Hello, good morning, and welcome to CaixaBank's results presentation for the third quarter of 2020. Today, it will be just Gonzalo Gortázar, CEO, and myself, Javier Pano, the CFO, presenting. Eddie O'Loghlen, our Head of Investor Relations, is away on sick leave, but is recovering well and expected to return shortly. Otherwise, the format is the same as usual. We plan to spend around 30 minutes presenting, with 45 minutes available for live Q&A, for which you should have received instructions via email. Let me just add that the investor relations team is at your full disposal after this event. Without further ado, let me hand it over to the CEO.
Thank you, Javier. Good morning, everybody, and thanks for your time. We'll get directly into the result presentation for the quarter. Highlighting here four ideas in the quarter. First, the recovery in activity and, hence, the continuity in the market share progress. Obviously, after the second quarter, this was quite critical for us to make sure that the machinery regained speed very quickly, and it has happened. You see there how our market share, and we're highlighting particularly long-term savings and business lending. One, because it's so much our core business, and the other one is also our core business, and it's been quite critical in this year, 2020. Second, credit metrics. I have to say, much more positive than what we were expecting. We have actually reduced non-performing loans quarter on quarter by 1.5%. Obviously, ratio is stable.
On that slight contraction, though, we have some seasonality in the third quarter of the total loan book. The cost of risk is lower in the quarter, obviously, because we actually did a major provisioning for COVID in the first and particularly the second quarter. I have to say, given that this was a quarter in which most of our moratoria started to resume payment obligations, we were expecting a different impact, and the situation has been quite good. I know this is looking backwards, and we are all concerned about what is coming in the future, let's make it clear, the third quarter has been, I would say, outstanding from this point of view. Third quarter revenue growth and cost control. We have actually delivered a 3.1% reduction in costs compared to last year, a pretty good level.
Then on the core revenue side, we have pressure on NII. You've seen that, but we have been able to almost completely offset that with good performance on fees and particularly on the insurance business. This is obviously part of our strength. We are confident, I would say quite confident, that we will be achieving positive yields in 2020. In terms of solvency, it's been a good quarter. We know we had some market headwinds associated to our equity stakes. Despite that, we actually have grown our CET1 and built up further our MREL buffer. I'd say pretty good on that front as well. Getting some detail on market share. You see how long-term savings up 66 basis points. Life risk insurance and major outperformance in terms of premium versus the market, and then on loan to business as well, almost 100 basis points.
In fact, not almost, but over 100 basis points of market share gain. We continue to increase the number of clients that we define as relational with three or more products with us. Things are working well, despite the very difficult situation we had. In terms of the activity, we're sharing here our statistics on credit card turnover, which are a good proxy for what's happening in Spain. Obviously, big reduction during the hard part of the lockdown in March, April, May, and then recovery pretty fast towards similar levels to last year. In the last two, three weeks, clearly some weakness associated to the situation of the pandemic and the new restrictions that are being imposed. On loan production, we have households where we are on mortgages. We're actually better than last year.
Consumer, we have recovered a good level of activity compared to second quarter, but we're still below last year. I think it does make sense in the current economic environment, and we want to be obviously prudent in this environment. Long-term savings, a pretty good performance, as you can see in the third quarter compared to the second quarter. Almost as good as the first, and better than the third quarter. You all know that there's seasonality in the third quarter, negative seasonality on activity. The fact that we had this level of net inflows is a pretty good signal. Protection insurance, again, comparing to last year is a major improvement, also compared to second quarter. Good feelings about how we actually managed to recover activity quite quickly after the worst part of the lockdowns. Non-Performing Loans, I mentioned we reduced 1.5% in the quarter.
We've maintained the 3.5%. Out of our moratoria, we had 97% of the amount under moratoria that have resumed payment. Sometimes it's partial payment, or most of the time, because we start with interest payments, not yet with principal. Out of the moratoria, only 3% are not up to date in terms of payments. Obviously, of this 3%, some of them will eventually be non-performing loans. Others may actually not, depending on the recovery process between zero and 90 days of default. Good feeling from that point of view, and a good reduction of nonperforming loans actually across all lending segments. It's evident that there will be credit quality issues ahead of us. Let's not have any doubt about that. Clearly, at this stage, where we are is much better than what we were expecting we would be at this stage.
I guess that part of the picture is pretty good. In terms of the macro outlook, obviously Javier will elaborate on all this, we have basically a macro environment that is similar to the one that we had expected at the end of the second quarter. What we have done, you see the dotted line blue and the sort of firm blue. The difference is basically that we were being more negative about 2020, more positive about the recovery in 2021, we are a bit less negative. Even after today's GDP number, we're clearly even less negative for 2020, less optimistic for the recovery in 2021. We're ending up basically at the same point at the end of 2021 than we were before, that's really the driver for provisions.
For that reason, the COVID sort of generic provision has not been changed. We did make a great effort in the first half, and we've seen that the current macro forecasts are consistent with that level. We've also put there some expectations by, for instance, the forecast of Bank of Spain to give you an indication that we feel what we have done already is conservative. There's no question that the environment now, as we speak, and given what's happening in Europe and Spain, should sort of move us to the side of even more cautiousness around what may happen in the fourth quarter and 2021. That is why we're also pointing there what is our adverse case, which is obviously a very slow recovery in 2021.
The fact that we have also included that scenario and weighted that scenario in our provisions gives us good comfort about where we are now in terms of provisioning level. You've seen that we had this guidance of 60 to 90 basis points. In this third quarter, not on an annualized basis, we've added 10 basis points, so we're at 63. I think we have to be quite confident at this stage that we are on track within that guidance. We have two factors. One is performance in the third quarter, which makes us much more optimistic than we were. At the same time, outlook for the fourth quarter and 2021, which make us more cautious, at least for the time being. We'll see, depending on how these two things play, particularly the second one, because the first one is a fact now.
We will end up closer to one side of the range or more in the middle of it. NonPerforming Loans coverage up to 65%. Obviously, that indicates the provision that we have built for future problems. Other pretty good news from the quarter is the jaws. You see we had good drivers of comparison in terms of core revenues and recurring costs. Core revenues obviously positive in the quarter, but negative year-on-year, but much more significant reduction in cost of 3.1%, which shows, as you can see, in terms of core operating income. Deducting the recurring cost from core revenues, you see that we have actually managed to go back to positive jaws in these sort of three quarters. We certainly expect to maintain that by the end of the year. Solvency, finally, I think a pretty good performance.
You have the details here of significant organic capital generation. The impact of Comercia, I have to say, this is a proforma , but it has closed on the 1st of October, so yesterday, after the quarter end. It's pretty hard number. The accrual of dividends, which as you know, because of the current rules we have from the ECB, is being done at 37%, or sorry, at 43%, despite the fact that we have said that our intention is to be with a payout that will not exceed 30%, assuming that the recommendation of the ECB is somehow lifted. On top of that, we had issued Additional Tier 1 during the month of October, and this has increased notably our MDA buffer to that level of 458.
I have to remind you what you know well, but it is that we have one of the lowest SREP requirements among the large banks in Europe for good reasons. I think our risk profile is obviously much reduced compared to others. Hence, our absolute levels of capital compared to our SREP requirement gives us a very comfortable MDA buffer well above our targets. Also obviously allows us to get into this merger project with Bankia from a position of strength. I wanted to finish there. On the merger project, there's not much news. Idea is just things are progressing well. Timetable is on track. We'll have EGMs at the beginning of December. Our EGM is expected for the 3rd of December. We're still expecting to close during the first quarter.
Actually, we're now working also with an initial target of integrating all IT systems by the end of the year. Again, we have good spirit. There's quite a few things of preparing for the merger that we can do. Obviously, there are others we cannot do until we have competition approval, and then the transaction closes. So far so good. We're, I think, on the right track. Thank you very much.
Thank you, Gonzalo. Let me now elaborate on the third quarter. Let me start with an overview of the evolution of the loan book. You may see that in the third quarter, the book is almost flat. Actually, it's improving, considering seasonal impacts, by 0.4%. You know that year to date, what has been driving loan growth has been mainly the new origination of government-warranted loans. This demand has tapered during this third quarter, EUR 1.4 billion, for a total balance of ICO loans close to EUR 12 billion. We have had also a good performance in the origination of mortgages and consumer loans this third quarter. With this, year to date, our loan book is up by 6.5%. In the right-hand side chart, you may see precisely this, the monthly evolution of the new production of mortgages and consumer loans.
You may see that for mortgages, we are at the same level since the month of June, approximately, compared to last year, and that in consumer lending, we are slightly below, considering current circumstances, but clearly improving from the trough we had in the second quarter. Just a few words on the ALCO portfolio. We have had maturities this third quarter. The size of the book stands at slightly below EUR 42 billion, but the metrics of the portfolio remain broadly unchanged. The yield, the duration, maturity profile, and the sovereign exposure, you have here all the details, but as I say, no changes at all during the quarter. On the customer fronts, I would mention here that in the third quarter, we have had lower inflows into on-balance sheet deposits compared to what happened in the second quarter.
We have had inflows also into long-term savings, EUR 600 million this third quarter. This makes the total for the year EUR 1.4 billion, which we think it's a good result. This third quarter, markets have helped to recover part of the losses. We recovered EUR 2 billion, thus making the negative mark-to-market impact for the year at EUR 2.4 billion. In the right-hand side chart, you may see the evolution of our average AUMs. You may see that in the third quarter, average AUMs are over the average of last year approximately by 3%, and also by the end of the period, we are over 3% over. This bodes well for fee revenues on AUMs in coming quarters, markets permitting. With this, let me shift to the P&L. Some brief comments. You have here all the details.
I would say that better cost, and also insurance and fee performance this third quarter has led to an improvement in our pre-provision profit. You may see that core revenues, as I say, supported by fees, up by 4.9% quarter on quarter, and insurance up by 6% quarter on quarter, is what has been driving this performance. Core revenues up quarter on quarter by 3.7%, still, compared to last year, down by 1.1%. At the same time, we have a strong decline in expenses, underpinned by restructuring, some lower pension liabilities, and other saving initiatives. As a consequence of this, our core operating income improves significantly. Year to date is up by 2.7%. Below the line, we have lower loan loss charges this third quarter, as was already our forecast, as you know that we built strongly this COVID reserve during the first half.
With this, we end the quarter with a net income at EUR 522 million, a clear improvement compared to the pace of the previous two quarters. Some words on BPI. In this case, I would say that BPI has a strong support from resilient net interest income, despite government-guaranteed loan scheme that is smaller compared to the situation in Spain, but we have managed to grow the loan book in Portugal by 3.9% year-to-date. As you may see also with positive contribution from mortgages. Also in Portugal, we have a reduction in NPLs, as is the case in Spain, 6% year-to-date. We have this third quarter, a further release of the PPA that we built-in 2017 with integration.
As a consequence of this, we have a positive contribution on this front this third quarter for our net attributable profit from BPI this third quarter at EUR 55 million. Some more details now on the P&L. On NII, we are flattish this quarter on quarter, and down by 2% year on year, in line with our initial expectations. You may see that from the client side, we have a positive contribution from higher average loan volumes, but on the other hand, this is more than offset by lower margins, as the loan yield is impacted by the mix of the portfolio now with a larger wave of lower yielding ICO loans.
On the ALCO activities, we have the positive contribution from the full take-up of TLTRO III, but this is partially offset with a lower contribution from the fixed income portfolio, as we have had those maturities, and also the higher cost of carry from the growth in deposits we had during the second quarter. As before mentioned, you may see that the back book yield comes down this quarter by 6 basis points to 192 basis points. The yield of the new production, the front book, has clearly recovered and is up by 46 basis points as the mix is, I would say, normalized again, and the front book yield is now at 220 basis points. We are expecting that the fourth quarter net interest income will be in line with the levels of the second and the third quarter.
On fees, we have had a strong recovery quarter-on-quarter, up by 4.9%, as commented before. Year-to-date, we are flat. We have had good performance across the different segments, I would say. In recurrent banking fees, we are up by close to 10% quarter-on-quarter. We are still down year-on-year, in this case impacted by the less positive evolution of our payment business, affected obviously in the third quarter by a weaker tourist season. In asset management, a clear improvement, quarter-on-quarter up by more than 6%. Also improvement year-on-year. We commented before the positive evolution of average AUMs. In insurance distribution, improving quarter-on-quarter, close to 5%, and clearly on an upward trend. We expect that this will continue to be the case in coming quarters.
In wholesale banking, always more volatile, but we have had so far a very good year. Improving year on year, this third quarter, and obviously the third quarter always with seasonality. You may see in the right-hand side chart the evolution by month of our fee revenues, and we are matching last year performance from June, except last month, of course, impacted mainly by this impact in payments I mentioned before. A few words on insurance. Here, I would mainly highlight the very positive evolution of our life risk business. EUR 150 million of quarterly revenues on this business. Record high, actually. This sets the accumulated increase in this business at 8.5% year to date. In the right-hand side chart, you see the evolution of these, let's say, insurance activities in our P&L. I would remark also a positive contribution on net interest income.
Here, just to highlight again the good performance of the MyBox commercial offer that is helping to do really well in current circumstances. On costs, we are doing well on this front. Year to date, costs down by 3.1%. We are on track to comfortably meet our guidance. Remember that we were expecting costs to come down by this year by at least 2%. As of today, I can tell you that probably we will be more close to the 3% area or around the 3% area, down by the 3% in 2020. You see that the improvement is across the different cost lines and that what we have saved in costs more than compensates what we have lost in core revenues year to date.
This is why we have a clear improvement in core operating income, and also in our cost to income, that is down to 56.3%. A few words on moratoria, important part of our presentation. You may see here the weekly moratoria production. You may see clearly that this is tapering, or it has already ended by September 30th. In the right-hand side chart, you see the expected evolution of the stock of loans with moratoria. This is for Spain and for individuals. You may see that most legal moratoria has expired right now and has resumed interest payments in the third quarter. Actually, I would say that almost all performing, as Gonzalo commented, 97% is honoring these payments. In the fourth quarter, there are most consumer loan moratoria that is going to expire and will resume normal installments.
This is affecting approximately slightly more than EUR 1 billion. This is important to follow and monitor this fourth quarter. In the second quarter of next year is when most mortgage moratoria expire and will resume normal installments. Here you have a clear profile of what is going on on this front. In Portugal, the timetable is different. It's a different program. Stock of moratoria, that is EUR 6 billion. 38% of the loan moratoria is facing payment obligations in the third quarter. I would say that almost 100% honoring those obligations. Of the remaining 62%, only 3% show any indication of potential future payment difficulties. Here, what we are doing is to cross-check with our indicators for the client in order to foresee any potential issues. Some comments on loan loss charges. On this front, well, EUR 260 million for the quarter.
On IFRS 9 models, we have made a few changes of fine-tuning, as Gonzalo commented. On a cumulative basis, here you have the figures for three years. We are considering our base case that the Spanish GDP will be down by 1.5% in three years, and this remains broadly unchanged, although the profile changes a little bit. You have all the detail about the stages of our loan loss provisions and also our COVID reserve. I would also like to remark that this third quarter, those loan loss charges include generic reserves applying extremely conservative approach. On liquidity, I would say that we continue to be in a very ample situation, with liquid assets at EUR 111 billion. Liquid coverage ratio at 280% and net stable funding ratio 141. You know that we have been in the market recently with an AT1 issue.
With this, we fill more than 2% of the AT1 bucket, now our MREL ratio standing at 41.40%, well above the current MREL requirement at 22.7%. On this one, I would like also to remark that CaixaBank ratings have been confirmed by all three major rating agencies post the announcement of the merger agreement with Bankia. Finally, on solvency. This third quarter, we end considering the commercial transaction that, as Gonzalo has commented, is already closed at 12.17%, ex transitional IFRS 9. It is a quarter where we have had strong organic capital generation, 45 basis points in this case. With the tailwind after the introduction of IRB models in the non-warranted part of ICO loans. We have been accruing dividend clearly. As you know, 43% according to supervisory requirements. We have a negative impact from markets, mainly from Telefónica, as you know well, and others.
This is -11 basis points for the quarter, then a net positive impact considering dividends of 20 basis points from Comercia. On top of this, we have 51 basis points for transitional IFRS 9, thus ending the quarter with, let's say, regulatory capital ratio standing at 12.68% and resulting into an ample MDA buffer at 458%, considering all the impacts from the Comercia and the AT1 issuance. This is all from my side. Just to wrap up, it's a quarter where we have continued market share gains with activity levels clearly picking up in the quarter. At the same time, credit metrics have been broadly stable despite the bulk of the moratoria assuming payment obligations.
It's a quarter where we are widening core recurring jaws. At the same time, we have been reinforcing further our solvency metrics with the AT1 issuance resulting into an ample MDA buffer. Thank you very much. With that's it for my part. It's now time to proceed to Q&A. Please, operator, proceed with the first question, including the name and the company of the caller. Let me please remind you all to keep your questions brief for the benefit of everyone on the call. Thank you. Operator?
Yes. Hi. Do you listen to me?
Yes. Hello.
Yep. Hi. Thanks very much for the presentation, Javier, Gonzalo, and for taking the questions. Also wanted to send my quick regards to Eddie, and hopefully he recovers fast. Just have two questions. One on NII. What should we expect beyond 4Q20 in terms of NII, given the trends that we see in Euribor? Also wanted to get a bit of your thoughts on how to reduce the excess liquidity that you are gathering, and whether the fee policy changes that you are fostering will lead to some reduction in that, or you don't count on it. The second question is on costs. The 3Q20 cost base has fully captured or not the departure from the restructuring that you did in 2Q. If so, whether you are planning to book some extra costs from the merger in fourth quarter. Thank you.
Thank you, Nacho. I'll let Javier elaborate about NII. In terms of levels of liquidity, I'm sure Javier will obviously mention it as well. We continue to be fairly successful in our activity, and this is bringing additional levels of excess liquidity. This is unfortunately something that we have to cope with. The new policy on fees, I don't think it's going to change that in any significant matter. We will continue to try and pass those negative costs on the corporates side as strictly as possible. It is certainly one of the big issues that we have. In terms of costs, there's no extra costs booked so far associated to the merger. There will be some in the fourth quarter, preparatory work that will be included. I think it's pretty clear that we are in pretty good shape in terms of cost this year.
In fact, it is my expectation that we will end up close to 3% down as opposed to 2% down on cost in 2020. Beyond that, I think, Javier, what do you want to add, and particularly on NII?
Hello, Nacho. Well, on the interest income, I think that into 2021, for us, the most important uncertainty we have now is on volumes. To what extent the production we have had or strong growth in government-guaranteed loans, mainly channeled to SMEs and self-employees, et cetera. This will prevent loan growth into 2021. This is probably the biggest question mark. To what extent capital spending will be there or not in order to help loan growth. As of today, unfortunately, I cannot give you much more visibility, because you can understand that what the situation in terms of health situation is preventing to have, at least now, a longer-term view. I would also add here, to what extent consumer confidence will continue to support growth in mortgages and consumer lending, so far is the case. We have been positively surprised with the performance.
Actually, this, let's say, positive mood has continued into October. Clearly, we need to see what happens going forward. You asked about the impacts from rates. I think that here in the past, we have been giving you sensitivity analysis. Let's say that for each 10 basis points on Euribor, we could have approximately an impact of 1% in NII. I think that this, according to the average profile of the balance sheet, this metric continues to be valid and probably can help you to figure out what may happen in 2021 from this front. On the positives, well, let's see how we are able to manage this excess liquidity. That's true, but it's a situation where there is an excess liquidity in the system. Actually, this is what the ECB is targeting. A situation with excess liquidity.
At the end of the day, this liquidity filters some way or another into the balance sheet of banks in general. From our side, what we try to do is to put in place the right incentives for our teams, our salesforce , at all levels, in order to at least to try to compensate what the costs of this excess liquidity that can be compensated with revenues in other parts of the business. The right incentives for this are in place. I would also like to remark here any potential positives that we may have. Clearly, yesterday, the ECB already outlined that there will be some news in terms of monetary policy or instruments in December. Here, potentially, lower of the TLTRO or at least the benefit of the TLTRO at minus 1% or a different level.
I think that this is potentially something that may be on the cards or potentially an increase of the tiering. Those are, who knows, part of the, let's say, the toolkit that the ECB is thinking about. Well, if at some time we may have a steepening of the yield curve. We may have the chance to add to the ALCO portfolio. At current levels, I would say that thinking in the long term probably are not the right levels to do so. I don't know, Nacho, if this answers your question. If this is the case, I would go into the next one, please, operator.
Thank you. Good morning. My first question is on Spain long yields . Can you hear me? Hi, can you hear me?
Yes, Marta. We can hear you. The problem is that we cannot hear the operator.
Sorry.
We are a little bit lost.
Right.
We recognize you. Go ahead.
Yes, thank you. First one, Spain long yields. Can you explain the 7 basis points drop this quarter? Looking forward, on top of the revival effect, how much long yield do you think you could lose over the next 12 months due to mix? The second question is on payment holidays. The stock is up 11% in the quarter. Other banks have reported shrinking books. What explains the increase in CaixaBank? Related to this, just a quick one on ICO lines. We've seen articles in the Spanish press suggesting grace periods and maturities could get extended. How does the scheme work? In the event of a loan covered by a guarantee defaults, can you claim the guarantee from the government straight away, or do you need to restructure first? What's the probability of default you are calculating in your ICO line portfolio? Thank you.
Thank you, Marta. In terms of payment holidays, we actually had, at the end of June, a similar level, EUR 11 billion in Spain. EUR 1 billion was under analysis. Now we have EUR 11 billion, it's been more or less stable. Honestly, maybe Javier, I cannot make comparison with others because different people have followed different policies. Ours has been, so far so good, is that this instrument was actually the right instrument we use with certain clients. We've been proactive during the lockdown. What we're seeing is that, as I said, a payment is actually now following through. There's been no increase on the total amount because we had EUR 10 billion granted, but EUR 1 billion under analysis at the end of June, at least those are the figures I have. On ICO, basically, a question you had on how it works.
If there's default on principal, not on interest, if it's default, then we can execute the guarantee. That's a reality. Obviously, we are all looking at this being an instrument that is helpful, and what the discussion currently is being is, obviously, we had this lockdown. We had a tool to help companies and self-employed people with these government-guaranteed lines. Most of them are one year, with a grace period for one year on principal. These will obviously expire during the second quarter for most people. The reality is, unfortunately, activity is not back to normal. For many situations, I think the right policy tool is to extend that period maybe up to a year or six months or whatever. I don't know if it will be done at a sector level or at an overall level.
We are in a discussion with the government Bank of Spain or the banks, et cetera, the banking associations, to try and find out what makes more sense. One thing is how we recognize accounting in our books, all this. I think most importantly is to make sure that we help people when there's really a viable business that is just temporarily under pressure. For those businesses to have to start paying principal when activity has not been back to normal will not make sense as a policy measure. Clearly, the rule is that if a client defaults on principal, then we can execute. There was a question about yields and t he PD on this book, if you want to, Javier, just close the question.
Yes. Well, on the back book yield, the main impact quarter-on-quarter is coming from the fact that you have a full quarter of the lower yielding ICO loans in the book. I would say that this is almost main part of the impact. Actually, this third quarter, we are not having much impact from 12-month arrival downwards, but yes, we are having some impact on three-month arrival downwards. This is also affecting to some extent. Going forward, our view is that this back book level should be more sustainable. Let's say the big impact of the new production impacting the back book has already been felt. You had a question about PDs. Well, according to our internal figures, the average PD of our ICO, let's say, portfolio, it's slightly below 2%, 190-something.
Well, even if you exclude some of the more risky parts, this is even below 1%. Probably this helps you in this question, Marta.
Thank you. Thank you very much.
Okay. Thank you. Please, then, we can proceed with the following question, please.
Thank you. Your next question comes from Andrea Filtri for Mediobanca. Please go ahead. Your line is open.
Thank you. Could you detail the regulatory headwinds that are implied in the merger combinations? I'm referring to the future impact on definition of default and EBA guidelines and when they're expected to come, please. On slide 20, the Adeslas trend, would the lower claims that's shown in Q3 be just seasonal or there could be an impact from COVID with people claiming less, making less use of the insurance? Is the trend expected to revert to normal in 2021? Allow me, please, just a few details. What dividend per share will you accrue in Q4 from Telefónica? How much generic provisions you charge in the quarter, and your minus 3% cost guidance, does it include the anticipation of merger costs that you mentioned before? Thank you.
Okay, Andrea. If I may start with the regulatory headwinds. Okay. Well, when presenting the Bankia transaction, we disclosed our best estimate, after a close supervisory dialogue we had in the previous weeks, as you can imagine, of the upcoming regulatory impacts that we will face over the medium term. There were three main blocks. The quick fix for intangible assets, the IRB models on Bankia books, mainly on the mortgage book. Other internal model inspection, the impact from other internal model inspections plus EBA guidelines. On this third block, I would say that approximately 80% of the impact stems from CaixaBank. What happens here is the following. This impact is higher than initially expected because in the low default portfolio for CaixaBank, historically, we have been calculating the risk parameters.
This is PDs, LGDs, relying on external data supplied by rating agencies, as those are large corporates. It's something that is normal to do, and this is what has been approved historically by the supervisor. According to the new EBA guidelines, those parameters have to be built according to our internal historical experience. Okay? Well, as a consequence of this, we need to rebuild those models. This is a process that will take 18 to 24 months, because then you need the approval, et cetera, another internal model inspection. What happens is that, meanwhile this happens, and we have all this in place, we have what is called by the supervisor a limitation. This would be set a minimum PD and a minimum LGD. As a consequence of this results into a much higher risk-weighted asset density.
Actually, it will result into a risk-weighted asset density on this portfolio. It's a EUR 37 million portfolio of 70%, from 55% approximately that is now. In our view, clearly this risk-weighted asset density is much higher than what is needed. Let's say that the regulatory capital that is set aside for this portfolio is much higher than what is needed according to the underlying, let's say, credit quality or credit risk of the portfolio. I think that this probably helps you to understand a little bit the different building blocks. I would say that probably the main difference compared to where our initial expectations is this part.
I would like also to take the opportunity to add that for the quick fix, and after the changes, quick fixing on intangibles, and after the changes announced a few days or a few weeks ago, for CaixaBank standalone, the impact is 15 basis points approximately, and that for the combined entity is approximately 20 basis points. Okay? I think that with this, Andrea, I have answered or helped at least to understand a little bit the different blocks. I don't know, Gonzalo.
Thank you.
There's a few more questions. Let me add on Adeslas, this is seasonal. It's every year that we have lower claims in the third quarter, and I expect for it to continue that way. COVID has affected, but offset, because we have had the higher claims from COVID, but lower claims from others. Actually, during the third quarter and months of September and July in particular, we had expected an increase of non-COVID related claims, and that has materialized, and it's included in what has happened in the third quarter. I think we should look at the activity at Adeslas on a normalized basis, like every year, where we see higher profits in the third quarter because of the month of August in particular. The outlook there for the fourth quarter and next year is good.
With respect to the rest of the questions, I mentioned on the cost side, we're talking about 3% excluding any merger costs. It's not clear to us what amount of merger costs we'll book into 2020, the fourth quarter. In any case, I expect it to be a limited number, obviously. Whatever we book in 2020, it will be reduced from the extraordinary charges that we'll make in 2021. It's not additional cost, it's just moving ahead future costs that we're incurring, obviously, mostly related to consultants and preparatory work and some other impacts associated to the legal process. Other than that, I think there was a question on Telefónica as well, Javier.
Yes. Well, Telefónica has just announced the dividend for the fourth quarter, EUR 0.20, and it will be registered in the fourth quarter accordingly. We know that it may be in cash or shares, and that decision on this will be taken in due time. Thank you, Andrea.
Thank you very much.
With this, we answer your questions, we would follow. Please, operator, move on.
Thank you. Your next question comes from Sofie Peterzens from JP Morgan. Please go ahead, your line is open.
Hi, here is Sofie from JP Morgan. A question on dividend. I think the local press was saying that you are not going to pay any dividends before the merger with Bankia is completed. Is that a correct assumption? When should we basically expect the first potential dividend payment from CaixaBank? How should we think about the kind of dividend payment? Will it be 30% of the combined entity, or will it be 30% of CaixaBank's earnings? That would be my first question. My second question would be on DTAs. Bankia has a significant amount of DTAs, so does CaixaBank, and combined you will have quite a lot of DTAs. Tax fees are going up across Europe, and I think the expectation is that we're going to see more tax hikes. Also, the macro environment is very uncertain as you highlighted.
How should we think about any potential risk for DTA write-downs in the coming year or two? Just a quick follow-up. On the costs, how much of the cost saves that you're seeing this year could potentially reverse in 2021 from higher travel costs and variable salaries? Thank you.
Thank you, Sophie. In terms of the dividend, you are right. The way the merger agreements work is that neither us nor Bankia will pay dividends until after the merger. Otherwise, we will have to have some equalization in the exchange ratio, which would have made things a bit more complex. It will be paid after the merger is closed, subject to, obviously, the recommendation from the ECB allowing us to do that, which is our hope and expectation at this stage. In terms of what we said, our payout is going to be up to 30%. What we will do is decide on what exactly the number will be. We need to hear the ECB recommendation. At this stage, it's a bit, I think, futile to speculate on exactly what the level would be, because unfortunately, it may be zero, if the recommendation is not lifted.
I expect that it will be. We will have a discussion and then extend the payment to the total number of shares. Which by that time rather than being EUR 6 billion, which is the rounded number for CaixaBank, would be EUR 8 billion, because Bankia would be part of the group and we would have issued the corresponding shares. That's the way it will work. On costs, obviously, we have had a positive impact from a lower level of activity in traveling expenses and, as you say, there will be also in comm and some others. You have to keep in mind that as well, we had a negative impact from COVID related expenses. Last number I have in mind is around EUR 50 million. It's not just providing sanitizers and masks and all of the pure medical tests and all what we're doing.
We've tested 30,000, basically the number of employees that we have. Also we have obviously had to manage a complex process during the year and increase cleaning assistance in many areas. All these costs, in a normal year, will also disappear. On top of that, we have, before the merger, a very strict cost-saving program, re-engineering of processes, et cetera. The expectation for 2021 is not just an increase because we have a reversal of costs that we did not incur in 2020 and will incur in 2021. On top of all this, we're going to obviously have the merger with Bankia, and this is what is going to obviously dominate the ultimate outcome. We will, in due course, update on cost expectations for 2021. To be honest, not before the merger closes, because I think at this stage it wouldn't make much sense.
Efficiency is the name of the game. Obviously, the merger with Bankia has much to do with that point, and we're going to continue delivering. This year, we've managed to deliver more than what we expected, partly because of COVID-associated savings, but a lot of it because of other structural changes. We'll continue on that basis. DTAs taxes going up is good, not bad for anyhow. [crosstalk]
Yes. Theoretically, yes, this, I believe in the U.S., what happened in 2016 is the opposite. If you remember well. Well, a few words on DTAs, because there is always questions around. Well, just to confirm the figures, I think that are public and well-known. Well, yes, Bankia, talking about monetizable DTAs, holds EUR 7.4 billion, CaixaBank EUR 5.6 billion. This makes EUR 13 billion, the combined. Well, those are, let's say, warranted DTAs, we are paying a fee for those DTAs, risk-weighted 100%. For us, on that front, we don't face an issue. For the other parts of the DTAs that are probably more complex parts, in any case, in many cases are already deducted. I would like to give you some figures, because I think its worth mentioning.
For CaixaBank standalone, let's say for CaixaBank, not talking about the combined entity of Bankia, we already have a capital consumption of EUR 3 billion for DTAs. This is 200 basis points of our CET1 ratio. Well, DTAs are there, but are already having a cost also. I think that any time you market them, let's say questions raised a bit, all the DTAs also have to take into account that are already or deducted or with a very high consumption in capital, that in our case is 200 basis points, as I say. From our side, well, this has its process internally with every six months and, let's say, an impairment tests. As of today, there are no issues. According to long-term forecasts of profitability for the bank, no need for an impairment, at least according to the assessment.
I don't know, Sophie, if with this we are answering your questions. If this is the case, we would move on to the following question.
Yeah. Thank you very much. It was very clear.
Thank you, Sophie.
Thank you. Your next question comes from Adrian Cighi from Credit Suisse. Please go ahead. Your line is open.
Hi there. Thank you very much. This is Adrian Cighi from Credit Suisse. I have one question on cost of risk and one follow-up on NII, please. On cost of risk, clearly Q3 was better than expected, but we're seeing renewed restrictions in Spain. What do you expect this to impact your cost of risk into 2021, clearly mindful of the pending merger with Bankia? Any guidance around your outlook there would be helpful. Just following up on NII to clarify your earlier sensitivity. The highest point, the 12-month Euribor, versus now, we've seen some 40 basis points decline. Is it fair to say that you would expect NII to decline by 4% in 2021 before any sort of impact of volumes and potential incremental benefits from the ECB in December?
Thank you, Adrian. I'll take on the first question on cost of risk. Nothing different from what we've been saying so far. We expect this year to be between 60 and 90. We said last quarter will be probably close to the upper end of the range. Based on what we have seen in the third quarter, I would be more optimistic. At the same time, I'm cautious because the fourth quarter, and particularly the expectation for 2021, may be less positive. All in all, even if we take a fairly conservative approach, we assume further deterioration of the 2021 environment. We are expecting to stay within that range of 60 to 90 basis points.
We continue to believe that in 2021, even though we'll have the increase in non-performing loans, because this year it has not materialized, and in the fourth quarter, I don't think it will, in any sort of significant size. Even if we see a higher NPL in 2021, because we are trying to cope as much as we can with anticipating that environment in 2020, we should have a lower cost of risk next year than this year. This is on a standalone basis. When we add Bankia, obviously we're going to be adding whatever is Bankia's impact, but being very much protected because of the adjustments that we've had to do on completion of the transaction. That lower cost of risk in 2021 versus 2020 should hold even more, taking into account the merger transactions.
Obviously, we have some degree of uncertainty, but I think when we look at the overall big picture, we're pretty confident that this should be the framework or the range on which cost of risk should evolve. Javier, do you want to take the second one, please?
If I may, now I realize that I forgot to answer a question for Andrea before, asking about the amount of generic provisions related to this question on cost of risk. The amount of generic provisions this third quarter, it's approximately EUR 150 million. To your question on net interest income, what you need to take into account is the delta. The average 12-month Euribor in 2020 will be around -30 basis points approximately, and into 2021, according to, let's say, market forwards, it's going to be probably 10, 15 basis points lower. This is the impact. The delta is what impacts net interest income year on year, not the full amount of 12-month Euribor. I hope with this, we answer.
Okay, thank you very much.
Please operator.
Yeah, thank you.
Can we move on? Thank you.
Of course. Thank you. The next question comes from Carlos Cobo Catena from Société Générale. Please go ahead. Your line is open.
Hi. Morning. Thank you very much for the presentation. Two questions from me. One is on cost of risk outlook and the recently published stress test from the Bank of Spain. Obviously, that is a theoretical exercise. This has nothing to do with your base case. Even under the Bank of Spain base scenario, they are coming out with a big scenario for loan losses of around 12% of risk-weighted assets for domestic banks, and they believe that the system would consume capital under that base scenario. Again, I understand the differences, but there seems to be a huge discrepancy, and I wanted to understand if you have a chance to compare. When I look at their base case, they also talk about a 1.5% cumulative contraction of GDP in two years. That's similar to your base scenario.
I would like to hear your thoughts on that. Secondly, maybe if you could help us to understand some figures that other banks are publishing about the usage of payments and credit cards, which are returning to normalize levels. That's quite reassuring. On the other hand, we have also seen a reduction in cash transactions. In a way, that is improving the comparative, but it's not really implying an improvement in consumption. Do you have any way to adjust for that improvement in the usage of cash, sorry, of plastic transactions? Thank you very much.
Thank you, Carlos. Let me answer the second question. The statistics that we publish actually include not just payments with cards, but also withdrawals with cards in our ATMs.
Okay.
That we're making public for October are like minus 5% versus last year. It already includes that impact that you mentioned, which is very true, that obviously there's been increased propensity to pay with cards, which is good for that side of the business. When we look at the statistic we put, we said about credit card turnover, it includes withdrawals from ATMs.
Right.
What we've seen, a -5% in October compared to a -3% in September compared to slightly higher in August. I would say the -5% in October is close to the levels of late June and July, to give you a sense. Obviously, we're expecting the last week in October has been -10%, to give you an indication. We're expecting that in this increased restriction framework, which is already obviously happening in the last week, we're going to see some weakness. Compared to April, where we were down 40-something percent, it's a different type of lockdown, obviously, a different type of impact on our car payments and on the economy. Obviously, you may think that it's going to be so bad that we'll go to a very hard lockdown.
I don't think it will be the case, not for a very long time period, certainly. This current sort of partial lockdown is having an impact, but it's very different. It's not just for our business, because obviously, that's not most important. It's what is the impact on the economy? The impact on the economy is people, schools stay open, people send their children to school, they can continue working from home or from wherever they have to. The industry is not stopping, et cetera. Hopefully, we can keep this level of restrictions, which are hard on people, but not as hard on the economy as last time. We're going to have some weakness in the fourth quarter. Clearly nothing comparable with what we saw in the second quarter. Obviously, we'll need to follow the situation quite closely.
On the Bank of Spain exercise, I really don't have You, Javier, may know the answer.
Nor me in detail. I need to go into detail on this. You know that this is a top-down stress test at aggregate level. The base scenario of the Bank of Spain is in line with our macro central scenario. According to Bank of Spain estimates, this is going to have an impact of approximately 1 percentage point in CET1 between 2019 and 2022. In this case, also with the help of government-guaranteed loan schemes, et cetera. In the adverse scenario, this clearly is having a more harsh impact. I would say that at least the initial estimate that we have done, that this is in line with the previous stress test result for us. I would say that in general terms, this would result into a CET1 ratio for us above our reserve requirement.
You know that it's so difficult to modelize the whole thing. You know that ECB, from their side, also they presented a sector-wide, let's say, impacts of the pandemic. In general terms, I would say that according to our internal estimates, we were comparing well. I'm sure that we can go into the details in another time. Because, well, it's so complex. It's so vast and extensive, I would say.
Thank you, Javier. Yeah. We can follow up. My intention is to understand better what they are including in the stress test, which you aren't, to pay dividends, and they don't consider payment, for example.
I agree. We can follow up on the details, I'm sure. Thank you, Carlos.
Thank you.
Operator, please, can we move on?
Thank you. Your next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead, your line is open.
Hi, Javier, and Gonzalo. Question on asset quality, maybe in a different way than one on capital. Clearly, asset quality is surprising everyone positively. Presumably in the retail side, it's the furlough schemes, and as long as the furlough schemes are extended, presumably that will continue to do relatively well. Just a confirmation of that. Also on the corporates side, obviously you've injected and all the banks have injected a lot of liquidity to the corporates and obviously things are going. We're not going to see from our side any real changes in NPLs until maybe next year. From what you track in your clients, are you being positively, negative surprised or in line when you look at how much cash they're burning during the lockdown or during the tough times? Is that also a surprise or not?
Maybe you can speak to how corporate is holding up, which is maybe less intuitive, and should we be worried or not about the cliff edge when they start paying the principal. On capital, hopefully a simpler question. Just the moving parts for CaixaBank standalone, this was obviously a focus when you announced the merger and the 11.3 combined. I just want to get clarity on the moving parts for you standalone into Q4. You've already called out software. I think talking with IR, there's around 50 basis points from the high default portfolio from you standalone in Q4. On the positive side, I don't know if you can quantify the insurance dividend that is still pending and any other positives we should take into account. What are the moving parts that you already know about as we head into Q4? Thank you.
Thank you, Alvaro. Let me address the first question on asset quality. Let me be very clear. The experience we have had so far is much better than what we expected. Obviously, we had expectations based on furloughs and moratoria, paid deferrals, et cetera, government-guaranteed loans. Even including all that, we're doing much better than expected. That is reflected also in the cost of risk that this quarter includes that amount of approximately EUR 150 million of collective generic provisions, again, because we know that obviously we need to be prudent. Really, the experience we're having, it's also in early defaults in what we call morosidad temprana, up to zero to 90 days, et cetera. We're having a very positive experience.
Experience in October also been pretty good, where we're having already also some sort of final maturity of grace periods for consumer lending in full principal and interest payments. Let's be clear. The quarter has been outstanding in terms of asset quality. Let's be clear, obviously, we are very much aware that we have plenty of challenges for the future. With respect to corporates, in general, we have pretty good feeling how they're coping with this. I would say not only corporates, but the rest. Obviously, the question is, for the smaller companies, their protection, and the margins, the buffers they have are lower. What we've seen in terms of how the economy has recovered, levels of activity, and generally, certainly corporates during the third quarter has been quite positive.
I have the sense that if we have to make now a sort of an evaluation of where we are, I'd say what it's been done so far, its been done well and it's worked. Obviously, we also have to be conscious that this is not the end of the picture. Picture is still not final. Hence, we cannot have a final judgment on everything. Clearly, in terms of how we're seeing our clients, we're seeing them in better shape than expected. You have to go sector by sector, and obviously, there are sectors that are being particularly affected by what's happening right now. Those obviously generate a higher degree of concern. The resilience, and again, I go back to the figures of sort of a leverage in companies, businesses, and retail in Spain before this crisis.
They were below Europe, and certainly way below where they were at the time of the last crisis. There are some reasons to think that we are actually going to be able to cope, and particularly referring to our clients, that they will be. There will be damage, certainly in certain sectors and certain parts. I think at this stage, we are well prepared to face that. Time will tell. On capital, Javier, please.
Yes. Hi, Alvaro. Well, for the fourth quarter, I have already disclosed the potential impacts, well, the impacts for the software deduction, 15 basis points, I think, let's say, for CaixaBank. There is also an issue about the potential That the contribution to the deposit guarantee fund will not be deducted anymore. You know that this influence, you had an issue on this front, probably we have also some clarity into the fourth quarter on this. This could add approximately eight basis points. Then you mentioned the insurance company, well, on this front, the insurance company has already paid an interim dividend. This is already unlocked, this issue. What we have been able to argue to the supervisor that the solvency ratios for the insurance company were sufficiently ample in order to allow for dividends.
We don't expect, going forward, any, let's say, internal model inspection on, as I mentioned before in detail. The most probable is that it will be in the fourth quarter, although it's not 100%, but I would say that you should count that it will be in the fourth quarter, as you say. Thank you, Alvaro.
Thank you.
Please, operator, can we move on to the next question?
Your next question comes from Domenico Santoro from HSBC. Please go ahead, your line is open.
Hi. Good morning. Thanks for the presentation and for taking the question. Thanks for giving us, actually, the different scenario implied in your model at page 23. I do have a question on how the amount of model provision will change if you have to give more probability to the adverse scenario. Any sensitivity on this side will be great to have, and especially also any also implication for risk-weighted assets from rating migration, if any. The second question is on capital. I know that there are many moving parts here. I wonder whether you rerun the calculation for the quarter one in Q1 next year, if this 11.3 still stands as it is, or you have probably have an update on this. Given that there are, of course, this is a number on which there are ODIs from investors.
I was just wondering whether you have any timeline for capital rebuilding here, in terms of timing to get to 12% now that probably you have done more works on the integration side. Then I have a question on deposits, if I can. I've seen that you got quite a big chunk of deposits this year, and given the level of rates where it is, I'm just wondering whether there is any, from clients or any commercial activity from your side in order to migrate this money into asset management products going forward. Thank you very much.
Thank you, Domenico. I'm going to try and be concise in the answer in order to make sure we allow for the rest, because we should finish by 1:00. I say in terms of liquidity, we're actively managing liquidity, both through appropriate charges and obviously making sure that we have a balanced proportion of liquidity from clients, given the business they have with us. Also, if clients have a lot of liquidity, they should have all the business, and the overall picture should be profitable, clearly. There's room to go further on that front, because now it's clear to all of us, and it's clear to our clients that money has a cost, and it's going to have a cost this year, next year, and for quite a few years.
This is no longer a discussion where we say, "Well, this is just a few months or a couple of years." This is now a structural problem, if you look at it that way. Money is costly, and our clients need to behave accordingly. I expect to make further progress on that front. In terms of the merger numbers, we have not updated them on capital or costs at this stage. I think it is something that we need to do in due course when the transaction is completed. It's obvious to, I think, everyone, given the numbers that we have delivered in this quarter, there is upside certainly on the capital side to the numbers that we have presented.
I think both institutions are doing nicely in increasing further their capital ratios beyond certainly what the market was expecting, and we'll keep working on that front. On the rest, Javier, can you maybe take it?
Okay, Domenico. On rating immigration, we are in the same place. Remember that what we commented is that we have approximately 50 billion of risk-weighted assets in IRB models. The rating immigration would affect that part. Our expectation is that this will be less than somewhere between 5% and 10%. This is probably the worst case, 10%. Thus, we think that it's something that we can manage in any case. You had a question initially about the impact of, let's say, a more pessimistic view in the combination of the scenarios. Our view here is that, well, this according to what we may think may happen on this front on the different weightings, we should be able to accommodate this into our guidance for this year. I think that this is an important message.
Unless, well, the situation of the whole scenario had to be changed. We think that we can absorb a more, let's say, acid view on the combination of the scenarios. Thank you, Domenico.
Thank you very much.
I think that this helps to answer your question, and we should move up. We should be closing by 1:00, so let's see if we have time for one or two more questions, please. Please, operator.
Thank you. Your next question comes from Jose Coll from Santander. Please go ahead. Your line is open.
Hello. Thank you very much for taking my questions. I have a follow-up on capital and cost of risk. You mentioned that Bank of Spain central scenario expect around a 1% impact on CET1 up to 2022. I think the EBA analysis that they presented a few months back was sort of a 1.52% impact on CET1 ratios. If I have understood correctly, you said that your view would be in line with that sort of analysis. My question is, where do you think the impact on capital are going to come from when cost of risk, you're guiding for a lower cost of risk next year versus this year, and the group provision profit already more than covers your cost of risk. You see a big increase in risk-weighted assets?
Is this where the big driver for impacts on capital could be going forward? A second question on ICO lending. It's been done at lower yields versus the back book for both corporates and SMEs. I understand that adjusted by capital consumption, ICO loans are very profitable. Would you expect a spillover effect on the rest of the non-ICO lending in the corporate and SME book when the time comes to roll over these non-ICO loans? Thank you.
Yes.
Thank you, Jose. On the CET1 impacts here, I understand that you already take into account that we have front-loaded much of those impacts, because we have built those COVID-related provisions. It's not from now on that those impacts will be felt. We have already front-loaded a large part of those impacts. Just to take this into account. I would say that our macro views are in line with what you have commented. I don't think that this is going to be an issue, at least according to our analysis. Regarding your second question on ICO, I think our views are not that they should not have an impact on the new production of loans after ICO, because while it's a different product, it's a different, probably, target.
Our view is that we should be able to resume the new origination loans at, let's say, wider spreads as before. Remember that also this front book yield, from ICO loans also takes into account the cost of the warranty. With loans without the warranty of ICO, you don't have this. This, it's worth mentioning also. I don't know, Jose, if this answers your question. We should be moving on.
No.
Thank you. Operator, please.
Thank you. Your next question comes from Daragh Quinn from KBW. Please go ahead. Your line is open.
Hi. It's Daragh from KBW. Thanks for taking my questions. One question, a follow-up on capital. Just on the commentary explanation you gave for the low default portfolio and building out your own model. Just to be clear, the 50 basis point roughly impact that we should expect in Q4 or in Q1 will essentially be reversed, as you rebuild your own models. Could you just confirm that, and if you could just outline the timeline of that process. Then just a small question on NII. Just confirm the amount of TLTRO accrual, in NII this quarter. The final question on Telefónica. I know in hindsight, it's maybe easy to look at as an investment and come to a conclusion.
As you see the impact that this has had on your capital ratio, maybe just some color around what I know it's available for sale and what the kind of standard answer to this question is. Just really what is the logic and benefit of having this type of investment? Thank you.
Javier, you want to start, and then I'll finish on Telefónica, if you wish?
Hi, Daragh. Well, we are starting to work on, let's say, the new model, according to the parameters required by the supervisor. This is going to take some time, as I said, because then it's not only that we do our homework, it's also that the approvals for this new model have to be obtained, and this is going to take probably up to two years. Our view is that we will come up with a situation that is better than this, with a asset density of 70%. If we will be back to where we are today, it's something that is still an open question, but clearly, an improvement with the situation that we will be facing, since the moment this limitation is enforced. On NII quarter on quarter, the positive impact from TLTRO is EUR 35 million. We are accruing 87 basis points, according to accounting rules.
We already had some impact from TLTRO in the second quarter. This is, let's say, the 87 basis points compared to the 50 basis points you are obtaining or you are charged in the deposit facility of ECB. On Telefónica.
Sure. On Telefónica, Dara, there's nothing new other than the underperformance of the company, which obviously shows in our capital numbers. I hear you, but there's nothing new. I think in the interest of time and taking the last question, I will not elaborate more because there's absolutely nothing new.
Okay. Thank you.
Okay. Thank you.
I think that's all we have time today. Well, the team is available for you, and I am also personally available for you at any moment, as always. Please. Thank you very much.
Thank you very much.