Good morning, and welcome to CaixaBank's Financial Results Presentation for the Q1 of 2019. Presenting today is our CEO, Gonzalo Cortazar and our CFO, Javier Panon. Let me mention a few housekeeping items for comparison purposes with last year's Q1, you need to account for the Repsol announcement of disposal and the change in accounting treatment of BFA as well as the capital gain of Viacer, which happened at BPI. We have also provided new details of customer funds to highlight unit linked products within the insurance breakdown and finally, post the sale of our OREO last year, we have discontinued reporting the real segment, and what was left has now been integrated into the bancassurance segment. With that, let me also give A brief reminder of format for our first time viewers.
We plan to spend around 30 minutes presenting with 45 minutes available for live Q and A. And again, you should have instructions on your screen to participate in that. My team and I will be available after the presentation to take any calls or questions you may have. And with that, let me hand it over to our CEO, Gonzalo Cortazar.
Thank you, Eddie. Good morning, everybody. Let's start directly with the summary of the quarter. I would say it's The performance on noninterest income. NII, it's been supported by growth in the loan portfolio.
We actually have achieved a 0.9% year to date growth in the performing portfolio, which is, I guess, again, a continuation of good trends we saw in the last quarter of 2018. So Good news there and good news in terms of customer spread, where we have increased 4 basis points. So we have so far managed to do better than others in terms of the loan side, but protecting margins, which is obviously tricky but quite critical to create value. With that, we have 2.9% growth in NII year on year and a small but positive growth versus the 4th On the other hand, as you've obviously seen, though core revenues increased by 0.9%, We have negative performance on fee and insurance. I'm sure we will spend a lot of time on that, both during the presentation.
Javier will Getting to some of the details, and there will be surely questions on the topic. I want to advance at least one Particular point, asset management fees, which are down 3% year on year and 5% versus or 5.8% versus Last quarter, one factor that is behind these and that is positive vis a vis the future is obviously market performance where We see 4.4% growth in AUM year to date, so pretty good number there. But in terms of average volumes, which obviously drive fees, we're below the Q1 of last year and certainly below as well the Q4 of 2018. As a result of both matters, pre impairment income has a positive 2.7% after the adjustments that Eddy mentioned. And here, obviously, we have an increase in our expenses, recurring And saving in real estate expenses, €75,000,000 which is particularly high this quarter because of the tax impact on the OREO portfolio.
We were saving €75,000,000 and hence, actually offsetting that increase in recurring costs through the expenses saved associated to that real estate portfolio that we sold last year. The balance sheet, Positive evolution. CET1 increases to 11.6 percent. And where the ratio That's increased in over 20%, close to the minimum requirement that we are We have been fixed for 22.5 percent, and NPLs come down in the Q1. As We've said we expect for NPLs to continue coming down in the rest of the year and hit our minus 4% target by the end of the year.
All in all, net income is down 24.3%, up 4.3% once we make this adjustment and the group return on tangible equity is 8.7%. Commercial activity. Obviously, in the short term, it does not necessarily drive results. But in the long term, it does drive performance. And I think it's quite important to remind everybody, particularly as you see that we may have had a weaker quarter in terms of fees and insurance Results, the realities in terms of market share and presence in the market has been a very positive quarter.
You can see the movement in clients that we call relational clients. Those that have 3 or more products with us continue to increase. This is obviously the base for our business continue growing. Payroll deposits, the Nominas product, which is critical way to attract and retain loyal clients, it's Up to 26.9 percent in terms of market share. We've gathered 350,000 new payroll deposits in the quarter, 5 More than last year, which was a very good figure, we are now at the €4,000,000 number in terms of payroll deposits with us.
So the machine continues to do fairly well. Transformation program, we announced it in terms of increasing the Advisory hubs, the store branches. It's been a very, very active quarter where we have either opened or planned with execution Underway for 3.77 branches, obviously, the sooner that we can find new locations and open these new branches, the sooner we will Be able to reduce headcount associated to the branches that are integrated. So it's positive. No question in the fact that we are advancing Swiftly here.
The inTouch remote systems model continues to do very well. In fact, we are Ahead of schedule, we had, by the end of March, 1,000,000 clients here. Remind you that this is a model focused on These are clients that have also now the opportunity to have a relationship banker through a remote channel, mostly phone channel, which is allowing us to increase the efficiency, I. E, business volume that is managed by one of our people here is Approximately 3x when they are in the in touch model than in the retail branch network. And they are being actually much more effective in bringing new business.
You can see Figures on payrolls, which are probably the most meaningful for us in terms of gaining new business. It's almost double the speed at which the NERVO I forgot to mention on the left hand side that obviously, the statistics on the store branches are also of higher productivity, both in terms of absolute position today and also gaining new business. Digitalization continues. 58.5 percent of digital clients at the end of the quarter. This is a trend that is actually fairly predictable.
We continue to do well with mobile being the main channels. We made some interesting developments in the quarter with some Noise, particularly positive noise on the biometrics for ATM and Some other developments that reflect our innovation and our leadership in this area. In terms of actual numbers on the balance sheet, 3.1 percent is a very positive number in actually 3 months. It's also A quarter where it tends to be seasonally weak with respect to the year end where we have higher flows. So the fact that there's been a 3 Growth is a lot to say.
And again, I would urge you to consider this as indication our commercial success, which continues regardless of a weaker quarter in the noninterest revenue side. You can see that the growth has been supported by market development, €4,800,000,000 of additional value of assets under management, which is definitely very positive. And hopefully, it's going to result in higher fees in the next coming quarters. That's obviously what drives fees here is average AUMs, And average AUMs have been lower in this quarter, but the end of the quarter suggests or basically is Just the basis for a higher average AUM and higher average fees going forward. Moving on to the insurance business.
Again, We had a good quarter in terms of market presence. Long term savings, 16 basis points growth in year to date. Remind you that we include here all the mutual pension and life insurance funds. When we look at the total premia, we are actually at 12.8%. And adding the premia of Segura Caixa Dessler, our joint venture Associate, we actually get to 18.5%, by far the market leader.
And with those 53 basis points The year to date increase in market share. Some developments During the quarter, smart money of CN on the financial advisory proposal to clients. We are in discretionary management, up 9 percentage points versus last year, important because this is obviously much more, I think, Adapted to clients, very transparent with them in terms of new the new MiFID models and doing quite well. MyBox is a new insurance offering that we have launched in March April. That is doing very well In March April this year, we have already 50,000 new contracts under this product.
It's part of the reason the fact that we were developing this new product, Part of the reason why we cannot compare properly the Q1 results on insurance with the Q1 results of this year, so The year on year is a bundled offering of life and non life insurance products with a 3 year price that is flat for Clients payable in monthly installments, which has a very high insurance value because of its predictability And the fact that lapses in this portfolio are expected to be much lower and is, again, A pretty positive development in terms of how the network and the business model continues to do fairly well. On the lending side, it's been positive in terms of performing loans, plus 0.9%. Total loans is plus 0 point 8%. So it's those are good numbers relative to what we're seeing in the market generally. You can see that actually it's the best 4 quarter by margin in the last 6 years sorry, I said 4th.
I mean, the best first quarter of the last years by some margin. We'll have to see to what extent we can sustain This differential growth and combined it with a good margin Management. But certainly, it's now been 2 quarters of positive developments on this front. So there's good reasons To be hopeful here. The growth is based on businesses and consumer in particular.
And in this quarter, there's also a contribution from the public sector. That part is more, I would say, tactical, tends to be larger transactions and associated to shorter transaction. So I wouldn't read too much on that part, and it's not also driving the margin really, the consumer on the business side is much more relevant and is following, I think, nicely were commercial actions. In terms of new production, I guess continuity in mortgage, Plus 5%. Here, the new product, CasaFacil, that we launched last year is having quite a lot of Success.
Twothree of the production has been in fixed rates with adequate rates for us, so adding value to the existing back book. In terms of new lending on the consumer front, still nice growth. We have had even faster growth in the past, That 6% in new production is, I think, healthy, and we expect to continue to see This kind of improvement during the year. On the business side, we had actually a very significant increase over last year. It's up 40 6%.
Of course, there are some larger transactions. And this figure, by definition, because of the large tickets, is kind of More volatile, but there's no question it's a very positive development on this topic. I will continue to try I'll do better than others on this front. So that's all with commercial activity. Pretty strong quarter, I have to say.
We're very satisfied with that. In terms of financial results, you see the chart here, first of all, the adjustments On the BFA Repsol and Viacera transactions that Eddy mentioned, we do not adjust for that. Obviously, we have that 24.3% fall in net income for this If we take this into account, which in the end is making our P and L of higher quality, then what we have is modest but positive growth of 4.3 percent core revenues are up, contributing €17,000,000 And then as I mentioned before, this graph is On a post tax basis, what we're saving from the Lone Star transaction is offsetting the increase in operating expenses that we had anticipated. Then As I said, core revenues are up 0.9% versus last year. And with that, sort of differing view with NII Growing 2.9% and net fees and insurance coming down.
Other than that, I think there's not much more to comment. All is according to guidance and expectations. Looking at the segment P and L. Obviously, Eddie mentioned that we're discontinuing the noncore segment and integrating it into the bancassurance Activity now that it has a relatively low weight in our results, bancassurance with that sort of residual Noncore segment is having a 9.9% return on tangible Equity Investments and BPI are contributing positively. As you can see, I'll refer to BPI shortly.
In any case, BPI will also results on Thursday. But BPL results are now not including, I would say, any meaningful extraordinary, So a good indication of what Ben can do going forward, which is somewhat reflected in this slide, is the segment P and L for BPI, including therefore the Consolidation adjustments that we need to make, you can see NII growing at 2.2%. There's a big fall in net fees and commissions, I have to say that is a consequence of an intergroup transaction because obviously, remember That Caixabank and our partner Comercia bought many of the sort of fee generating businesses of BPI to consolidate it with The net attributable profit at €58,000,000 is a significant increase. Obviously, we continue to work, And BPI continues for us to be a source of growth and providing those €58,000,000 to Our P and L. Growth in terms of mutual funds, customer lending, business lending, digital transformation of the bank, it They are all going in the right direction.
And as you may have seen, we announced along those lines precisely Yesterday, BPI will pay again a dividend of €140,000,000 after 9 years of The bank not having been paying dividends given the situation in Portugal. So those are the highlights. There's a lot to be discussed in terms of the details, and I'm sure Javier will walk us through that.
Okay. Thank you, and good morning. Well, as always, I will comment on the different lines of the P and L and also I'll focus on key items on the balance sheet. First, on net interest income at group level. As commented, it's up by 2.9% year Wage loan balances, also a wider customer spread, good contribution also this quarter from to NII from life Savings insurance.
We have increased the size of our ALCO portfolio. We'll now comment on this. But although we have done It has not been enough to hedge the negative impact of Very high cash balances. Just it's worth mentioning that we closed the quarter with €21,000,000,000 At the ECB deposit facility, also the quarter is affected by a lower day count and also by the impact from this 1st quarter of IFRS 16, where we expect an impact between €4,000,000 or €5,000,000 every quarter from now on. All in all, we think that everything is on track to meet our guidance for the year for NII to grow around 2%.
Now focusing a little bit more on the impact of our the customer [SPEAKER FRANCOIS XAVIER BOUVIGNIES:] It is on NII. You may see that on deposits, everything goes according to plan. There are no changes. We are rolling our euro time deposits at The Opitrolia 0. Our back book yield is not being affected that much.
And on the asset side, you may see that The front book yield goes up this quarter to 287 basis points, in this case, helped by A higher weight of consumer lending this quarter and also this Q3 with better CIB margins on those last transactions That have held our loan volumes. As a result of this and also thanks that from this quarter, we are no longer having a negative For arrival repricing impact, our back book yield also goes up by 2 basis points. And this fact, together with the situation with higher or larger Site deposit balances, our customer funding cost goes down by 2 basis points to just 2 basis points. And as a result of this, our customer spread widened by 4 basis points to 227 basis points. Net interest margin Goes down by just 1 basis points to 127,000,000 in this case, impacted by this a larger balance sheet as we have much larger cash balances.
Now I will comment on our ALCO activities. On wholesale funding costs, despite It moved up by just 4 basis points to 116,000,000 of our 6 month arrival and still below what it was 1 year ago. And on the asset side, as commented, we have expanded we have decided to expand the structural ALCO portfolio. It's a combination of lower yield environment for longer and also extremely ample liquidity situation. And we have purchased around €3,000,000,000 of Spanish 10 year government bonds plus €1,000,000,000 Diversified corporate portfolio, European and U.
S. Corporates. And well, because at the end of the day, the size of our balance sheet has increased by close to €20,000,000,000 this quarter, so We have to encompass also the growth of the portfolio according to the size of the overall balance sheet. The liquidity management portfolio has also increased a little bit as we are closer to the TLTRO maturity. Now let's continue with fees, where as commented, we are having here this first quarter lagging impacts From the Q4 market volatility, that this is affecting mainly our asset management fee revenues.
Net fees are down by 2.2% year on year and down by 5.2% quarter on quarter. On banking fees, I would say that year on year are resilient with support from our payments Fee revenues and also by CIB. But quarter on quarter is those banking fees are affected by seasonality, always the Q1 being A little bit weak. But on asset management is where we have a larger impact. Year on year, Our asset management fees are affected by the cap on pension plan fees that entered into force in on April last year and also some other one offs.
But quarter on quarter is where we have also the impact of Markets. And we try to show this on the right hand side chart, where you may see that the average balances Assets under management have been lower during the Q1 of 2019 than not only the 4th Quarter of 2018, but also the Q1 of 2018. But the good news here is that by the end of the period, you may see that the balances have Thus, we can expect that with markets performing, let's say, reasonably, that From now on, our fee revenue will recover markedly together with the fact that also the Q1 of the year is affected by seasonality. We expect that fees from asset management, with all things being equal, will grow during the second quarter by at least by 3% after those effects have already are already behind us. On insurance distribution also, we have an impact year on year, In this case, because we have had different timings on the new product rollout, the CEO has already commented on our Plans on this front and quarter on quarter, you may see that growth is already showing an improvement.
Now let me focus a little bit more on our insurance activities and the contribution to our core revenues. On the left hand side chart, This is our total revenues that you may see that grow at 2.8% on a 12 month trailing basis. And on the chart on the middle, you may see here the consolidated revenue from insurance. And what we have tried to do here is To split into the engines for growth that we identified on our A strategic plan that is on protection and long term savings where our insurance revenues land on those 2 engines. And you may see that Although we have an impact year on year and our insurance related revenues are slightly down by 1.7% Quarter on quarter, once you consider all effects and also the contribution from the equity accounted from Cebu Casa Deslas and everything, Our fee revenue from insurance sorry, fee revenue and other related revenues from insurance are up quarter on quarter by 10.7%.
On the right hand side of the Slide, you have the P and L, the contribution from insurance that you may see that the net attributed profit goes up by 6.6% year on year. Now I continue with costs, where everything goes as expected and no news on this front. According Moving to our plans. As we are rolling out our new distribution model, Our recurring cost base goes up by 4.7% year on year and by 3.1% quarter on quarter. This is offset, as the CEO commented, by large real estate cost savings after the disposal of our Nonperforming portfolio and as you may see, costs related to this our real estate activities have fallen from €87,000,000 during the Q1 of last year to just €12,000,000 this quarter.
And these those savings more than offset, as said, the our core operating costs. And this helps to support our pre impairment income with growth after the adjustments that Eddie commented, That grows by 2.7% year on year. I would like here also to comment that the restructuring negotiations with unions are And finally, on the P and L. On loan loss provisions, low levels. Although we have An uptick this quarter.
We don't think that this will change an overall trend. And we expect It's a cost of risk that will be below our 20 bps guidance for the year. And as you may see, we are, on a 12 month trailing basis, is at just 3 basis points. And even not considering an extraordinary writeback we had during the Q3 of last year, cost of risk It would be below, and it would be at 15 basis points. And now let me shift to the balance sheet, a look To NPAs or our nonperforming exposures.
The NPL stock has come down a little bit this quarter and set to be reduced further in coming quarters. Remember that we have a target for our NPLs to be Below 4% by the end of the year, something that we reconfirm today. And we closed quarter with an NPL ratio of 4.6%. And you may see that the nonperforming loan coverage remains stable. Our real exposure is nonmaterial.
It's just €800,000,000 and it has come down markedly. We continue to dispose €90,000,000 of real estate sales and making a 10% capital gain. On liquidity, as commented, a extremely comfortable situation, €86,000,000,000 of liquid assets. Liquidity ratios, very comfortable levels. Liquidity coverage ratio of 198 percent also the net stable funding ratio at 121,000,000 and liquidity metrics at CasaBank on an individual basis also extremely comfortable.
Before commenting on solvency, let me touch on our MREL requirement that, as you know, It has been released a few days ago. We must comply with a ratio at 22.5 Percent by early 2021. The ratio as by the close of the Q1 of this year And according to the eligibility criteria that we understand that will apply the SRB, This ratio stands already at 20.2%, so just 3 percentage points to Meet the target. This is around €3,000,000,000 so not that much. Once we consider this ratio is made of our total capital, our senior nonpreferred, our eligible senior preferred and 60 basis points of other eligible instruments.
Our this MREL requirement is aligned with our expectations and consistent with our funding plan. Remember that we are done with Tier 1s and Tier 2s, and we don't face refinancing needs in the near future. And remember that our plan consists on the rollover of the next during the next 3 years of €7,500,000,000 of wholesale debt through the issuance of MREL eligible liabilities, mainly of subordinated nature. So far this year, we have already issued close to €3,000,000,000 on different instruments. So we you may to be present in the market with senior nonpreferred and senior preferred during the next few years.
And finally, on solvency. It's a quarter with several one offs, but we have managed to improve our CET1 fully loaded ratio by 10 basis points to 11.6%. We have risk weighted asset inflation from IFRS 16 that results Into a negative impact of 11 basis points. Also, we have risk weighted asset inflation from Those exposures real estate exposures that are considered speculative with our risk weighting now at 150%, This results on a negative impact of 5 bps. And we have had organic capital generation, positive Of 15 basis points, plus also markets and the disposal of Repsol, this quarter helping I think 12 basis points.
On Repsol, I would like to comment that we've closed the quarter with a stake at 2% of the But as recent of as last Friday, our stake was already 1.1%. Our tangible book value per share also improves this quarter by And just To remind you that our final payout for 2018 was 51%. And a few remarks to end from my side. We have Lagging impacts from the 4th quarter market correction that has affected our fee revenues, this has been, compensated by the good performance on NII and with better lower loan volumes and margins. And also, we have had the chance to compensate cost increases with savings from our real estate portfolio that was disposed last year and this, together with a reinforced solvency, liquidity and credit risk profile.
All in all, our view is that we are progressing well rolling out our new distribution strategy. And with this, I think that we may be ready for questions. Thank you very much.
Okay. Thank you, Javier and Gonzalo. Operator, Can we now move on to questions? And could you please ask for the name and the company of the participant?
The first question we have today comes from Alvaro Serrano from Morgan Stanley.
Two questions, please. First of all, on fees. On my numbers, to get to the 3% growth this year, you need €70,000,000 Higher fees for the rest of the year is the run rate versus your 612. You've mentioned the AUMs And the AUMs are up, I think it's 4% year to date. And Javier, you also mentioned that Fees on asset management should go up, but it looks like you need a bit more than that, especially in banking and insurance.
So Can you maybe give us some color? Is that 3% still achievable? Or if there is a shortfall, how what's the sensitivity And around that? And the second question is on the agreement with the unions. It's taken Quite a while.
So I don't know if you can maybe sort of talk us through what the difficulties versus other agreements we've seen in other banks That seemed to be a bit faster. And if we do get the agreement in the next few weeks, your cost base is up 4.7% In Q1, it's a touch lower than the 5%. I realize it's not fully comparable maybe. But Once you reach the agreement, the question is how quickly would the cost takeout happen once the agreement? And can we look forward to lower than the 5
Thank you, Alvaro. Good afternoon. I'll let Javier elaborate more on the first point with respect to fees expectations. But I want to make clear, we're not managing or changing our views On the basis of our quarter, it's obviously been difficult in terms of the average sort Market, but then pretty positive at the end. And there's many other sort of factors that have their influence.
But We still are of the view that we can sustain the numbers we've guided for in terms of our expectations For the P and L this year, obviously, it's a weaker start on fees. It's a stronger start in lending activity than we expected and a pretty good performance on NII. We're going to certainly be managing The business in order to get to where we want to be. And at this stage, we're still confident that we can be there. With respect to the unions, it's an agreement that is taking time.
Yes, it's an important agreement where we have many things being discussed. This is not just an about headcount reduction. Obviously, headcount reduction is what is going to be most meaningful in the short term and most visible In terms of charges and expenses saved and cost savings, but we are negotiating A few other things that are quite relevant, including opening hours, including mobility for employees, including the structure of branches that we have to have in rural Spain as we want to have more branches with fewer people, More we're not opening branches. I'd say a higher proportion of our existing branches with fewer people. And Obviously, we have different views from different unions, and we are Making good progress.
We are expecting to reach an agreement in the month of May, but we're still not there. And obviously, until we have an agreement, nothing is final. But we are hopeful that we will get there. In 1, we certainly are, at this stage, looking for full delivery in terms of our not just this year, but 3 year growth in costs, which means that even if this year we have 5%, That means we're going to have to come down to 2% for 2020 2021, and there's question that we're going to try to do better. It's a difficult environment.
Even if it wasn't difficult, we will try to do better as well. But certainly, we're going to do everything we can to see if rather than being at that level, we can be at least somewhat below. But it's not easy. It's complex. We hopefully are going to reach an agreement during next month.
And certainly, we'll make a proper announcement about its financial consequences, in terms of charges and savings associated to it as soon as we have that agreement. And maybe, Javier, you can Elaborate more on fees in particular.
Yes. Well, first thing, I would like to remark a couple of Our fee revenue is becoming more and more seasonal, first thing, and affected by calendar effects in some cases. So our asset management revenues is around €100,000,000 per year, so this is more or less round numbers. This is onethree of our fee revenue base. Thus, this quarter Affected by 2 days less, so we have just by this an impact.
This is more or less 1 percentage point of our fee revenues quarter on quarter. And then in other areas, for example, in payments. Payments, our fee revenue on payment related activities It's around €400,000,000 per year. And clearly, we have strong seasonality on this with the 3rd quarter and the 4th quarter being the strongest. So all in all, we don't see on the underlying trends of those, Let's say, nonrelated non asset management related fee revenues, anything that makes us think that we cannot attain our target.
So this is why we are not changing our guidance. Moreover, we see that our average Balances of assets under management have recovered nicely during the quarter. So the end of period That is, let's say, the starting point for the Q2 is a much higher figure. We have tried to show this In the chart we displayed in the presentation, that's only for this effect. And together with the calendar effect, we can expect Our Asset Management revenues to recover nicely from now on.
Obviously, there is another route In markets that would affect, but so far, we are not seeing that even the average fee revenue on our assets Under management, it's fairly stable. It's around 81, 82 basis points, just Slightly down by 1 basis point this quarter, but because also the weight of those Products with wider margins also has decreased because of the market impact. So all in all, we don't see any sign And that is letting us to the fact that we cannot attain our target. So This is why we reiterate our guidance. And also, our nonlife insurance related fees also have been affected by a different timing on the rollout of new products.
The CEO commented new initiatives on this front. So far, launched late in March And so far, this month of April, we see that the performance is doing well. So we expect that also. Fees related to our non life insurance activities will gradually recover In next quarters. And we set targets for the long term, and we are trying to run the business thinking on those long term targets.
And in some cases, you need to take some commercial initiatives that probably may have a short term impact, But that, at the end of the day, will pay off over the long run. And this is why we may have this probably, In the short term, this negative or slightly more negative impacts than expected.
Thank you
very much.
Thanks, Alvaro. Could we have the next one, please?
Thank you very much. The next question today comes The line is Marta Sanchez Romero from Bank of America Merrill Lynch.
I've got a couple of questions. A follow-up on guidance On your life insurance business and the results from Jadesla's joint venture, I think if I'm not wrong, you were guiding for 10% growth year on year, and you're falling well below that target. Can you update us On that, sorry. And then a second question on asset quality. And in fact, a few quick questions here.
The first one is we've seen another €23,000,000 release in BPI. Can you update us on the PPA tailwinds? How much is there left? And the second question is an update on your Outlook for savings related to the Lone Star transaction. You've said €550,000,000 in 3 years and over €200,000,000 In 2019, do you stick with that guidance?
What are you seeing there? And then on NPL workout, we've seen a slowdown generally, You and the rest of your peers, is this seasonality? Or are you seeing more or trickier trends Fair. And if you're thinking about selling in wholesale transactions residential mortgage
Thank you, Marta. Let me make a couple of comments and then pass it on Javier. With respect to Adeslas, not sure the basis for comparison, but what I can tell you is that it's doing nicely, and it's working well And certainly in line with our expectations for this year, the joint venture is not having a negative impact. So that's Working well, and Javier may have the ability to go through the detailed numbers, but there's no Negative news there. Let me also comment on your last question with respect to NPLs.
It's So our target to be below 4% this year. And The budget that we had as to how that works quarter by quarter has been exceeded in the Q1. So there's no slowdown. It is true that obviously, it is more difficult to bring down the level from 5% to 4% than it was from 6% to 5%, but We are well working well towards the plan to be below 4% by the end of this year. And obviously, we have in the past on transactions from time to time.
These are not large transactions like the Lone Star. Sometimes, we're talking about maybe 200, 300 of NPLs that come here and there, and we will continue working on that front During this year and depending on the timing, you would see particularly a quarter where the numbers come down faster or slower. There is from the point of view of the P and L and the guidance we gave for cost of risk, that obviously includes some of these transactions, and hence, we are not thinking that in order to Do more in terms of NPL reduction, we're going to have to exceed our cost of risk expectations. That's not the case. It's all, I think, budgeted, and things so far and we're in April are working nicely on that I will make those two comments, Javier.
If you can help me out answering the rest of the questions.
Well, absolutely. You mentioned the 10% implied, Let's say, life insurance growth ratio. Well, that this is assuming the mid Of the rest of our key reference points for our guidance, Well, in any case, for sure that the end result will not be the mid. But well, in any case, we set Long term targets for this business, and we fully reiterate those. Thus, we are working On ways to fulfill those targets over the long term.
You had a specific question about the PPA. Now The balance on the PPA now is €320,000,000 And as you say correctly, we have released £23,000,000 this quarter. And well, so far, it's something that is updated regularly, every quarter, obviously. And so far, it's proceeding well. So the developments on the asset quality of BPI Are developing, I would say, better than probably what we estimated when making this adjustment.
So this is why You can expect our release. You had a question also on the real estate savings. I think that we made An estimate on this when we close the transaction. Also, we have to take into account that We are disposing our also from our rental real estate portfolio. You see that it's Very gradually, but trending down.
Now we're standing at €2,400,000,000 That's also that means that we [SPEAKER DIDIER MICHAUD DANIEL:] Losing some revenues on this front. Everything is the net of all those effects are in the same line. And remember that On this line on the P and L account, we have other major impacts related to the Deposit, warranty fund, etcetera. And I think that I will note that much So on what the CEO has already commented on NPL, so we are fully on track. The pace of NPL reduction is obviously, it's not linear, But we are fully confident.
And as we see that the pace of inflows into NPLs and also if you look At the breakdown by stages of our credit exposures, you may see that we have had a clear reduction On Stage 2 this quarter, so this also tells you about the underlying trends On our, let's say, nonperforming exposures or nonperforming or, let's say, on credit watch exposures, In this case, that's what makes us confident that we can attain our targets.
Thanks, Margaret. Can we move on to the next one, operator, please?
The next question comes from the line of Jimin Thoms from RBC.
First question is, can you keep or are you confident in keeping NIM Flat for the rest of this year. Second question is when you're one of the potentially stronger domestic Spanish banks in terms of digital banking, Can you tell us what your annual budgeted spend for digital banking is? And thirdly, your JV with Lone Star, where you have a 20% stake, Is that generating any profits in your state line currently?
First thing was flat, but I need to understand what you meant flat. Flat What was the question, please?
Are you confident in keeping net interest margin flat for the rest of 2019?
Okay. Let me just Answer the well, the third question, Javier will have the details. But basically, in the Q1, we have most of the payments of taxes associated to real State in Spain, and hence, that affects the results of that joint venture. It's a joint venture where we do not have a majority. So I don't have, at this stage, the confidence to disclose those results without The majority shareholder having done that, but it's according it's going according to plan in terms of results.
And again, We are going to have seasonality from that, in any case, not meaningful for our P and L. But the same way that we said we are having a big Cost saving this quarter because we sold the portfolio. Obviously, that portfolio today is in the hands of Lonestar, and it is in the Q1 where the taxes associated to most of this portfolio are paid, so that has a negative impact on a seasonal basis. We expect this joint venture to be obviously profitable from its 1st year of inception, I. E.
For the Overall of 2019. NIM, I think, Ariel, you're going to be better than certainly myself.
Well, on NII, I reiterated our guidance, our 2% NII growth guidance. And as per spreads, we should expect that with its ups and downs Quarter by quarter, no, but 1 bp up or down should gradually recover. As From next quarter, we should not only no longer expect negative impacts from Euribor repricing, but slightly positive, although LIBOR has stalled at minus 11 bps, but it was Below 1 year old. So in this front, we are confident. The only The main headwind that probably worries me on NII is the extremely large cash balances we are managing.
I mentioned that we have we closed the quarter, but it's a figure that remains fairly Stable. We closed the quarter with liquidity deposited at the ECB of more than €20,000,000,000 Thus, all the benefits of from TLTRO are already offset by this, so everything is matched. And I would say that trying to manage those larger cash balances that come from strong commercial activity, We are really strong on payments. At the end of the day, being so strong in payments, we have a natural tendency to accumulate cash. And at the end of the day, we end with cash on hand.
And also issuance, we are issuing regularly on markets, as you see, for and other purposes, thus, we're accumulating cash. The size of our balance sheet is increasing. Our balance sheet is now over close to €20,000,000,000 up in 1 quarter, thus managing all the situation with a negative Fare rate at minus 40 bps is quite challenging. So I would say that this is the main challenge going forward. But so far, According to our projections today as of today, we will manage the situation, and we have a clear Tailwind here, which is loan growth doing, I would say, a little bit better than probably expected With our performing loan balances growing close to 1% year to date, Last year, we delivered loan growth at 1.8%.
So far, we are at 0.9%. Let's see how the rest of the year evolves, but we are Quite a bit on this front. And you had a question about our expenditure On digital banking, well, what I can give you is what impacts our P and L Related of IT related investments and amortization of intangibles, It's a figure that is around €600,000,000 per year. So this is the figure that is going through the P and L related to digital, let's say, but on a more broader view, digital or IT related activities.
The next question today comes from the line of Jose Abad from Goldman Sachs.
You, Raj, for your presentation. I have three questions, if possible. So the first one is on the broader economy. I think I mean, We are well into a slowdown already. We have a number of indicators which point us in that direction.
And interestingly enough, we I mean, you just You are starting to see some indicators beyond actually this data point in particular, which is in which would support this idea of actually Broader slowdown in the economy. The second question is a follow-up on from Javier's last point. He was mentioning, So should we interpret that you are not interested in going to the TRL 3? Then And the third question, Jafar, if you could update us on the outstanding IRPH book. Last time you reported this year, I think it was €7,000,000,000 I believe there's been a number Amortizations and renegotiations in the meantime, if you could tell us what's the number as of Q1?
Thank you very much.
Jose, I will try to address the first question and let Javier deal with the other 2. A slowdown. That's not what we're seeing. Obviously, there's many reasons why we need to be cautious And obviously, not just markets, but the international slowdown is quite obvious. Spain, we have had a slowdown.
We were 3% up to 2017, 2.5% region last year. We're seeing 2.1 percent GDP growth for Spain in 2019. With the information we have today, the information we have quarter on quarter, We actually see upside risks. Obviously, we're in April end of April and still a year ahead of us, So this may change. But to be clear, with the information that we have today, we think that the risk is on the To GDP growth for 2019.
In terms of the Consumer lending NPLs. I would urge you to not measure it on the basis of quarterly NPL ratio. Obviously, consumer lending is usually tends to be short term loan. And you know well that we have to look at this on a basis of the cost of risk, including what transfers are made to sort of return of loans. And on that basis, what we see in the consumer lending is actually improvement in the asset quality.
Every year, we're going to have increase in NPLs, but every year, we'll also have Write offs. And depending on the quarterly schedule of write offs and NPLs, we'll have different numbers. Really, what we do internally is we'll get it on the basis of the total cost of risk. And The indications we have so far are positive. We are actually looking at, I think, a portfolio that is in better Shape now than it was 12 months ago.
Obviously, if the economy deteriorates, suddenly, that will change, Jose. There's no question, but so far, so good On that front. And TLTRO, no, thank you, but let's see. This is
the summary. Unfortunately, Jose, we as you know well, we don't have the final terms. We have a natural tendency to rely much less on ECB funding. So we don't think that we should rely on ECB funding structurally. Thus, if there is Not a clear economic rationale.
We will not take part or at least take part significantly. So This is a summary. We need to see also if this time there is any kind of, Let's say, if it's again a monetary policy tool as it was 3, 4 years ago, now It's not clear which is the final purpose of this facility. So well, whenever it's the final terms are released, We will make a final assessment, but we are more prone not to participate at this time. And you had a question on IRPH.
Yes, we have an update as we have Obviously, there are payments and prepayments on this portfolio. And as and for the close of the Q1 of this year, The balances outstanding the performing IRPH balances to individuals was standing at €6,700,000,000 by the end of this Q1.
Okay. Jose, I hope that answers your questions. Let's move on to the next one then, please, operator.
The next question today comes from the line of Andreas From Mediobanca.
First question on capital. Could you give us your Early preliminary indication of the impact from CRD5 and specifically from the exclusion of software from Deductions of intangibles and from the SME support factor. And finally, if you could give us An update on the TRIM impact, including the revision of the corporate book and the low default portfolio and when you expect to get these impacts by. Also, if you are swapping and how much of your fixed rate mortgage Production, how much is being swapped into floating? And just finally, you've beefed up a lot the ALCO portfolio With tightening spreads, where what's the level you're happy with?
Thank you, Andrea. And lots of detailed questions, Javier will address better than I. But let me say Just a couple of things. On TRIM, it's the low default portfolio that is yet to be carried out. At this stage, we do not expect that there will be an impact for us in this calendar year, 20 And 'nineteen, so the impact, if any, it will be most likely for 2020.
In terms of the CRD V, it's very early days, I have to say. But Javier, you may want to mention some of the color. But obviously, if it happens Or when it happens, it will be positive. In terms of our consolidated financial statement, it's slightly above 0.5 €1,000,000,000 And the SME supporting factor will be positive, obviously, but it's still to be quantified. Javier, you may want to
Well, on those two questions, not much to add. Just to reconfirm that On these potential deductions on intangibles, we don't expect a material impact, but everything is being worked on and probably we can update you in coming quarters. You had questions about the ALCO management. Well, I tried to give you a rationale. It's a combination of a larger balance sheet, larger cash balances, extremely ample liquidity situation.
And as all of us, we think that we can agree, the expectation that rates And also, long term rates will be at low levels probably for longer than expected. So this is why we have decided to expand the portfolio, and I gave you some details on what we have already done. So we will adjust the size of the portfolio on market conditions and our expectations. And I think that we have to be a little bit flexible on managing this because As I said before, probably this is one of the main headwinds that we face On managing our net interest income. And you had a specific question about The swaps on mortgages.
I would say that generally speaking, yes, we have our mortgage fixed rate mortgage Portfolio swap, although we are always a little bit flexible on timings and the final size.
And on the impact from TRIM on the corporate book?
Well, I think that
Not this year. And hence, it's further away, so we will see. We do not have an estimate. We did provide that 1% cushion in terms of our target capital ratios of 12 +1. And hence, I think there's no news to be commented on at this stage other than the timing, which means With respect to capital creation this year, it is unlikely that the this TRIM sort of Remaining TRIM exercise is likely not to conclude on time to have any impact during 2019.
Okay. Thanks, Andrea. You may want to follow-up later on with us. Next question, please.
The next question comes from Ignacio Elaghi From
Deutsche Bank. Just have two questions. 1, if you could update us a bit on What you would expect as the organic capital buildup in coming quarters? How do you see the capital going from here, taking into account the potential Tailwinds that we have in terms of sorry, headwinds that we have in terms of valuation. And the other thing is on the mortgage markets.
I mean, I remember from the strategy day, your beyond the mortgage market was somewhat more conservative. Could you just update us whether There has been a pickup in demand in lending growth. How do you see the mortgage trends? And also, how you see your spreads From the competition going forward?
If I may, on the second, there's not much news. We are, I think, doing reasonably well in terms of new production, but the loan book continues to deleverage. That's what we saw in the Q1, a percent increase in new production for us. Still, the loan book is down 0.6%, I believe. Well, These are the trends that we saw, and I think what we're seeing is consistent.
There continues to be very strong competition. That was what we expected. That's also why we did not sort of build our next The year's sort of business case on the back of growing mortgage book, but the opposite on deleveraging book. And it seems to be going that way. And our own strategy, which is to be pushing what we think is best Our clients and the bank and the fixed rate offering is going very well.
I mentioned the CasaFacil product has had a very good acceptance, and twothree of the production is We obviously have had these two impacts this quarter, which Javier mentioned. I think the most likely Sort of source of capital is going to be retained earnings. And when we look at retained earnings, obviously, in the coming quarters, we'll To take into account the impact of our restructuring process, which is likely, as We discussed before with the question of Alvaro. He's likely to finish next month, and hence, we'll have to Account for its costs in the year 2019 and most likely in the second quarter, and that will obviously reduce the capital generation for 2019. But it will not be driven, As far as we can know, by extraordinary or unpredictability of other elements, but just By earnings and obviously, to some extent, also how risk weighted assets, given the good growth We're seeing in the loan portfolio we have.
We expect to be around 12% by year end. And certainly, by the end of 2021, we'll continue to maintain our target of being at 12 Plus 1%, with that 1% being built for the various sort of regulatory headwinds that we have
The next one comes from Javier Echanove from Santander.
Yes. Hello. Thanks very much for taking my questions. I have two questions on NII. The first one is whether you could comment on the likely path of wholesale funding costs, Particularly in view of the NRELs or NREL related issuance that you're contributing in the next couple of years, I've also seen that We see quite a positive performance in the last few quarters.
And the second one is on the ALCO. You've increased the ALCO by €3,000,000,000 But it looks like it hasn't really had an impact on NII. When we look at the fixed income portfolio contribution to the NII,
If I'm
not mistaken, more or less the same in the Q4 2018 compared to the Q1 of 'nineteen. And I was wondering whether This means that there will be more positive impact or more positive contribution in the coming quarters.
Javier, well, on incoming MREL issuance, You saw that we closed the quarter with wholesale funding costs around Wrong numbers, 120 basis points. I don't expect that the average of the new issuance We'll be much higher to this. So if you look at our spreads as of today, obviously, there was a Widening of spreads late last year but now have tightened significantly. So if you look at The average of what we are planning to issue in coming years, that is senior nonpreferred and senior preferred also. I don't expect that the average will be that far from what we already have now.
So on spreads, obviously, the size Probably maybe a little bit larger, but not that much because we have also maturities. And on the ALCO, well, sometimes it's difficult to track. So there are also on this information, you follow also the Trading books, etcetera. We purchased those we made those investments around mid Quarter, so I would say on average. So we you should assume that we made those investments by mid February.
And for coming quarters, we should expect Larger contribution, although I remember again about the negative impact at ALCO level because I See probably the Alco on a broader view, also considering large cash balances that offset Probably the positive contribution from the fixed income portfolio.
Thank you, Javier. Next one, please.
Thank you very much. The next question comes from the line of Carlos Cobo From Societe Generale.
I'd like to ask you a couple of questions And a very quick check, if I may. First one on the business plan. Just wanted to revisit the Guidance for the 12% RoTE target. You also, I remember, mentioned that, that target could be revised to 10% if rates It increased. So I was wondering if we should now assume that your 2020 IoT target should be closer to 10% Or if you stick to the 12, why are you offsetting the lower rates?
We've already seen some of your competitors in Spain cutting items On the back of the changes in the rate quality of the ECB. So what are your thoughts around that? It would be nice to hear. And then the ALCO, Well, just to understand a little bit, if you could repeat, say, the new acquisitions. I remember you said something around Buying corporate bonds, I'd like to understand a little bit better the type of assets you are buying, is it purely a liquidity management?
Otis, it's starting to be some risk taking as well. So struggling to get traction on lending demand, you're adding NII through the corporate loan bond sorry, corporate bonds, which could be seen as slightly more aggressive than your ALCO portfolio in the past. Understand the rate environment, but I don't know. Yes, we want to understand the type of bonds that you are buying. And alternatively, To understand why you're not swapping, for example, as an alternative part of the deposits that you deposit that you have at the ECB For short term government debt, that has a lower cost in terms of negative rate.
So Wanted to understand better your strategy here. Yes, that's it.
Thank you very much.
Carlos, let me answer the first question, Javier. We'll deal with the second one. In terms of our guidance, we continue to target a 12% return on tangible equity for 2021. Yes, rates are now lower than what we expected them to be. But bear in mind that we said 12% as a sensitivity in rates.
It's not about rates being lower than expectation, there was no absolute no movement from the levels that we had in November. Then the 12%, as a sensitivity, Activity would be 10%, and that's before any management action. But even today, we're expecting increases in rates, Obviously, very minimal but not you look at July or 12 months, obviously, it's turning positive by the end of next year, and it's Going in the right direction, it's not staying flat. So the 12% is not Today, 10%. The sensitivity case has not yet materialized, and we're hopeful that it will not materialize.
In any case, obviously, We have more pressure, and it means we need to do better or that the target is more challenging. We still are committed to deliver on that one.
Okay. On the ALCO purchases, I mentioned that we purchased €3,000,000,000 of Spanish 10 year government bonds Plus €1,000,000,000 of a diversified portfolio of European and U. S. Corporates, investment grade in any case and on average, maturities between 5 7 years. We think that, that makes sense.
As you may remember, Spreads in markets widened markedly late last year. And at the beginning of this year, we saw that there was a clear Risk return on opportunity on this front, and we thought that it made sense to diversify the portfolio with this small €1,000,000,000 portfolio, but it's extremely diversified across different issuers.
The next question comes from the line of Mario Ropero from Fidentiis.
My first question is on restructuring costs. Since you are aiming to book This in the Q2. How do you see capital generation in the Q2? Do you see a negative quarter for capital generation because Losses or do you see a neutralish quarter in terms of capital? And then the second question, a follow-up on the ALCO portfolio.
Since the deposit book is still growing, probably because of the performance of the company should continue to grow, Is it right to assume that the additional money you get here is, at least to an extent, Being investing in additional ALCO portfolios?
Mario, in terms of the first Question. At this stage, I'd rather not speculate because we obviously are giving guidance of where we see capital at the end of 2021, I mentioned that we expect to be closer than we are today to 12% by the end of the year. I think at this stage, elaborating on the next quarter, it's a bit more complex for us because it's driven by what is the exact amount of the restructuring charge. And at this stage, we're not being allowed to provide guidance on that front because obviously a material event. Javier?
Yes. On managing the ALCO portfolio, we will be flexible as we think that we need to be, And there is not a direct correlation on our deposit balances and automatically increasing the size of our ALCO So we'll act depending on our views on markets and what we see on fundamental value On the fixed income markets and also with an ample degree of flexibility.
You very much. The next question comes from the line of Britta Schmidt from Autonomous. Please go ahead.
Yes. Hi there. I've got a question on the ALCO Portfolio as well. Could you comment a little bit on the increase in the duration that we've seen this quarter? Do you manage the duration on the total balance sheet?
Is this partly Probably your loan portfolio reducing in duration or are you increasing the risk appetite for this book? And in that context, Would it be fair to say that you've invested into OCI rather than held to majority assets to manage the risk given that it's corporate risk rather than sovereign risk? And then secondly, you haven't provided any guidance on the corporate TRIM impact. You're also not providing guidance yet on the restructuring costs. But shall we assume that your guidance to the CET1 ratio close to 12% by year end includes these expected impacts?
If I may answer the end of the last part of the question given that probably Javier will have responded with more detail. But in any case, The low default portfolio TRIM impact, we do not expect it to be impacting our numbers in 2019 because it will Not finishing time. That's our expectation today. So if there is an impact, that's for 2020. And hence, our indication of being close to 12% by year end does not include any impact from the low default portfolios on the TRIM side, okay?
But it does include, obviously, the impact of the restructuring
As for your Britta, as for your first question, you're right. We are managing the balance sheet on a broader view, and [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] And we are monitoring the sensitivity of the full balance sheet. That is if we increase our cash balances because We have larger deposits or larger issuances, etcetera. Then we have to encompass this with the management On the asset side, and this is why also we want to retain flexibility as we have classified those investments On OCI, I would like just to reconfirm that the overall sensitivity of the balance sheet remains where we expect it to be despite all those investments and the sensitivity that we have been disclosing. As you remember, it's the 20 to 14 months sensitivity of an increase of short term rates by 100 basis points Remains at around even above 15%.
The next question comes from the line of Stefan Nedialkov from Citi.
Yes. It's Stefan from Citi. A couple of questions on my end. I will start with the sort of most straightforward one. On the new lending yields that you are showing in the presentation, The increase Q on Q in your lending yields is around 19 basis points.
I'm not sure if this question has been asked before or answered. If you can just provide us with some color on what is driving this pretty meaningful increase Q on Q. Second question revolves around MREL. You have told us 22.5%, I think it was last week as a requirement that has been communicated to you to meet by January 2021. Based So in your reading of the banking package that's close to being passed by the European Parliament, Is that the final steady state MREL requirement for you?
Or would you expect that to go up potentially By the end of 2023, I believe. Related to that question, do you plan to I have around 2% or more of senior preferred in terms of meeting your MREL requirement. And if that's not enough questions and if you do have time to answer one more, I would love to hear your thoughts on your Payroll model, where you basically are growing payroll deposits by 5%, I think you say in the quarter versus last year. But obviously, your fees and NII are growing less than that. So are we basically stuck in a bit of an excess liquidity problem with Caixa for the next couple of years.
Let me answer the third question, and Javier will I'll take the other 2. When we talk about payroll deposits, we're talking about the inflow of the salary a monthly basis that we receive from clients, this is the main tool we have to acquire new clients and make them Profitable in terms of being able to cross sell all kind of products once they have the payroll with us. There is obviously some associated increase in balances as people bring their salary Payment to us that in today's interest rate environment obviously has a small cost, Well, we're not generally talking here about big deposits. These are monthly salaries. And certainly, very well received even if they have a short term cost because subsequently, In following quarters, once they have the payroll, we'll be able to sell them consumer lending, insurance, asset management, you name it.
What I want to say and because precisely results have some appearance of weakness on the fee side, which we have discussed the reasons for. I will try and emphasize the point. Let's go looking beyond quarter by quarter. This quarter has been Very successful for our business model. We continue to gain market share across the board, and the results are going to continue to be delivered.
Yes. When we compare 1 quarter with another quarter, we may have a different timing for a campaign For the network, for certain products, others, but the track record of market share continues, and payrolls are certainly 1 of the most visible ways for us to gain and cross sell to new clients, not just when we acquire the payroll, But going forward, Javier, on the other 2?
Stefan, well, Front book yields have gone up quarter on quarter because of a mix of things. First thing is that we have a higher weight of consumer lending this quarter, and that affects the average, obviously. Also, the new production from CIB has been at wider margins, so this is a positive also. And then also, it's remarkable, and we commented before about mortgages, That so far, with this new product that we launched, CasaFacil, after the stamp duty Introduction last October. So far, we have been able to increase the front book yield on fixed rate mortgages that are being done now at an average of around 2.5%, thus absorbing completely, taking into And also a reduction on swap market rates, absorbing completely those extra expenses that now Have to be paid by banks.
So those are the main reasons. On MREL, According to the information we have, this is our final requirement, although the SRB will review it annually. And but so far, with the indications, we have this maybe on our final Guarme, our plan, as you know, is to fulfill this requirement mainly with subordinated instruments, But also, we want to build a buffer over this requirement. So we want to build, I don't know, how many Percentage points, a few, 1 or 2 percentage points over this requirement that That will be filled mainly with senior preferred. So this is the rationale and the plan we have To fulfill December requirement, you know that we are already at €20,200,000,000 Thus, we need to add around 2 percentage points.
It's around €3,000,000,000 according to our risk weighted assets, so not much. And we expect to be there and even surpass This requirement well ahead of the final date.
Okay. Thank you, guys.
Thank you, Stefan. It's 1 We've kind of run out of time. We'll take one more. I realize there are some
The next question That comes from the line of Andrea Unzueta from Credit Suisse.
Just two quick follow ups, if
you don't mind. Given that you mentioned seasonality is impacting your insurance revenues and that you also had the impact of the launching Or the timing of your product. How should we think of the progression of the €387,000,000 of revenues that you Disclosed in Q1 in the coming quarters and into 2020. And my second question is A follow-up on the cost of risk guidance, which I'm apologies if I missed. But you're guiding For a cost of risk of less than 20 basis points, does that include additional recoveries in Portugal?