Good afternoon, everyone, welcome to BBVA First Quarter 2019 results presentation. I'm Gloria Couceiro, Head of Investor Relations, and here with me today is Onur Genç, Chief Executive Officer of the group, and Jaime Sáenz de Tejada, BBVA Group CFO. As in previous quarter, Onur will begin with a presentation of group's results, then Jaime will review the business area. We will move straight to the live Q&A session after that. As always, let me remind you that we would appreciate all the participants to try to make the calls from the landlines and avoid using the speaker phone. Now I will turn it over to Onur to start with the presentation.
Well, thank you, Gloria. Good afternoon to everyone, welcome to the presentation of BBVA's 2019 first quarter results. As Gloria mentioned, I will comment on the group's evolution, Jaime will focus on the separate business areas. Starting at slide number three. We have started the year with net attributable profit of EUR 1,164 million. This represents a 9.8% decline versus the first quarter of last year, given the sale of BBVA Chile in July 2018, though. If we exclude BBVA Chile, the current operations, the decline would have been 7.7%. With respect to the previous quarter, though, namely the fourth quarter of 2018, the net attributable profit, it grew at 16.2%. Two other key messages to highlight on this slide, as we have started a few quarters ago.
First, in the middle of the page, you see that we maintain our clear focus on creating value for our shareholders. In the quarter, that's why we have this metric in this documentation, that's why we have it even in our management scorecards. In the quarter, we increased our tangible book value per share plus dividends by 4%. This increase this quarter is the highest since the second quarter of 2014. The evolution on a year-over-year basis is also very strong and impressive with a double-digit growth rate of 11%, as you see on the page. On the right-hand side of the page, as you see, what we also would like to highlight is our capital position.
Despite recognizing the full negative impact of 11 basis points due to IFRS 16 in this quarter, our capital position inched up slightly by one basis point towards our goal of 11.50%-12%. Net, 12 basis points increase in capital position in the first quarter 2019. Moving on to slide number four, to be more specific on the quarter. On slide number four, we would like to highlight the evolution of some of our core performance metrics. The year-over-year variations, starting from this page, they will exclude BBVA Chile. As you all know, as I said, we sold our Chilean operations, the banking operations, in July 2018. There were recurrent operations in the first quarter and the second quarter of 2018 in the numbers. If you exclude that to be able to have a more apples-to-apples comparison, there are a few messages coming out very clearly.
The first message, number 1, we would like to highlight the very strong, actually, growth in core revenues. Net interest income plus fees, they have grown by 8% in constant EUR year-over-year. Second, number 2, the good performance on the top part of the P&L on the core revenue side, coupled with our continued focus on efficiency, has led us to show a double-digit growth on operating income. Double-digit growth in operating income by 10.2%, this helped us reduce the cost-to-income ratio by 118 basis points to 48.1%. This C/I ratio, cost-to-income ratio, it represents the lowest quarterly cost-to-income ratio since the third quarter of 2012. Number 3 on the page, the risk indicators, they continue to be sound with the good trend in the NPL ratio reduction. NPL ratio now stands at 3.94%, dropping 53 basis points versus first quarter last year.
Another positive message, an increase of 110 basis points in our coverage ratio, our coverage ratio now stands at 74%. Although we have seen some pickup in our cost of risk versus the same period last year, and same period last year was an exceptionally low cost of risk quarter, it remains better than our expectations. For 2019, we expect cost of risk to remain around this number at the aggregated level. Number 4, on the same page, on slide number 4, the resilient capital position, I mentioned it also in the first opening page. Our capital position, CET1 full loaded, stands at 11.35%. It is an increase of 1 basis point in the quarter, absorbing the full 11 basis points negative impact from IFRS 16. Number 5 on the page, again, as partially mentioned on the opening page, we remained focused on creating value for our shareholders.
In terms of profitability and return metrics, BBVA is a leader in the European banking industry, our return on tangible equity remains very strong at 11.9%. A very strong number to note also, again, this quarter, is the tangible book value per share plus dividends. It grew 11% versus March 2018. Again, as mentioned, the best value creation quarter since the second quarter of 2014. Finally, on this page, number 6, listed in the page, the trend in digital sales and digitalization of our customers. It is once again, in our view, very strong. Digital sales, it has risen to 57% of the total units sold in the year. Digital customers, it is up by 17%, now at 28.4 million customers.
Similarly, the number of mobile customers reached 24.4 million, with a yearly growth rate of 25% and a 45% penetration, closer to our 50% target for the end of the year. Looking at the summarized P&L on slide number 5, you can clearly identify the positive evolution on the core business drivers. If you look into the right-hand column, the most right-hand column, the net interest income is up 9.5%, gross income is up 7%, operating income is up, as I mentioned, 10.2%. On this slide, though, you also see some line items negatively affecting the bottom line. Two numbers to note, the provisions, the first one. Regarding the increase in provisions, it is again worth to note that first quarter 2018, last year first quarter, was one of our exceptionally low provision quarters.
As compared to that very low base in this quarter, given the slowing global growth and its implications on the macro fundamentals of our footprint countries, we have registered some negative IFRS 9 macro-prudential adjustment impact. To be specific, versus last year first quarter, there is an additional EUR 130 million of macro-related provisioning. Also, on provisioning line item, we should also mention USA. Again, there's a macro-prudential adjustment in USA which is affecting the numbers, but there is also some higher provisioning in the commercial and the unsecured consumer lending portfolios. In terms of expectations, cost of risk in the U.S. this quarter shouldn't be extrapolated for the rest of the year.
The second one to note on this page in terms of factors affecting the bottom line, underlying net trading income was negatively impacted by the muted markets activity in the first quarter this year in comparison with the same period last year. You don't see it in the numbers, but as we will discuss it in the next page, there is a one-off impact. If you exclude that one-off impact, it was a relatively soft quarter in terms of net trading income. Going to slide number six to talk more about this. As you can see on slide number six, page number six, net interest income growing nearly double digit at 9.5% versus a year ago.
The comparison with the fourth quarter 2018, excluding the contribution of CPI linkers in Turkey, which you all know has an inherent seasonality, is also positive with an increase of 2.2% even as compared to the last quarter of 2018. Positive evolution on the right-hand side at the top, positive evolution in net fees and commissions, 2.6% versus the same quarter last year. Net trading income in the quarter is growing actually 13.5%, but as I just mentioned, this figure is impacted by the Prisma stake sale in Argentina, which is EUR 107 million at the revenue line. If you exclude the Prisma proceeds, the underlying NTI, as I mentioned, was relatively soft given the market conditions as you have seen in the announcements of other banks as well. Given the muted global markets activity, it was a relatively soft NTI quarter.
All in all, total revenues, they are up 7% versus the first quarter of last year. Slide number seven, page number seven. This is the page that I like the most. One more quarter, we continue to show positive operating jaws. It is once again very satisfying to see that our expenses are growing 3.7%, well below the growth rate in core revenues, which was 8%. This has been happening for so many quarters now, and the increase in costs obviously is, as compared to the very high inflation in some of our countries in our footprint, is very favorable. In the middle of the page, we show the very strong evolution at double-digit growth of the operating income, which we discussed before. Finally, on the right part of the slide, the efficiency ratio keeps improving.
Year-to-date improvement is 118 basis points, our new C/I ratio stands at 48.1%. If you go to slide number eight, talking about risk, moving on to asset quality. Sound risk indicators. As we mentioned, this quarter, we have seen impairments growing at 31% versus the first quarter of 2018. As I said before, it's driven mostly by the low base of the first quarter 2018 and due to broader macro-related provisioning and some higher impairments in the U.S. On the other side, if you compare this quarter's impairments with the previous one, we see a 24% decrease. On other risk metrics, NPLs were significantly reduced by EUR 1.8 billion versus last year, and the NPL ratio decreases by 53 basis points to 3.9%. Again, as I mentioned, the coverage ratio increases 110 basis points year-over-year to 74%.
Moving on to slide number nine, one of our clear bright spots in the quarter regarding year-to-date capital evolution, CET1 full loaded ratio, it has increased by 1 basis point to 11.35%. It is once again important to highlight that in the first quarter this year, we have fully absorbed the IFRS 16 impact, which was again 11 basis points on the capital ratio. This implies, again, if you combine the two, a robust capital generation in the quarter of 12 basis points. All in all, our CET1 ratio stands well above the regulatory requirement of 9.26%. Additionally, we still maintain our guidance that we will be within our capital target range of 11.50%-12% by the end of this year. I also would like to highlight at the bottom of this page, the quality of our capital.
You can see that we continue to lead the ranking in our European peer group in terms of the leverage ratio, which stands at 6.4% versus an average of 5% for our peers. Regarding the AT1 and T2 buckets. Which have been actively managed during the quarter. You might have seen some of our issuances. Both buckets remain completely endowed, both on a phased-in and also on a fully loaded basis. Slide number 10, to conclude this section on the financials and the numbers. I would like to reconfirm our focus on shareholder value. Our tangible value per share increased by 11% year-over-year, including dividends, and we again remain at the forefront group of the European banking industry in terms of profitability. Our return on tangible equity standing at 11.9% versus the average European peer group number of 7.7%, which is again, a very favorable comparison.
Moving on to digital transformation. We would like to highlight some tangible metrics around value creation here, that we also believe that will ensure the sustainability of our positive results going forward. How does digital transformation help our numbers in terms of some tangible value metrics? First, on growth. On the top left-hand side of the page, you see the growth numbers. As you can see, active client base has increased 4.6 million customers, 8% number in the past two years. We believe it's now the right time to boost activity and grow our customer base further, leveraging also our digital levers. Second, on engagement and transactionality, again at the top-end side of the page. Digital tools, they help us engage with our clients better and faster. We put here the Peru example.
In Peru, our digital engagement tools, they help us improve our interface with the clients to better identify their needs, they tailor the product offer based on those needs. This obviously then results in higher cross-sell, you see it in the numbers there. Number of clients with more than one product, it has been multiplied by 2.4 times, three months after onboarding through a new digital engagement process that we put in place in Peru. Network productivity on the left side. Very important driver. We want to optimize our branch network, we want to devote more time in our branches to advice and sales. With the help of digitized processes and tools, as you can see on the graph, the products sold per branch per month in the U.S., it has increased by 42% as compared to two years ago. Finally, efficiency.
We maintain our commitment to improve efficiency. Reducing transaction costs is another good example of how digitalization is helping us to create value. Transactions are migrating to digital channels, like mobile, online, ATM, those channels now account for 61% of our overall transactions. In this context, we have reduced the cost of a transaction by 31% in two years as a result of the channel mix of the transactions, as well as the measures that we have taken to increase the efficiency of our platforms. If you move to slide number 12, again, as we have commented in the last quarters, underpinning the growth in digital business is the continued digitization of our customer base. Digital customers, they are up 17%, they now represent 53% of our customers. In the middle of the slide, you can see the same perspective with our mobile customers, mobile channel.
Our mobile customers, it grew almost by five million, up by 25%, reaching a 45% penetration. This accelerated adoption is also expected to reach the tipping point of the 50% that we committed in the last quarterly presentation, we are on our way to reach that goal by the end of the year. Finally, on the graph, at the right-hand side of the page, you can see the continued outstanding trend in digital sales. Finally, on page number 13, before I hand it over to Jaime. On digital transformation, we would like to highlight how different we are from competitors in pushing through this transformation. One way to exemplify that, there are many other methods, it's the availability of our products and services in digital channels. This is a Spain example.
In Spain, a recent market report done by an independent firm, it shows how BBVA's availability of products, services, and advice features is leading the market. 83% of the features that are available in traditional channels, they're also available digitally for BBVA customers. The closest competitor to us is 65%. Proven by experience, it takes a while to close that gap, this gives us a differentiating edge as we serve our customers through our digital channels. Having said all of this, let me now turn it over to Jaime for an overview of the business areas. The floor is yours, Jaime.
Thank you very much, Onur, and good evening, everyone. Beginning with Spain, let me start by explaining the evolution of the NII, down minus 4.9% on a year-on-year basis. The commercial activity with clients showed a positive performance in the quarter. We had a good start of the year in loan growth, 1.8% year-on-year, together with a slight improvement in the customer spread. The loan mix is improving, it's more profitable, and it's also being supported by higher arrival rates. On the other hand, the positive evolution of the commercial activity is more than offset by a lower contribution from the ALCO portfolios, the IFRS 16 impact, and the cost of excess liquidity we hold in the ECB.
In this sense, given ECB's more dovish tone in its last meeting, we now expect a lower for longer interest rate environment, as a result, NII might decrease slightly around 2% in 2019. In any case, the Q1 decrease should not be extrapolated. The main drivers of the P&L in Spain continue to be the reduction in operating expenses and the low cost of risk. Cost continue to go down, minus 3.5% on a year-on-year basis, with efficiency improving to 54.4% as of March. That is 1.5% better than in December. We also had a better-than-expected evolution of impairments, down to 38% versus Q1 2018, drove cost of risk to 18 basis points in Q1. As a result of this very good number, we now think that the 2019 cost of risk could be around 20 basis points, improving on our previous guidance of mid-20s.
Let's move now to the U.S. Topline growth continues in line with our expectations. NII increases at high single digits, 8% versus last year, mainly supported by loan growth, especially in the consumer portfolio, growing at 22%, and the improvement in customer spread, up by 10 basis points in the quarter. Operating jaws are widening as OPEX remained nearly flat versus last year, gross revenues are up by over 6%, driven by NII and net trading income. All this makes operating income grow by over 15% year-on-year. In terms of asset quality, as Onur has already mentioned, the cost of risk reached 106 basis points in Q1 due to three reasons.
A negative IFRS 9 macro impact, higher provisions for large tickets in the commercial portfolio, write-offs in the consumer segment, where the bad performance was focused on specific segments and channels, as you can imagine, we've already adjusted underwriting and standards. It is also worth mentioning, as Onur also said, that impairments in Q1 of last year were extremely low due to provision releases and a positive IFRS 9 macro impact. Regarding cost of risk expectations for the full year, Q1 numbers should not be extrapolated, now we believe that the cost of risk at the end of the year would be around 80 or 90 basis points below Q1 levels, as we expect consumer write-offs to decrease in the second half of the year. Let's now turn to Mexico.
Mexico continues to deliver very strong results, with net attributable profit increasing by over 10% in current EUR versus last year, supported by NII and the good evolution of impairments. NII is up around 8% in constant EUR, supported mainly by activity. Loans are up by 8.6% versus last year, showing a well-balanced growth between wholesale and retail portfolios. Probably worth highlighting the sound growth in consumer loans up 12% and mortgages up 8.5%, where we've gained market share in both products in the last quarter. Mexico again delivers positive operating jaws, with core revenues up by 6.6% and costs up by 4.8% on a year-over-year basis. The cost evolution is affected by a larger contribution to the BBVA Foundation Mexico. Excluding these, OPEX would have grown by 3.8%. All asset quality indicators improve. The NPL ratio stands at 2%.
Coverage increases five percentage points to 159%, and cost of risk stays at 293 basis points, in line with our guidance for the year of around 300 basis points. These solid results continue to reflect BBVA's leadership position in Mexico, both in terms of market share and profitability. Let's focus now on Turkey. Garanti had a strong start of the year with better-than-expected performance. Compared to the last quarter, net attributable profit increased by 55%, mainly due to lower provisioning needs, and to a lesser extent, strong fee growth and lower expenses. Loan loss provisions decreased by 63% versus Q4, becoming the main P&L driver in the quarter due to mainly a significant lower provisioning needs in the foreign currency book and a limited IFRS 9 micro impact. As a result, cost of risk is down to 182 basis points, better than expected, and significantly below last year.
If the trend continues like this, we think we could beat our 2019 cost of risk guidance, which is below 300 basis points. Regarding NII, the quarterly decline, 26%, is fully explained by the lower CPI linkage contribution, very high in Q4 as inflation, you will remember, peaked at 25%. Excluding this, NII is up by 41%, mainly due to the significant reduction in TL funding costs and the TL loan portfolio growing by over 7% in the quarter. Regarding the year-over-year comparison, core revenues show a very strong performance with NII up 20%. Thanks to the higher CPI linkage contribution, versus last year. Remember that we started accruing an 8% inflation level. Also to the increase in TL loans, while fees are up by 26%. These positive numbers have been offset by the increase in impairments. All these versus the first quarter of 2018.
Let me finalize with South America. Let me provide some color on the evolution of the three main countries in the region. Starting with Colombia. Operating income increased by 8% versus last year in constant EUR, mainly supported by net trading income and flat expenses. The decrease at the net attributable profit level is explained by the increase in impairments, related to a single large ticket, now fully written off. Peru enjoyed a very good first quarter, with the bottom line up by 15% year-over-year. NII continues to be the main P&L driver, growing also at 15% on a year-over-year basis and above activity, thanks to lower funding costs. The loan book is up by 6.5%, thanks to a dynamic retail market and improving growth in commercial.
Argentina reported a net attributable profit of EUR 60 million this quarter, that's versus minus EUR 23 million last year in constant euros. Q1 results include a hyperinflation impact of minus EUR 49 million that is fully offset by the EUR 50 million positive result coming from the Prisma sale, also at net attributable level. NII is once again the main P&L driver in the country, driven by the contribution from the high yielding bond portfolio. Now back to Onur for some final remarks.
Thank you, Jaime. Final remarks are, I would like to reiterate the very strong core business fundamentals with operating income growing at double-digit. The good news is driven by recurring income and efficiency improvements. The second message I would like to highlight is that we show sound risk indicators and resilient capital position, absorbing the full impact of IFRS 16. Third, we continue creating value for our shareholders, we are one of the clear leaders of the European banking industry in terms of profitability. Finally, as the page also says, as we experience it every single day, digital transformation is positively impacting our business and ensures sustainability of our future results, as evidenced in levers like growth, customer growth, transactionality, productivity, and also efficiency. Thank you very much for listening. Now I give the floor to Gloria for the Q&A. Gloria.
Thank you, Onur. We are now ready to move into the live Q&A session. First question, please.
Our first question today comes from Alvaro Serrano, calling from Morgan Stanley. Alvaro, your line is open.
Good afternoon. Thank you for taking my questions. Two quick questions. Spain, on the NII in Spain, you very clearly explained what happened in Q1 and obviously the guidance. I want to press a bit more on why do you think the NII is going to improve over the next few quarters, given your -1% to -2% NII growth? Can you explain a bit more what's going to improve and what gives you confidence, and what should we take into account in terms of modeling for the next few quarters? The second question is on Turkey. Obviously, you've shown confidence that the provisions will be better than probably expected at the beginning of the year. The currency keeps on sliding, which you flagged in the past that the main uncertainty when it comes to provisions.
Can you maybe give us a bit more color on that confidence and what you think the currency impact so far could be or some kind of sensitivity? Thank you.
Thank you, Alvaro. Great questions, both. The first one, Spain. What will change to improve the trend is the question. As we mentioned, there are three drivers of the decline, because if you look into the Spain page, the activity and also the customer yields, they actually have improved versus last year. There were three other factors that created the decline in the NII, and those three were, as partially explained by Jaime. First of all, the IFRS 16 impact, which is there to stay. The second and the third, we see better prospects in the next quarters. The second and the third impacts or the factors were the ALCO portfolio and the excess liquidity that we had in the Spain balance sheet. The ALCO portfolio, as you might remember, we partially talked about it in the fourth quarter results.
There was a big maturity of the ALCO book assets at the end of last year, in the fourth quarter 2018. That ALCO portfolio, we started replenishing them with yielding assets, and it takes a while. We were also watching the excess liquidity situation, a similar perspective there. The excess liquidity, we were looking into TLTRO situation and everything else. Coupled all of that, we are seeing improvement on those two areas. ALCO portfolio and excess liquidity will not yield as negative impact on our NII in Spain. That's the key change looking into the next few quarters. Regarding Turkey, you are right. We said in the past that the key sensitivity here is to the currency.
What we have seen and what we have budgeted for the first quarter, we see a positive dynamic there, and we look into every single client on a client-by-client basis. So far, it's turning out to be better than what we expected. It doesn't mean that the currency is not affecting or the currency is not the key driver. Currency is still a very important driver of the NPLs going forward and the cost of risk going forward. So far, I think what we are commenting is so far, we have seen relative to our expectations, a positive picture, and given that, we expect our guidance of less than 300 to hold. Again, currency is going to be a critical driver.
Thank you very much.
Thank you. Thank you, Alvaro, for your question. Next question, please.
Our next question today comes from Carlos Peixoto. Carlos, please go ahead. Carlos from CaixaBank, your line is open. Please go ahead.
Hello? Are you listening to me? Yes. I'm getting through now. Okay. Sorry. Thank you for holding my question and also for holding your presentation in the afternoon, which I think is quite useful. First question would be regarding a bit on how do you see the potential, the new TLTROs from the ECB, and what role could that play in the management of your ALCO portfolio? Overall, how do you expect to manage the overall exposure to the ECB against this backdrop? Second question would be on capital. Basically, the IFRS 16 impact was a bit smaller than expected, which was good news. We now have another pending regulatory impact, which will be coming from the TRIM, I believe. Do you expect it to be able to entirely throughout this year?
Do you maintain the 25 basis points guidance that you have mentioned in the past? Are there any other impacts, such as the changes in risk weightings on real estate exposures, real estate lending, that we should take into consideration? Finally, just sorry for putting a third question, but just a quick one. What's the current size or evolution of the foreclosed assets portfolio in Spain in the quarter? Thank you.
Carlos, would you mind to repeat your last question, please?
The last question was the evolution of the foreclosed real estate portfolio in Spain.
Okay. Thank you.
Why don't you start with the first one? Do you want to take the first one, the TLTRO, Jaime?
Yeah, sure. As you know, we have a EUR 23.7 billion position with TLTRO2 that matures June next year. Our best case as of today, and that's why we're accumulating so much liquidity, is to pay down at maturity. We will wait until final details are provided to see whether or not it makes sense to do anything with TLTRO3.
On the capital question, Carlos, just to restate what I said in the fourth quarter quarterly presentation. We expect for 2019 regulatory impacts to be in the range of 30 to 40 basis points. This was including IFRS 16 plus the TRIMs that we expect to be concluded in 2019. As you know, the TRIM exercise is running from 2017 to 2019. Some of that will be concluded at the end of 2019, and some of that impact will probably be realized in 2020, especially the low delinquency portfolios. Our guidance that in 2019, we will see a total regulatory impact of 30 to 40 basis points, it still remains. This includes the IFRS 16 of 11 basis points, which we have already realized.
It includes the TRIM exercises that will be completed and concluded in 2019, like the credit risk in Spain, like the market risk exercise that we have just completed, and everything else. The 30 to 40 guidance still remains for this year, for 2019, as we have mentioned before. On the foreclosed assets, I have the numbers in front of me, but do you want to take it, Jaime?
Sure. They remain stable during the quarter at EUR 1.9 billion. We actually close another portion of the Merlin transaction with Vivarium during the month of April. During the month of April, we've actually transferred an additional EUR 500 million. We expect to transfer the full amount pending, an additional EUR 200 million during the next quarters.
Thank you, Carlos. Next question, please.
Our next question comes from Andrea Filtri, calling from Mediobanca. Andrea, please go ahead.
Thank you very much for taking my question. One question on the U.S. regarding your consumer strategy. If from the negative surprise of the quarter of the surge in cost of risk, what have you learned, and if this is implying any changes to your strategy in the U.S.? Secondly, on capital, the approval of CRD5, allowing for the exclusion of certain IT intangibles from deductions and the SME support factor. I wonder if you could share with us if this could be an element of relevance for you, I guess, on the positive side going forward, and how much. Just a follow-up on what was just said before regarding the regulatory headwinds. Have I understood correctly that the 30 to 40 basis points just regards the 2019 impact, and therefore on the low default portfolio, you could have some additional impacts in 2020? Thank you.
Very good, Andrea. Thank you for the questions. Let me start with the U.S. What did you learn, and are we changing the strategy, and so on? Of course, we learned. We learn every single day. In the U.S., as we probably mentioned before, and I partially mentioned it in the last quarterly presentation as well, our approach in the U.S. has been to grow the customer base, and consumer strategy was developed to achieve that. At the end of the day, what we realized was when we were acquiring customers, what we call from the open market, they are completely new customers to BBVA. It's not like lending to our existing customers, which we know and which we do very well. Given our customer base in the U.S., we went out to the open market to underwrite and acquire completely new customers.
That requires a learning curve. That requires refinement of the underwriting engines over time with the data that we have, with the real underwriting and the loans that we give out. Given that, we have learned, we have adjusted at a very micro and granular level of segmentation. We know where to go and where not to go. We have done that adjustment in the second half of last year, 2018. We are seeing some very good vintages from that new originations. What we have realized in the first part of this year, in the first quarter of this year, is some implications from the first batch of underwriting that we have done. It's an ongoing learning process, basically. You also asked, does this have any implications on the U.S. strategy? U.S. strategy is very clear.
We believe we have a clear goal of growing organically using our digital capabilities and our digital assets. This doesn't mean that we always look into inorganic opportunities as well, but our focus is clearly on organic, and that's going to continue to be helping us and serving us in the coming quarters. On the intangibles, do you want to take it, Jaime?
Yeah, sure. On the intangibles, the current deduction that we have on capital because of intangibles is 43 basis points. How much we will potentially benefit from the change in CRD5 is still not known, because as you know, we will only be able to, not to the dot, the software that is not affected in resolution or insolvency or in liquidation. Further guidelines from the EBA need to be developed. I think it's still too soon to provide a final number. On the case of the SME factor, also together with the potential additional benefit from investment in infrastructure, I think it's also still too soon to quantify the impact. It's true that it could potentially be positive.
On the last question about the 30 to 40 basis points, you asked if this was the 2019. Yes, it was. Our guidance was the 2019 total regulatory impact. This can obviously change and so on, but we still stick to that guidance, the 30-40 basis points. It included IFRS 16. It included the TRIM impacts in 2019. It included other regulatory impacts, which is we continue to have OCs and so on. All bundled was 30-40 basis points. You asked whether this includes the low delinquency portfolio. It wasn't, because we don't expect the low delinquency TRIMs to be concluded and finalized in 2019. We will see what comes out of them in 2020.
Thank you.
Thank you. Thank you, Andrea, for the questions. Next question, please.
Our next question today comes from Marta Romero calling from Bank of America Merrill Lynch. Marta, your line is now open.
Thank you very much for the evening presentation. I have a couple of questions. The first one is a follow-up on NII in Spain, the ALCO portfolio. You've got EUR 23 billion. Seems low for the size of your balance sheet in Spain. How are you thinking about it? Where are you aiming at building in the ALCO portfolio in Spain? The second one is on Turkey.
The public banks are raising equity. This is going to add pressure to volumes, margins. How comfortable do you feel about the capital position of Garanti at the moment? If you could share the sensitivity to moves in the currency to NPL. What would happen to your NPL ratio if the currency depreciates by every 10%? Where do we need to see the currency going for Garanti to need more capital? Thank you.
Very good. Why don't you take the first one, Jaime?
Sure. Okay. As you mentioned, Marta, the size of the ALCO portfolio went down significantly in the fourth quarter of last year. We had significant maturities of around EUR 6 billion. Half of that was Spain sovereign risk, and the other half Italian sovereign risk, as we shared in a previous call. We've increased it slightly, just slightly, the position this first quarter. We are planning to increase a little bit more the size of the portfolio, but we're waiting for slightly higher levels before we do that. As Onur mentioned before, we're trying to reduce also the negative cost of carry of the high-quality liquid portfolio that we have prepared in order to pay down the TLTRO in June next year.
We've increased the size of that so as to reduce the 40 basis points negative carry, and we've reduced significantly the size of the deposits in the ECB that reached EUR 27 billion at the end of last year, and now are close to around EUR 15 billion. That's what I would say.
Very good, Marta. On the Turkish situation question, let's start with the capital one. As you all know, all the numbers are public because all the banks are publicly traded. Garanti has one of the highest capital ratios in Turkey. If you look into our latest end of March numbers, we have a total capital ratio of 15.5% and our CET1 ratio stands at 13.3%. This obviously, again, is a competitive differentiation for us because when you look into the other bank's figures, we stand above them. You asked about the sensitivity of this to the depreciation. Our estimate is every 10% devaluation in TL to USD, every 10% deduct 55 basis points from these ratios, and we believe we can manage that. On the pressure on the margins, you also touched upon the pressure on margins regarding Turkey.
As you have seen in the presentation, Jaime went through it very quickly, we have seen a pickup in the spread in TL, and the foreign currency is also increasing in terms of customer spread. On the TL, it obviously depends on the level of interest rates. We might see some stabilization or maybe some decline in it, depending on the latest interest rate situation in the country. Again, we budgeted and planned for this very clearly.
Thank you.
Thank you, Marta. Next question, please.
Our next question today comes from Francisco Riquel calling from Alantra. Francisco, please go ahead.
Yes, hello. First question about Spain. You are guiding down NII slightly. I wonder if you can mitigate it somehow across the P&L, with other P&L lines. If you can please update how do you see fees evolving and the cost base, which is falling again this year. That would be helpful. I would also like to follow up on the cost of risk in the U.S. You can please elaborate it a bit more. IFRS 9 macro impact you mentioned, so can you explain the assumptions because the macro is holding up well at this point in the U.S. cycle? The write-offs in the consumer loan, this has been the main driver of NII growth to date in the U.S. Do you plan to change the risk appetite and the growth outlook in the U.S. because this segment is still growing by 22% year-on-year.
Can you give us what you 80, 90 basis points cost of risk at this point in the late cycle in the U.S. is high. What could be the through the cycle cost of risk in the U.S., given what you have shown us in the first quarter?
Thank you, Francisco. On the first question, some guidance on Spain going forward. As Jaime said, NII, we expect it to decrease slightly, 1%-2% this year, again, better than the first quarter trend, as we also mentioned due to the reasons for the first question. NII to decrease 1%-2%. On net fees and commissions, our guidance is low single-digit growth. On expenses, we continue to maintain our guidance of slightly down. On asset quality, and Jaime also mentioned it. Our original guidance was around 20s, mid-20s, now we are revising it down to around 20, which is a better figure. We also have seen it in the numbers in the first quarter. Our actual cost of risk came out to be better than what we expected in the first quarter in Spain.
That's the positive that we will generate to reach our still bottom line goals and expectations. Regarding U.S., I might have missed the first part of it, but you were asking IFRS 9 macro impact, given the cycle and given things are fine, why is there an impact? You might have seen it. We have reduced, obviously, these numbers are driven by the original expectation versus the revised expectations. We have revised our growth in the U.S. slightly down in the first quarter. This is a reflection of that. There was a negative impact coming from the revised down expectations in the macro growth. Also IFRS 9 is not only just macro, it's other metrics like real estate prices. We see some softness in real estate prices as well.
All of that bundled has created a decrease in our perspectives, negativity in our perspectives, hence it was reflected into the provisional figures. You talked about 80 to 90 basis points and so on, and you talked about the 22% growth in consumer. As you would see in the coming quarters, that growth has been tamed down a bit based on, again, the things that I've said. We continue to learn and adjust. It's all about micro segmentation. It's about underwriting to a new customer base. We have adjusted. The growth rate in consumer might be a bit toned down going forward, but still, we see huge margins there, and we will continue to do it in a gradual fashion. 80 to 90 basis points in this context, you're saying it's too high. Well, 80 to 90 basis points in this context depends on the portfolio.
As you see, our portfolio is shifting towards a higher retail heavy environment. The commercial and corporate is still going to be the core, but our growth in retail is higher than the other portfolios. Obviously, that has an implication on the cost of risk. As you can imagine, if you go and pick up any other competitor out there, the customer yields for those loans and the returns that we generate from those loans in consumer lending is much better than the wholesale portfolios. We will manage it very well. We will continue to gradually grow, and the cost of risk implication might be a bit negative, but the return implication and the profit implication will be positive.
Thank you, Paco. Next question, please.
Our next question comes from Britta Schmidt, calling from Autonomous Research. Britta, please go ahead.
Yeah. Hi there. I've got two questions, please. Coming back to the U.S. business. Am I right in understanding that you're referring to underwriting issues with the Express Personal Loan in the U.S.? Coming back to the question of what loan growth could be, could you give any guidance what the 22% could be dialed down towards? Andrea has asked about this as well. Are there any learnings from this that you can draw also on your Spanish business, given that giving out consumer loans to non-customers is all the rage, especially also in the digital lending area? The second question will be on Turkey. There's a bit of a mismatch emerging in terms of FX deposits growing, but FX lending declining. Can you comment a little bit on the funding cost outlook given the dollarization in the economy?
Also comment a bit on the Turkish lira funding outlook.
Okay. On the first one, Britta, you ask about the U.S. business, our guidance still stands for the overall loan book. We expect mid-single digit loan growth in the U.S. this year, mid-single digit. There will be a higher growth in consumer. You ask about the precise guidance, we cannot give that to you because it's an ongoing calibration, ongoing dynamic management of the portfolio. On that one, I will reiterate our overall guidance on mid-single digit for the overall loan portfolio. On the Turkish case, do you want to take it, Jaime?
Yeah. As you've mentioned, the Turkish lira portfolio is up by 7% in the quarter. The same rate on a year-on-year basis. We maintain guidance. We expect the year to end at around 5% growth in the Turkish lira portfolio. It's true that the economy, especially deposits, have been dollarizing over the last couple of months in Turkey. The loan-to-deposit ratio in $ has decreased significantly, but it's up in Turkish lira. This has created additional pressures in the Turkish lira funding over the last couple of weeks. On the level, the very positive trend of cost of funding that we've experienced in liras over the first part of the year will probably decrease slightly as the second quarter evolves. On the other hand, the FX spreads continue to improve. They continue to improve significantly. That was also the case this first quarter.
They're up by over 60 basis points, and we expect that to sustain as the year goes by.
Thank you, Britta. Next question, please.
Our next question comes from Mario Ropero from Fidentiis. Mario, please go ahead.
Hi, good afternoon. My first question is on the coverage in Spain. It is, I think, 58%, which looks very high relative to the sector. I wonder if you can give some color on the level of this going forward, and if you think it should remain this high. Don't you think that this is a competitive disadvantage versus peers regarding long growth? The second question is also about Spain profitability, trading income remains very high, I would say. To understand the sustainability of this line, could you please tell us what are the unrealized gains in the European ALCO book? Thank you.
Okay. On the first question, yes, as you said, the coverage level increased in Spain this quarter to 58%. We don't believe this is a competitive disadvantage. We think this is a competitive advantage. We are quite comfortable with our coverage level. I think we've always been very prudent, provisioning-wise, and we maintain that policy. The second question is around, if I understood correctly, the unrealized capital gains on the ALCO portfolio?
Yes, correct. In the European part.
Okay.
Yes.
The trading income went down versus the first quarter of last year in Spain. Two reasons: lower ALCO sales, and then a slower beginning in the global markets area. We do expect additional ALCO capital gains in the year, but they will probably be lower than the ones that we had last year. Even if unrealized capital gains in the ALCO portfolio have increased quite significantly over the quarter, taking into account the very low premium that Spain has reached during this latter part of the quarter.
Thank you, Mario. Next question, please.
Our next question comes from Ignacio Ulargui, calling from Deutsche Bank. Ignacio, please go ahead.
Hi. Hi, good afternoon. Just have two questions for you guys. One is, if you could update a bit on the trends that you see for NII in Mexico in terms of competitive landscape. Two small things, maybe you have commented that, but I join a bit later in the presentation, whether you could give some color on what is the under the EUR 123 million of other provisions in Spain, and also whether the EUR 8 million of other income and expenses in the quarter is sustainable. Thanks. Or what is the recurring level that we should go on a normalized level going forward? Thanks.
I'll take the Mexico one. Jaime wanted to take the second one. On the Mexico one, our guidance remains NII. We see it growing at high single digits, in line with activity. We see the clear signals of that in the first quarter as well. We expect high single-digit loan growth for the year as well. Robust as before, robust net interest income growth in Mexico. On Spain, I think it was about provisions in Spain.
If I understood correctly, I think it was on other provisions in Spain, right, Ignacio?
It was that. Yep, it was that.
Okay. I'll answer that question because it was not clear in the call. The other provision line is down versus Q4 of last year. The main impacts that we had this first quarter in this line mainly had to do with restructuring charges. We've increased restructuring charges related to the closure of branches. A good portion of the expected closures have been front-loaded to this first quarter, and so we've had to recognize some costs there, and also had to do with some early retirement charges. If you compare the number to the first quarter of last year, the number is higher because we had releases in Q1 2018, having to do with especially the real estate portfolio, both in some contingent liabilities and also on the update of the appraisal values of some foreclosed assets.
I also think that you asked a third question regarding how sustainable the -3.5% year-on-year operating expenses is. Well, we don't believe it is sustainable going forward. That's why we are guiding for a slight-
Expense decrease in 2019, although, as you can imagine, we will strive to perform as best as we can. Nothing changes from the current guidance that we have given regarding the costs in Spain. We still see a clear decline in costs, but not as large as last year, which was 3.6%.
Thank you, Onur. Next question, please.
The next question today comes from Stefan Nedialkov from Citigroup. Stefan, please go ahead.
Hi, guys. Good evening/good afternoon. A couple of questions on my side. Sorry to come back on the U.S. consumer topic, but it's something that you basically got involved in relatively recently. It looked like you wanted to make a showcase out of the U.S., how quickly you can increase operating leverage, et cetera. At least that's how it came across. In order for us to understand things a little bit better as analysts, could you just help us with, for example, return metrics of some sort? What was your hurdle rate of return or return on risk-weighted assets? Or for example, what was the cost of risk you were expecting through the cycle on that new book of business, and what did it come out to be in the past few quarters? Some color around that would be extremely helpful. My second question is on Mexico.
I see that fees grew 1% year-on-year in the quarter. Is this part of the new normal in terms of fee growth that we've been witnessing the political noise around for the past couple of months, or is this just a one-off, and we should probably be seeing something bigger than the 1%? Some color around that would be great. Thirdly, if I may, there have been some press articles on you potentially reorganizing your insurance agreements in various parts of the world. If you can share your strategy vis-a-vis insurance overall and specifically in Europe and also South America. Thank you.
Very quickly, I'll do the all three of them because we need to save time. There are five other colleagues who want to ask questions. Very quickly, Stefan, thanks for the questions. Consumer topic, I can very clearly tell you that with the expectation and still the plan, and we believe we can execute on that plan, is to have clearly double-digit return on regulatory capital on the consumer book in the U.S., and very healthy double-digit return on regulatory capital. Does this come with high cost or risk? It does come with high cost or risk. Does it come with a very high return on capital? It does come with a very high return on capital. We will continue to watch it. If it continues as we plan, we will push ahead because we manage our business on return on regulatory capital through the cycle.
If return on capital through the cycle is a good one, which in this case is a good one, we will continue to invest, but we have to do it in a very balanced way, which is the way that we are doing it. On the Mexican case, 1%, it is a bit lower than what we are expecting in the next coming quarters. We should expect some pickup in that number. On the third insurance business, yes, there were press rumors around this. We do not comment on press rumors, as you know. Insurance is a product that we love as a bank. Our customers have a clear affinity towards that product. We will always keep it in our product portfolio. In terms of production of that product, we will look into opportunities, we will look into different alternatives.
All right. Thank you, Onur.
Thank you, Stefan. Next question please.
The next question today comes from Javier Echenique, calling from Santander. Javier, your line is open.
Yes, thanks very much for, excuse me, taking questions. I wanted to go back to the commissions thing in Mexico. We were expecting some resolution of the negotiations with the government and the banking sector on this, but things appear to have stalled. I don't know if you could comment on that, and give us an idea of where we are, excuse me, right now. I'm sorry, that was my question. Everything else was answered. Thanks very much.
Okay. Very quickly again on that one. Commissions, the fee proposal, as we call it, there has been a new fee proposal, as you all know, in the past few months on the table. A revised version of the original fee proposal that was put in place back in October-November timeframe. That new fee proposal is, as far as we understand, it's sitting on one side. There's a clear guidance from President López Obrador on the fact that in the next three years, there will not be any new legislation on these type of topics, on the financial topics and so on. We don't know. There is some uncertainty around this. We don't know what will come out of it. As mentioned previously multiple times, whatever is good for Mexico is good for BBVA. We are long-term investors in Mexico.
We have been there for long. We will be there for long. Whatever is good for Mexico, and if the fee proposal supports the key objectives of the country, we are 100% supporting it as well.
Thank you.
Thank you, Javier. Next question please.
The next question comes from Benjie Creelan-Sanford calling from Jefferies. Benji, please go ahead.
Yeah. Hi, good afternoon, everyone. Most of my questions have been answered. Just two quick ones. First of all, on the U.S., and apologies if I missed it, but I just wanted to check whether you had updated the NII growth target in 2019 for the U.S. business. The second question is just a broader strategic one. Just when you think about the footprint of the group, and capital allocation going forward, and whether you're thinking about organic or inorganic growth, do you consider the mix of capital between developed markets and emerging markets an important factor? Is that a constraining factor in terms of how you'd want the group to grow going forward in terms of that balance?
Very good. On the first one, updated NII guidance for the U.S., right away, we expect high single-digit growth in the NII. High single-digit growth. That was our guidance. We stick with that guidance. On the capital allocation regarding the footprint, obviously, there are macro, and we're looking to, again, through the cycle, mid to long-term view on the countries. Our capital allocation framework is a very clear one. We do it at the micro level, which means every single dollar of capital that we deploy in any country has to go through a capital planning process, which means it has to be above a certain threshold of return on regulatory capital. It has to be above a certain threshold of return on economic capital. On those two metrics, if the relationship with the client justifies that capital deployment, we support that deployment.
We believe on top of the macro, which is very important, this micro capital planning approach is the right one to go, because there might be really great clients and opportunities in countries that we are in. The macro should not be shadowing the opportunity at the client level. We should put the macro view on top. On top of that macro view, that micro planning is very critical to us, and that's how we deploy capital. Two more questions, and we have to close, I know, but let's take the two. Gloria?
Yes. Next question, please.
The next question is from Ignacio Cerezo calling from UBS. Ignacio, your line is now open.
Hi, good evening, everybody, and thank you for the presentation. Sorry to come back to the U.S. consumer book. If you can give us some color in terms of how quickly those vintages have gone bad, basically. The second one is on Turkey. If you can share with us actually why you feel comfortable to show profits in Turkey, considering that the music around the economy and the currency in the last couple of months has deteriorated. I'm basically wondering if you have been a bit more conservative, actually, to keep some of those profits, especially on the loan loss provision side. Thank you.
Okay, on the first one, how quickly those vintages go bad. You are asking very specific. Let me go very specific. They are typically 52-month loans on average maturity, and some of them are prepaid. The weighted average lifetime is around 2.1 years because the maturity after closure is around 44 months, and the weighted average lifetime is around 2.1 years. We see the vintages in six months. That's why what I said in the beginning of this call that we have adjusted looking into the vintages in the second half of 2018. We are seeing some implications of that in the first quarter this year, we have done the adjustments. On Turkey, I didn't get the full question. You're asking whether we should be more conservative on Turkey, no?
Yes.
Yeah, I can ignore it. Well, Ignacio, the profits are still there. They're still in Turkey. If we don't need to make additional provisions, the profits are still there, are still in Turkey, I think they still qualify as being conservative.
Okay. Thank you, Ignacio. Next question, please.
Our final question today comes from Carlos Cobo, calling from Societe Generale. Carlos, please go ahead.
Yes. Good afternoon. Thank you very much for the afternoon presentation. A couple of questions. I read something around the European Union approving the regulatory equivalence in Argentina, and I wanted to know if you are expecting any sort of positive capital impact out of that. The second one, if you could add some more color on the type of ALCO portfolio you are building up. Because at current rates levels, conservative portfolio with very short-term maturities is not very profitable, I wonder what type of maturities are you adding, ALCO yields, and if you are comfortable with the risk reward of the new portfolio and whether it makes sense or it would be more conservative to add a short-term portfolio to improve the liquidity metrics but not adding such a market risk to the portfolio. Thank you.
Very good questions, Carlos. On the first one, yes, European authorities have recognized the equivalence of Argentina. It will be reflected in the second quarter numbers. We expect 5 basis points impact from that equivalence. 5, obviously positive impact. On the ALCO portfolio, Jaime?
Yes. The increase in the ALCO portfolio, Carlos, was EUR 400 million in the quarter. Okay? We agree with you that at current levels, it doesn't make too much sense to increase the size, and that's exactly what I said when I answered a previous question. What we're doing is exactly what you're recommending, which is trying to build a high-quality liquid asset portfolio of very short-term in nature, less than two years, so as to reduce more or less by half the minus 40 basis points cost of carry. We agree with you that at these levels, it doesn't make sense. The current ALCO portfolio in Spain is EUR 22.9 billion, and a little bit more than half is accounted in the former held to maturity situation. It will not affect, in case there's volatility in the market, our capital numbers.
We still hold, as I said, quite significant amounts of unrealized capital gains to act as a buffer. The average is five years, sorry.
Oh, thank you.
Yeah, I wanted to understand as well.
We have the press conference in a few minutes. Thank you very much for participating in this call. Let me remind you that the entire IR team will remain available to answer any questions that you may have. Thank you very much.
Thank you to all of you.