Good morning, everyone, and welcome to BBVA Second Quarter 2019 Results Presentation. I'm Gloria Causero, Head of Investor Relations. And here with me today is Onur Gensch, Chief Executive Officer of the group and Jaime Sanchez de Jada, BBVA Group CFO. As in previous quarters, Onur will begin with a 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.
As always, let me remind you that we did appreciate all the participants to try to make calls are underlined lines and avoid using the speakerphone. And now I will turn it over to Anur to start with the presentation.
Thank you, Gloria. Good morning to everyone, and welcome to BBVA 2nd quarter 2019 results audio webcast. As Gloria mentioned, I'm going to talk about the group, the group's evolution and Jaime will focus on the respective business areas. So let's jump into it. Page number 3.
Starting with Slide number 3, we are reporting a very good second quarter in terms of results, value creation and Capital generation. This is the same page that you have been seeing in the past few quarters and very good progress on all the key metrics that we see on this page. So our net attributable profit on the left hand side of the page in the second quarter is EUR 1,278,000,000. This represents an increase of 2.6% versus the Q2 of last year. But as you all know, given the sale of BBVA Chile In July 2018, if we exclude BBHLN recurrent operations from the base from the Q2 of 2018, The true comparable level to capital increase is 5.7%.
And comparing to the previous quarter, the Q1 of the year, net attributable profit grew at a strong rate of 9.8%. There are 2 other very important key messages on this page. In the middle of the page, you see that we continue to deliver Outstanding value for our shareholders. In the first half of the year, we have increased our tangible book value per share plus dividends By 6.9%. We haven't seen this level since 2014 basically, so very strong.
The evolution on a year over year basis is also worth to mention with a double digit growth rate of 12.6% versus June 2018. And second, on the right hand side of the page, what you see, we would like to highlight on the right hand side is despite absorbing 24 bps From 2 regulatory impacts, IFRS 16 and TRIM related regulatory impacts, our capital position increased 18 bps versus December 2018. And we already stand within our target range. As you all know, we have communicated a Target range of 11.50 percent to 12% and earlier than expected. We were expecting to be in that range by the end of the year, but earlier than expected, we are now within our capital target Strange.
Slide number 4, the key highlights of the quarter. We would like to highlight the excellent evolution again on some of our core performance metrics, as in the Q1, the year over year variations exclude BBVA Chile, recurrent operations just to be comparable In this slide and also in the consecutive slides. So in the rest of the presentation, we wanted to make it more comparable. With that footnote, the main highlights of the quarter are: First, number 1, we would like to highlight the robust growth in core revenues. So net interest income plus fees Growing 8.7% year over year in constant euros as always.
And net interest income, growing even at double digit, 10.4% at constant euro terms, again. 2nd, the good performance at the top part of the P and L, coupled with our Constant focus on efficiency, it helped us show a reduction in the cost to income ratio of more than 40 bps. Now our cost income ratio stands at 49%, continuing the trend of positive operating jaws, which we care about a lot, as you all know. Risk indicators, number 3. Risk indicators were one of the bright spots of this quarter.
Excellent trend in the year with NPL ratio down 57 bps versus 1 year ago. And our NPL ratio now stands at 3.84 percent and an improvement of 3.30 bps in the coverage ratio. So the coverage ratio now stands at 75%. Also, we have seen an improvement in our year to date cost of risk, It now stands at 0.91 percent, 91 bps in year to date accumulated terms, again, much better than our expectations. Number 4, capital.
I partially mentioned it, but our strong capital position is obvious in the numbers, dollars 11.52, increasing 17 bps in the quarter. And in this quarter, we absorbed 13 bps from TRIM related impacts. So again, as I mentioned in the first in Slide number 3, We have already achieved our targets earlier than expected. Number 5, we continue creating value for our shareholders in terms of profitability and return metrics. BBVA is at the forefront of the European Banking Industry.
Return on tangible equity, which is a number that we care about a lot, It remains strong at 12.4%. Another outstanding figure on this page, obviously, is the tangible book value per share plus dividends. As I mentioned in the previous page, it grew 12.6% versus June 2018. And finally, We are progressing ahead of expectations in digital transformation. Digital sales increased to 58% of the total units sold in the year.
I remind you, this number was 30% 2 years ago. And digital customers, they're up by 17% to 29,700,000 customers. Similarly, the number of mobile customers, it reached 26,100,000 with a yearly growth rate of 25% And this represents a 48% penetration. As I mentioned in the previous quarters, our goal is get to 50% by the end of this year, And we are well on track to get to that goal as well. Slide number 5, this is about the Q2 profit and loss, simplified P and L statement.
You can identify the positive evolution on the core business drivers on this page. As mentioned, net interest income is up 10.4%, Gross income is up 5.1 percent and operating income is up 6.1% at constant euro terms. Also, as I mentioned, very positive news regarding impairments with an improved figure in the 2nd quarter versus the first one. The soft spots of the quarter, again, They're obvious on the page, but there are 3 soft spots that we would like to highlight. The first one is NTI.
The NTI contribution was lower Given the market situation due to the muted markets activity basically and lower portfolio sales that we did in the 2nd quarter, Other income and expenses negatively impacted by the hyperinflation adjustment of Argentina. It was higher inflation adjustment for Argentina in this quarter. Plus This line includes a higher contribution than last year to the single resolution fund in Spain. And also the last, I would pick the soft spot as the provisions line here, provisions and other gains and losses line. Note that in the Q2 2018, We recorded in this line some capital gains from the sale of a building in Mexico.
So the base was is not fully comparable. But as compared to that base in this quarter, we have had higher early retirement costs in Spain and higher continuous risk We potentially accounted in Turkey, so leading to a negative year over year comparison. But again, in our view in this page, The highlight is the core income, core operating income and core business drivers, which are showing very positive signals. Slide number 6. This is the half year numbers, again, in a summarized P and L format.
The top line Similarly, it shows a very strong evolution versus the 6 month 2018. Gross income is up 6% and operating income is up 8.2% at constant euro terms. Looking at the bottom line, though, I mean, again, we improved a lot in terms of year over year comparisons in the second quarter, but this is the half year numbers. We remain flat versus 6 months 2018, driven mainly by the impairment line. As you can see, the impairment line has grown 15.7% versus the 6 months 2018, Multiple things, but due to the negative impact of the macro update, higher provisioning in the commercial and unsecured Consumer lending portfolios in USA in the Q1, as you would see in a few pages now, there's a very meaningful improvement in those numbers in the U.
S. In the second quarter. And the low base of the U. S. Actually in the 6 months of 2018 because we did some there were some provision releases in that period in the U.
S. Mostly due to Hurricane Harvey releases, and there was a positive macro impact. So that was basically the key changes versus the base. And also in Turkey, as you know, we have had higher requirements in the retail portfolios in the first half of this year. So impairments line was the key difference.
But on the core Top line drivers, as you can see, we are again registering a very robust growth. Slide number 7, Maybe a bit more details on the revenue. As I mentioned, net interest income growing double digit, 10.4% versus a year ago. This year's trend is very positive comparing to the 1st quarter. So Q2 is doing much better at 4% growth.
Very important to note that and you will see when Jaime talks about the countries, but most geographies are performing very well on this line And it's a critical dimension of our business, so we welcome this opportunity, this development. The positive evolution in net fees and commissions, as you can see, 3% versus the same quarter last year and 4.2% increase versus the Q1 of this year. This is, by the way, the highest figure in the last 10 quarters It comes in euro terms, so very well under net fees and commissions. Net trading income, as I mentioned, is down 58%, highly impacted by the muted Global Markets Activity and lower portfolio sales, as I mentioned, that we did in the 2nd quarter. All in all, total revenues are up 5.1% versus the 2nd quarter of last year, 1.9% down versus the 1st quarter.
But as I mentioned, in the 2nd quarters of every year Or this year, in the Q2, we registered our annual single resolution fund. So comparison between the Q1 and the second quarter It's not apples to apples. But overall, 5.1% growth in gross income. Moving on to Slide number 8. One more quarter, We continue to show positive operating jaws.
It is once again very satisfying to see our expenses growing at 3.9%, Well below the growth rate in core revenues, which is 8.3%, as you see on the left hand side of the page. And it is doing this for so many quarters now, and it is despite the high inflation in some countries of our footprint. In the middle of the page, we show the strong evolution at high single digit growth, 8.2% growth In the operating income and on the right hand side of the slide, as you can see, the efficiency ratio keeps improving, showing a 41 bp decrease So now standing at 49% overall cost income ratio, significantly better than European peer group. And if we calculate Cost to income at the core revenue level without the NTI, the improvement is actually more than 70 bps. I keep reiterating this every quarterly call.
Our commitment improve efficiency is clearly top notch. In the context of our transformation, we are highly prioritizing this topic. And I believe our track record It shows how high it stands as a priority for us as the management in the group. Moving on to Page number Slide number 9, Asset quality and risk indicators, very good news. As I said here on the slide, in the impairment line, we see an improved figure versus the Q1 of this year.
So the provision impairments line, 25.6% down versus the previous quarter, and it's flat versus the Q2 of last year. So the quarter over quarter decline improvement is driven by Spain, thanks to the sale this past June 21 Of another mortgage portfolio of €1,200,000,000 of gross book value. But beyond Spain, by Turkey, due 2 lower requirements in Turkey, especially on the wholesale side by the U. S, driven by the lower requirements in the U. S.
As compared to the Q1. On other risk metrics, NPLs were significantly reduced by €2,600,000,000 on the top right Versus last year, EUR 2,600,000,000 reduction versus last year and EUR 600,000,000 reduction versus the Q1 of this year. Cost of risk at the bottom keeps improving versus the Q1, stands now at 91 bps year to date, an increase of 9 bps versus last year. And at 77 bps actually on a quarterly annualized basis for the quarter, it was 77 bps, a very strong figure, declining 27 bps compared to the previous quarter. The NPL ratio keeps decreasing this quarter, so a 57 bps Reduction to 3.8 percent and coverage ratio again improving 3.30 bps improvement to 75%.
So overall, we maintain an excellent profile and better than our expectations. Capital, Slide number 10. Regarding the quarterly capital evolution, the CET1 fully loaded ratio, as you can see, it has increased 17 bps even after absorbing the 13 bps of TRIM related impacts in the quarter. The good evolution was helped Where the grant of regulatory equivalents in Argentina, as you can see on the waterfall chart, and the good performance of the Help to Collect and Sell Portfolio. But beyond that and overall, these numbers underscore once again our very strong organic capital generation capacity.
I would also like to highlight the quality of our capital. On the bottom left side of the slide, it's we think it's an important metric to look into. You can see that we continue to lead the ranking of our European peer group in terms of the leverage ratio, which stands at 6.6% versus The European peer average of 4.9%. Ricard, regarding the AT1 and the Tier 2 buckets, we are already covered and completely endowed. And lastly, at BBVA, I would like to mention this topic that we keep strengthening our capital position through green, social and sustainable bonds.
Last June, we successfully issued our second €1,000,000,000 senior non preferred green bond. This perfectly illustrates BBVA's vision and Strategy towards a more responsible way of doing business, as you can imagine. Because our success depends, and this is a genuine belief culturally shared across the organization. Our success depends ultimately On the prosperity of the communities that we serve and the society in general. So you will hear us talk more about this going forward.
But in short, we believe Business should up its game, addressing the main challenges the society has, both environmental and social, and we intend to be one of the leading actors Moving on to Slide 11, outstanding delivery on shareholder value creation. Again, we keep delivering on this. As you can see, I repeated it, so I'm not going to spend too much time on this, 12 point percent yearly increase in tangible book value per share and the return on tangible equity, we are at the forefront of the European banking industry and 12.4% Return on tangible equity. Slide number 12. As we have commented in the last quarters, Underpinning the growth in the digital business is the continued digitization of our customer base.
So on the left hand side of the page, you see the evolution of digital customers, up 17% versus June 2018. It represents a 54% penetration of our customers. And same With a different angle, mobile customers, the penetration of mobile customers, mobile customers grew more than EUR 5,000,000 in 1 year, up 25%. And now we are at 48% customer penetration. We had a goal of 50%.
We are very close to it. We believe we will achieve it by the end of the year. And finally, on the right hand side of the page, as a consequence of the strong base of digital and mobile clients, digital sales continues to grow, Now 58% in terms of number of units and 44% in terms of value. In our view, very, very strong numbers. Moving now to Slide number 13, I would like to highlight the impact of our transformation on our business drivers.
This is important because we talk a lot about digital transformation. We believe We can create a competitive advantage through our investments in digital and through owning this topic. And in every quarterly call, I would like to highlight to you a few things, Which does a few things which do highlight the reasons on why we think this is a competitive advantage. So First, the impact of digital transformation on growth. On the left hand side of the page, I believe we can further foster growth by leveraging our digital capabilities.
We have been doing well in serving our own customers through digital, but now we can use our digital advantage to acquire to grow our customer base, to acquire new customers. One example of that is Uber, I mean, the partnership that we launched in Mexico. So Uber has partnered with BBVA to launch its 1st financial product outside the U. S. And this is also BBVA's first product created through our open banking capabilities and the API based infrastructure We have been building all around the world.
So this is an important partnership that we pay attention to. 2nd, the customer engagement and advice. You can see on the right hand side of the page, technology and data will be key to deliver advice based value proposition at scale And increase our customer loyalty. One good example of this is this new feature in the BBVA Spain app, which is set up your account. And this is Beyond alerts, it helps you with aims to help customers manage their everyday finances, automating certain tasks, creating a self Functioning bank for the customer through simple settings.
And these initiatives, it helps us to be in the daily cash flow of our clients and to help them better Make better financial decisions. So very important developments. It keeps adding on. And then finally, I would like to give you an example of an end to end, a holistic assessment of how digital is helping us in delivering better numbers. The numbers are up obviously at the surface, but there are many things that are being done underneath.
So our transformation in Spain, I think, is a good example of that. And we have Started our transformation long time ago to generate growth in our customer base, to improve engagement, to improve efficiency and we are seeing clear results there. So on growth, Bringing new clients to the bank, even in a very mature, highly mature and bankerized market like Spain, increasing cross sell and transactionality were made possible digital transformation, as you can see on the left hand part of the left hand side of the page, customer acquisition by digital channels in Spain, it has grown 33% in the last 2 years. On engagement, on the middle side of the page, creating a world class customer experience. I mean, we are being recognized by Forrester 3 years in a row now as the best mobile app in Europe, and it has helped BBVA to lead Spanish NPS, ranking for the last 2 years among the large banks in Spain.
And also, it has helped us reduce the attrition rate by 18%. And finally, on efficiency, thanks to digital transformation, a convenient relationship model With the seamless integration between digital and people, it helped us to lower the cost of doing business. Again, past 2 years, total costs Has declined by 8%. So I'm now handing it over to Jaime. Jaime, maybe you talk to us about the countries and the business units.
Thank you very much, Onur, and good morning, everybody. Let me begin with Spain. The economy here remains quite Strong with GDP expected to grow by 2.3% in 2019, more than 1% above the European average. We expect GDP growth to continue at healthy levels around 2% also in 2020. Net attributable profit in the half decreased by 1.7% versus last year.
The decrease Fully explained by a significant reduction in NTI, down 67%. And the release in other provisions, 2018 included significant provision releases from the real estate area. Both impacts are only partially offset by the provision release coming from the sale of the mortgage portfolio That was closed this quarter. The most relevant P and L drivers are first, a significant NII recovery versus Q1 up over 5%, thanks to a good commercial activity and an improvement in the customer spread up by 3 basis points, a higher Spread up by 3 basis points higher contributions from the ALCO portfolio and the lower cost of excess liquidity as we have reinvested part of the excess cash at the ECB in high quality liquid assets. As a consequence of this improvement, the evolution of NII on a year on year basis improved significantly to minus 2.4% in the half, in line to meet our year end guidance of NII decreasing slightly by between 1% 2%.
The 2nd most relevant driver is again expenses. They continue to go down 3.5% on a year on year basis, thanks to the success of our transformational efforts. And finally, impairments that showed a positive figure driven by provision releases. Excluding the one off already mentioned, cost of risk would have been 18 basis points year to date, more in line with our year end guidance So around 20 basis points that excludes these positive one offs. Let's move now to the U.
S. We continue to expect a good macro for the Sunbelt region, with GDP growing around 2.8 percent in 2019 and 2.7% next year, outperforming once more the U. S. Average in the period. Revenues in the U.
S. Are growing by 5% year on year, driven by NII and NTI, mainly due to ALCO portfolio sales. NII is also growing around 5%, supported by loan growth, up 4% year on year and higher customer spread, up 21 basis points versus the first half of twenty eighteen, Benefiting both from the change in mix towards higher yielding consumer products and last year's rate increases. For the whole 2019 and considering the change in interest rate expectations for the U. S.
Dollar, we now expect NII To grow at the low single digit level. We continue to enjoy positive operating jaws in the U. S. As expenses remained flat. In terms of asset quality, impairments increased versus last year.
As Onur has already mentioned, In the first half of twenty eighteen, provisions were extremely low, positively impacted by provision releases, both from hurricanes and some commercial portfolios and a positive IFRS macro impact. The increase in provisions is Explained as follows: 50%, more or less, comes from retail portfolios, mainly consumer loans write offs 25% due to negative macro impact and the remaining 25% due to high provisioning needs from wholesale portfolios. Having said this, impairments show a meaningful decrease versus Q1 of this year, down 24%, Mainly explained by lower provisioning needs in retail books, driving cost of risk From 106 basis points in Q1 to 82 basis points in Q2. We want to reiterate our 80-ninety basis points guidance for the year. Let me focus now on Mexico.
BBVA Research has revised down its GDP growth expectations for Mexico in 2019, 2.7%. Despite this, BBVA Mexico continues to deliver very strong results. Net attributable profit increases Over 7% in the half in current euros, so 1% in constant. The comparison is impacted by a $40,000,000 capital gain post task from the sale of 2 real estate assets that took place in the first half of twenty eighteen. Excluding these, net attributable profit would have Increased by 11%, 4% in constant euros.
NII remains as the main P and L driver in Mexico, growing by 8% in constant euros and supported by activity and a higher contribution from the securities portfolio. Activity grows by 5% year on year, Bias towards retail portfolios, particularly consumer loans growing at 12%, where we continue to gain the market share. The commercial segment grows slightly, 2.3%, excluding the FX impact. And as you remember, in Q2 of last year, We had a strong lending growth rate as companies cover their funding needs ahead of the presidential election. All in all, we remain committed to our year end guidance loan growth at the high single digit level.
Positive jaws are maintained with core revenues growing 6.2% versus 4.7% growth in expenses. Expenses growth continues to be impacted by the additional contribution to the BBVA Foundation, which doubled this year. Excluding this effect, OpEx would have grown by 3.7% and well below the 12 months average inflation of 4.5%. Impairments are up by 8.4% and above activity growth and explained fully by negative IFRS Press 9 macro impact. Cost of risk stands at 2 98 basis points year to date, in line with our 300 basis points guidance for the year.
And as you know, significantly below the historical average of the last 9 years, which is 340 basis points. These solid results continue to reflect BBVA's leadership position in Mexico, both in terms of market Share and profitability, proving its resiliency even in lower GDP growth estimates scenarios, sorry. Let's move now to Turkey. Despite the domestic and geopolitical tensions, the macro recovery is on track. Positive quarter on quarter growth in Q1 points towards the end of recession.
We expect a positive GDP growth rate already in 2019 And to reach 2.5% next year. In this context, guarantee continues to surprise, reporting better than expected results. Net attributable profit in the half decreased by 24% year on year, mainly explained by the TL depreciation. In constant euros and despite a much more challenging environment, net attributable profit was down by only minus 2.8% versus the first half of last year, proving guarantees earning resiliency. Pre provision profit is up by 12% versus the first half of last year, thanks to our robust core revenue growth and expenses growing below inflation.
NII is up by 15% year on year due to a higher contribution from the CPI linkers and also the foreign currency portfolio, Jose's spread is up by over 75 basis points in the half, more than offsetting the pressures in TL customer Spreads due to the increase in deposit rates. Following the Central Bank July decision to cut rates by 425 basis points, our 2019 guidance of flat NII ex the contribution of the linkers Has clearly upside potential. Fees increased by 24% year on year with good performance across the board. This double digit pre provision profit growth was offset by the increase in long loan provisions Up by 37% due to the deterioration in some retail portfolios as a consequence of the worsening economic conditions. Partially mitigated though by lower provisioning needs for some large tickets.
It is worth mentioning that Provisions are down versus Q1 by 26%, driving year to date cost of risk to 157 basis points As of June, down from 182 in March and clearly much better than expected. This leads us to improve our cost of risk guidance for the year. We now think we will Probably end the year closer to 250 basis points, below the 300 basis points previously guided. All the provisions for contingent liabilities have also increased this year. While in the first half of last year, we had a positive result Coming also from the sale of a real estate asset.
And finally, South America. Colombia's and Peru's GDP growth rates remained quite healthy, around 3% for 2019. In 2020, they should continue to behave well. Colombia's net attributable profit in the half is up by 13% With NII increasing 4% year on year on the back of higher volumes, improving customer spreads and a higher contribution from the securities portfolio, Expenses remained flat, achieving again positive jaws. And year to date, cost of risk significantly down after Q1 one offs.
Peru's net attributable profit also grows in the half around 13% year on year, With NII up 14% and remains as the main P and L driver, growing above activities, thanks to lower funding costs. Positive jaws are also maintained in Peru. Argentina reported a net attributable profit of €110,000,000 in the half, Improving its contribution versus last year, thanks both to NII, boosted by the contribution of the securities portfolio as the excess Liquidity is invested in high yielding short term treasury notes. And also, don't forget the positive results from the sale of Prisma that took place in Q1 of this year. And now back to Onur for some final remarks.
Perfect. Thank you, Jaime. I'm going to finish the presentation highlighting the few key messages that we mentioned. First of all, I would like to reiterate the very Strong core business fundamentals. Double digit growth in net interest income in our view is a very good result to be happy about.
Then number 2, I would say best in class efficiency, continuous improvement in the jaws, continuous improvement in the operating jaws. Number 3, sound risk indicators, very positive evolution in the year. Number 4, our capital position, it's even stronger today with CET1 full loaded ratio. We are already within the target range, again earlier than expected. Number 5, We continue delivering on outstanding shareholder value creation, double digit profitability, return on tangible equity, leading our European peer group.
And finally, we continue ahead of the curve in digital transformation, positively impacting key business drivers such as growth, Customer engagement and efficiency as we have explained to you in the first part of the presentation. All in all, I would say we had excellent results in the second quarter, driven by our unique and diversified footprint and our business model and obviously driven by our talent base and our employee base. With this, I conclude the presentation. So Gloria, back to you.
Thank you, Anur. So we are now ready to move into the live Q and A session. So first Question please.
Our first question comes from Francisco Raquel from Alantra. Francisco, please go ahead.
Yes, good morning. Thank you for taking my questions. I will start with NII in Spain. I appreciate you keep the full year guidance at minus 1%, minus 2% Despite the lower interest rates, however, the falling in the U. S.
Has only happened in June. So I wonder You can elaborate what is what happens after 12 months. And if you can give some sensitivity on what if the driver is 10 bps lower next year on average compared to this year and the main drivers of the NII going forward. And then the second question is different is in Mexico cost of risk. I see that you have downgraded GDP forecast for Mexico twice this year, but you are still maintaining the 3% cost of risk guidance.
So I wonder if you can give more details on what you are seeing on the ground by loan portfolio, I see a small pickup in NPL ratio. And then also on the spectral loss model, how far are we to change If you will revise again the macro assumptions, so some sensitivity also there. Thank you.
Perfecto. Thank you, Francisco, for the questions. Let's start with the NAI in Spain. So are we sticking with guidance of minus 1% to minus 2%, we are sticking with the guidance. What were the key drivers that led to relatively Positive results in the Q2, there were 3.
I would highlight the 3 of them. First of all, activity continues to grow, although 0.7%. You see it in the activity growth that it is there. And as you can see, The growth is coming from portfolios that we have prioritized, where we can generate much better returns. So activity growth, core business.
Plus, if you look into the spreads regarding Spain, in 1 quarter, we have gone from 196 To 199. So it's like 3 basis points, very small figures, but it takes a lot of effort to get those 3 bps. So that's the first lever, very important core business related. Number 2, as we mentioned at the Q1 quarterly call, We were trying to manage our extra liquidity and we were investing in the ALCO portfolios. So the impact of reduction in extra liquidity and ALCO portfolio decisions is also helping.
So there are impacts or effects Dare to stay. So we expect those positive effects to continue in the second half of the year. And as a result of this, We are sticking with our minus 1% to minus 2% guidance that we have given in the Q1 call. Regarding the future years and the Euribor impact and everything, We are publishing this, as you know. So minus 9% is the 100 bps parallel Decline in yearrebor curve impact that we have on net interest income.
So if the curves go down by 100 bps on a parallel fashion, So the impact on our net interest income is minus 9%. So that's the impact that we highlight. But we have multiple management levers To compensate for this and in a lower interest rate environment, activity turns out to be better, cost of risk turns out to be better. So as you know, we don't provide guidance beyond the existing year for 2020. I'm not going to provide any guidance yet.
But net interest income sensitivity, we published it. It's again 9%, but we will try to manage through it. Then Mexico, cost of risk. Are we sticking with our guidance, if that's the question? We are sticking with our guidance of 300 basis points.
You are right. We have revised down our growth estimates for Mexico. As you all know, it used to be 2% at the beginning of the year. Then we came down to 1.4%, and now the latest forecast that BBVA Research has published is 0.7%. So there is that impact, but we still stick with the 300 basis point guidance.
This is a very good number to note. As you might know, if you take I think it was the past 8 year average was 3.40 bps for Mexico, and that 3.40 bps It's now hovering around 300, which is again very, very good news for Mexico.
Thank you. Thank you, Paco. Next question please.
Our next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead, Alvaro.
Good morning. Hi. Just on my two questions are actually both on Spain. You've given the E and I sensitivity. Thank you very much for that.
But You didn't mention among the management levers or among the levers, I don't think you mentioned costs. And I just want conceptually, How much room do you have to cut costs in the event the margin Sort of turns out rate cuts turn out to be worse than expected. How much room there is to cut costs even further? And related to that, if I take a step back, BBBA my impression at least for BBVA is more in Spain is a low risk, low margin business in Spain and hopefully, low cost. But in a world of increasing more negative rates, that seems more challenged In the past, to what extent do you think M and A is necessary to in Spain in the Sector.
And under what circumstances would you contemplate that given the outlook It looks definitely worse than we expected at the beginning of the year. Is that not a necessary source Of cost cutting M and A in Spain as a whole and then for BBVA in particular? Thank you.
Thank you, Alvaro. How much room is there to cut costs? I think we have proven quarter after another. And if you compare ourselves with the Spanish owned banks, you will see that Good performance. Again, it's also obvious in the numbers.
If you look into the Q2 costs versus Q2 of last year, we have reduced our OpEx by 3.5%, which is, In our view, a good performing figure. So we have proven and we will continue on that trend. So 3.5%, it might not be as much going forward, but we are very disciplined on costs, and we will try to create value to compensate for some of the macro and interest rate dynamics that we are facing. On the low risk, low margin business, overall, I would a bit back to differ on that one. If you again look into the Spain numbers, the growth for Spain is coming from high margin portfolios, Again, based on pure numbers.
If you look into consumer, consumer year over year growth for us is 18.2%. Very small businesses, as we call it, PMS, the growth year over year is 4.3%. And back, the commercial business, Middle market business, our growth in lending for that book is 7.5%. So we are growing in areas where we see margin, and We are doing this by gaining market share. If you're looking to also the stock market shares are not published, but you're looking you can do the production flow market shares.
We are gaining market share in those portfolios. So we are changing the profile. That's why in the context of Euribor, I think Francisco asked it and I missed it. So the resetting of the mortgage portfolio based on Unibor, it takes a while, yes. But even in that context, some resetting has already happened and is happening.
And despite that, we have increased our spread by 3 bps. And again, 3 bps margin gain in Spain is not easy, and it all goes back to the debt mix adjustment. So we are growing in those. Then your last question about M and A, I hate to give the same answers that I do, but M and A is a separate topic. We focus on our daily business and organic growth, and we need to perform every single day To get better figures from what we have.
And then M and A, we always look into it as well. It's a value lever. It only happens when we see there is a clear opportunity out there For value creation.
Thank you.
Thank you, Alvaro. Next question, please.
Our next question is from Mario Ropero from Fredentis. Mario, please go ahead.
Hi, good morning. Thank you for taking my questions. The first one is a follow-up on the NII comment that you made, 9% negative sensitivity to 100 bps decline in rates. Given the guidance you have given for Spain, this is a decline of only roughly EUR 30,000,000, EUR 35,000,000 For NII for 10 basis points, but you have a mortgage book of over EUR 70,000,000,000. So please could you help us understand why it is only 9%?
And then another question is could you please tell us The percentage of fixed rate mortgages in your back book? Thank you.
Let me do the second one right away. The back book is 7% to 8% in the stock, and it's 50% in the flow in the new originations roughly. I'm giving you the rough figures. Regarding the 9%, how come? Because there are other dynamics that kick in.
So this is a modeling based on the full macro related drivers. So when the rates come down, our cost of funding, wholesale cost of funding directly comes down as well. So we bundle everything. And then also the volume impacts are considered in that modeling as well. We are quite confident in that because we have tested that modeling in the past.
So I'm giving you the final output rather than a direct impact on one piece of the balance sheet.
Understood. Thank you, Mario.
Thank you, Mario. Next question please.
Our next question is from Sophie Peter Zins of JPMorgan. Sophie, please go ahead.
Yes. Hi. Here is Sophie from JPMorgan. So with going or continuing on the NII line, Could you just also remind us what your NII sensitivity is to 100 basis point move in interest rates also in other geographies? So For example, in Turkey, where we saw quite big cuts, also in Mexico, where expectations are that they are going to cut rates.
So that will be my first question. My second question is on your capital. You have 11.5% core equity Tier 1, which is So what you basically target. Could you just remind us what additional impacts do you expect from TRIM, Basel IV and other regulatory measures and how we should think about that? And also on the capital, What will you do with any capital that is kind of above 11.5%.
How should we think about excess capital? How it will be deployed? Is it M and A? Or will you return it to shareholders? Thank you.
Thank you, Sophie. Very clear questions. NII Let me immediately respond to that one first. So again, 9% for the euro balance sheet. It's around 9% a last time, but around 9% for U.
S. A. As well. This is net interest income sensitivity to 100 bps Parallel decline for a year for the consecutive 12 months. Mexico is 3.4%, Around 3%.
South America is a blended geography, is around 2.7%, 3% again. And Turkey has the least sensitivity for multiple reasons that we will take on another call, it's around 1.4%. So The least is in Turkey. So that's the NII sensitivity by country. Then regarding capital and what additional impacts are we expecting.
So as I mentioned, this quarter, we have done 13 bps from TRIM. And in the Q1, we did 11 bps for IFRS 16, if you remember. For the rest of the year, we are expecting around 10 bps From TRIM, on the mortgage portfolios, basically, another 10% to be there. Then there is one final TRIM remaining. The field work is still continuing.
As you all know, the TRIM was an exercise where the field work going to be done between 2017 to end of 2019. So the only remaining field work is on the low default portfolios, As we call them, low default portfolios, corporate FIs and so on. That low default portfolio will be done, it seems, by the end of this year as originally planned, But the letter and the process will be in 2020. We don't have that visibility on that book yet. So that impact is going to come in 2020, though.
So this year, if you remember, we guided the market at 20 to 30 bps Impact in 2019 from TRIM. And if we get that additional 10 bps that we are expecting in the 3rd or 4th quarter, The total for this year would be 13 of this quarter and then 10 that would be coming in the rest of the year, in total 23. So it's basically within the range that we have guided you at the beginning of the year. For 2020, for the low default portfolios, again, we don't have any visibility now. Then the last question, what do we do with the excess capital?
Again, we always look for opportunities. If the opportunity if the value creation opportunity is there, We will leverage it and other levers can be also leveraged. But at the moment, we are not there yet. So let's get there and then we'll discuss then.
Thank you. Thank you, Sophie. Next question please.
The next question comes from Marta Romero Bank of America Merrill Lynch. Please go ahead, Marta.
Hello. Good morning. Thank you. A quick follow-up question a couple of follow ups on Capital and NII in Spain. On capital, the 13 basis points, where is it coming from?
Because I was surprised to see the average weighted assets in Spain Flat, with flat activities. I would have thought that we would see some inflation there. On NII in Spain, how much of the growth, 5% quarter on quarter growth we've seen is coming from your From managing your liquidity, increasing your ALCO portfolio, can you give us a sense of your risk appetite going forward? So what is the Total volume between ALCO and liquidity in Spain and how do you If you expect to grow that book. And quickly, sorry, on Turkey, what is driving your Reduction of cost of risk.
The environment remains quite challenging. Your Stage 2 loans probably need Higher coverage and you've mentioned that you're starting to see some other quality deterioration in retail. What is driving that reduction in guidance and what you see for next year? Thank you.
Great. Thank you, Marta. I partially mentioned responded to the First two, but maybe we can have Jaime add another perspective to it. So Jaime, on capital overall and then the NII in Spain, then I take Turkey question.
Yes, okay. Yes, maybe the Martha, maybe the surprise on RWA growth in Spain comes because of the fact that The only impact that of coming from TRIM that it's already in the Spain's RWA numbers It's part of the add on from the TRIM and market risk Review. The 10 basis points that we have prudently recognized In this second quarter have been assigned to the corporate center, okay? So that's maybe the reason why You don't see that RWA inflation. Okay.
Second question is regarding NII contribution from the liquidity and the high liquid asset portfolio. NII contributions are coming from The ALCO book is up roughly €9,000,000 €10,000,000 in the quarter versus Q1. Having more or less the same amount in the ALCO portfolio, roughly EUR 23,000,000,000 So we've done Some net acquisitions, but a fairly limited amount. We've tried to share with the market a little bit more Clarity on the ALCO portfolio. So you have in the annex further info that I think you can take advantage of.
The yield of the euro ALCO book is 1.2% and the average duration is more or less 5 years, very similar to what we had last quarter. In terms of how to collect and how to collect and sale mix, It hasn't changed much from the previous quarter. Out of the EUR 23,000,000,000 roughly EUR 12,500,000,000 are in the Help to Collect The portfolio and roughly EUR 10,500,000,000 come from our account rating in the held to collect and sale part. And then the last part of the question is the excess liquidity. What we've done with excess liquidity, remember that So we're holding roughly EUR 25,000,000,000 in excess liquidity at the ECB at the end of last year.
We've been progressively reducing this amount to roughly EUR 14,000,000,000, EUR 15,000,000,000 at the end of the first quarter and EUR 5,000,000,000 at the end of the second. And we've been reinvesting those amounts into high quality liquid assets, reducing the negative carry Of 40 basis points that we were holding. That the size of that high quality liquid asset It's roughly EUR 50,000,000,000 or so. I hope this answers the question.
And Marta, regarding Turkey, As you know, I mean, if you break it down into different components, the retail portfolios are very clear. The rules are very clear. What you take as a provision is very clear. IFRS 9 and forecasting for the future is very clear. So the gap that you mentioned, which is why is it Turning out to be better than otherwise.
It's mainly because of wholesale clients, and they're all individual 1 by 1 client assessment. And so far, We are not seeing what we were expecting at the beginning of the year in those respective clients 1 by 1. Then you referred to Stage 2. And given our provisioning levels in Stage 2, Basically, I guess you're asking whether we are feeling comfortable with that, and we are. Again, it's a very client by client.
And again, I have the list in front of me, a client by client perspective on all of them. And let me give you a few numbers, for example. I mean, roughly 30% of the Stage 2 is not delinquent at all. They're not even showing signals of any problematic situation. But we still, just because we want to be prudent, have taken them into Stage 2 and we have provisioned for them.
Close to 26% of that Stage 2 is restructured loans, and we see complete alignment with the restructuring plans. And then the 32, it's still some of them are not delinquent. We've kind of put them into this category of watch list. And again, client by client assessment is showing us what we need to provision for. So overall, in the Stage 2 IFRS 9 reporting, you would see that we are 10% provisioning for Stage 2.
But looking into the portfolio and we're looking into the client by client situation, We feel comfortable with where we are.
Thank you very much.
Thank you, Marta, for your questions. Next question, please.
Our next question is from Stefan Nedialkov from Citigroup. Please go ahead, Stefan.
Hello, guys. Good morning. It's Stefan From the Citi team. Two questions from my side. On Mexico, just looking at the fee evolution Year on year and Q on Q, it looks like to be the weakest performance in at least 5 years.
And then kind of Trying to not put it together with the doubling of the BBVA Foundation contribution, but Should we be combining those? I mean, have you basically committed to AMLO to contribute more in social causes? How should we think in terms of fee evolution going forward? What's the political impact from AMLO on you basically for the next 12 to 24 months. The second question is on the U.
S. Onur, I did hear your explanation about the 3 basis Points Q on Q increase in spreads in Spain. But then when I look at the U. S. Spreads, they're basically flat and you guys are increasing.
You are basically going down the credit risk curve in terms of previous emphasis on C and I lending and now it's a lot more credit How should we think about the change in your loan mix split going forward? You are obviously not increasing your Spreads, but your credit costs should be going up going forward. Any color on that would be great.
Perfecto. Stefan, very good two questions. Mexico, the fee decline, you are 100% Right. As the numbers also show, it's mainly related to CIB, the Corporate and Investment Banking, and the lack of Deals and lack of activity in CIB, given the market context. We are seeing In the pipeline, we are seeing some pickup in those deals in the 3rd Q4.
So the pipeline is relatively strong, But there was nothing, let me say, structural in that decline. Then you asked about the BBVA Foundation and For sure, causes, yes, we do prioritize and care a lot about it. We have this balanced approach towards our business. We have to be caring for all the stakeholders of the bank. One of the stakeholders of the bank, it's the communities that we serve.
It's the countries that we are in. And given the excellent performance of Mexico, We have decided that we should be increasing our foundation contribution there as well. So that's part of it. And then you asked question of what is the political impact of AMLO to our business, we don't comment on politics, as you know. The country is the country.
Mexico is I will just say last week, it's a wonderful market to be in. We have a wonderful franchise in Mexico, Independent of the political development and macro developments, I think we will do well in Mexico. I always care about the track record. So what happened in the past is always a great signal. It's not the only signal, but a great signal of the future.
You look into Mexico, the macro growth of Mexico in the past 10 years is around 2.2%, which is much lower than other Latin American countries other emerging economies. And in that context, BBVA has grown close to double digit every year because the bankerization level in the country is very low. And again, We have a wonderful franchise in Mexico. So I'm not going to comment on the politics dimension of this, but we are confident On our value creation capability in Mexico. The second question is also very well established U.
S. Cost of risk is going up, but the margins are not going up. So what's going on? First of all, I would like to once again clarify this notion on how we approach our business. We approach our business as Optimizing the scarce resources that we have.
1 will be scarce beyond liquidity and other things, other resources, capital is one of our most scarce resource. So we have to optimize the capital allocation. So we look into our business at micro level with that lens. Are we deploying capital to the places that we are making good returns out of it? In that context, some of those portfolios that you mentioned, It might be increasing the cost of risk, but under a through the cycle, under a long term perspective, if we are creating very good returns From those books, we will invest on those books.
So just picking the cost of risk is not Telling us the full story because the implication of that book is in fees, is in net interest income and so on. So are you optimizing the capital is the critical question. But then I haven't answered your question of what about why are the net interest income is not going up. It's again obvious on the page. The volumes have not been that good In the first half of the year in the U.
S. And the volumes are going to be again, the pipelines are relatively better for the second half. So the C and I business, the commercial business that we have in the U. S. Is a wonderful business.
So we will keep growing in C and I. So we are not changing our mix at all. What we are doing is if we can find portfolios and capabilities that we have that we can deploy in creating better returns for our capital, we will do that. In the case of U. S, it implies that we will grow maybe in SMEs, in consumer EBIT, but the bulk of our portfolio We'll still be commercial, and we will be growing in commercial in the second half of the year.
Okay. Thank you, Omar.
Next question please.
Next question is from Jose Abad from Goldman Sachs. Please go ahead Jose.
Hello, good morning. Thank you very much for the presentation. I think most of my questions have been answered already. Only one maybe follow-up on capital. So to a previous question And I was asking you actually how you plan to allocate any capital beyond the current levels of 11.5%.
You said that you are always looking for Opportunity. So I just wanted to clarify. So do you consider any capital accumulated beyond 11.5% as excess Capital or you plan to keep a commodity capital and get closer or even above the upper bound Of your target rates, which is actually 12%. Now second, I mean, a sub question, if you want, is that I my understanding has always been actually this target It's a pretty Basel IV target. So I think someone asked this, but I didn't get.
So apology if you already replied this. Maybe if you could actually give me or give us actually some color on how you are thinking about Basel IV and in particular, also operational risk going forward, so we can actually Estimate our proper Basel IV target for BBVA. Thank you very much.
Perfecto. Thank you, Jose, for the questions. Very clear. The first one is, do we consider above $11.50 excess capital? No, we don't.
And we guided the market on this one as well. We have a range, €11.50 to €12. And as we have stated before, we Expect to be towards the upper end of that range by the end of 2020. So $11.50 is not The goal is the range, and we want to be towards the upper end of that range, as we mentioned before. Then the Basel IV and the impact That is too early to calculate the full impact, Jose.
The only thing I can say is it's our Hypothesis, let's say that way, but relatively strong hypothesis, the impact on BBVA would be probably less than others, given Our news of modeling and given our footprint and how we approach and then you can also see it in The RWA density of our bank. So we would expect lower than the peers, than European banks, But it's too early to put a number to it yet. And we will hopefully guide you on that one in next year and so on, but it's too early at the moment.
Thank you, Jose. Next question, please.
Next question is from Andrea Unzueta from Credit Suisse. Please go ahead, Andrea.
Hi. Thank you for taking my questions. I'm going to go back to fees in Mexico. I'm not sure I fully understood the answer or your expectation for the year. If I go to On commerce release from Q1, it clearly states that you are revising the charges made to customers Looking for changes into digital channels.
So are you Revising your commissions in Mexico and what should we expect for the year? Is it a stable fee Line that we should expect? Thank you.
Andrea, as I mentioned, the key difference, The minus 3% quarter over quarter, this quarter versus last quarter So the year of 2018, the minus 3% is primarily driven by CIB, Patent Investment Banking, as you all know, when you do deals, you get some upfront fees in those deals. And if you look into the sub drivers of our fee line, It's that line which is showing a decline. And why? Because the market activity in Mexico in the Q2 was muted. So are we revising our fees in general?
We are revising our fees in general everywhere as part of regular business. Are we doing something beyond normal, beyond business as usual? Obviously not. The key difference, again, is the CIB. So what is the expectation for the 3rd Q4?
You're asking, I guess, very specifically about the remainder of the year. Given the pipeline that I'm seeing, I would expect that we would be better than the minus 3%. But Again, it's dependent on the conditions of those deals happening in the CIB book. So we would be probably better, But it's not structurally negative topic that you should be alarmed about is what I'm trying to say.
Thank you, Andrea. Next question please.
Next question comes from Andrea Filtri from Mediobanca. Please go ahead, Andrea.
Yes. Good morning. Could you please elaborate on the drivers of the other income line in Spain, Turkey and Mexico in the quarter as they look particularly good versus expectations. Also on TLTRO III, From your moves on excess liquidity, can we assume therefore that you will not be taking TLTRO III? And are you expecting Other Spanish banks to do the same.
And if so, is this expectation already factored in Your NII guidance. And finally, on the U. S. NII, your funding costs are going up. Is this the driver behind the lower NII guidance or is it the lower rates going forward?
Can you update us on the specific consumer issue and how you're solving it? Thank you.
I will take the U. S. Maybe. Jaime, do you want to take the first two? Sure.
Okay. On the other income line, I think I said something on the split, but I'll try to expand a little bit The answer. It's clearly one of the line items that have changed the most versus the first half of last year. I'm going to try to distinguish between the first half of compare the numbers between the first half of twenty nineteen and the first half of twenty eighteen. The other point is You
just stick to Q2, because that is the result that we struggle to understand.
Well, okay, versus Q2, the reasons are pretty much the same, but the numbers are slightly different. Okay. So the difference between Q2 is €47,000,000 and it's mainly explained by both Spain and the U. S. In the case of Spain, it's up $58,000,000 As in Q1 of 2019, we included higher restructuring charges, okay, That did not take place took place in the second quarter.
And in the case of the U. S, In Q2, we include some provision releases for contingency risks, while in Q2, We've had some provision charges. Those are the most important changes. On TLTRO III, we clearly think that It's an interesting funding source for the bank as we feel conditions are quite favorable. Although at this point, it's not Easy to precise when and how we will participate.
We will try to take into account What are the actual terms? Those terms will change depending on what happens with the interest rate environment After the summer and how our liquidity generation capacity evolves in the next 6 months. We would
Probably
not draw during 2019, although that decision is not yet taken. And probably the first drawing, if at all, will take place in 2020.
Okay. And Andrea, regarding the third question about the U. S, there are 2 sub questions I understand. The first one is the net interest income. Is the net interest income slowing down because of the cost of funding?
And going forward, is the cost of funding the key reason? No, it's both. It's both. As you might know, in the U. S, the book the impact on the books come in different sequence.
So for the loans, when the rates go up, for example, its immediate impact on the commercial book, it's immediately repriced. But then the reflection of the increase in the rates to deposits comes with time When the customers renew their CDs, certificates of deposits and so on. So what we are seeing now is the impact That is coming after the successive rate rises that we have seen in the U. S. In the past 2, 3 years.
So we are seeing it partially over time. That's why the cost of funding is going up. And it's not unique to BBVA. If you take any other U. S.
Bank, you would see that the cost of funding gradually goes up since the past 2 years. So that is one impact. But going forward, if you're asking is this going to be the key, the negative impact on the NII line, obviously not. As I mentioned at the beginning of the call, we are asset sensitive, which means and I did give you the numbers, the NII would come down by 9 Percent, if we see 100 bps decline in the rates for the successive 12 months. So a step function change in the curve, impact is around 9%.
So that is going to also, obviously, depending on the rate situation in the U. S, It's going to affect us. It has already started affecting us because our book, commercial book is mainly driven by LIBOR 1 month. And LIBOR 1 month, Independent of the Fed decision, obviously, has been coming down since February, March, and that is immediately affecting the yields that we have in the book. What you see today is already reflecting those changes.
So both of those will affect NII. That's the answer to the question. Then about the cost of risk. I partially mentioned it, but let me give you maybe better figures. As you see in the presentation, our first quarter Asset quality cost of risk is 106 bps, 106.
And as you can see in the Q2, year to date, That number has come down to 94 bps. If you take only the 2nd quarter and annualize the 2nd quarter, The Q2 only cost of risk was 82 bps. And if you again remember in the Q1 quarterly call, we guided all of you That we would be between 80% to 90%. So 82% was the 2nd quarter figure. So we feel comfortable with that guidance for the remainder of the year.
And again, as long as we create returns in portfolios, We will invest in those portfolios. And that perspective is not a very short term sporadic perspective. It's a true to cycle, Meaning, putting some buffers, taking into account that the economy might slow down and so on. So if through the cycle return is good for a portfolio, we do invest in those portfolios. And that's what we will continue to do in the U.
S. But the bulk of our portfolio, as you can see also in the presentations, it's going to be the commercial book.
Thank you.
Andrea, I think you asked me well, you asked about the other income line. Yes. Right. I answer other the difference in the other provision line. Okay.
So Let me answer the question on other income. Okay? The other income at group level It's in the Q2 minus EUR 18,000,000, okay, which compares to Q1 at +8. We need to take into account that, as Onur said during the speech, that in Q2, we include in Spain The contribution to the single resolution fund, okay, which was EUR 144,000,000. This negative number was offset by 53,000,000 Of dividends coming from Telefonica that as you always know, that's as you know, they normally come in Q2 and Q4, which is accounted in the corporate center.
This line also includes quite a good number In Mexico, in insurance results, which behaved quite well in the quarter, Overall, EUR 62,000,000 in the quarter versus EUR 40,000,000 in Q1. And then lastly, in the case of Turkey, We also had quite a positive number in this line, EUR 24,000,000 versus EUR 6,000,000 in Q1. And this is partly explained by the reversal of a tax fine that we did in Q2. I hope this explains better.
Yes. Thank you very much.
Thank you. Thank you, Andrea. Next question please.
Our next question comes from Britta Schmidt from Autonomous. Please go ahead Britta.
Yes, hi there. Good morning. I've got two questions please. Thank you for providing the net interest income sensitivity. Can I just ask, maybe you can reformulate it slightly differently, what will be the NII sensitivity For a 10 basis point reduction in Spain over 2 years, I'm just asking because I assume that it's probably more than oneten of the 9% That you provided due to loans, for example, hitting the floors?
And then my second question will be on loan growth in Mexico. You're still guiding to high single digit. Year on year, I think this quarter was a bit lower due to a strong Q2 last year, But there are several other banks that have cut their loan growth outlook for Mexico quite recently. What gives you the confidence that you'll still that you see high single digit growth and which segments do you intend to focus on?
Okay. I'll take the Mexico one. On the first one, I start, it's going to take 10 minutes. So I'm going to give it to you, Fagre.
Okay. You're right, Britta. You cannot divide simply the sensitivities. The sensitivity in the euro balance sheet to a 10 basis points decline on a 12 month forward looking basis, again, Parallel decrease is €52,000,000 We'll not disclose impacts beyond the 12 months.
Regarding Mexico, we still stick to our guidance, high single digit loan growth. You do see that there are certain portfolios which are not growing as much, but there are also certain portfolios that we are growing and growing And also return wise very good returns. So consumer book, as you can see, it has increased 12.4% year over year So year to date, so very year over year, which is very, very strong and same for other books as well. So You stick with our guidance basically. Let me be more open.
You stick with our guidance by the end of the year.
Thank you, Britta. Next question, please.
Our next question comes from Fernando Gilte Santervanas from Barclays. Please go ahead, Fernando. Hi, there. Thank you for taking my questions. Most of my questions have been answered, but just a quick question on deposit pricing in Spain And what and how do you feel about corporate deposits?
What is your mix? And if you plan to translate any further cuts or Negative rates to direct to our clients? That will be my question. Thank you very much.
Thank you, Fernando. Yes, We are managing the tax to liquidity, as I mentioned at the beginning of the call. If you look into The breakdown of our deposits in Spain, so demand deposits is like 82% and time deposits is like 18%. But you were asking specifically for the commercial or corporate enterprise deposits. We do have this policy that for very large Depending on the relationship with the customer, depending on the book that we have with the customer, we differentiate pricing.
And there are cases That we are charging on deposits. And depending on the evolution of the curve, we will continue with the same practice basically.
Thank you, Fernando. Next question, please.
Our next question is from Carlos Queixoto from CaixaBank. Please go ahead, Carlos.
Hello, good morning. Most of my questions have been answered yet already, sorry, but just a bit of a follow-up. In Turkey, You're guiding towards the cost of risk below 250 basis points. If I look at well, 1st Q was 180 2nd Q, EUR 160,000,000 so let's say EUR 170,000,000 for the first half as a whole. My question here is, are you expecting Some additional some increases on cost of risk because of asset quality deterioration that is still ongoing.
I noticed that NPL ratio went up quarter on quarter. Or are you just being cautious in playing it safe, But you do see it well below 200. I'm just trying to understand here what is the move there In Turkey. Then on NII, in Turkey as well. You still maintain the guidance of a flat NII or could we see a better performance For the rest of the year given the evolution that we saw in the first half?
Thank you very much.
Very good question, Carlos. Very quickly on both. First of all, let me just clarify one thing. In the documentation that we provide on cost of risk, the numbers are year to date. So the Q2 number that you see for Turkey, the cost of risk of 157 bps, that is the year to date number, so which implies that the Q2 was actually better than one.
And the 2nd quarter number is actually 129 bps. So the blended is the 157 bps. Those are year to date figures. So but what do we expect for the rest of the year? If you remember, at the Q1 of the call, we guided Less than 300 for Turkey.
Obviously, there's some upside to that one. We would update that. We want to be still prudent. We want to be still prudent for sure. So given that we are going to be at the end of the year around 250 is the latest that we are foreseeing.
Again, just to be on the prudent side. Regarding net interest income, excluding CTI linkers, our guidance, as you said, was flat. And given the latest decision of CBRT, the Central Bank of Turkey, To cut the rates by 4.25 bps in July, we do think there's an upside potential there. So probably it's going to be better than flat. But again, we'll see.
But in terms of guidance, there is an upside in both metrics for Turkey.
Thank you, Carlos. Next question please.
Our next question is from Dara Quinn from KBW. Please go ahead, Dara.
Hi. Thanks for taking all these questions. One question just on Mexico net interest income. So I'm not clear if you were maintaining the guidance there as well of high single digit growth, particularly given the outlook for rates and slower GDP rate cuts, if you could just clarify that. And then a follow-up on Basel IV.
I appreciate you're not able yet to give guidance, but maybe you could point us in the right direction in terms of magnitude, Particularly on from operational risk, is it a 0 to 20 bps number, 30 to 50 bps or 50 to 100? I don't know if there's Any additional color you could provide there? And maybe just one final question, kind of moving away from Results and I'm thinking about your digital strategy and the strong and continued progress you're making there in terms of digital sales, etcetera, as That penetration level increases and I don't know whether it's 60%, 70%, 80%, but how do you see over the medium term Both the size of the branch network and number of employees evolving as that digital Distribution increases. Thank you.
Very good questions, Zara. Thank you so much. The first one, Mexico, Let me be very straight to the point. Are we retaining the guidance? Yes, we are keeping the guidance.
We are keeping the guidance as what it was, high single digit. On the Basel IV, I understand you want to get a range, but we don't have an estimate yet. So if I was younger, I could have given you a range, but I cannot there. On the third one, digital strategy, what is the implication on the rest of the cost structure and the branches and so on? Thierry, on this one, I mean, we are measuring it very, very clearly in every single market, and the situation of every single market is very different.
I will give you 2 examples. In the case of Mexico, for example, we are not reducing our branches in the past 3, 5 years, if you look into the numbers. But in Mexico, our what we call target customers, which are really active customers, active customers beyond a certain threshold, it has grown 50%, 50% growth in number of customers in the past 3 years. So they are wonderful numbers. So we don't need to reduce rest of the cost structure because for that additional customer base, we still need to serve them through these channels because some of them at least, they still demand those channels.
In the case of Spain, the situation is a bit different. It's a very mature market. Obviously, the growth in number of customers is much less. We are, by the way, In target customers, we are growing even in Spain. We are growing even in Spain because of that digital strategy.
But in Spain, given the fact That the growth is not going to be as high because the bank recitation is much higher. Then those levers, those levers around Cost reduction becomes more relevant. And that's what we are doing. That's you can see from the numbers. What we care about is this notion of the jaw.
Again, the growth in revenues Should be higher than the growth in costs. If you if we can create growth in revenues, then the cost structure is there To serve that revenue base because there would be more customers to serve. So it's a balance. But what I can tell you is on an apples to apples basis, meaning For the same number of customers, for the same set of services, digitalization is definitely and I'm underlining definitely going to help us on efficiency. And that's what we are seeing in the numbers.
Perfect. Thank you.
Thank you. Thank you, Daragh. There are still 5 people on the line, so let me ask you to try to be short in the answers. So next question, please.
The next question comes from Ignacio Cerezo from UBS. Please go ahead, Ignacio.
Yes. Hi, good morning.
Can I go
back to, I think it's the first question by Paco around NPLs in Mexico? If you can explain the pickup we have seen actually in that line Segment by segment. And what are the chances of a pickup of cost of risk in the second half due to recalibration of models for IFRS 9? And the second question on capital. I know you cannot give a number in terms of Basel IV, but then do you expect to cover whichever headwind you have within the next 2 years?
Do you think you can phase it out from 2022 to 27? Thank you.
Well, The Mexico, the pickup in NPLs or the cost of risk, it's not a major pickup, I would say. In the cost of risk, 2.93% to 2.98% in cost of risk, for example. But I mean, there was what we call this pulling effect because the And also there was this macro adjustment. As you know, we have reduced our macro, I mentioned it at the beginning of the call, from 2% at the beginning of the year to 1.4 Percent first and then to 0.7% as of last month. So the impact of that is being reflected into the figures in the cost of risk figure.
So but we don't if the question is again, are we sticking with the guidance, we are sticking with the guidance. We don't see any major negative effect that would be coming along We see the business drivers. German, do you want to add something? Yes, go.
Yes, actually and on the recalibration, the recalibration will probably be positive this year. It won't take place in the Q4 of the year. It will take place in the Q3 of this year.
But I care a lot about vintages, vintages of the All those retail and SME and so on in the vintages, which is the new production that you do and what happens after the same period, basically the harvest, We don't see any negativity at all on the contrary, to be fair. That was it? And only Mexico, no? Because I was looking into something else. Is there any other question?
No. Okay. Then next one.
And the next one was Basel IV. Basel IV, the answer remains Thanks, as we've said. Okay?
Thank you, Carlos. Thank you, Nacho. Next question, please.
Next question comes from Carlos Cobo from Societe Generale. Please go ahead, Carlos.
Hi. Thank you very much for
the presentation, yes, everything has been discussed already. Just a quick one on ALCO and if you could provide some more detail on Same as you've done with Spain, the ALCO portfolio in Mexico, size, duration and sensitivity to 100 basis point Change in rates, please, that would be very much helpful. Okay. The rates, the sensitivity, As we mentioned at the beginning of the call, it's minus 3%, minus 3.4%, 200 bps parallel decline. So A step function change in the curve for the consecutive 12 months, the impact would be 3.4% in net interest income.
On the ALCO portfolio, Jaime? Yes. ALCO portfolio Yes, very much the sensitivity of
the ALCO in particular, if possible.
The ALCO portfolio size went down In Mexico in the quarter by almost €1,500,000,000 from €6,500,000,000 to €5,000,000 The split between how to collect and how to collect and sell is It's pretty much everything is in held to collect on sale, EUR 4,200,000,000 and EUR 800,000,000 not even EUR 1,000,000,000 is in Help to collect. The duration is much shorter than in Spain. It's 1.7% 1.7 years. And the contribution to the NII is actually negative. The recurring cost of this book is Negative.
So the reduction in rates will definitely help on this.
On the graph sheet without the cost
of funding, Could you explain that, please?
No, I don't have that in front of me. So it should be roughly 8%, 7.9, but please take this in quotation, okay. It's from Emera.
Okay. Fantastic. I appreciate that. Thank you very much.
Thank you, Carlos. Next question, please.
Next question comes from Benjamin Thomas from RBC. Please go ahead, Benjamin. Good morning. Thank you for the disclosure on the Alcoa portfolio. The reinvested Excess cash that previously sat with ECB, what assets have you invested in?
It looks like it might be predominantly Italian bonds. Is that correct? And secondly, do you expect any material impact from the switching of U. S. LIBOR to software?
Thank you.
On the first one, I'll take it. The extra liquidity, what did we do with the extra liquidity? No, we did not invest in Italian bonds. It's mostly it's basically all of it actually that extra liquidity switch Is to high quality liquid assets. So they're all high quality liquid assets.
In terms of the switch, Benjamin, I missed the question. What was the question again?
The thinking rates in the U. S. Live War II? So far.
So far, yes, yes. Okay. So it's a process. It's ongoing. It's actually a major project.
It takes a lot of time of management and everyone else. It's in the process, but as you know, it's going to be a while. So it's not immediate yet. The key one that we are preparing for is the Ionia has their change. And again, it's a major, major project that we are dealing with a lot these days.
Thanks, Benjamin.
Thank you, Ben. Next question please.
Our last question is from Yalan Lu from ACF. Please go ahead, Yalan.
Hi, good morning and thanks for taking time to answer all of our questions. I got some follow-up questions On Mexico, for Nacho and Tacos, regarding cost of rigs and recalibration of models, I'm surprised to hear that the impact is going to be positive or should be positive by the recalibration in Q3 Because I would say that the macro parameters would be against the increase when we engage the provisions. So what would be the sensitivity of those models to an hypothetical case of a deterioration in the macro parameters, Let's say with a recession in GDP growth. And then the next question on capital allocation. I noticed well, congratulations on your results in South America because being around 8% of your total assets It's yielding you around a 60%, 15% contribution to your gross margin.
Would that mean that you would allocate more capital to that region? And then last one, if I may. Do you have any views on what kind of measures the ECB could be Going forward, in order to alleviate the penalty on your NII in the sense of measures like A tiered deposit rate or expanding the APP program by buying financial credit or even Let's say, equity, do you have any views on that, please? Thank you.
Yaron, thank you so much for the questions. Me do the second and the first, I'll give the cost of risk to you, Jaime. On the capital, are we going to invest divert more capital to South America? We are Putting capital where the return is. If there is a return, you highlighted that.
And it's not done at the country level. It's done at the micro level. Wherever the capital return is, we put capital right there. So in that context, the answer is yes. If we get returns, we put it in those areas and portfolios.
The expectations on the tiered deposit scheme and so on, Obviously, it's ECB's decision. We are waiting for the decision. There is the expectation that there would be some sort of that scheme getting in place, But we are preparing our plans to mitigate the impact of interest rates through many other measures. And if tiered interest scheme comes along, You welcome it. If it doesn't, we move along.
On the first one, Jaime, very quickly and then we wrap up.
Yes. Okay. We need to distinguish between A recalibration of parameters, which we do once a year and the macro adjustment that we do every quarter. If you remember, last year, at the end of the year, in Q4, we recalibrated with Including all the info from 2017. What we're doing as we speak and will be accounted for In the Q3 is to input in the models all the data from 2018.
And this will, of course, Affect the PVs and LGDs because of the inclusion of these new vintages. That is what we call recalibration. 2018 vintages were probably the best vintages in the last 10 years. So when we share with you guys the impact, The negative impact last year, we also said that this was going to be a probably a positive recalibration as is we are expecting to have. And as Onur has already said, the negative macro that We are having in Mexico, it's already affecting a little bit the numbers quarter on quarter.
And it fully explains the increase in cost of risk in 2nd quarter versus the first because the negative macro Affected us by EUR 26,000,000 quarter on quarter.
So
yes, Alan, for macro, we might still register a negative. We might still register a negative from a macro From a macro perspective, macro modeling perspective in the numbers, but recalibration, which is based on the portfolios, Based on the credit quality that we are seeing versus what we were expecting, that's the impact that we were referring to when we said recalibration. And on that one, It's going to be a positive effect, it seems. That's what we were trying to explain. We passed our time.
Gloria, anything else you want to add?
Now just to thank you for participating and to remind you that the entire Bio team will remain available in case you have further questions.
Well, thank you so much again for attending the conference call. And hopefully, if you haven't done so, have a great vacation period. Thank you so much.
Thank you.
Thank you.