Morning everyone, welcome to the first quarter 2018 results presentation of BBVA. I am Gloria Couceiro, Head of Investor Relations. Here with me today is Carlos Torres Vila, Chief Executive Officer of the group, and Jaime Sáenz de Tejada, BBVA Group CFO. As usual, Carlos will begin with the presentation of group's results. Then Jaime will review the business areas. After the closing remarks, we will move straight to the Q&A. As always, we would appreciate all the participants to try to make the calls from the landlines and avoid using the speakerphone. Now I'll hand over the call to Carlos.
Thank you, Gloria. Good morning, everyone, welcome to BBVA's first quarter 2018 results audio webcast. We have really started the year with an impressive quarter, with net attributable profit of EUR 1,340 million, which is the highest quarterly number in the last three years, with growth of 12% versus the same quarter of last year, growth of 12% versus the prior quarter. It has also been a strong quarter in terms of capital generation, with 13 basis points, resulting in a yearly increase, since March of 2017, of 46 basis points and reaching a fully loaded core equity Tier 1 ratio of 11.47%. Pro forma, including here, of course, the full impact of IFRS 9, the impact of selling Chile and the real estate sale to Cerberus yet to come later this year.
The key highlights for the quarter are the strong core revenue growth, NII plus fees growing above 9%. One more quarter with an excellent evolution of costs, which significantly improve our efficiency ratio by more than a full percentage point in just three months to 48.9%, with positive jaws in all of our businesses. Outstanding trend also in digital sales. Customer digital sales were 37% of the total units we sold in the first quarter, versus 20% that we had a year ago. The number of mobile active customers exceeded 19 million, up by 43% versus March of 2017. Risk indicators continued to be very sound and improving, with a drop of 50 basis points in the NPL ratio to 4.4% and an increase of 214 basis points in the coverage ratio as a result of IFRS 9 implementation. Cost of risk stable at 0.85%.
Capital I already mentioned 11.47% with an increase of 13 basis points. Finally, we remained focused on creating value for the shareholder. Our ROE in the quarter was 11.9%, return on tangible equity 14.6%. The evolution of tangible book value per share plus dividends was a slight increase of 0.7% quarter-on-quarter, as it was impacted by the first time implementation of IFRS 9. Now, the increase in the quarter after that implementation was quite significant, 3.2% quarter-on-quarter growth of the tangible book value per share plus dividends. Incidentally, please note that the EUR 0.15 dividend that we paid in April has been deducted from our reported tangible book value at the end of March. In the flash, results were strong in the quarter with both net interest income and fees and commissions growing above 9% in constant EUR terms.
Net trading income compares to a high first quarter last year, when we recorded EUR 204 million gain that we had on the disposal of CNCB, if you recall. Gross income grows at 4.2% rate, and that would have been 7.9% ex-CNCB last year. Costs, one of the highlights here, once again, very well contained. They increased 3.2% in the quarter, well below the growth of revenues, core revenues, as well as total revenues, and well below the inflation rate in all of our footprint. As a result, pre-provision profits EUR 3.2 billion, growing 5.1%. That would have been 12.8% ex-CNCB last year. Versus that, good growth of pre-provision profit. Impairments were quite low, dropping by 5.2% versus last year. Provisions came down very, very significantly, both because of lower restructuring costs in Spain as well as lower provisions on foreclosed assets.
Net attributable profit, as I mentioned before, grew 12% versus the first quarter in euros or 22% in constant euro terms. Going a bit more in details, net interest income growth accelerated up 9.3% versus a year ago to EUR 4.3 billion. You see a slight decrease year to date. That's because of the high contribution that the linkers had in Turkey, the CPI linkers in the fourth quarter of last year when we, if you recall, we updated the inflation rate that we used to calculate the CPI linkers. Net fees and commissions also grew faster in the quarter, 9.8% versus the same quarter last year, mainly driven here by Turkey and Spain. Net trading income, I mentioned in the first quarter, was EUR 410 million. That compares to a first quarter last year in which we had the gains on CNCB.
Also our fourth quarter in 2017, in which we had significant results from our FX hedges. 4.2% versus last year, and that would've been, as I said, 7.9% ex-CNCB disposal. They're down 1% versus the fourth quarter for the reasons I just mentioned. In summary, strong core revenues in the quarter. On the expense side, we sustain the good performance. Expenses continue to grow well below core revenues quarter-on-quarter. This has been the case for many quarters now. This quarter, the costs grow 3.2% versus last year, well below the 9.6% growth in our revenues ex NTI. Also, the growth rate of expenses is well below the inflation rate in our footprint. That was 4.4% in the last 12 months, excluding Venezuela. Efficiency ratio improves significantly, 106 basis points improvement in the quarter to 48.9%.
If we look at the cost to income ex NTI, the improvement is of almost 200 basis points in just three months. Looking since the end of 2016, 600 basis points improvement. Quarter after quarter, I have reiterated our commitment here to this efficiency, and I believe the track record shows how high it stands as a management priority. The improvement in efficiency is common to all of our businesses. Costs are growing below revenues, ex NTI, in all of the geographies. Also below the inflation, except in the USA and in South America. In the U.S., it compares to an exceptionally low level in the first quarter of 2017, where we had low personnel costs. In South America, we have high inflation in Argentina.
I would particularly highlight the case of Spain, where costs continue to go down 4.7%, and Turkey, with costs growing well below inflation, 8.6% versus 11.2% inflation. In summary, we have maintained our focus here on being more efficient. We're seeing the positive impact of our transformation efforts. We had really an excellent quarter in this respect, and I'm very happy with the effort, and with the commitment across the group. A large part of it has to do with our push to digitize the business. Not only to drive efficiency, but also to increase sales. Digital sales keep growing at a fast pace in all of the countries to a very significant level. Almost 37% of all units sold in the quarter were sold digitally, and that is up from 21.5% a year ago. The strong growth trend is consistent across markets.
As you can see, digital sales represented 42% of all units sold in Spain, 39% in Turkey. They more than doubled from 14% to 31% in Mexico. In South America, the percentage has also more than doubled with a high 46%, although in this case, the figure is less representative, very influenced by the high growth in the units sold of very small ticket items, micro-insurance product in Colombia and in Peru. In the U.S., the progression is also good. Here, we had significant growth of branch sales as well, thanks to our focus on increased productivity. Digital sales are growing strongly as we make more and more products available for purchase through digital channels. We have increased our DIY availability from 83% last year to 92% now.
One recent example of this is the redesign of the pension plan digital purchase in Turkey in January of this year, where we made it fully digital, much simpler, faster, friendlier than the paper-based traditional sales process. As a result, pension plans sold digitally have multiplied tenfold in just the last two months. This is, I think, a good recent illustration of what I'm talking about. Quarter after quarter, we also continue to add tools and solutions to better support our customers in their life and their business, to make better decisions around money. Developments like BBVA Baby Planner to help families understand the impact of their household finances or BBVA Valora, which has been extended to Mexico and Colombia after the continued success in Spain. It's a good feeder for our mortgage business. BBVA Invest, a platform for funds recently launched in Spain.
The economy, the set of tools that we update every quarter that include things like the accurate prediction of future transactions and future balances, and many more. We, for example, just completed the first global corporate loan transaction using blockchain technology. The entire process from negotiation of the deal to signing the deal. That was announced yesterday with Indra. The increased availability, DIY availability, and the improved experience drive the growth of digital sales. As digital sales grow strongly, so do total sales. A couple of illustrations of that. In the U.S., for example, the production of our Express Personal Loans, the personal loan, consumer loan. For example, as you can see, has seen growth of 47% since last year.
While traditional channels had a growth of 16%, the booster was clearly on the digital side, with sales multiplying by more than four and representing almost a third of all of the volume. Another good example is the Click&Pay product for small businesses in Spain, which is a line of credit for regular payments. By improving the DIY, we have multiplied the sales through digital by 15 times since a year ago. Not only does digital drive total sales, as you can see in this case, plus 33%. It also helps to migrate transactions to channels that are much more efficient, improving our efficiency in selling and servicing. As you can see, digital sales were just 5% of this product a year ago and are now 59%. It's a clear win for our clients.
They get better service, better experience, it is more business for us and more efficient business. Underpinning the growth in digital business is the continuing digitization of our customer base, with digital customers up 25% versus one year ago to 24 million clients. That represents a 45% penetration rate of our total target customers, and we expect to exceed the 50% tipping point over the course of the next few months. We have already crossed that tipping point in six countries, including Spain, Turkey, and the U.S.A. Our mobile active customers grew almost by six million, up 43% one more quarter. With a 36% penetration, we will also reach the tipping point sometime next year. We also find that digital customers have higher satisfaction levels and that they have lower churn.
As you can see, attrition rates of the customers that are digitally active are less than half than that of the non-digital customers. Engagement levels are much higher as well, and they're growing as the functionality grows. In Spain, where our app is the best in the world, as per the latest Forrester ranking, monthly interactions of our customers through the app have doubled since May of 2016, while in the other channels, as you can see, remain flattish. While the average number of visits to the branch is less than once per month, interactions through the app is almost a daily occurrence. The increased interactions logically drives engagement, drives satisfaction, reduces churn, and increases sales. Moving on to the balance sheet, to our risk indicators. We have seen lower impairments, down 13.6% versus last year, with sustained low cost of risk of 0.8%.
Also lower NPLs by EUR 3.7 billion. A very significant drop in the quarter, another EUR 1 billion just in this quarter in drop of NPLs. The ratio NPL ratio decreasing to 4.4%, coverage up 73% thanks to the increase in provisions as a consequence of the first-time IFRS 9 implementation. Overall, we maintain an excellent and an improving risk profile. Our capital position is also strong, with core equity tier one fully loaded ratio pro forma reaching 11.47% in March, including here the full impact of IFRS 9. That was 31 basis points. The positives that will be coming from the sale of Chile and the real estate, 57 basis points on aggregate. Those will be closed, as I say, this year in the third quarter.
Very good evolution of the core equity tier one ratio in the quarter, with a generation of 13 basis points, 37 coming from our results. We deduct the accrual of dividends of 15 basis points at a 40% payout, and other impacts that deduct an additional nine basis points. Once again, I would like to highlight the high quality of our capital, which is a differentiator versus peers. We remain as the bank with the highest risk-weighted asset density, 52%, and the highest fully loaded leverage ratio, the best number here, 6.4% versus 4.9 in our European peer group. We're also one of the few banks with the AT1 and T2 buckets already covered, both on a phased-in basis and also on a fully loaded basis. A very strong position overall in solvency.
I turn it now to Jaime, who is going to give you an overview of the business areas. Jaime?
Thank you, Carlos. Good morning, everybody. We've made a small change in the business area presentation. Now each one takes up only one slide, but with the same information as the former three. As always, feedback is welcome. Let us start with Spain. In Spain, macro continues to improve. BBVA Research revised upwards its GDP growth estimate for 2018 from 2.5% to 2.9%, and also for 2019 from 2.3% to 2.5%. Core revenue growth, cost reductions, and lower impairments boosted the profitability of the Spanish business. Net profit increased by over 17% year-on-year, and that's despite a decrease in net trading income. There are three main drivers that I think explain the good performance of Spain. First of all, fee and income growing over 7% year-on-year, higher than the mid-single-digit growth guidance.
That has been supported by both asset management and higher banking fees that allow core revenue to grow one more quarter by 1.1% year-on-year, consolidating the positive growth trend initiated last quarter. That is despite the decrease in NII. Costs are down by over 4%, improving the efficiency ratio that now stands at 51.5%. We also had lower impairments, down by over 55% year-on-year. Cost of risk in the quarter went down to 17 basis points, one seven, explained by some big-ticket provision recoveries, including the sale of a large NPL. We expect to comfortably achieve our cost of risk guidance of around 30 basis points by year-end.
On top of these, the NPL reduction trend continues down EUR 450 million in the quarter, and coverage goes up by a full 7 percentage points to 57%, mainly explained by the increase in provisions as a consequence of IFRS 9 implementation. NII decreased by 1.6% year-on-year. Loan growth was concentrated on the most profitable segments, mainly consumer, growing above double digits year-on-year and SMEs. This was more than offset by the deleveraging of the mortgage and public sector book, and also the reduction of the large corporates portfolio. We expect the second half to be stronger than the first half in terms of loan growth. Customer spreads behave well, increased by one basis point in the quarter, thanks to the increase in the loan yields, mainly explained by the mix change towards a more profitable segment, and a successful price management.
We remain confident that our 2018 guidance of a flat-ish NII will be achieved. Q1 NII is completely in line with our first quarter budget, and we expect it to grow from current levels, thanks to a slight growth in loans and some recovery in the arrival rates in the second half of the year. Moving now to real estate. The agreement with Cerberus, signed last November, will allow us to reduce almost entirely our exposure to real estate-owned assets. We continue to expect the closing of this transaction to take place in Q3, probably in September. Regarding the P&L, net losses in Q1 were contained at EUR 27 million. Less than EUR 100 million versus last year. We are well on track to meet the year-end guidance on the bottom line of around EUR 100 million loss.
That compares with net losses of half a billion in 2017, helping to boost profitability in Spain. To the U.S. GDP growth expectations for the sample have also been revised upwards as a consequence of a stronger global growth, solid domestic momentum, as well as the recent tax reform. GDP in 2018 in our footprint is expected to grow by 3.8% in 2018 and 3.7% in 2019, one full percentage point above the U.S. as a whole. In the first quarter of the year, the upward trend in profitability continues, with net profit growing by 74% year-on-year in constant terms. NII is growing at 15% year-on-year, being one of the main profitability drivers, mainly supported by improvement in customer spreads, up 11 basis points quarter-on-quarter, benefiting from the higher rates and our focus on deposit costs.
NII will continue to benefit from further rate increases as the balance sheet is asset-sensitive. NII goes up by over 6% for every parallel increase in the curve of 100 basis points. Our main focus continues to be on the consumer book, where growth accelerated to 13.5% year-on-year. This solid growth in the consumer portfolio is fully offset by the decrease in the mortgage and the CIB business as a result of our focus on profitable growth. Operating jaws continues to be positive, with revenue growing by 12% year-on-year, significantly above expenses. Loan loss provisions are down -68% versus Q1 of last year, and cost of risk reached 16 basis points due to the recovery of provisions related to Hurricane Irma and Hurricane Harvey and some commercial loans.
Although Q1 cost of risk should not be extrapolated to the following quarters, taking into account the provision releases, 2018 estimates for cost of risk could be better than our initial guidance of 50 basis points. Finally, the Group tax rate has declined to 22% after the negative one-off registered in the fourth quarter of last year due to the write-down of some DTAs. In Mexico, BBVA Research maintains the GDP growth forecast for the country, both for 2018 and 2019, around 2%, driven by both domestic demand and exports. Once again, despite the uncertainties related to NAFTA and general elections in July, BBVA Bancomer results continue to show sustained growth in all P&L lines, with bottom line growing over 12% in constant terms while maintaining its leadership in efficiency and profitability.
NII grows over 8%, in line with our year-end guidance of above loan growth, thanks to the improvements in customer spreads, up by six basis points, and the higher contribution of the securities portfolio. Loans are up by 5% year-on-year, with a similar trend as in the second half of last year. While the retail portfolios are growing well, around 6%, the slowdown is concentrated in the commercial and public sector book. We expect loan growth to be stronger in the second half of the year due to diminishing uncertainties and seasonality, especially in Q4. Thus, we maintain our 2018 guidance of high single-digit growth. Fees are growing above 6% year-on-year, also in line with our full-year guidance of mid-single digit growth driven by mutual funds, investment banking, and credit card fees. Operating jaws remain positive, and costs continue to grow well below inflation.
The cost-to-income ratio continues to improve. It reached 33.1% in the quarter, despite being already best in class in the industry. Impairments on financial assets decreased year-on-year. The NPL ratio is down, and cost of risk stands at 318 basis points, well below our guidance for the year. We expect cost of risk to be below 350 at the end of the year, but above Q1 levels, given our expectations of higher activity growth. Finally, coverage goes up to 153% in the quarter as a consequence of higher provisions due to IFRS 9. Let's move on to Turkey now. BBVA Research expects growth to moderate this year from a GDP growing 7.4% in 2017. We now expect a 2018 that will grow around 4% on the back of tighter monetary policy and lower fiscal stimulus.
Garanti Bank continues to show outstanding results, net attributable growing by over 27%, excluding the change in perimeter. Thanks to core revenue growth and its focus on cost control, core revenues are growing by 16% year-on-year, thanks to both NII and fees. NII is up by 10%, mainly explained by loan growth and a successful customer spread management, more than offsetting the increase in swap costs. As Carlos said, the comparison versus Q4 is impacted by the inflation rate accrual of the CPI linkers that generated an extra EUR 124 million in the quarter. Excluding this, NII would have been flat quarter-on-quarter. Lending growth in Q1 is up by 11% year-on-year, in line with our full-year guidance of double-digit growth thanks to the TRY portfolio and despite the limited use of the credit guarantee fund this quarter.
We're gaining market share in the most profitable segments as consumer and business banking. Customer spreads are up by 25 basis points versus Q1 of last year due to a successful price management and the better mix. Net fees and commissions grow by over 40% year-on-year. The main drivers are credit card fees and project finance commissions. Operating expenses show an impressive performance once again, with costs growing just 8.6%, significantly below average inflation, and positive jaws widened even further. It's worth mentioning that Garanti is implementing its new service model that continues to bear fruit, improving efficiency, customer experience, and employee satisfaction. Finally, on asset quality, cost of risk increased in the quarter to 117 basis points, explained mainly by a large ticket provision and negative IFRS macro adjustments. Excluding these two effects, cost of risk would have been around 100 basis points in the quarter.
We maintain our guidance of cost of risk of around 100 basis points for year-end, although, as we mentioned in January, it will continue to be very dependent on the economic environment. Let's wrap it up with South America. BBVA Research expects GDP in BBVA's footprint to grow at 2.7%, above the 2.3 achieved in 2017, converging to levels above 3% in 2019 in pretty much all countries. Q1 results reflect a sound growth in all P&L lines, with core revenues up by 14% versus Q1 of 2017. NII increases over 15% year-on-year with two main drivers: lending growth above 11%, mainly explained by Argentina and Colombia, and higher customer spreads in Colombia and Chile. A good performance of fee and commissions that grow over 10% year-on-year, and an excellent cost management in the region, also with positive operating jaws in every country but Chile, where they are flat.
Impairments on financial assets increased by only 2.2% year-on-year, significantly below activity growth. Remember that last year we had a large ticket to be in provision in Colombia. Cost of risk stands at 137 basis points, and we maintain our year-end guidance of around 160 basis points. That's a 30 basis points increase versus 2017. All in all, bottom line is growing by 33%. Now back to Carlos for some final remarks.
Thank you, Jaime. My final remarks are only to reiterate the high quality of our results this quarter, supported by core revenues, which grew 9.6%. We are seeing a clear impact of digital on our revenue growth and also on efficiency improvements, with many quarters now of increased efficiency as a consequence. We are achieving double-digit returns in developed markets, both in Spain, even including the real estate business, as well as in the U.S. It has been a long journey after the crisis, and it is good to see that returns in these two countries are now above the cost of capital, even in the current low rate environment. Finally, we're sustaining growth and sustaining good returns in the emerging markets with strong performance in Mexico, in Turkey, and in South America. All in all, we continue to focus on shareholder value. Thank you very much for listening.
Now I give the floor to Gloria for the Q&A.
Thank you, Carlos. We are ready to move into the Q&A. As always, I would like to ask you to limit yourself to two questions per caller so that we can attend as many participants as possible. First question, please.
The first question today comes from José Abad from Goldman Sachs. José, please go ahead.
Yep. Hello. Good morning. Do you hear me? I got disconnected, I think.
No, we can hear you, José.
Hello, good morning. I have two questions. The first question is, obviously, you make a very clear point this time on the causality coming from your digital strategy on lower costs at the group level. I think my question here is, could you please quantify what is the contribution? We've seen this improvement about three percentage points in the cost to income over the last year. What would be contribution of your digital strategy to that three percentage point improvement in your cost to income? A follow-up to this is where do you expect actually the cost to income to get following your strategy? The second question is on capital. You are reporting the pro forma core equity Tier 1 ratio, the 11.5%, including these two transactions.
Do you consider that as excess capital, and if so, what plans do you have to deploy any potential excess capital going forward? Thank you very much.
Thank you, José. On the impact of digital, it is very hard to attribute directly impact and quantify it in the way you request, José, it is very clear now after so many quarters of growing, not only the customer base exponentially, particularly in the mobile side, with sustained growth rates of 50% now for many months. As I was saying, it's not only the growth of the mobile customer base, not only the growth of our digital sales, is that then we're seeing that the total sales grow, that our revenues grow, and they grow well above the rate of increase of costs. Certainly, there is a high element of the impact of digital on this. I think we have much more room to go in this avenue. Still, we have not reached the tipping point.
We will reach this year on digital customers, next year on mobile customers, then soon, also on digital sales, so that digital sales will be more than 50% of our business within two or three years. That opens the door to a rethink of the cost base on the fixed cost element, which represents really the traditional channels. Also, on the back end, below the glass, so to speak, the process improvements that we're working on in the transformation of what we call the production model, the TMP, transitional production model in Mexico and the U.S., in Peru, in other countries, we're working in many initiatives that should yield additional improvements in efficiency. Our view is that we will continue to see many quarters ahead with revenues growing ahead of costs, thereby continuing to improve the cost to income.
I would not dare to give you what ultimately that might be, but it could be significantly lower than today. On the capital, this is a recurring question. I don't think we have much change from a quarter ago. Yes, we generated 13 basis points. That's really good. We still have to close the transaction, so the 11.5% certainly is 50 basis points ahead of our target. Once we close those transactions, and depending how then the business has evolved, how much growth we have seen in our loan book, in our risk-weighted assets, we will see where we stand, and we'll make decisions on whether there's excess capital then. I think it is a bit premature to consider what to do with that excess capital.
Thank you, José. Next question, please.
The next question comes from Sofie Peterzens from JP Morgan. Sofie, please go ahead.
Morning. Here is Sofie Peterzens from JP Morgan. Given that we have the elections upcoming in Mexico, I was wondering if you could just share your view on what you think will happen after the elections, especially if AMLO wins. Do you think loan growth could accelerate? Do you think asset quality could continue to improve further? What's your scenario once we have the presidential elections behind us? My second question is around your hedging policy. Could you remind us on your hedging policy, especially for the Turkish lira, given that we have seen, or the currency has been reasonably weak year to date? Thank you.
Thank you, Sofie. On Mexico, again, it's been now many months with the speculation as to what might happen in the election. The good thing about the election happening in July is that it will be over, so the uncertainty will be reduced, and that has been weighing, together with the NAFTA uncertainty for many months, as I say. No matter what happens, Mexico is one of the most attractive regions in the world, regardless of who wins. Competitive industry, great business community, promising growth ahead with a very young population, with a history also of sustained growth for two decades. Strong, very well-regulated financial system. None of that will change. What we see is, we're looking ahead to the election independently of who wins. We believe Mexico will have a bright future.
Also, we have seen uncertainties around NAFTA decreasing significantly, and that, I believe, is much more relevant to Mexico's future than the election. On the hedging policy, I turn it over to you, Jaime.
Yes. We currently have hedged around 50% of the P&L contribution coming from Turkey and around 70% in the case of Mexico. Regarding CT1, sensitivities remain as in the previous quarter, very low. For every 10% depreciation, CT1 will go down by around two basis points, and that is true in Mexico, Turkey, and Latin America. We currently have hedged 85% of what is not naturally covered by the ratio in the case of Mexico, 70% in the case of Turkey, and the FX impact in the quarter on the CT1 was nil.
Thank you. Thank you, Sofie. Next question, please.
The next question comes from Alvaro Serrano from Morgan Stanley. Alvaro, please go ahead.
Hi. Two questions, please. First of all, on Spain and the loan book growth, it continues negative. You've pointed out public lending, but I'm just curious if you can give us an update, because the latest comments from yourselves and general in the industry this is the year where we would see the end of the deleveraging. Can you give us an update of how you're seeing that process and if you're still optimistic about seeing loan growth this year? The second question is related to some of the questions asked before around your footprint. Obviously, you've talked about the elections in Mexico, the elections in Turkey. Ultimately, that's a reminder. I think political uncertainty is an issue in the emerging markets, and I completely agree with you that the franchises in the countries have a lot of potential.
In the past, you've talked about bigger footprints in developed world. If you could choose, would you choose to have a bigger footprint in developed world, ideally? I'm just looking a few years out how you see the bank and ideally, is there too much emerging market at this point? Thank you.
Thank you. Thank you, Alvaro. On the Spain loan growth, I think Jaime summarized it really very well. We still see a slight loan growth ahead, and we believe the second half will be stronger than the first half. Also, the first quarter is typically seasonally low, more so this year where we had the Easter holiday. Good trends we've seen and we will continue to see in the consumer and SME portfolio. Mortgages still will deleverage. We have more uncertainty around the corporate world, the CIB, and the public sector. We still, as I say, think that the second half will be stronger. On the uncertainties and your question on developed emerging. Uncertainties on elections happen in every country, in Italy, in Spain, in the Netherlands, in Germany.
I don't think it's fair to say that because we have elections in Mexico and in Turkey, then we have a footprint that has uncertainties. That happens everywhere, anywhere, the U.S., everywhere. Yes, there are particularities around the candidates here or there, or around the personalities. Again, those two countries are large populations, very young with bright futures ahead. That's how we look at it. We look at it as a diversified portfolio. In each one of the markets, we strive to have returns above the cost of capital. The issue, even adjusting for depreciation, was not in the emerging countries, was in Spain and in the U.S. For the first time in many, many years, we have a quarter in which in Spain and in the U.S., our return is above the cost of capital, clearly. That will continue.
We have in the U.S., the headwinds, I mean the tailwinds of the rate increases, plus the huge potential of our franchise there, great performance with the management we have in the U.S. In Spain, the weight has already increased to 25% of the total net profit of all our businesses, and will continue to increase. We see the increase in developed markets more by the natural return of Spain and the U.S. to profitability more than anything else.
Thank you, Alvaro. Next question, please.
The next question comes from Marta Romero from Bank of America Merrill Lynch. Marta, please go ahead.
Hello. Good morning. I've got two questions. The first one is on the competitive landscape in Spain. The second one on costs in Spain as well. First one, how do you think BBVA is playing its cards there? Are you being more aggressive on pricing? We're seeing some of your peers are starting to complain about your pricing policy. Here, where are the areas where you're more interested in growing, is it mortgages, consumer? What's your pricing strategy and loan growth targets for large corporates? The second one is on costs. Your performance is pretty good. You're outperforming your peers. How sustainable is this? In particular, I was curious to see what the outlook is for the depreciation line, given that you keep investing in digital. I would've assumed that line would be growing, or at least not coming down.
It would be great to have a little bit of a view on your digital budget on the P&L. Thank you.
Thank you, Marta. Our competitive positioning in Spain. We clearly have a much higher market share in mortgages than what we're producing today. In that segment, we're still well below what our natural market share would be. We're putting a lot of focus on growing in the consumer loan, small business segments, and we're having great results there. We have improved significantly our tools to discriminate price based on risk. That's true also for the mortgage business. One might see aggressive numbers in terms of pricing. That's not the general pricing available to everyone. It's prices that are adjusted to the risk profile of the customers. We're very confident that in each and every one of our originations, in any one of the segments, we are earning our cost of capital, both on an economic capital basis as well as on a regulatory capital basis.
We have, as I say, improved tools to make sure that's the case. We do want to grow in Spain. We want to grow in the consumer book. We want to grow in small business. Also commercial has been one of our strongholds, will continue to be, as well as mortgages. On costs, we will continue to see a slight decrease, as we said three months ago. We had a good performance this quarter, and that will continue. Of course, the effect of CatalunyaCaixa last year was still significant, so we won't see numbers coming down as much. The fact that we are, as you say, investing in digital, doesn't mean that we are increasing our total investment.
We have put a lot of focus into dynamic allocation of resources, so that every three months, applying agile methodologies, we reassign resources, both people and money, to the projects that have most impact. It's not that we're doing in total more things. We're just doing the right things, the things that have impact. I think that goes a long way to improve the experience of our customers, to improve our sales, at the same time, without increasing the total bill.
Thank you, Marta. Next question, please.
The next question comes from Benjamin Toms from RBC. Benjamin, please go ahead.
Good morning. Two questions for me, please. Firstly, are there any headwinds to capital that you foresee before the end of the year other than RWA inflation? Secondly, do your assumptions for loan growth in Mexico incorporate a positive outcome from NAFTA negotiations? Would they be revised if a deal is not reached? Thank you.
Sorry, I didn't quite understand the second question. What was it?
The NAFTA negotiations.
There are no headwinds to our capital position, so that one's easy. On Mexico, again, as I said, the uncertainty has been lingering for long. We have seen already the fourth quarter last year, a slowdown in investments in the corporate sector that translated into lower growth in the loan book. We continue to see a bit of that in the first quarter. We don't believe that will continue. We are very confident that NAFTA will reach an agreement, because everything has been going to the positive over the last three or four months, and every successive round of negotiation, the sixth, the seventh, the eighth round, I don't know where they are now, shows that NAFTA will be concluding with something that is a win-win for Canada, for the U.S., for Mexico.
Thank you, Ben. Next question, please.
The next question comes from Rohith Chandra Rajan from Barclays. Rohith, please go ahead.
Hi, good morning. I've got two as well, please. The first one was on fees, where you've again showed strong growth. You highlighted Spain and Turkey as key drivers there. Spain up 8% year-on-year, and actually up 6% quarter-on-quarter. Turkey 18% year-on-year, 21% quarter-on-quarter. I wonder if you could just talk about the drivers there, and also, I guess the sustainability, because those, I guess are particularly strong trends. That was the first one, and then secondly, just on the U.S., you've done a good job of keeping the deposit cost low. We are seeing, I guess, some increases in deposit betas across other U.S. banks. Just wondering if there's any more that you can do on deposit costs or if you expect them to start rising from here. Thank you.
Jaime, do you want to answer these, the two questions?
Yeah, sure. Okay, on fees. There's nothing special, really, in Spain. Both mutual funds and pension plans and banking fees support the good trend. We remained very confident that we're going to meet our mid-single-digit growth guidance for the full year. In the case of Turkey, the same is true. Rates are even more impressive. In this case, it's true that we have a project finance commission that we got in the quarter. Even with that, the performance will continue to be very strong, very diversified. Merchant fees are behaving very well, credit card fees in general, I think that trend will remain true in the rest of the year. Regarding deposit costs in the U.S., I think it's a good question.
It's true that we've had a very good cost control in our retail funding in the U.S. This has been going on now for over a year. This has allowed us to improve significantly our customer spread over the last four quarters. As we continue to expect a good behavior in rates in the U.S., we have no reason to believe that this trend won't continue. We remain very positive, not only on beating our guidance in the U.S., but on reaching but probably beating the NII guidance.
Thank you, Rohith. The next question, please.
The next question comes from Carlos Cobo from Societe Generale. Carlos, please go ahead.
Hello. Thank you very much for the presentation and the numbers. Two questions from me, one on Turkey. Garanti has showed the application of IFRS 9, the geographies, and there's been a big increase in the stage 2, let's say, loans or doubtful loans, so to speak. Could you elaborate a little bit more on this, if this includes restructured credit and how that compare with the ECB standards? Whether those loans would have been included in NPL ratios under the ECB standards or not, and how do you expect those restructured credits performing, whether they'll be normalizing back to performing or there's a fair chance of increasing NPL stocks?
Second, I know you may be tired of this question, but just quickly, if you could discuss your thoughts around capital and the gap with European peers, let's say your 11% target could be comparing with an average CET1 ratio of 13% in Europe. Could it be a chance for you to increase your target ratio higher from 11%? Let's say that would give you a better solvency position when you do business with large corporates, and that could help. Is that an option at all or not? Thank you.
Starting with that one, again, we've talked about it before. We are very stable here. We've had this target of 11% now for years, we continue to have that target. There is nothing in our business that would signal that we would need a different one because we have a very diversified business, very high risk-weighted asset density, good leverage ratio, very resilient recurrent earnings, very low volatility in those earnings, all the good things. If you look at other banks, yes, they might have higher ratios, but they are much worse in all of those elements or many of those elements. Then you see quarter on quarter that they're losing 60 basis points here, 80 basis points there, like some announcements just this last quarter. We consistently generate capital quarter on quarter, and with those characteristics, the 11% is what we're happy with.
On Turkey, this has to do with what Jaime mentioned, the big-ticket names that have been restructuring. Mostly it has to do with that. We are well provisioned for the names that we know very well, again, the guidance continues to be the one we had. Meeting it will depend on what happens on the macro side. As I said, there's no further than that. I don't know, Jaime, if you want to add anything.
No, that's perfect. Just clarifying. Of course, our consolidated numbers comply with all international standards, so you just look at our numbers, and they are perfectly correct.
Thank you, Carlos. Next question, please.
The next question comes from Andrea Filtri from Mediobanca. Andrea, please go ahead.
Yes, good morning. Two questions. With IFRS 9 implementation, would you expect a lower like-for-like SREP in December? If so, what would you need to see to change your payout policy? Secondly, what is the cost of the hedging strategy you have in place currently, and when does it roll off? Thank you.
We have to see what SREP comes. It is really very premature to know what SREP will be like, even the stress test is also going on. I don't think we have a view that anything might change because of IFRS 9. I don't think so. What this rep will come up with, we will see. It is very early in the supervisory evaluation process. If you look at the bank, everything has gone to the good side in terms of every metric. Things should look better than they have ever looked. In terms of customer hedging, Jaime?
Yes. Well, what I said is all the data on a 12-month forward-looking basis. It is an average. We have 50% P&L hedge in Turkey and 70% in Mexico, and that is always on a 12-month forward-looking basis. Regarding costs, the cost of coverage of the P&L goes in the NTI line, and the cost of hedging the CET1 ratio goes in reserves.
Thank you, Andrea. Next question, please.
The next question comes from Ignacio Ulargui from Deutsche Bank. Ignacio, please go ahead.
Hi. Good morning, everyone. Just one question on my side. Could you update us on the interest rate sensitivity in Spain and in the U.S.? Thanks very much.
Ignacio, it remains exactly the same as it was last quarter. In the U.S., for every 100 basis points increase in the curve, our NII will go up 6.3%. In the case of the EUR balance sheet, it will go up by around 15%.
Thank you, Ignacio. Next question, please.
The next question comes from Carlos Peixoto from CaixaBank BPI. Carlos, please go ahead.
Hi, good morning. Just one question from my end as well. If I recall correctly, Jaime mentioned a cost of risk of 30 basis points for Spain. I'm sorry, I'm having some problems here. My question here was basically, do you see this as a level for the upcoming quarters, or should we expect the upcoming quarters to be above 30 basis points so that the full year is at 30? This is basically whether we should expect a stronger duration in upcoming quarters or just a normalization after the write-backs in the first Q. Thank you.
Okay. Thank you, Carlos, for your question. What we said is that we will comfortably achieve our guidance of cost of risk of around 30 basis points, and that remains true now. I'd rather leave it there.
Thank you, Carlos. Next question, please.
The next question comes from Andrea Unzueta from Credit Suisse. Andrea, please go ahead.
Good morning. I have a couple of questions. Apologies if you've addressed some of this during the call, I joined a bit later. Did I understand correctly that your flat NII guidance for Spain assumes Euribor increases in the second half of the year? The second one is on Mexico. Your loan growth is at 5% year-on-year levels. There has been NIM compression in the quarter. Can you tell us if you reiterate the double-digit growth target in terms of loans? Can you comment a bit on margins, please? Finally, if you could quantify the one-off fees on Turkey. Thank you.
The answer to the first question is yes, we are expecting a slight increase in Euribor rates in the second half of the year. In the case of Mexico, we are expecting a high single-digit loan growth in 2018. NII will grow in line with activity. We remain very confident that NIMs will behave well as we've been able to manage customer spreads very well during the last few quarters, and also the higher contribution of the securities portfolio.
Thank you, Andrea. Next question, please.
The next question is from Javier Echanove from Santander. Javier, please go ahead.
Hello. Hi. Thanks for taking my questions. I just have two very quickly. In Spain, on the NII, could you give us an idea of how the ALCO book has moved or changed between the fourth quarter and the first quarter of 2018 in terms of size, yield, and average maturity or duration? The second thing is, also on the net interest income in Spain, it looks like the reduction in funding costs in Spain is logically bottoming. At the moment, I'd like to know what is your thoughts about future behavior or funding costs in Spain. Thank you.
Okay. On the ALCO side, it's pretty stable versus what it was the last quarter, slightly below 26 billion. The average duration is around 3.4 years, pretty similar to the one that we had last year. Of course, we do expect a lower contribution in the ALCO portfolio, in 2018 versus the one we had in 2017. Regarding cost of funding, it is true that our retail funding cost is seven basis points this quarter. As we said before, it's very difficult to see this continue to decrease. We do expect mix improvements. We also saw these significantly in this first quarter. Demand deposit accounts continue to increase. Time deposits balances continue to go down. That deposit mix will continue to impact positively our cost of funding.
What we continue to have is lower wholesale funding costs, as well as lower wholesale funding volumes. That is also having a very positive impact on NII. That is a trend that, as we pointed out before, we continue to expect for the rest of the year. Let me answer the question that I didn't answer before, around Turkey. The one-off on the project finance side is 18 million, between 18 and 20 million EUR. That's all.
Thank you. Thank you, Javier. There are no more questions. Thank you very much for joining 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, and have a nice day.