Slide 21. Our LTD ratio remains low at 75% and the net stable funding ratio and the liquidity coverage ratio continued to be well above the requirements and among the highest of the sector. In terms of wholesale maturities, we don't have significant or expensive maturities this year, however, as you can see, in the slide between 2019 and 2020, almost EUR 1 billion of corporate bonds at an average cost of 2.5% will mature. Finally, regarding the amount of liquid assets, as you can see in the bottom left, they continue to represent more than 25% of total assets. Finally, moving to solvency in the Slide 22. You can find our capital ratios position. As you can see in the top left, current regulatory capital ratios are well above the SREP requirements with EUR 1.7 billion buffer over the CET1 and slightly above EUR 900 million buffer in total capital. CET1 phase-in reached 15.3% in June 2018, while total capital was 15.5%. It is worth noting that we are not including the -- as Tier 2 normal risk provisions anymore. Bear in mind that for us the regulatory solvency is very relevant, because the phase-in calendar that we apply finish in the 2023, rather than the regular 2019 deadline. In other words, our regulatory capital ratios will not meet the fully loaded once until 2023. In fully loaded terms, the CET1 reaches 13.5%. However, if we deduct the unrealized capital gains from our debt portfolio something that will probably happen in the coming quarters the ratio remains quite high at 13%. Finally, as we used to do, we have included our credit risk weights in the bottom left of the slide. As you all know, we continue to apply a standard approach, as a consequence, very conservative credit risk weights. I will now leave the floor, again, to Enrique for some final remarks. Thank you.

[Enrique Sánchez del Villar Boceta, Chief Executive Officer]

Thank you, Pablo. As we usually do, let me finish the presentation with some final comments that you have in Page 25. These remarks remain the same than last quarter. But for us, it's quite important that they remain the same because it means that we are going in the right direction. We have been able to show resilient results generation capacity one more quarter. With the bottom line growing to EUR 105 million, almost 23% above the previous year. This has been possible, owing to the improvement in the top line, cost control and lower provisions. The commercial activity continues to improve with credit and loans starting to stabilize, owing to the higher new loan production and more stable mortgage trends. And something very important, such an improvement is taking place with the right pricing. It's also worth noting that NPAs continued to decrease. This quarter with a very relevant decrease of NPLs. On top of the pace of decrease, it's also important to realize that we are doing it with a positive contribution to the P&L. Partially explained by a best-in-class coverage of the problematic exposure. And finally, we have been doing since we became listed, we are generating capital and keeping an extraordinary comfortable liquidity position quarter-after-quarter. Thank you, very much.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Enrique, and thank you, Pablo. We will now start with the Q&A.

[Jaime Hernández Marcos, Head of Investor Relations]

There is -- there are some questions. And Enrique, this one probably is for you. [indiscernible] from Banco Sabadell but also Carlos Peixoto, at BPI. They're asking us if we can provide respective impact on our recent potential in new taxes ratio for the sector.

[Enrique Sánchez del Villar Boceta, Chief Executive Officer]

Well, it's really very difficult to estimate the potential impact of something that has not happened, and that has not been confirmed yet. It's true that during the last weeks, there have been a lot of different alternatives analyzed in researched reports and in the press. All we can say, is that, of course, if Spanish banks taxes finally increase, it won't be a good news. However, if it happens, we are analyzing different measures to adopt to this situation. That's all, I can say.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Enrique, Pablo. We have 1 regarding the debt portfolio, the decrease in the quarter everyone, they're asking us that it is not reflected in the balance sheet, if we can elaborate a little bit?

[Pablo González Martín, CFO & GM]

In the balance sheet and in the NII breakdown, the balances include the forward sales, that we don't include in the presentation. That is why there are some difference between the balance sheets and the presentation. Regarding this quarter changes, the debt portfolio, in particular the fair value to OCI, portfolio decreased in the second quarter because of the forward sales, while the structural portfolio increased its sizes slightly. As co-rates moved lower during the second quarter, and we had a message from the ECB related to the end of the QE and the potential rate hikes in the second half of 2019, we decided to reduce the risk of this portfolio, switching some interest rate swaps into forward sales. So that the number of the size of the forward sales has increased. In terms of size and depending on market conditions, we can expect to increase the exposure to our Spanish sovereign debt in the structural portfolio to replace part of the forward sales already executed and to invest the excess liquidity of our balance sheet. For the fair value to OCI portfolio, as we mentioned in the previous times, the size will not be linked to our liquidity position as this is an opportunistic portfolio to obtain additional gains. So the size and risk sensitivity of this portfolio will depend on the -- on our view of the evolution of the financial markets.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. [indiscernible] from [indiscernible] and he is asking us on the contribution from the debt portfolio to net interest income and expected trends.

[Pablo González Martín, CFO & GM]

As we explained in previous quarters and already mentioned in the presentation. As soon as the forward sales that are currently yielding in the NII reach the settlement date, the contribution from the debt portfolio to NII will decrease. The final timing is not decided yet, and we cannot confirm it, but it will be done throughout this year. The potential new purchases of bonds for the amortized cost portfolio to invest the excess liquidity and to replace some of those forward sales should smooth the decrease of the contribution to NII. Timing and yield of the new purchases will determine the final impact, but we have already explained the normalized contribution to NII is more close to the last year levels than to the one achieved in the first half of this year.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. There is another one for you, Pablo, on the interest rate sensitivity and the expected impact from the recent [indiscernible].

[Pablo González Martín, CFO & GM]

We remain, as last quarter, positively positioned to an increase in interest rates. Specifically, for the 2020, 2021, and not in the short term, close to our view on rates. The impact in NII of a parallel increase of 100 basis points of the rates curve from the month 12 to 24 months, so the second year after the rate hikes remain similar as the first quarter at around 13% of NII. Let me remind you that this is using -- obviously, using a lot of assumption, but we think it's a conservative number, but realistic assumption. For example, we consider changes in the mix between term and sight deposits, and we consider in this a constant balance sheet. We can face impact in the coming quarters in NII versus our projections, if the current implied curve remains for the next few quarters. But we remain comfortable with the consensus of some potential increases of the REFI rates from the ECB in the second half of 2019, which should push indices up, and so hoping the NII in that sense.

[Jaime Hernández Marcos, Head of Investor Relations]

This one question coming from Paco Riquel at Alantra. He is asking us if we can explain the decrease of the customer spread in the quarter and the difference why the trend is so different between the back and the front book.

[Pablo González Martín, CFO & GM]

The net interest margin fell in the quarter, owing to the lower loan yield, mainly in mortgages and that, as you know, continued to decrease due to the lower balances of mortgage with floors. The different trend between the back and the front book is mainly explained by the mix of the new production, but also, because the new production, in the new production customer spread, we didn't include the seasonal advances that we have every second quarter. And this explained some basis points of the customer spread decrease. On the top of that, as I said, the back book reflects the lower balances with mortgage floors.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. There is a couple of questions coming from Ignacio Ulargui from Deutsche Bank and Carlos Peixoto, BPI Caixabank, on the net interest income guidance for this year, an update?

[Pablo González Martín, CFO & GM]

As we said in previous occasion, we reiterate our expectation that the NII will grow this year. Once we'd realized the gains from the fair value to OCI portfolio, the interest income from such portfolio will be lower. However, despite such an impact, we continue to expect NII of 2018 to be above the 2017.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Maria Ropero from Fidentiis, Paco Riquel from Alantra, Ignacio Ulargui from Deutsche, and Carlos Peixoto from BPI, are asking us on an update on mortgage floors?

[Pablo González Martín, CFO & GM]

The balance of mortgages with the floors continued to decrease one more quarter, but every quarter, the decrease is lower. Balances with active floors were EUR 2.8 billion at the end of last year. These fell to EUR 2.5 billion in the first quarter, and they have decreased some more in the second quarter to around EUR 2.3 billion. Bear in mind that the decrease is not only explained by removal of floors, it is also explained by the natural amortization of the portfolio. However, as we explained in the presentation, the lower contribution from these mortgages explained around EUR 2 million of lower interest income in the second quarter compared to the first quarter, while it represented almost EUR 3 million in the previous quarter. This means that trends are starting to stabilize a bit further, although it will continue to be a headwind in the coming quarters.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Probably Enrique, you can take this one Paco Riquel from Alantra, Ignacio Ulargui from Deutsche Bank, José Abad from Goldman Sachs are asking us on the guidance for loan growth, when do we expect to see clear lending growth ahead?

[Enrique Sánchez del Villar Boceta, Chief Executive Officer]

Yes, okay. We expect to see the inflection point this year. As we explained in the presentation, new production continued to improve in the second quarter of '18. New mortgage production is growing every quarter, but it's still not enough to compensate the natural amortization. Every quarter, the decrease is lower. In the second quarter of '18 performing mortgages fell less than 1% quarter-on-quarter. This compares with quarterly decreases close or even above 2% during the last couple of years. So little by little, the mortgage book is starting to stabilize. Something that this required to report clear overall loan growth. In corporate loans, we grew 1% quarter-on-quarter and 2.5% year-on-year. In consumer loans, excluding the seasonal advances and the runoff mortgage portfolio classified in this segment, the growth was 4% quarter-on-quarter and above 5% year-to-date. It's also worth noting that the trend in new production yields remain very positive, and we continue to focus in quality-lending growth with right pricing policies. So far the trend continues to improve every quarter. So we reiterate our guidance for an inflection point this year and if this trend is confirming the coming 2 or 3 quarters, the balances should start growing at least to low single-digit rates.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Enrique. Pablo, Ignacio Ulargui, Deutsche and Carlos Peixoto from BPI, are asking us an update on fees?

[Pablo González Martín, CFO & GM]

Sure. First of all, it is important to remember that from first quarter '18 onwards, fee income does not include some fees related to the insurance company Union del Duero Vida y Pensiones. Such fees in 2017, represented around EUR 8 million. This quarter, there are also close to EUR 3 million of nonrecurring fees related to the insurance business. However, despite the mentioned impact, fee income in the first half of 2018 grew 2% year-to-date, excluding the impact of the Union del Duero. During the first half of 2018, the market volatility hasn't helped really the asset under management and even with that asset under management grew 7% and nonbanking fees more than 6%. For the second half of the year, if we have a more positive market conditions, the trend should also be positive in terms of fees gathering.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you Pablo. There is one coming from Paco Riquel, Alantra asking us if we can explain the breakdown of other income and expenses?

[Pablo González Martín, CFO & GM]

Yes. On the positive side, we have EUR 3 million from real estate rentals plus EUR 1 million from our real estate business from sales of the real estate business plus EUR 5 million from Union del Duero and some other as more contribution that represents around EUR 2 million. All these positive impacts mitigated in full the negative of this quarter that were close to EUR 17 million from the contribution to the resolution fund and the DTI levy at around EUR 1 million and around EUR 1 million of real estate maintenance cost.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Enrique, Maria Ropero from Fidentiis is asking us if we can update the expected cost synergies and savings from the -- for the coming years.

[Enrique Sánchez del Villar Boceta, Chief Executive Officer]

Well, as Pablo said in the presentation, we are currently reviewing the potential savings and the related and needed restructuring cost. This, of course, will be mitigated by these realized gains in our portfolio, fixed income portfolio. Well, probably, we'll update the situation in soon -- in coming quarters.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Enrique. Another one for you, on the EspañaDuero when we do expect to fully integrate EspañaDuero?

[Enrique Sánchez del Villar Boceta, Chief Executive Officer]

Well, as you all know, this was approved in our Annual General Meeting. I can say is that we are now completely ready and just waiting for the final authorization, some formal and required approvals. We will execute the final integration once we receive them, probably after the summer.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Enrique. Pablo, we got several questions from the provisions. Starting with probably the loan loss charges, Maria Ropero at Fidentiis, [indiscernible] from Banco Sabadell, Juan Tuesta at JB Capital, Carlos Peixoto at BPI [indiscernible] are asking us why -- what can they expect on the cost of risk going forward in loan loss charges and if it's still 3 basis points cost of risk a good reference?

[Pablo González Martín, CFO & GM]

Okay. And as we explained in the presentation. In the first half of the year, we sold some small written-off portfolios that explained around EUR 18 million of provision release. Excluding such disposals, the cost of risk was very close to 0, but we were not releasing provision as the reported figures show. That is why despite such a low charges we don't expect to report continuing releases in the future. We have a relative high coverage level and asset quality trends are positive. In the short term, cost of risk could remain low, which is very positive for our P&L trends, but we prefer to be prudent on net-net, the overall provisioning effort, including credit foreclosed assets, another provision should remain close to our 30 basis point guidance, excluding any extraordinary restructuring cost as we mentioned.

[Jaime Hernández Marcos, Head of Investor Relations]

We'll go move to the Pablo now to foreclosed assets provisions guidance.

[Pablo González Martín, CFO & GM]

Okay. As I said, during the presentation, the big bulk of provision for foreclosed assets book in 2017 were consequence of the reappraisal of the assets. Once the appraisals are updated and considering the level of coverage that we currently have, foreclosed assets provision should be below previous year. As I said in the previous question, we look at an overall provisioning effort as a reference. So some quarters 1 type of provision could be better or worse than others, but at least, for this year, we expect to reduce the overall P&L provision.

[Jaime Hernández Marcos, Head of Investor Relations]

And Pablo, finally on impairments, [indiscernible], Banco Sabadell, Paco Riquel at Alantra, Juan Tuesta from JB Capital and Carlos Peixoto from BPI are asking us what did other provisions include? And what we expect for this type of provisions going forward?

[Pablo González Martín, CFO & GM]

In other provision, we book impairments related to off-balance sheet guarantees, legal risk and other type of provisions, such as the restructuring cost. In the second quarter, provisions were mainly related to legal risks. Following the positive trends in loan losses and foreclosed assets impairment in this quarter. We have decided to see there and even more proven approach for this type of risks, in line with the conservative management culture of the group. As we have said in the past we will probably continuing booking these types of provision on a regular basis going forward. However, going forward, as I said before, total impairments of around 30 basis point of gross loans, excluding the extraordinary restructuring cost should remain a good reference.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Enrique, we got also several analysts like Carlos Peixoto of BPI, [indiscernible], Sabadell, Maria Ropero, Fidentiis, Paco Riquel of Alantra, Ulargui from Deutsche Bank, Juan Tuesta from JB Capital, asking us on our NPA disposal policies if we can elaborate our views on our strategy?

[Enrique Sánchez del Villar Boceta, Chief Executive Officer]

Okay. Well, our strategy regarding NPAs is to continue reducing balances, while preserving our shareholders value. In the second quarter of '18, we sold this -- more portfolio for NPLs. Going forward, we will continue to analyze alternatives, including disposals as we have done so far. We do not expect to change this strategy among others because it has been a very positive so far. This quarter, the big bulk of the decrease came in the form of NPLs, while for example, last year, we reduce more foreclosed assets than NPLs. We always analyze different options, and we formulized those deals that we believe make more economic sense.

[Jaime Hernández Marcos, Head of Investor Relations]

There is another one for you, coming from Maria Ropero of Fidentiis, [indiscernible] from Sabadell on solvency on [indiscernible] that excluding the capital gains from the portfolio continues to increase and what will be -- the question is, what will be the level at which we will start analyzing a higher payout?

[Enrique Sánchez del Villar Boceta, Chief Executive Officer]

Yes. Well, we have a CET1 fully loaded target of 12% and our current CET1 fully loaded is 13.5%, which is 150 basis point above such a target. However, excluding the unrealized gains of our debt portfolio, the CET1 fully loaded is 13%, leaving the buffer with our target of 100 basis points. We do expect to realize a significant part of our recurring unrealized gains as we have said. So we focus in the ratio without such gains, because it's medium-term reference. As we explained last quarter, we continue to generate organic capital significantly among others because our NPA balances are decreasing at a good pace. However, there are no changes to our dividend targets so far. That is to pay in cash dividends of 40% of the net income by 2020.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Enrique. José Abad from Goldman Sachs is asking us on our views on M&A and sector consolidation?

[Enrique Sánchez del Villar Boceta, Chief Executive Officer]

Well, really nothing new on this matter. We continue to see a lot of comments and reports related to sector consolidation. As we said in the past, we understand that it's a sector topic, but for us, really nothing has changed. We still have synergies to crystallize from the acquisition of EspañaDuero, which is one of our priorities. We work every day to improve shareholder's returns, taking conservative and prudent risks with the idea of generating as much value as we can. And we believe that we can do it in a standalone basis without acquiring or merging with any other bank. However, as we did in the past and as everyone does, we will analyze whatever opportunities appear, but at this moment, our priority is to deliver on our business plan.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Enrique. One final question for you, Pablo. They're asking us if we can update our exposure to the SAREB, please.

[Pablo González Martín, CFO & GM]

Yes, we initially had an exposure of EUR 61 million of which EUR 43 million was equity and the remaining EUR 18 million was subordinated debt. In June 2018, we have fully provisioned the equity and for the subordinated debt, we currently have EUR 10 million of provision. So the remaining total potential exposure to this has been reduced to only EUR 8 million.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. Thank you, Enrique, thank you, Pablo. We will now finish the webcast. If you need further details or you want to discuss some other issues, please don't hesitate to contact the IR team. We wish you all a [indiscernible] and great summer break holidays. See you next quarter. Thank you.