Good morning, everyone, and welcome to the VA Third Quarter 2019 Results Presentation. I'm Gloria Colcayro, Head of Investor Relations, and here with me today is Onur Ghent, Chief Executive Officer of the group and Jaime Sandertejara, BBVA Group CFO. As in previous quarters, Onur will begin with the presentation of group's results, and then Jaime will review the business areas. We will move straight to the live Q and A session after that. And now I will turn it over to Onur to start with the presentation.
Thank you, Gloria. Good morning to everyone and welcome to BBVA's Q3 2019 results audio webcast. So Let's jump into it. Starting with slide number 3. Once again, we are reporting an excellent quarter in our view in terms of results, In terms of value creation and capital generation.
So on this page, our net attributable profit on the left hand side of the page in the 3rd quarter It's €1,225,000,000 At a constant perimeter, which is basically excluding the recurrent operations and the capital gains From the sale of BBVA Chile in the Q3 of 2018, our net attributable profit grows 6.1% There are 2 other very key and important messages on this page. In the middle of the page, you can see that we continue to deliver outstanding value for our shareholders. The year on year evolution of our tangible book value per share plus dividends is in our view extraordinary. I mean, growing 14.2% year over year. The annualized year to date growth, if you take the 9 months and annualize it, that same percentage is actually 16%, which is even better.
And then on the right hand side of the page, I need to highlight once again that our strong capacity to generate capital Invest In this regard, our fully loaded CET1 ratio has increased 22 bps in the year. And as you know, this is happening even after absorbing 24 bps due to regulatory impacts, namely TRIM and IFRS Investing in the first half of twenty nineteen. It's also worth to mention that we are already within our Capital target range of 11.5% to 12%. Moving on to slide number 4. And to be more specific on the quarter, Let's highlight some of the key metrics and the evolution of some of our core performance metrics.
For comparison purposes, the year over year variations In this page and beyond, exclude BBVA Chile, recurrent operations in 2018 and the capital gain obviously from that sale. So If you at that constant perimeter, the main highlights of the quarter are: so number 1, we would like to highlight that our core revenue growth is very robust With net interest income growing 3.2% in constant euros. And as you know, despite a challenging macro environment And the low rates environment in some of our core countries. We are also showing strong fee income generation growing Invest. 6.4 percent year over year in constant euros.
Number 2 on the page. The good performance at the top part of the P and L is coupled with our constant focus on efficiency, resulting in an excellent operating income evolution. Operating income is growing close to double digits, 9.6 percent to be more precise. Our cost to income ratio continues to show a very positive trend with a reduction of 75 bps in the year. Now it stands at 48.7 percent.
And the trend of positive operating draw creating positive operating leverage it continues Invest. Number 3 on the page. Risk indicators continue to be sound. Good trend in NPL ratio reduction. It's now at 3.90 percent, dropping 23 bps versus 1 year ago, an improvement of 257 bps in the coverage ratio also to 75%.
And our cost of risk remains stable in the year standing at 101 year to date accumulated terms Completely in line with our expectations. Number 4, I already mentioned it, but our solid capital position. Fully loaded CET1 stands at 11.56, 4 bps increase in the quarter and 20 bps increase in the year. Next, we remain focused on creating value for our shareholders In terms of profitability and return metrics, BBVA continues to be at the forefront of the European Banking Industry. Value per share plus dividends, a key metric that we look into all quarters, grew exceptionally well at 14.2%, as I mentioned, versus September 20 And finally, we are progressing ahead of expectations, I would say, in digital transformation, doing very well in digital transformation, a key lever For our results this year and beyond, so digital sales increased to 59% of the total units sold in the year versus It was 33% 2 years ago and 56% of our customer base interacts with the bank now through digital channels.
Similarly, 49.7 percent of our customers interact actively through our mobile app, almost reaching the 50% target we have established for ourselves for for the end of the year. So we are going to arrive at that goal much earlier than the end of the year. Slide number 5. If I move to slide number 5, summarize P and L of 3rd quarter, you can identify the positive evolution on the core business drivers. I mentioned some of them already, but net interest income is up 3.2 percent fees and commissions up 6.4%.
Net trading income is up 76.1%, mainly impacted by global markets, Very strong global markets results and some portfolio sales. And all these result in gross income being up 5.9%. Again, cost control, excellent cost control. Operating expenses growing only 2.2%, leading to nearly 10% growth in operating income at constant euros. Some of the soft spots that I would like to highlight though.
Other income and expenses, Negatively impacted by the higher hyperinflation adjustment on this line item due to Argentina and some lower insurance activity in Mexico. And then the impairments on the impairments line, you might be looking into the increase, but it's mainly due to a worsening macro environment in most countries And mostly due to base effect because in 2018, we had some significant provision releases last year in Spain and in the U. S. Moving on to the year to date numbers, slide number 6. The top line shows again very similar trends, strong evolution versus the same period in 2018.
Gross income is up 5.5% and operating income is up 7.9% at constant euro terms. And looking at the bottom line, we are nearly flat versus the same period last year, driven by the impairments and the provisions and other gains lines. But regarding the impairments line, the 16.2% increase in that line item is all within the expectations. And as you might all remember, Within the previous guidance that we have all given to you in the previous quarters. And regarding the provisions line, Please note that in the 1st 9 months of 2018, we recorded some capital gains from divestments, mainly real estate related divestments in Mexico and in Turkey.
And there were some provisional releases from real estate business again in Spain. So as compared to that low base, it's mainly a base effect. As compared to that low base In 2019, we have had some higher contingency risks, so leading to this negative year over year comparison. But again, as you can see from the page, Very positive core operating performance. Slide number 7.
Let's talk about revenues, the top line. As I mentioned, net interest income growing despite the challenging macro environment. And as you all know, despite the lower interest rates in developed markets, We have grown our net interest income by 3.2% versus a year ago. And this growth is emerging also Despite the lower CPI linkers contribution in Turkey, we have registered €113,000,000 less in the CPI linkers versus the Q3 of 2018. And again, despite the low interest rates, despite lower contribution for CIP linkers, 3.2 percent in net interest income growth.
On the top right, you see the net fees and commissions, up 6.4%, as I mentioned, versus the same quarter last year. This is the highest figure in the last 10 years and 10 quarters, sorry, in the last 10 quarters at constant euro terms. So the performance in the net fees and commissions is making us particularly happy. Net trading income increasing 76.1% versus a year ago, positively impacted by portfolio sales. Global Markets obviously is also performing much as I mentioned before compared to the Q3 of 2018.
All in all, total revenues, the gross income is up 5.9% versus the Q3 of 2018. Moving on to slide number 8, operating income growth and efficiency. Again, we continue to show positive operating jaws. Our expenses are growing 3.2%, well below the growth rate in core revenues of 6.3%. These are 9 month numbers and well below the blended inflation in our footprint.
Our blended inflation in our footprint is 6%, Again, versus the cost growth that we are realizing. So we are on the positive territory here. In the middle of the page, we show the strong evolution of operating income, high single digit. This is year to date growth of 7.9%. Finally, on the right hand side of the slide, you see the efficiency ratio improvement Showing a 75 bps decrease to 48.7 percent, a figure again as you see on the page significantly better than the European peer group.
And if you calculate cost to income at the core revenue level at the denominator, the improvement is actually even better at 90 bps. So I have often reiterated our commitment to improve efficiency in the context of the transformation that we have been pursuing. But once again, I believe this page is a clear display of our track record of our focus on this topic of the management discipline that we are putting onto Invest. Slide number 9, the risk indicators. We continue to see some risk indicators.
This quarter, we saw impairments growing at 17.6 But as I said before, it's mainly due to the base effect in the U. S. And Spain and its macro related provisioning because as you know Many countries, we have reduced our macro growth forecast throughout the year, especially in Mexico. And as a result, we have seen some impact here. But quarter over quarter increase also shows some change, but it's mainly because of the lower base in Spain.
As you know, in Spain in the second quarter, There was a sale of a mortgage portfolio and quarter over quarter increase also partially driven by Turkey because In the Q2, we had very low wholesale requirements in Turkey. On other risk metrics, NPLs were reduced by €600,000 versus last year, mainly due to portfolio sales in Spain. Cost of risk is now at 101 bps year to date, an increase of 10 bps versus last quarter. But as I mentioned and as we have discussed with you before in the previous quarterly calls, it's completely in line with our expectations. The NPL ratio decreases 23 bps in the quarter and it stands now at 3.9 and the coverage ratio is at 75 bps an improvement of Evolution and as previously said CET1 has increased 4 bps in the quarter.
Again, these numbers underscore our strong organic Capital Generation Capacity. And I would like to highlight that the 4 bps comes in the context of some negative market related impacts included in the others bucket Coming mainly from the U. S. Dollar appreciation in the quarter, which has created a minus 4 bps impact on the CET1, plus The increase in the RWAs in Argentina. As you know, there was a sovereign rating downgrade in Argentina.
That resulted in another minus 4 bps impact in the quarter. Despite those 2, despite the U. S. Dollar appreciation creating a minus 4 bps impact, Argentina Sovereign creating another minus 4. We still have improved our capital position by +4, again, thanks to our organic capital generation capacity.
All in all, our CET1 ratio today stands at 11.56%, well above the regulatory requirement of 9.26 and continues to be within our target range of 11.50 percent to 12%. I also would like to point out, it's very important to us, the high Quality of our capital ratio. As you can see on the bottom of the page, we continue to lead the ranking in our European peer group in terms of the leverage ratio, which stands at 6.9% today on a fully loaded basis. And regarding AT1 and T2 buckets, we maintain both buckets fulfilled In both fully loaded and also phased in basis. And the last page on the financial side is page number slide number 11, Shareholder value creation mentioned it already.
Tangible book value per share including dividends growing 14%. And The more important message on this page is the continuous evolution of upward trend that you see on this page. Every quarter, every quarter, tangible book value per share is going up consistently and nicely as you see on the page. And also in terms of profitability, I mentioned about return on tangible equity 12.2%. Obviously, this is one of the highest.
We are at the forefront of European Banking Industry in terms of profitability and Return on Tangible Equity. Moving on to slide number 12. As we have commented in the last quarters, Invest. Underpinning the growth in the digital business is the continued digitization of our customer base. And as you can see on the left hand side of Page, we continue to show positive evolution here.
In our digital customers, they're up by 17% versus September 2018 And now it represents 56% penetration of our active customers. In the center of the slide, you see the mobile penetration and the mobile customers. Invest. We grew our mobile customers by more than EUR 5,000,000 in 1 year. It's up 26% and now it's Invest.
At the penetration level of 49.7%, again very close to the 50% goal that we have. And finally, we are very happy again once again that our app in Spain Once again awarded as the best banking app in the world by Forrester in 2019 for the 3rd consecutive year. And as you know, the 2nd best in the world is Guaranty BBVA in Turkey. Slide number 13. I would like to highlight the impact of our transformation because you talk about Okay.
But how do we extract more value from digitization? And here you see some clear highlights of that process. Digital sales. I believe we can further foster growth by leveraging our digital capabilities. And given the digitization that we just talked about, You see here that our digital sales now represent 58.9% in number of units sold and 44.8% in terms of the value of the Sales done through digital, very strong numbers.
And secondly, we are constantly trying to improve the customer experience together with that sales goal. In this context, I mean, one good example of growth and customer experience playing together is this digital end to end onboarding for SMEs. We launched this in Spain very recently, allowing SME clients, SME potential Investors to open a fully operative account through digital means. And BIVA is the 1st bank in Spain to provide this capability digital onboarding capability for SMEs and targeting 650,000 potential new clients. And thanks to our global capabilities, We have done this platform in such a way that we can take this platform to other countries through our global platform.
And finally, on slide number 14, And in order to understand the impact of transformation holistically, no? I gave you in the last quarterly presentation an example on Spain. And now I'm putting the Mexico case on the table. And you can see very strong numbers on multiple dimensions and you can see the clear evidence of how digital is helping us To push our numbers. So on growth on the left hand side of the page, we are bringing millions of new clients to the bank in Mexico with the help of digital sales.
So our total sales increased by 14% in value and it's mainly fueled by our digital end to end sales capabilities. And as you can see, our digital end to end sales Has gone up by 131% in 2 years and then regain new clients through these capabilities. 2nd, on engagement at the middle of the page. Creating a world class digital experience, it helps us to lead the NPS customer satisfaction in Mexico. Among our peer Group, we are by far number 1 for the last 2 years.
And our digital clients in Mexico, they are showing an attrition rate, which is 54% better The non digital ones. And on the right hand side of the page, on efficiency, obviously, transformation is also positively impacting our network efficiency. I would like to highlight here that the sales growth that I just mentioned, despite all that sales growth happening, we only increased our branch sales force by 1%. Additionally and as a result of the transformation, our clients are moving to lower cost channels for the cash related transactions. You see on the page that the transactions managed by Thales decreased by 13%, while at the same time the use of ATMs, a much more efficient channel, increased by 20%.
So I'm finishing this section. I now turn it over to Jaime for an overview of the business areas. But overall, very good quarter. So Jaime, on the countries.
Thank you, Onur, and good morning, everybody. Let me begin with Spain. The economy remains And even if GDP is slowing down, it's still expected to grow by 1.9% this year and 1.6% in 2020. Maintaining a gap of nearly 1 full percentage point above the growth rate in the eurozone. Net attributable profit in the 1st 9 months of the decreased by 2.5 percent.
That's EUR 27,000,000, mainly explained by a significant reduction in NTI, down by EUR 2 0 €2,000,000 and the increase in other provisions, up 63,000,000 as 2018 included significant provision releases in the real Investing Business, as Onur has already mentioned. Both negative impacts are partially offset by lower impairments, Thanks to the sale of a mortgage portfolio in Q2 that released €185,000,000 in provisions. The main P and L highlights are, 1st of all, NII. In the 1st 9 months of the year, it decreases by 1.9 percent year on year, in line with our 2019 guidance of a 1%, 2% decrease. The positive evolution of the commercial activity and the customer spread was more than offset by the lower contribution from the ALCO portfolio And the EUR 32,000,000 impact coming from IFRS 16.
We have a good We had a strong growth in fees in Q2, up over 5% versus last year, supported by both CIB Asset Management and Retail Banking Fees. We confirm our guidance that fees will go up in the low single digit level in 2019. Cost continued to go down 3% year on year, thanks to our transformation efforts. Cost of risk stands at a solid 23 basis points, excluding the provision release from the mortgage portfolio sale we did in Q2, with coverage And the NPL ratio further improving this quarter. The quarter on quarter increase in cost of risk is fully explained by the extraordinary Investor Relations.
Real Estate write offs in the quarter as the underlying trend remains stable. We remain committed to our 20 basis points cost of risk guidance Specs for the San Belvieu region continue to be solid. In fact, our research department has recently revised upwards the GDP growth rate expected for the region to 3.4% in 2019 and 2.8% in 2020, outperforming once again the U. S. Average.
Operating income is up by 15% versus September of last year in constant euros, driven by NII, Up by 2% versus last year, supported by a slight increase in loan growth, a more profitable loan mix And a higher customer spread still benefited by the rate increases in the second half of twenty eighteen. Having said this and given the LIBOR decline well above expectations in the last few quarters On our high NII sensitivity to interest rates, we now expect NII to be flat this year versus 2018. Trading income continues to behave well due to some portfolio sales, higher valuation of equity stakes and higher global market results. We sustained positive operating jaws as expenses remained flat year on year, while gross income is growing above 5%. Growth in the operating income line is offset by higher impairments.
Remember that provisions in the first half of last year We're affected by some releases. Having said this, impairments are trending down quarter on quarter since the beginning of 2019, In line with our expectations, cost of risk is also trending down, while coverage levels are also improving every quarter. Cost of risk stands at 87 basis points year to date and already within our 80, 90 basis points guidance for the year. Let's now move to Mexico. The macro scenario in Mexico has proven to be more challenging than expected at the beginning of the year, For 2020, we expect the economy to recover to levels around 1.3%.
Despite this, BBVA Mexico continues to show its earnings resiliency with net attributable profit growing by 7% in current euros as of September. Last year numbers included capital gains from the sale of 2 real estate assets. Otherwise, net attributable profit would have grown by 9.4% in current or 4.2% in constant. NII continues to be the main P and L driver in Mexico, increasing by 6.5% in constant euros, growing in line with activity set by higher contributions from the securities portfolio. We maintain our expectations NII growing at a high single digit level in 2019.
Regarding activity, loan growth continues to be driven by retail portfolios, up by 8.5% year on year, supported by both mortgages and consumer loans, where we continue to gain market share. In the commercial segment, growth remains subdued, up only 2.1% year on year due to the lower public and private investment in the country. Net trading income increases by 15%, favored by some portfolio sales and strong global markets activity with clients. Positive jaws are maintained in line with guidance, with core revenue growing 5.4% year on year versus OpEx at 4.8%. Investor.
Improvements increased by 11% in the year and above activity due to A negative macro impact in 2019 actually was positive in 2018 and growth being biased to retail portfolios. All in all, cost of risk remains at 2 98 basis points, in line with our guidance for the year of around 300 basis points, and as you know, at the lowest levels of the last decade. These results reflect once again BBVA's Mexico leadership position, both in terms of market share and profitability, Let's now focus in Turkey. Macro data is improving with GDP showing already 2 quarters with positive quarter on quarter growth And inflation falling significantly to 9.3%. BBVA Research expects GDP growth In the 1st 9 months of the year, numbers continue to prove guarantee's BBVA's earnings strength In a challenging environment, with operating income increasing by 1.5% in constant terms.
This has been possible, thanks to our robust core revenue growth and our focus on efficiency. NII is up by 6% year on year, explained by higher customer spreads, especially in the foreign currency portfolio, up 76 basis points and lower wholesale funding costs, more than offsetting the lower contribution from the TL loan book, both because of loan activity and customer spreads. Considering the year to date evolution and the Central Bank rate cuts since July amounting to 10%, We now think that we will beat our previous guidance of NII excluding CPI linkers Because it will increase in 2019 versus 2018. Fees continue to increase by over 22% with very good performance across the board. Expenses grow significantly below the 12 months inflation, improving the efficiency ratio by 61 basis points Line is offset by the increase in loan provisions, up 16% versus last year.
The quarter on quarter increase in cost of risk was expected and is The year to date cost of risk stands at 199 basis points in September, still below our year end guidance of around 250 basis points. We now expect to end the year below this figure. Other provisions have also increased, Explained by provisions related to contingents liabilities and a base effect as last year numbers Colombia and Peru will continue to show a solid GDP growth rate, around 3%, both for 2019 2020. And we will wait until the new government announces new policy measures to update Argentina's macro. Colombia's net attributable profit grows by over 18% in the 1st 9 months of the year in constant terms, Thanks to NII, up almost 5% versus last year on the back of higher activity.
Positive jaws With expenses growing below inflation and also lower impairments, thanks to a positive IFRS 9 calibration impact. Peruza net attributable profit also grows strongly by almost 18%, driven by NII, Increasing over 11% and growing above activity, thanks to lower wholesale funding cost. This has allowed the franchise to generate positive jaws, offsetting the increase in provisions Distribution in the 1st 9 months of the year of €170,000,000 And that was thanks to the sale of partly Thanks to the sale of our stake in Prisma in the Q1 of the year and a higher NII driven by the contribution from the securities portfolio that has been able to more than offset the impact from the inflation adjustment, The depreciation of the currency and the increasing cost of risk related to the macro and sovereign rating downgrade. And now back to Onur for some final remarks.
Mike, one second. Yes. I would like to reiterate once again that the very strong core business fundamentals, operating income growing Nearly at double digit, 9.7% growth in operating income, a continuous improvement in efficiency where we keep maintaining our Invest in class position versus competitors. Sound risk indicators, very positive evolution in the year, thanks to our diversified footprint. Our capital position is even stronger today.
We reached the target range for the CET1 full loaded ratio Investor Relations. Much earlier than expected and we keep maintaining it at those levels and we continue to improve. We continue delivering on outstanding shareholder value creation and double digit profitability. We are at the Investibility. We are at the forefront of our European peer group.
And finally, we continue ahead of the curve in digital transformation, positively impacting key business drivers Such as growth, customer experience and efficiency. All in all, I would say we had an excellent results in the 3rd quarter, driven by our unique and diversified footprint and business model. With this, I conclude the presentation. Thank you very much for listening. Now I give the floor back to Gloria.
Thank you, Onur. We are now ready to move into the live Q and A session. So first question, please.
Our first question today comes from Alvaro Serrano of Morgan Stanley. Your line is open.
Good morning. Thanks for taking my questions. My first question is on Spain and the NII. I know you've reiterated the guidance for this year and don't give guidance beyond this year, but A question on general trends. In your ability to sustain, if I think about sequentially from here on the NII, Obviously, lower rates will feed through.
Volume growth doesn't appear too strong anywhere in Spain, But you also got levers like charging for large deposits, etcetera, etcetera. So could you give some commentary around Do you think you're able to sustain this current level of NII going forward despite the headwinds Into next year or given your management levers that you may or may not apply, do you think this is a good run rate Or some color around that, given the different trends that I've touched on. And the second question is on capital. If you can give us an update on the different so it's been discussed the disposal of Consumer business in Chile, the joint venture insurance, the Castellano Norte development. Maybe you can give us an update of where we are apart from organic, if there's Any more levers that we should look forward to?
Or give us a sense of how much how material those things could be? Thank you.
Thank you for both questions, Alvaro. So very quickly on non Spain and net interest Income, as you said, we don't provide guidance for the upcoming years. We had the guidance of minus 1% to minus 2% for 2019. We have one more quarter to go and we still stick with our original guidance for 2019. For 2020, as you said, as I said, we don't provide Try to use our management capacity to try to balance the amount as much as possible.
You mentioned some negative Topics, obviously, but there are also some positive things. Obviously, the TLTRO three conditions, the 2 tier deposit system, it will help the Spain Business Unit in 2020. And as you can see here, I mean, when we were starting the year, The cost of deposits, it was 8 bps. And over time, we have taken them down to 5 bps. And that 3 bps is It's very valuable to achieve that decline.
So we are doing the things that we can to be able to manage the headwinds. And we will discuss on more specific guidance in the next quarterly call. Regarding capital, you mentioned topics That are mainly inorganic and M and A related. And on those topics, obviously, it depends whether we execute those deals or not. And we are for Value creation.
If you don't see any value creation, we don't those deals. So but I so I would not comment on them because they might not happen. The only thing I would say is our organic capital generation capacity. I hope you see it from the numbers. It's very robust.
I mean, 22 bps in the year, despite the fact that we have weathered 24 bps from regulatory topics and Still growing 22 bps. It does point out to our organic generation organic capital generation capacity. So I'm very happy with what we have been doing organically, and we will continue to create organic capital.
Thank you.
Thank you, Alvaro. Next question please.
Our next question today comes from Sofia Pietzen of JPMorgan. Sofia, your line is open.
Yes. Hi. Here is Sophie from JPMorgan. So I'd like to continue on the capital topic. This quarter, I can't see that you took any TRIM impacts.
But could you just remind us what regulatory capital headwinds you expect Going forward, how much additional TRIM impact do you expect? Anything from Basel IV impacts that you can give us? And If you expect to see any impact on any pension adjustments in the coming quarters, That will be my first question. And my second question would be on M and A, both in Spain and outside of Spain. Could you just elaborate a little bit how you kind of look at the opportunities to grow inside Spain?
How do you view kind of organic versus inorganic growth? And if you're looking potentially at inorganic Growth, what are the kind of key things that you're looking for? Thank you.
Okay. So on capital, We have provided guidance at the beginning of the year that these regulatory impacts would be in the range of around 30s. Basically, it was the IFRS 16, 11 bps and TRIM 20. As you might remember, in the second quarter, we said we are prudentially taking 13 bps From TRIM into the capital numbers already. So 13 bps, 3 bps from the market risk and 10 bps from the mortgage portfolio basically.
And at the time that we set for the mortgage portfolio, our expectation we haven't received the final letter, but our expectation was going to be another 10 bps to be realized. We don't know the exact timing of when we will receive the letter, but we still expect that 10 additional bps will come either this year or next year. As you all know, the TRIM schedule is such that all the field work will be completed by the end of 2019 and then the impact might come either 2019 2020. So we are at the end of that cycle. So basically TRIM exercises is close to be complete.
The only remaining one is the low default portfolios And we expect the impact of that to come in 2020, but it's very tough to judge at the moment because we haven't received any guidance yet. So we are done with the TRIM except The additional 10 bps that will come from mortgage whenever we receive the letter and then the low default portfolios. The rest of the TRIM exercise has been, as you know, completed already. And given the fact that we our usage of internal models is quite low, The impact on TRIMs on BBVA has been as compared to our peer group basically has been relatively low. To cut the long story short, we have registered 13 bps in the 2nd quarter.
We have registered 11 bps in the 1st quarter, the total being 24. On the ones that we know, which is the mortgage, we expect another 10 bps to come either in the Q4 or in 2020. And you asked other topics that might be affecting us and so on. Obviously, the key one would be Basel IV. And obviously, it's not going to come in the very near future, but it will come January 2022 or beyond.
And at that time frame, what I can tell you is, again, given Our RWA density, the key lever in Basel IV is obviously the key impact is going to come from the output floor. And given our RWA density and our balance sheet, we don't expect to be affected from out of floor. So we would expect that our the impact, again, coming from 2022 and beyond, the impact The same discussion that we have every quarter, but I would repeat what we believe in, which is M and A. We only do it when we think there's a strategic And financial fit. We only do it when we feel we can create value from those opportunities.
So we are We obviously analyze opportunities and so on, but our focus, our clear focus is on growing organically. And I hope you see it again from the numbers today. We are growing our Top line, 3% in the 3rd quarter net interest income, 6% growth in fee income. I mean, the gross income is growing 5 plus 5%, The operating income growing 10% in the context of no inorganic opportunities. We have a lot of opportunities organically, and that's our focus.
Investor.
Thank you, Sophie. Next question, please.
Our next question today comes from Jose Abad of Goldman Sachs. Jose, your line is open.
Hello, good morning. Thank you very much for the presentation. I have two questions on Spain. The first one is that, as Jaime pointed out earlier, The most recent high frequency indicators point to economic slowdown, which seems to be particularly driven by weaker household consumption. So With that in mind, should we expect an increase in the cost of risk next year beyond the 20 bps guidance for this one?
And related to this, I saw in the that you're growing actually the back book of consumer lending at 15% north of actually 15% year on year. Could you please tell At which rate did you grow the front book of consumer lending in Q3? And maybe provide some color about your expectations going forward about originations? On a separate question, which is on fixed rate mortgages, could you please comment on the competitive dynamics as well as on your strategy in this particular segment. Thank you very much.
Thank you, Jose. Maybe do Do you want to take the first one, Jaime, on Spain? You commented on it already, so why don't you follow from there?
Yes. You were asking about the impact On cost of risk of the potential slowdown, as you know, Jose, we don't provide guidance beyond 20 2019. But as I've said already, we still think that we will end the year Within the guidance that we have provided at the beginning of the year, so without the impact from the sale of the Mortgage portfolio that we did in Q2, we're expecting cost of risk guidance of around 20 basis points at the end of this year. On how the back book is behaving On the spreads on the back book, especially on the consumer side, the reality is that back book Spreads are deals are behaving quite well. We're not seeing any pressure on yields.
They are improving in mortgages, in consumer loans, in various small businesses, even in corporates. Only the public sector portfolio and the midsized company book are reducing the yields slightly. The consumer portfolio is behaving quite well. The year on year rates are slowing down a little bit versus the part of last year of this year. As of June, we were growing at a yearly level of 18%.
We're down to slightly over 15%. So it's true that the year on year levels are slowing down. Cost of risk is not having Invest. An increase an irrelevant increase in this portfolio and behaving quite well. On the fixed rate question on mortgages and how things are changing, it's True that the front book fixed rates and fixed rate product is down slightly versus the 2nd quarter, We have 15 basis points, and that is due to the lower rate levels that we've had in Spain over these Invest.
Last 3 months, the mix of fixed rate mortgages in Spain has slightly increased this quarter
Thank you, Jose. Next question, please.
Our next question comes from Andrea Ungerata of Credit Suisse. Andrea, your line is open.
Hi. Thank you for taking my question. Both of my questions are on Mexico actually. You mentioned that NII It was supported by a higher contribution from the ALCO portfolio. Could you give us a bit of color on how big that contribution is, how big the ALCO portfolio is, what's Yield and Adoration.
And the second question is on the NPLs. The NPL ratio has increased by 40 basis points in the last two quarters, and it was very stable during 2018. So I was wondering if you could explain a bit how asset quality is progressing? Thank you.
Very good. Antjea, thank you for both questions. The first topic Invest. It's around the growth in the net interest income and ALCO portfolio. As you can see, the core of the growth is driven by The volume growth and while maintaining more or less maintaining the margins.
If you look into the growth in our volumes, year over year growth in our loan book in Mexico is Invest. 5.4%. If you look into our year over year growth in net interest income, it's around 4%. So most of the growth is actually coming from in the net interest income book, the net interest income coming from volumes. We are growing our business in Mexico.
Some contribution from ALCO, but not a major contribution. On the NPLs, as you can See the cost of risk is actually very stable in Mexico and the NPL has gone up. The reason for the NPL increase is the fact that It's a definition change. We have moved from 3 past due installments to 90 days past due to harmonize Our definition of NPL is all around the globe. And as a result, some portfolio, which was there and in most cases, which we already provisioned for, Has moved into NPL, so it's a definition change.
The key metric that we should look into obviously is the cost of risk and cost of risk is 298 bps. Again, if you remember, if you take the average of the past 10 years, our cost of risk was 3.40 bps. Last year, we had 300 around 300 bps cost of risk and it was the best year ever. And so far, this year, we are doing even better than that. So This cost of risk is actually making us extremely happy.
Just to point out that twothree of increase in NPLs Investment. Definition change. The criteria change that Onno has mentioned.
Thank you, Andrea. Next question, please.
Our next question today comes from Ben Toms of RBC. Ben, your line is open.
Good morning. Thank you for my questions. Just one for me, please. I'm not quite sure if I heard correctly, but I think you adjusted your cost of risk guidance in Turkey for Q4 or for the full year down. Did you say that you expect Invest.
Come in lower than the 2 50 bps you've given before. If so, how much lower than the 2 50 bps, please? Thank you.
Yes. Gogo, I'm Jaime Varentigo. We have a good answer to this one. Anyone can pick it up, so take it. Well,
Investor. I did say I did say that the guidance will be improved. It will be below EUR 250,000,000. I haven't said anything different. It's true that we started the year with a cost of risk expectation of 300 basis points.
Midyear, we reduced it to 250, And now we're expecting that number to be below that. Let's leave it there.
Thank you, Ben. Next question, please.
Our next question today comes from Carlos Cobble of Societe Generale. Carlos, your line is open.
Hi. Thank you very much for the presentation. Quick question, a follow-up on consumer credit. Clients of the bank in Spain. But considering that the credit repository in Spain is only negative of defaults, It's difficult to gather those data on clients and to price it properly.
So I was wondering How are you planning to do it? What's the growth target for this type of business? And if you are doing the same in Mexico actually because that's why you are gaining Lastly, do you feel there could be I mean, do you think it's the right The phase of the cycle to do that approach of a higher risk client outside the bank. And there could be a Mispricing as it happened in the U. S?
Or I mean, how do you calibrate this risk? 2nd, on capital. If you could explain the in Slide 10, the others impacts, which is negative by 5 basis points. You explained that a part of that is Argentina and the U. S.
Currency impact. But what is the balance in positive to make Invest.
Carlos, could you please repeat the last question, please, on Argentina?
No, no, the minus 5 bps.
Invest. Yes, minus 5, sorry,
the others on the capital.
Yes, Jaime, sorry. Maybe it's just if you could split that minus 5 basis point other capital impact. We know 2 negatives, minus 4 percent Argentina, minus 4 percent FX in the U. S. Or dollar.
What is the balance in positive?
Thank you.
Thank you very much.
So the first one on the Carlos, thank you for both questions, very good questions. On the consumer, First of all, the growth that we are seeing in Spain and in Mexico and for as a matter of fact, in other countries at the moment is only our existing customers Existing customers, no? Because we have not started the other program yet. So in the context of, for example, the Spanish Growth, the 15% growth that you see on the stock, that 15% growth is driven by our existing customers. And 89% of the origination that We do 89% of the origination that we do is coming from what we call pre approved loans to our customers that we know very well.
And in most cases, that have their salaries with payrolls with our bank. So it's a known customer to us. We have seen their behavior for many years. We have the clear safeguard of the payroll account being with us and so on. So And we don't see so at the moment, we don't see any concern whatsoever on that book at all.
On the contrary, I mean, we look into these things So if we have a portfolio, a book to build up to go for, we look into whether through the cycle we can make decent returns out of that book. In the case of consumer loans in Spain, for example, our current the yield on the loan is around 7%, 7%, okay. Obviously, the risk cost is much higher. But when you incorporate the risk cost, when you look into the capital that you deploy for that book, The return is justifying such a strategy. And I'm saying through the cycle with an underlying version because we don't look into the current risk.
We simulate And we look into what the risk cost would be through the cycle. And if that analysis gives us very decent returns, That's a book that we would like to grow and that's what we are doing. So at the moment, we don't have a concern whatsoever. And then I can assure you that the return The turn on capital for that book is basically encouraging us to grow the book. But you did ask another question.
You said and by the way, the same situation is in Mexico. In Mexico, At the moment, the whole growth is coming from our existing customers. But you asked another question. So it might be the case today, but you are Saying that you want to grow also for non existing clients or we call it non customers open market. That is also true.
But in all In those cases, in the future, as we try to grow that book and we will obviously try to do it gradually, only gradually, We will leverage and you ask about strategies. We will leverage again the data. And in the case of Spain, for example, we will leverage PSD 2. We will see what the client data is in other institutions. So if a client, a non client, An open market customer wants to buy a loan in Spain from us, a consumer loan, we would ask through PSDD2 Invest.
The information about that customer so that we can underwrite comfortably that customer base. And in the case of Spain, again, that open market strategy Nomina, your payroll to our bank as well. And the similar strategies in Mexico. So we would look into it with a through the cycle profitability lens And we will have enough data to be able to underwrite these customers and then do it gradually so that we can manage our profitability overall. Is this the right time to do it given the cycle, as you say?
It goes back to the strategy that I mentioned. We look into this through the cycle. So we put stress Invest. On the 5 bps, why don't you jump in, Arne?
Yes. On the 5 bps in others, we do not have the Argentinian impact that we talked previously about. Here we have the impact mainly from the FX, which was minus 6 basis points, In which the U. S. Represents 4 basis points.
In this column, we also represent the mark to market of the held to collect and sale portfolios. That is up by 1 basis points in the quarter. That's minus 1% coming from the equity portfolios and plus 2 The impact of Argentina, it's in the RWA column, And this minus 4 basis points impact is due to the sovereign rating downgrade that increases foreign currency exposure exposure in foreign currency, together with also increasing in weighting for some Argentinian corporates.
Thank you, Carlos. Next question please.
Our next question today comes from Andrea
Invest.
A question on your capital target. Is your 11.5% to 12% CET1 target good pre and post Basel IV? And could you please give us the contributions from the different ALCO portfolios By geography in the Q3 results. Finally, can you remind us the U. S.
Invest. Unit sensitivity to interest rates. Thank you.
Very good. Andrea, thank you for the questions. I'll take 1 and 3. Jaime, maybe you talk About Taco portfolio. On the first one, the capital target, EUR 11.50 billion to EUR 12 billion, is it pre or post Basel IV?
After Basel IV, we might need to really I mean, this target is a dynamic target. We will look into it after the implementation of Basel IV and then we might revise it. We will look into it. It's at the moment For today, I mean, for pre Basel IV basically. And if you remember what we said last time is we would expect to be Within this range in 2019 towards the lower end of the range, which we already are.
And at the end of 2020, We will try to be at the upper end of this range, upper end of this range, and we still need that strategy. And those 2 years, our goal Those 2 years are pre Basel IV, obviously. Then the second question was on the contribution of ALCO portfolio.
Yes. We never provide the contribution of the ALCO portfolios to the different P and Ls, but we do provide In the annex, a lot of detail on how they behave and the size of the different portfolios, The mix between Help to Collect and Sale and Help to Collect and the largest Also additional information on the largest portfolio, which is the euro book.
And on the NII sensitivity, the third question. We provide this Invest. To plusminus100 bps step function parallel movement in the curve. So with minus 100 bps parallel movement, the net interest income of the Europe balance sheet It's going to be minus 7% impact, minus 7%. If you remember in the last quarterly call, this number was around minus 8% to minus 9%, but we have Taking it down because of the TLTRO and also the tiering system.
In the U. S. A, it's between, again, 100 bps Downward adjustment to the curves, step function, minus 8% to minus 9% impact on net interest income In Mexico, minus 2% to minus 3%. In South America, as a blended geography, minus 2% to minus 3%, close to minus 2%. And in Turkey, basically, there is very limited sensitivity.
Thank you. Thank you, Andrea. Next question, please.
Our next question today comes from Ignacio Solreso of UBS. Ignacio, your line is open.
Yes, hello. Good morning. Thank you
for the presentation. First Question is on capital. If you can give us the size of that low default portfolio, you're expected to get some news flow next year and which are Invest. The geographies this is concentrated on? And the second one, I think I've seen in Mexico a pickup of the cost of deposits.
So considering the direction of interest rates, I I was wondering what is behind it. Thank you.
Ignacio, on the first From the size of the low default portfolio, if you're asking for the total amount that we are looking into, I don't have the exact number at the moment, but it's the FI book And it's the corporate book basically, corporate book. And you can very easily deduct it out from the numbers that we are providing in the presentation as well. But those are the two books that we are looking into. On the cost of deposit in Mexico, I couldn't get the full question. You were asking why it has gone up?
Yes. I mean, you have cost of deposits going up 16 basis points in the quarter when rates are going down. So wondering why?
Yes. So the cost of deposits have gone up EBIT because we wanted to fund more of our balance sheet through deposits. So it's completely normal. And given the curve now in Mexico, So as you know, the Bank of Mexico has started the easing curve, so the curves are coming down. As a result, that growth is going to be stabilized.
And in the next quarters, you will see that curve to come down actually. It was mainly because of the market situation and the fact that our appetite of we wanted to fund our growth through deposits.
Yes. It hasn't had any actually any impact on NII because these new deposits this new this funding needs used to be Invest, funded through the ALCO portfolios through short term funding that has been canceled. And now We're using deposits with clients, especially corporates and SMEs, to fund our needs.
That's why you see the 4% growth in net interest income in Mexico. Good.
Thank you, Nacho. Next question, please.
Our next question today comes from Fernando Gill of Barclays. Fernando, your line is now open.
Hi, good morning. Thank you for the presentation. Just a question on for the NII.
I think you
guided for higher NII for 2020 versus
I think we had trouble in hearing, but I think it was for Turkey because there are meetings.
Yes. Fernando, I think you were asking
About the NII in Turkey for next year and the contribution on the CPI linkers, I think I heard that you were guiding to higher NII in 2020 versus 2019, but I just want to check.
No, no. We don't provide guidance for 2020.
Okay. Thank you.
It was more Bernando, it was for 2019. We originally guided in 2019 that the NII, Excluding CPI, to be flat, and we are now revising that guidance to upwards. And we are saying that the NII, excluding CPI, We'll grow in 2019 rather than staying flat. That was the comment that was made by Jaime previously, yes.
Okay. And then the contribution from the CPI linkers?
Fernando, again, sorry, we cannot hear you very well. So can you say it again?
CPI linkers contribution to NII?
It's going to be lower in the 3rd Q4 because the inflation expectations has come down. And as I mentioned versus last year, CPI linkers has contributed €133,000,000 less This year than last. So the contribution would be less from CPI, obviously, because the inflation is going to be much lower.
In the Q3, the contribution was €100,000,000 Thank you, Fernando. Next question, please.
Our next question today comes from Carlos Peyto of Caixabank. Carlos, your line is open.
Hello, good morning. Carlos Pesciotta here from Caixabank. Just a couple of First one would actually be on litigation, on the litigation themes. I mean, recently or this week, we've seen a Spanish court or a Spanish Supreme Court ruling on overdraft Investments. I was wondering if you could give us some color on how much Those type of provisions represent for sorry, those type of commissions represent for BEVA?
And whether do you think that there is the Invest. Risk of similar lawsuits, I know that this one was involving a different bank, but I was just wondering whether there could be some cross readings Here for BVA.
Secondly,
Just to get a bit
of a feeling, so you're seeing NII in Spain declining by 1% to 2% for the full year, if I understood correctly. How do you perceive in terms of volumes growth, not only for this year, but also in mainly For next year, do you think we're now closer to turning off the cycle on that front? Or as the macroeconomic cycle seems to be slowing down over recent times, we shouldn't actually be expecting much of Investor.
Perfecto. So on the first one, Carlos, thanks For the questions on the litigation, as you said, this is a case of another bank on the overdraft fees. It was it came out on October 29. The ruling was on a specific overdraft clause fee. It does not say that every overdraft fee is void by definition and so on.
So based on what We have seen the ruling does not affect BBVA. According to Bank of Spain, the order of fee must relate to the expenses linked to the recovery processes and we think BBVA fulfills this requirement. So it was a very, very specific case And we don't expect any material impact to come out of it for BBVA. For growth, Obviously, we maintain our guidance that we have said originally, which is the flat loan growth for the year. So it's a bit Slightly year over year is minus 0.8 percent this quarter, but we maintain our guidance because the Q4 typically is a quarter of good loan production.
So we maintain our guidance of 2019 staying flat. For next year, again, we don't provide guidance for next year, But the volumes will probably be softening will be EBIT on the positive side because in the context of the mortgage deleveraging Coming down a bit, we would see probably some positive dynamics coming from mortgages. And if we can maintain the growth in the other portfolios, I wouldn't expect radically negative situation at all. I mean, we will probably be in that range that we have provided for 2019.
Thank you, Carlos. Next question please.
Our next question today comes from Britta Schmidt of Autonomous Research. Britta, your line is open.
Yes. Hi there. Two quick questions, please. One, in Mexico, 5% loan growth year on year In the quarter, there's 1% loan growth also, and we saw a decline in retail volumes as well. I think previously, you've given a message of high single digit loan growth in Mexico.
Do Do you think that in Q4 you can pick up? And can you give us a little bit of insight into whether this lower growth is demand driven or whether you are more cautious on pricing in certain segments? EMEA. And then secondly, on the NPLs in terms of change in definition, I think I might have missed something there. Is it something you did this
Invest.
Perfecto. Britta, thank you for both questions. The first one on the Growth in Mexico, as you say, 5.4% is year over year as of September. We think that we will Still achieve that high single digit growth at the end of the year because as I said, in general, the Q4 is typically a good season for new production. So we will we maintain our guidance basically.
The answer to your question is we maintain our guidance of high single digit growth. In terms of the NPL definition, as I said, the change was It's a methodological thing, but you count installments. And if you are 3 installments short delinquency, Then originally that was the NPL definition. Now that we move that from installments, number of installments to number of days. And that basically creates a one off effect.
That's the reason why the NPL has gone up. But it has nothing to do with the quality of the portfolio, with the cost of risk and so on. You did this one step change once and then we will continue as is. So there is nothing to be concerned about.
Thank you, Britta. Next question please.
Of course. Our next question is from Marta Romero of Bank of America. Marta, your line is open.
Good morning. Thank you very much. The first question is on the U. S. I'm trying to understand your commitment to allocating capital there.
The The annual loan growth is slowing down fast to just about 1% compared to 3% last year in Q2, sorry. Is this a reflection of the environment? Or is it you putting the foot on the brake? Invest. With rates not going up in the foreseeable future, do you think you'll be able to make your cost of equity in that market?
Are you open selling or merging your bank with another player in order to extract cost synergies? The second question is on Causero, Head of Investor. Capital on EBA guidelines and ECB calendar provisions. Do you expect any negative impact next year from calendar provisions on your capital And in 2021, from defaulted exposures and on if there is a headwind based on the exposure you have today, do you feel like you need to step up the disposal of NPLs. And do you think your coverage levels in Spain are adequate for that?
Thank you.
Thank you, Marta. The second one, Jaime, why don't you take it up on the NPL definitions? I give all the good ones to you Because there's a positive story there as well. But on the first one, on the U. S, as you said, we have the growth has come down, Invest.
Came down EBIT. But in terms of the overall strategy, if you're asking because you're asking merging, consolidating and so on. As I mentioned, we don't We analyze opportunities all the time, but our focus is very clear. Our focus is organic growth and that's what we are trying to do in the U. S.
A. As I mentioned many times before, we are in the sweet spot of the U. S. Market. We are in geographies.
We are in states That has been growing much higher than the rest of the U. S. And these are very large markets that we feel we can create value. Texas by itself is $1,800,000,000,000 economy. We are the 4th largest bank in Texas and we have an amazing growth opportunity in Texas.
So we would like to explore that organic growth opportunity as much as we can. And we feel given also our digital capabilities that we can Create a differentiation in those markets that we are in. If you are in a very good market and if you believe you can leverage Things that others cannot do like digital that we have been putting so much focus on in the past few years, then there is a value creation opportunity and we want to explore that value creation opportunity. In terms of the growth though, it has come down. You're saying 1%, so because the market has not grown up has not grown as much And as you have seen, we committed in the last quarterly calls that our cost of risk would be in the 80 to 90 bps range, which is where it is now.
So given that cost of risk and return, again, through the cycle return calculations, we are picking our bets and picking the portfolios that we want to grow in and that's what Still giving us a 1.4% growth year over year. Basically, in short, we are committed to the U. S. Market. We believe we have an organic growth
On the second question, I don't particularly expect the EBA guidelines to have a significant impact on us. As you know, they mainly affect PTs and LGDs estimations for advanced models, and we only use IRB models for onethree of our credit RWAs. So it shouldn't be relevant. And then as you know, The ECB, the SSM, when coming to the bank and doing TRIMs, on-site etcetera. They already use these EBITDA guidelines in the review on how we calculate RWA.
So I think we've seen the impacts already provided. This impact will be there. We're still working on the potential impacts on the new definition of And that is something that we're going to need the whole 2020 to have an idea. I don't think this will particularly change the way we manage our NPLs. I think we've been quite proactive in reducing the NPLs, especially in Europe over the last few years, and it shouldn't significantly affect our strategy.
Thank you.
Thank you, Marta. I think there is one last question.
Of course. Our final question today comes from Yalan Lu of ACF. Invest. Ylan, your line is open.
Good morning. Thanks for taking my question. Just two very quick questions. 1 on the ECB Tiering and LTRO 3, what are your plans? And how much are the savings you can cost savings from these 2 new ECB measures?
And then second, Goodwill. I mean, when is your impairment test due on your goodwill? And how comfortable are you on the resilience of your assumptions used To calculate your goodwill, particularly in the U. S. And Turkey, please?
Thank you.
I'll give the second one to you again, Jaime. On the first one, ECB and TLTR-three, Are we planning to use it? The answer is yes. The LTRO III with the new and revised guidelines, we want to leverage our allotment capacity And also for the tiering system as well. The total combined effect of this is going to be EUR 75,000,000 in net interest income in 2020.
On the goodwill impairments,
we have to analyze valuations every single Partner. This is an ongoing exercise. And as of now, we feel confident, of course, with the evaluations that we have in place, And we will continue to review and update this number every single quarter. It will clearly depend on the expectations of both franchises for the next a few years and also, in general, the valuation that banks in those geographies also have.
Okay. Thank you. Thank you, Yalan, and thank you very much to all of you for participating in this call. And let me, of course, remind you that the entire IR team will remain available to answer any questions you may have. So thank you very much, and have a great day.