Good morning, and welcome to Bankinter first quarter 2017 results presentation. As usual, our CFO, Gloria Hernandez, will comment on the highlights of the quarter, and we will follow with the Q&A session afterwards. Gloria?
Thank you, David. Good morning. The financial statements we are presenting today have been filed with the CNMV before market opens. As usual, you could access the different documents on our corporate website. Let's start with a brief summary of the main financial indicators of the quarter. Group net income stands at EUR 124.4 million, growing 19% year-on-year, and gross operating income reached EUR 467.4 million in the first quarter, growing by 14% from the same quarter last year. Efficiency, measured by the cost-to-income ratio of the banking business, stands at 46.6%. The NPL ratio went down year-on-year seven basis points to 3.88%, including Portuguese assets, and 13 basis points since December 2016, like-for-like. The fully loaded common equity Tier 1 ratio now stands at 11.3%, improving from year-end 2016, with a phasing ratio stable at 11.6%.
In annual terms, the group's ROE reached 12%, second to none in Spain in this main financial indicator. As usual, we have structured the presentation in three main sections: financial results, risk management, and finally, a quick review of the different business lines. Going into more detail and for comparative purposes, here we present a set of Bankinter's total group P&L figures and another one which shows the like-for-like comparison with our previously published figures, that is excluding our Portuguese business that was not part of the group during the first quarter of 2016. The quarterly net income of EUR 124.4 million has grown by 18.7% compared to the first quarter last year. Like-for-like, net income was EUR 120.6 million, growing 15.1% from a year ago, showing again a record level of quarterly recurrent profits.
The net interest income grows by 5.6% like-for-like in the last 12 months and by a remarkable 17.1% for the group, and continues to show very strong resilience despite the persistently difficult environment for banks. Quarterly net income for the group reached EUR 102 million, growing by 17.6% in the year, and excluding the contribution from the Portuguese franchise, shows a strong 8% increase, reversing last year negative trends in the markets, and also shows a good behavior in our corporate banking business. Other non-interest income from clients business at EUR 85.6 million is slightly down by 3% in spite of the increase in LDA contribution. Trading income at EUR 23.9 million is up year-on-year, although guidance for the full year continues to be flat with some quarterly volatility for extraordinary profits, such as the Visa Europe deal in the second quarter of 2016, et cetera.
All in all, total gross operating income stands at EUR 467.4 million, 13.8% up from the previous year and are still resilient and growing 5.5% up on a like-for-like basis. Bankinter continues to invest in organic growth and strategic customer business, with operating expenses up 6.1%, excluding Portugal. In spite of this, banking activities continue to show below the banking sector average cost-to-income ratio of 46.6%, including Portugal, a somewhat less efficient franchise. Total group's cost of risk at EUR 55.4 million in the quarter also remains flat, but shows a reduction of 19.5% compared to the first quarter last year on a like-for-like basis. Finally, the group's profit before tax of EUR 171.6 million grew by 16.3% and 13.8% on a like-for-like basis over the same period last year.
The loan book at EUR 51.3 billion remains flat quarter-on-quarter, in line with the objective, taking into account the seasonality of the first quarter every year, particularly in corporate lending, as we will analyze later. In the last 12 months, the total group loan book grew by 15.7% with the integration of Portugal. Excluding the Portuguese business, in the last 12 months, the loan book grew by EUR 2.4 billion, up 5.3%, a growth rate that is once again an exception in the Spanish banking sector that continues to shrink at a yearly rate of 2.9%. On the other side of the balance sheet, retail customer funds stand at EUR 45.3 billion and have continued to grow in the quarter by EUR 1.2 billion. Still showing an impressive 13.2% of organic growth year-on-year, that becomes 24.3% adding our Portuguese business.
Thanks to this continued growth in volumes, net interest income shows a very resilient pattern despite the continued impact from negative rates on main Euribor references. Like-for-like, quarterly net interest income amounts to EUR 232.5 million, equal to the amount of the previous quarter if we adjust the two-day difference. On a yearly basis, the total NII of the group grew by 7.1% and stands at EUR 257.7 million, and excluding Portugal, it has grown by 5.6% in the year. At this point, a full year guidance of mid-single digit growth for the group's NII seems reasonable. To date, net interest income only represents 55.1% of the total group's operating margin, and this contribution will remain stable going forward with balanced growth between fee income and other client incomes, such as insurance.
In the graph on the right-hand side of this slide, we can see that one more quarter, and despite a record low level of yield curves, the client margin, stable at 1.85%, continue to show resilience. On an accumulated quarterly basis, credit yield on loans stands at 2.06%, or seven basis points below the first quarter of the previous year. In the same period, the cost of liabilities, including both retail and wholesale, has enjoyed a reduction of 24 basis points and stands at 21 basis points at the end of the quarter. As a result of this, client margin has increased by 17 basis points in the last 12 months. In the last quarter, the reduction of the cost of liabilities was four basis points and stands at 21 basis points, less than half the level of the previous year.
The term deposit back book continues to shrink and now represents only 20% of total retail deposits. Its price remains at 27 basis points, with new production stable at 21 basis points. Credit yields, both in mortgages and corporate financing, as well as the cost of retail deposits, continue to be very stable, with a still improving cost of wholesale funding, which make us believe that client margin will remain very resilient in the coming quarters. Looking now at the contribution of the ALCO portfolio in the net interest income, the portfolio amounts to EUR 5.5 billion at the end of the quarter, with an average yield of 2.9% and an average duration of 2.9 years. Although the average maturity of these bonds is still long, with 7.2 years. 70% of the portfolio are Spanish government bonds.
Due to its maturity profile, we should expect a very recurring contribution to our net interest income in the next few years. Unrealized gains amounted to approximately EUR 400 million in total, and they mostly sit in the hold-to-maturity portfolio that has an average maturity of 5.8 years and a yield of 3.8%. Fee income has changed pattern over the last few quarters and now shows strong trends on a yearly and like-for-like basis, growing at 8%. Including the Portuguese business, this growth is 17.6%, accounting for a remarkable 21.4% of the group's total income. Looking at the fee income breakdown, the largest contributor continues to be asset under management fees, with a 16.1% year-on-year increase based again on volume growth both in mutual funds and managed portfolio business.
The second contributor of our banking fees is payments and collections that continues to show higher client activity in our corporate businesses, with a remarkable growth of close to 20% in the quarter over the same period last year. Equity brokerage has recovered from a negative 2016 and now ends the quarter with an increase of 16.2% over the same quarter last year. Fees coming from the sales of insurance products, mainly but not only life insurance, are also increasing by 30.5% year-on-year due to the strong contribution of the production of mortgages and Portugal's contribution. FX differences with customers and risks-related fees are both up by 12.9% and 7.9% year-on-year respectively due to better market conditions and more intense commercial activity. Finally, fees paid to our independent financial agents and partners are growing at 13.5% year-on-year, showing the greater profitability of both businesses.
Portugal's total contribution to fee income remains stable in the quarter, in line with the previous ones. The excellent performance of the fee income, reaching EUR 100 million in the quarter, makes us confident about the outlook of this line for this year. If the market environment remains stable, this should lead to a mid-to high single digit growth for the year. The group's client-related non-interest income, this is excluding trading income and fees, was down 2.9% year-on-year and now represents 18.3% of total operating income for the group. The largest contributor to this item continues to be the insurance margin of Línea Directa that amounts to EUR 85.8 million, up 7.1% compared to the first quarter last year figures after another very good quarter in its motor and home insurance businesses. This business accounts for 21% of the total income of the group.
Other income and expenses line is a miscellaneous category with small contributors with both positive and negative impacts, the total being less than half a million EUR in the quarter. As a reminder, here we include the contributions to the Deposit Guarantee Fund, the Single Resolution Fund, and other levies and taxes on deposits that will impact later in the year. Gross operating income is up 13.8% over March 2016, and on a like-for-like basis, plus 5.5% compared to a year ago. The contribution of non-client related income from trading and institutional activities continues at the lowest levels in years, with a mere EUR 24 million in the quarter or just 5% of total quarterly income in a good quarter for trading. Client-related business has grown by 4% like-for-like in the last 12 months.
Like-for-like banking cost of EUR 145.7 million in the quarter grew EUR 8.4 million or 6.1% over the same period last year, of which almost 90% were related to the increase of personnel in our Consumer Finance business unit and in the new digital transformation team. Comparing this quarter with the last one, the operating cost of our Portuguese franchise have been reduced by 14.2%. At the same time, expenses related to the integration process have disappeared, allowing a reduction in the total banking cost of 9.6% in the quarter. Despite the annual increase in operating cost, the yields have opened by 10% year-on-year, and the bank has kept a cost-to-income ratio, including amortizations, at 46.6%. Allow me to remind you that we have shut down the integration office for the Portugal project, and any additional expense will be absorbed this year by the Portuguese or Spanish P&L.
In Línea Directa, operating costs grew by 7.6%, right on plan, in line with the current increase in business activity with new clients and clearly below the 9.6% increase in the number of policies and premiums in the period, well above the sector growth. Our guidance for yearly group costs continue to be a low single digit, thanks to a more stable quarter evolution. In this slide, we show cost of risk performance on a quarterly basis and over a much longer period since 22. As a clarification, when calculating the cost of risk in Bankinter, we include both the cost of all impairments as well as the results of the sale of foreclosed assets. Overall cost of risk has decreased by 15% in the quarter. Like-for-like, the cost of risks has reduced by 16.4% in the last 12 months.
Now at 39 basis points, it is just below our 40 basis points guidance. Based on the historic graph on the right-hand side of the page, we maintain 40 basis points as mid-year guidance for the cost of risk through the cycle. Although we will probably see a small improvement this year. In this slide, we show the comparison of quarterly contribution of the different parts of the P&L account, all growing above double digits with respect to the previous year. Finally, annualized ROE has reached 12% from 10.7% a year ago, again second to none among listed Spanish banks and in line with the Bankinter Group business plan for 2018. We will now analyze the main risk management indicators, which cover credit and liquidity risk, as well as solvency.
Asset quality continues on an upward trend with a further reduction in problematic assets due to continued negative to gross entries, lower foreclosed assets, and write-offs. Portugal added in April last year around EUR 470 million NPLs, with a high coverage ratio above 86%. Total group non-performing loans stand at EUR 2.2 billion at March 2017, with a 7.7% reduction excluding Portugal effect year-on-year. The NPL ratio continues to decrease even after Portugal has been consolidated, and it now stands well below 4% and 13 basis points below the last quarter level. Excluding Portugal, the ratio fell to 3.47%, again showing an outstanding performance compared to the average of the Spanish sector. NPL provisions for the group amounted to EUR 1.1 billion. That means a 49% of coverage, an improvement from last year. The application of the new Circular 4/2016 splits provisions into collective and specific on approximately a 25/75% basis.
On the back of the new regulation, foreclosed assets coverage has risen to 44% from the 41% in the first quarter last year and exceeding the average discount of 35% we've been applying to asset sales in the quarter. Finally, 48% NPA coverage makes us comfortable ahead of the new real estate cycle. Now we'll review the main highlights regarding the foreclosed assets portfolio. The size of the book, including Portuguese assets, is EUR 510.9 million, with a yearly reduction of 12% like-for-like. Almost 50% is residential property, and the rest is evenly split between commercial and land property. Asset sales in the quarter accounted for 9.5% of the portfolio at the beginning of the year, and the average discount on sales remained at 35%, similar to previous quarters.
In terms of solvency, phasing common equity Tier 1 ratio reduced by 18 basis points to 11.6% from year-end, following the yearly phasing effect of 34 basis points, which was mostly compensated by the organic retained earnings of plus 20 basis points. Available for sales, unrealized gains, risk-weighted assets variation, and others only show a 4 basis points impact in the quarter. In fully loaded terms, the ratio improved, rising to 11.3% from 11.2% in December last year and remaining within our guidance of a level around 11%. Leverage ratio remains very stable at 5.2% on a fully loaded basis. The bank continues to be comfortably capitalized given its risk profile and growth patterns, as is shown in the total capital ratio at 12.70% at the end of March, and that will become 14.33% once the new Tier 2 issue is accounted for in April.
The group loan-to-deposit ratio, including the Portuguese business, improved by 2.4 percentage points in the quarter and by 7.1 in the year, standing now at 108.6%. The liquidity gap of Bankinter in Portugal has decreased by EUR 1.7 billion since the acquisition, standing now at EUR 400 million. Even absorbing this impact, the group's total liquidity gap has been reduced by EUR 2.5 billion in the last 12 months and EUR 1.3 billion with respect to December last year and stands at EUR 4.1 billion. The improvement in the loan-to-deposit ratio has been due to the strong organic growth of retail deposits, up 13.2% year-on-year, with lending volumes continuing to grow steadily at an organic 5.3% year-on-year. This positive behavior was one of the main reasons our rating was upgraded to BBB, keeping the positive outlook by Standard & Poor's in February this year.
The maturity profile of wholesale funding remains unchanged with very small concentration in the coming years. 2017 maturities already took place in March for a EUR 1 billion cover bond with a cost close to 3% without any rollover. The cost of issues coming to maturity next year are still above current market levels, making room for additional cost savings in the wholesale financing for the next and the coming years. In this regard, the success of the recent EUR 500 million Tier 2 subordinated debt issue is remarkable at the lowest coupon of any Spanish in the last two years at 2.50%. This issue was settled on April 5th. After this, we do not have any plans for additional wholesale financing for the rest of the year.
The liquidity buffer is quite substantial, with EUR 10.4 billion in liquid assets and EUR 8.5 billion of cover bond issuance capacity at a very competitive cost of approximately 10 basis points for a 10-year cover bond. We will now take a look at the customer business over the last quarter. Regarding the contribution to total income from various business segments, we show in this slide its clear diversification and balanced contribution during the first quarter. Corporate and SMEs banking, the main contributor, and commercial banking, including private and personal segments, represents 55% of the total. The insurance business with Línea Directa stands at 20%. Bankinter Consumer Finance growing contribution, now representing 8%. Finally, Portugal contributes so far 7% of the total group's operating income. A well-diversified financial group. Bankinter lending to enterprises remains flat in Spain, as it is normally the case in the first quarter every year.
In Portugal, however, corporate lending continued to grow close to 7% in the quarter, offsetting the decreasing Spanish loan portfolio. Year-over-year, corporate and SMEs lending grew by 5.2%, better than minus 4% across the sector during the same period. We are confident that we will maintain this growth rate in coming quarters, given our ever-increasing commercial efforts and the more benign economic environment. Our 4.5% market share in new lending is well above our natural market share in this business. Additionally, new customer acquisition in the corporate segment increased by 20% from the first quarter last year. Our corporate and SMEs banking business focuses on value-added products and services that contribute to fee income. Thus, our transactional business generates fee income, liquidity, and greater customer engagement.
The volume of corporate transactions, such as payments, collections, tax handling, guarantees, payrolls, standby letters of credit, et cetera, continues to grow by 11% with respect to the previous year. Therefore, we continue to increase our market shares in the related business. Finally, gross margin from international business grew by 17% compared to last year. Moving on to private banking, customer assets have performed very well, with net new money growing by EUR 0.8 billion in the past quarter, not accounting for market effect. Of this total, 28% relates to advisory products compared to 8% from the same quarter last year. Discretionary funds now represents 42% share of total assets. Quarter-over-quarter, total assets under management have grown by EUR 1.9 billion, which means an increase of 6% in the quarter alone.
Assets under management in personal banking grew by EUR 1.1 billion in the quarter, with almost EUR 600 million of net new money. Discretionary management and mutual funds maintain a 30% share of total assets in this segment, with further room for improvement going forward. With regard to retail banking, in the quarter, we continued to grow on our better-known products, such as payroll accounts, whose balances rose by 33% from previous year. On the mortgage market, we continue to show record levels of new production on a yearly basis. Our market share on new production stands about 7% in the last 12 months. Fixed rate mortgages stand at 15% of total new production in the first quarter, similar levels to the previous year. Total of balanced funds performed very well in the quarter, growing 21.5% from the previous year.
The largest portion of assets under management is mutual funds, with EUR 17.8 billion growing 35% year on year, mainly due to our Portuguese acquisition. Excluding this effect, mutual funds under management or distribution by Bankinter grew organically by 15.6%. Most of this growth has been concentrated in equity, long-term fixed rate, and guaranteed funds, with a 22% reduction in low added-value money market funds in the year. Third-party funds account for 55.6% of the total portfolio and continue to be the lion's share of the customer assets. In order to explain our market share gains over the last few years, we should compare our accumulated growth rates with those of the sector in the last few years. We are growing in active customers 22.4% since 2010.
This translates into an accumulated growth of 11.7% in the loan book compared to -33% in the sector in the same period, of which corporate lending grew 50% compared to -45% for the sector. Similar patterns on the liability side, with a growth of 78% in retail funding and almost 100% in investment funds, compared to 3% and 77% for the sector, respectively, since 2010. Some color on our Portuguese franchise in its first 12 months. Its loan book grew by 3% year on year to EUR 4.6 billion. Its commercial banking loan book, mostly in residential mortgages, amounts to EUR 3.8 billion, with corporate lending at EUR 800 million. Retail deposits grew by a stunning 46%, or EUR 1.5 billion, thanks to our differential investment-grade rating in Portugal and the launching of new products such as payroll accounts, welcome deposits, treasury accounts, et cetera.
The first quarter P&L account in Portugal shows a profit before tax of EUR 3.7 million, with an income of EUR 34 million and operating expenses of EUR 21 million. Going forward, we expect income to grow by new volumes in both loans and deposits, as well as a balanced business, while maintaining operating expenses flat. Therefore, efficiency should improve from a current level of 62% to a more comparable cost-to-income ratio in the near future. Regarding our consumer finance business, strong growth continues, capturing 78,000 new clients in the quarter, 48% more than last year. Lending balances have reached EUR 1.1 billion, growing 44% compared to the previous year. At the same time, cost of risk and NPL ratio, both crucial KPIs in this business, behave according to plan while increasing the loan book and the number of active customers. To finish, let's review the performance of Línea Directa.
The first quarter shows similar trends to the previous year, with both policies and premiums growing at high single figures. The number of policies grew 9.2% with respect to the previous year. Motor insurance policies rose by 7.7% and home insurance policies by 15%, both outperforming sector growth. Total issued premiums have increased by 9.6% compared to a year ago. Motor insurance premiums are growing by 8.8% compared to an average of 3.8% in the sector, and home insurance by 16.6%, where home sector premiums grew only by 2.7% by March this year. The combined ratio has shown some deterioration in the quarter, mainly due to growth in expenses. At 88.7%, LDA continues to be second to none in an industry whose average ratio is on the high 90s.
The claims ratio has registered a reduction of 30 basis points in the year due to the decrease in the average cost of claims. For its part, the expense ratio has worsened as a result of the increase in commercial activity and marketing expenses. The strength of the combined ratio is an opportunity to maintain growth in new, profitable business and to continue to gain market share. Finally, as usual, we present the standalone P&L of Línea Directa, following the insurance regulatory format. The underwriting result has reached EUR 23.7 million. That means a gain of 7%. Net earned premiums continue to grow at 8%, and operating costs saw an increase of 12% compared to last year. Financial income has gone down by 4% year-on-year due to the ultra-low interest rate environment.
All in all, net income of the company is up by 2% to EUR 25.8 million, making the standalone return of equity 33.7%, and with the technical coverage ratio stable at 136%, and the Solvency II ratio at a comfortable 231%. Finally, a quick recap of the main figures of the quarter. Bankinter has posted another record quarter of net income, up 18.7% over the previous year. Gross operating margin has grown by 13.8%. Net interest income has also grown by 17.1%. Fee income grew by 17.6%. Customer business volumes continue to grow. Credit and loans of EUR 51.3 billion by 15.7%. Customer deposits of EUR 45.3 billion by 24.3%. ROE stands at 12%. The group's NPL ratio at 3.88%. CET capital ratio, fully loaded, at 11.3%.
Finally, the strong performance of Bankinter's five main strategic lines of business continues: corporate banking, commercial banking, Línea Directa insurance, Bankinter Consumer Finance, and finally, Portugal. Thank you for your attention. This is all from me, and I'm now ready to take your questions.
Thank you, Gloria. As usual, in the interest of time, we will group the questions by topics. We will start reviewing the NII. The first question, what's our expect in the next few quarters from the NII?
Well, thank you, David. Taking into account the performance of this quarter, has been really very good despite the two-day difference. We can reaffirm our guidance of mid-single digit for the full year total group. That means around EUR 1 billion, more or less. The main drivers for this guidance continue to be volumes on the first place, volumes in loans and deposits. The change in mix we have observed in the quarter, an increase in consumer financing, which has offset the seasonality in corporate lending, and this is good for the NII. Second, the new production in mortgages, that continues to be at a higher price than the back book in some way because some of the mortgages are fixed rate mortgages, 15% of them. The rate of this new production of fixed rate is on average in the quarter 2.29%.
That means that we are improving the average rate of the portfolio. Second driver are prices. Prices in deposits mainly. We have back book in retail deposits of 27 basis points, and the front book is 21. We have some room, not too much, but some room to improve. Second factor is the fact that the sight accounts, the weight of sight accounts is every day higher. Nowadays, it's at 90%. The increase in deposits or the increase in retail funds is taking place in deposit with no cost. This is good for the NII also. In terms of prices also, I would like to mention the wholesale funding that continues to reduce its cost.
Finally, Portugal has presented a good quarter in terms of NII with a recurrent margin of around 12% that we mentioned last quarter, and non-recurrent, more volatile component contribution around the same amount, more or less. We hope that this recurrent and non-recurrent component of the Portuguese NII continue to contribute to the final figure for the group.
Okay. More specifically, what shall we expect in terms of spreads and client margin in the next few quarters?
Well, in terms of client margin, we have observed the stability in the last quarter, around 1.85%. It's going to be very dependent on the Euribor. If the Euribor maintains stable, we can wait for some kind of stability in the client margin because the credit yield will probably continue reducing a little bit as it was the case in the last quarter.
At the same time, this will be offset by the reduction in the cost of funding. So the cost of retail and wholesale funding, so that if Euribor maintains flat, the customer spread, the customer margin can maintain stable with perhaps a slight reduction.
Okay. We are also getting questions related to our rate sensitivity to higher rates.
Okay.
Can you just elaborate a little bit on that?
Okay. This is a very theoretical exercise because, as you know, when interest rate move, they don't do at the same level all along the curve. The exercise is a theoretical exercise that consists of analyzing the impact of 100 basis point increase along the curve in all the maturities, in all the points of the yield curve. If this is the case, the margin will increase by 10%. That means EUR 100 million, more or less, in a full year. If the interest rate are reduced by the same amount-
100 basis point, the impact will be very close to this one, a little bit less, around EUR 99 million, EUR 98 million in a full year.
Okay, thank you. Two more questions related to NII. The ALCO portfolio, what behaviors are we expect for this year, given the growth in the quarter, and also the TLTROs, if you can confirm how much TLTRO we have now and the contribution-
Okay
related to NII.
In the ALCO portfolio, we can expect a stable contribution around 12%-15% of the NII. The reason being the fact that the size and the quality is very stable, around EUR 5 billion-EUR 5.5 billion ALCO portfolio. The duration, you have seen the main figures of the portfolio in slide number nine. We have a very good quality ALCO portfolio with unrealized gains around EUR 400 million. What is very relevant or very differential, I would say, is that the average maturity is more than seven years, and the average yield is 2.9%, which is really a very good yield when compared with our main colleagues in the industry.
In terms of the TLTRO, the TLTRO II, we had EUR 4 billion at the beginning of the quarter in December. Now we decided to take advantage of the last opportunity that the ECB has offered to the sector, asking for an additional EUR 2.5 billion in the March auction. That means that we now have EUR 6.5 billion.
The reason why we have taken this additional amount is, as I have mentioned, to take advantage of this opportunity to get funds at -40 basis points, anticipating covered bonds maturing this year and the next one. That doesn't mean that we are accruing in our NII all the -40 basis points of this total amount, because, as you can understand, we have a transitory excess of liquidity that we have to invest in the money market, paying for that investment. On the NII, the impact of this additional amount is zero, it's neutral.
Okay?
Okay. Moving now on to lending. What kind of lending growth are you expecting for the year?
Well, we maintain our initial guidance of low single digit for credit investment. That will be a little bit higher in Portugal because they are growing in terms of market share and they are growing a lot in terms of customer acquisition.
In Spain, we maintain our guidance of increasing the balances, both in corporate lending as well as in mortgages. Although likely, the increase in corporate lending will be higher than in mortgages.
Okay. Thank you. We are getting questions on the guidance for the fee income after the quarter and the last two quarters' growth. What's our expect for the year?
Okay. The guidance, as I have mentioned in the presentation, is mid to high single digit. This is based on the good performance of the first quarter. We have seen that as a result of the favorable market environment that has boosted commercial activity and at the same time, the reallocation of the customer assets from low added value to high added value. The main contributor of this line is increasing its contribution by 14%-15%. Higher than the initial target that we have in our budget. From this side, very good performance.
At the same time, we have appreciated that the commercial activity, especially in international business, is also very high, that means that all the rest of fee income, for example, FX income or FX differentials, payments and collections, contingency risk, continue to increase. Finally, insurance fees, and particularly life insurance fees, are growing on a very strong basis. All that together permit us to maintain our guidance of mid to high single digit.
Okay. Just very quickly, can you just remind us on the cost guidance for the year, cost and expenses, what's expected?
Yes.
Just the guidance.
Okay. It is necessary to explain a little bit this line, because it is a very difficult line to analyze, taking into account the factors that have affected the line in the sector. Starting by analyzing the evolution of the quarter compared to the same quarter last year, we observed an increase in this line for the total group of 17%. We have to focus deeply in this 17% to understand what is happening here. First of all, you have to take into account that Portugal costs are now in this quarter included in the cost. This means EUR 21 million that were not included in the same quarter last year. That means 10.6% of increase by this only reason. Second, LDA cost has increased in the period EUR 4.3 million due to more commercial activity and more expenses in marketing.
Taking these two factors into account, the real growth for the banking activities in Spain is just 6.1%, EUR 8.4 million. 90% of this amount, of this EUR 8 million, are related to staff increases in Bankinter Consumer Finance business, which is in the last year of its business plan. The new digital transformation team, which is on staff, is more expensive than the average staff of the bank. Taking this into account, we can understand that the guidance for the year will continue to be the one that we gave to you last presentation, low single digit. Portugal, as I mentioned to you, this year will account for 4 quarters, but the reduction of this quarter against the last quarter last year has been more than 14% reduction. They are improving a lot in terms of costs in order to reduce their cost-to-income ratio.
We will support in this good performance of Portugal, as well as the increase and improve efficiency in the Spanish activities to maintain our guidance.
Okay. Regarding the cost of risk, are we sticking to the guidance of 40 basis points, cost of risk? Also, what kind of impacts are we expect from IFRS 9 next year?
Nowadays, the cost of risk at EUR 45 million in Spain and EUR 10 million in Portugal is around our expectations, is close to our target. What we are waiting for the rest of the year is some improvement in the next quarters, as a reduction of 8% or 9% on these figures. This is for this year. First of all, I can confirm you our initial guidance of around 40 basis points for this year. The question now is what is happening for the following year, taking into account the application of IFRS 9. At this moment, Bank of Spain has to release the draft of its circular concerning the options allowed by the international standard, I think it's too early to give you a fine estimate.
We are now working on the implementation of all these regulations, we will have a fine estimate at next month of July. For the next presentation. In any case, what we can tell you is that we expect a very limited impact because we are an outlier in credit quality, delinquency, and foreclosed assets. This is what I can tell you.
The last question we have time for today is on Línea Directa. What shall we expect from the combined ratio there and evolution of the business?
As we have seen in the presentation, this quarter has shown a very good performance of Línea Directa and very similar to the last two or three quarters, confirming a change of cycle after four years of downward trends in premiums in Spain. We have observed a worsening deterioration of the combined ratio, a slight deterioration in the case of LDA, this ratio continues to be well below 90%. The reason of the deterioration is clear. On the one hand, we have the impact of the economic expansion in frequency that increase the cost of claims. Second, increase the claims, sorry. Second, the new Baremo that increased the cost of claims. Both of them have worsened or have contributed to the worsening of the combined ratio. At the same time, the differential factor in LDA is the growth.
We are growing, outperforming the sector in terms of policies and premiums. This growth has permitted to offset the worsening of the cost of claims so that the claims ratio has improved in the quarter. That means that we have presented an insurance technical result growing positive, increasing by 4%, and a profit before tax increasing 3%, although the investable income has shown a reduction of 4% because of the low interest rate environment.
Okay. Thank you so much, Gloria. Thank you all for your attention. For any further questions, as usual, you can contact the investor relations team. Goodbye.