Hello, good afternoon, and welcome to CaixaBank's results presentation for the fourth quarter of 2018. Presenting today is our CEO, Mr. Gonzalo Gortázar, and the CFO, Javier Pano. Just a brief reminder for those first-time viewers, we plan to spend a maximum of 30 minutes with the presentation, with the rest of the time available for Q&A. You should have instructions on your screen to participate. Let me reiterate that my team and I are available after the webcast to take any of your calls. With that, let me hand it over to the CEO, Mr. Gortázar.
Thank you very much, Eddie. Good morning and good afternoon to everyone. I'll try to be brief, as always, to leave more time for Q&A. Summary of the year is on this page. It's been a strong year in terms of core revenues and de-risking. The numbers are known to you, but I would highlight on the core revenue side, it's a good year, 3%-4%, depending on what metric you look at. Volumes, particularly positive this quarter on the asset side, less positive on the liability side due to the market volatility on AUMs. But all in all, a fairly good year with price discipline, as you can see, in terms of customer spread. Various actions taken during the year have resulted in significant de-risking in terms of NPLs, with that 4.7% NPL ratio at the end of the year. Cost of risk, obviously, at very low levels.
The transaction with Lone Star leading to now having a very limited number of OREO on the balance. Maintaining capital and liquidity at very high levels and obviously, reaching that 9.3% of return on tangible equity, which we were targeting for 2018 under our strategic plan. The focus on core business is remarkable. When we look at the return on tangible equity for bancassurance, over 12%. And obviously, having taken a negative impact from the real estate sale, from the Repsol sale, and from the reclass of the stake in Banco de Fomento Angola, which we've taken these four quarters. These are a total of EUR 844- one-offs, which are consistent, though, with that 9.3% on tangible equity. You know that last year in the strategic plan, we are meeting most of the targets and certainly the ones that were more relevant for us.
I will not elaborate on it because we discussed it on our strategic plan presentation in November. In terms of activity, I will say in the customer fund side, it's been clearly a good year with the same trends that we have been sustaining for the last two or three. With one negative fourth quarter in terms of market performance. You can see that EUR 5 billion of negative market impact has resulted in a very significant increase, but obviously not as high as it would have been otherwise. I think it's important to see the underlying trends are intact.
Obviously, we do not control the markets, but we're confident that what we are doing in this area in terms of customer advisory and long-term planning is something that we're going to continue growing in the next years as we've done, obviously, with ups and downs, but very significantly, as you can see, between 2014, with 33% of long-term savings and a percentage of customer funds to almost 42% in 2018. Market share have been positive. Again, the one that I personally like most is the combination of mutual funds, pension plans, saving insurance, which is basically adding all the mid and long-term savings in Spain. On this basis, we actually gained 50 basis points to 21.8% in this year. Almost 300 basis points over the last four years.
Actually this year we've again grown in every single category, mutual funds, pension plans, saving insurance, in terms of market share. The model which you know well, based on advisory and with a strong leverage through our IT tools. The model is intact and it's producing results, and it's been, again, a very good year from that point of view. Look at that proportion of managed portfolios as a percentage of mutual funds, almost half our mutual funds in what has been a very quick, the anticipation of the trends under MiFID II, in which I think we continue to see upside for a very professional advisory model like the one we run. When we look at the loan book, actually we have a pretty good quarter.
The fourth quarter, as you can see, has grown our book by 1% in terms of performing loans to make it a total of 1.8% year-to-date. Obviously, this has been particularly levered on consumer lending, and as you can also see on that slide, corporates and SMEs. Business lending, consumer lending continue to power our growth. The year ends up, if you look at the group in Spain, with that 1.4%, 1.8% for the total, but in Spain, 1.4% growth. Looking at the comparison with other years, you can see that there is a very positive acceleration trend in terms of recovering a positive growth in performing loan book or one that has surprised us on the upside and one which leads us to be a bit more confident in terms of potential future evolution, as I'm sure our CFO will develop. Consumer and business lending.
Again, you see the data, 14% growth in new consumer lending, 20% in the case of new business. On the mortgage side, even though we continue to see de-leveraging, 2018 has been the best year in a long period, both in terms of new production. The fourth quarter has been a positive one, despite the issues that we had associated with the Supreme Court sentence. It's been a quarter with growth both over last quarter and over last year. The total de-leveraging in the portfolio continues to be significant, but has moved, as you can see, from 4%, more or less, the previous three years, to less than 3%, which is obviously an improvement. In terms of our payment business, which we provided some detail on in our strategic plan, continuously good upside here. Just some statistics, but mobile payments are growing very strongly.
This month of December, they accounted for 4% of our total payments, compared to 1.4% a year ago. Very significant trend. We have a market share here over 40% in Spain, thanks to our more advanced technological solutions, and continue to see that the direction of travel is actually going to favor our position more and more. Financial results. You've seen them in detail. Core revenues continue to grow. Core operating income as well, even though we have, as you know well, an important increase in expenses associated to the transformation of the business. Overall, trends that confirm what we've been seeing over the year. Probably very relevant, the decrease in loan loss provision to a cost of risk that is actually four basis points for the year, with some extraordinary.
Obviously, we have used that reduction in loan loss provisions, on the other hand, with extraordinary losses on disposals, mostly related to non-strategic divestments, as I discussed before. When we look at the P&L by segment, what we like is what is growing. You see bancassurance growing 32.8%. BPI with an extraordinary year as well, ex investments. We have negative evolution, both on the non-core real estate associated to the disposals we've made and on the investment side. I would say from a qualitative point of view, I like the breakdown of our P&L this year and the direction that each of the lines is taking. Continue to see that insurance asset management contribute almost as much as the banking business and payments and consumer finance, an 18%, which is obviously a fairly strong number.
To conclude on my side, the full year on BPI. Obviously, BPI is presenting its results in all detail. Clearly a very positive year, very positive from the point of view of business evolution, mortgage lending, consumer lending, business lending, deposits, all moving in the right direction, gains in market share. While at the same time, BPI is going through an important transformation process to make sure they have full access to all the platform and the products and services and the know-how that we can offer to them. Somehow it's, in my view, speeding up its ability to continue outperforming in the future in Portugal. We have concluded the squeeze-out in late December and continue to be optimistic on future trends. With that, I'll let Javier continue. Thank you.
Thank you, and good morning. Well, from my side also, I will try to be brief. First, a look at the quarterly P&L. You may see that for the fourth quarter of last year, core revenues and cost of risk continued to improve year-over-year, despite adverse market conditions. Actually, core revenues went down quarter-over-quarter by 2.7%. You know that we have always here the seasonality of the contribution of several servicer cash. I would also like to remark that non-core revenues have been affected by the seasonal deposit guarantee fund charge, but also due to a negative trading result, mainly related to our trading exposure to credit valuation adjustment. Finally, I would also comment that loan loss provisions have been quite low this quarter. I will comment later in further detail.
We have at the bottom line some other charges, some one-offs in the quarter, an impact from an early retirement, then the BFA reclassification, finally, the closing of the real estate business disposal. All in all, a profit attributable to the group of EUR 270 million, up by slightly over 10% compared to last year. Now, as usual, I will go across the different lines of the P&L account. I would only like to remark that on the NII, we are slightly down on the quarter, but this is a one-off. We have had a reclass here from NII to lower provisions, mainly due to an adjustment related to pension contingencies. If had not been for this, NII would have had a positive quarter-on-quarter result.
You may see that client yields is what is now starting to support NII, as we have a lower negative drag from Euribor. Also, let's say the front book is also supportive towards the back book. A further detail on our customer spreads. First, on our deposits, you may see that we have no news on this front in euros. We are rolling them at really low levels, this is something that is forecast to remain the same in the next quarters. On the loan book, I would say that the front book yield at 268 basis points, you may see that in recent quarters, the front book yield is slightly lower compared to the front book yield last year, but this is for the good reason. This is because the pace of the new production for SMEs and corporates is improving.
Thus, the weight of SMEs and corporates in the front book yield is higher, over 60% compared to 50% last year. As the customer funding remains stable, you may see our customer spread up, but also by one basis point, also our net interest margin up by one basis point. A look to our wholesale activities. I would say here that our wholesale funding costs come down to 112 basis points over six months after the early call of an expensive subordinated bond. On the ALCO portfolios, not much news. We have had some redemptions on the structural portfolio, some maturities, we are seeking for opportunities to expand this portfolio.
Also, at the same time, on the liquidity management portfolio, we have added as we continue to accumulate cash ahead of our TLTRO redemption in 2020. On fees, quarter-on-quarter, we have had a flat quarter. Fees have been flat despite adverse market impacts. You may see that banking fees have improved quarter-on-quarter. On mutual funds, we have the impact of lower assets under management due to market impacts. If it had not been for this, mutual funds fees would have been slightly up. Other than this, on pension plans, less affected by market impacts as by the end of the year, we collect some success fees. A focus on our insurance activities and asset management activities, our long-term savings business. You may see that revenues go up by close to 10% compared to 2017.
Now those revenues already make 26% of our revenues from insurance by 2 percentage points. You may see also the P&L of our insurance activities and net attributed profit from those activities up by 4.5% to EUR 663 million. On costs, we have a situation where personal costs during the quarter actually go down, but other expenses go up for a total, our cost base to go up by 0.5% during the quarter. We start to invest and develop into new opportunities for future profitability, but we continue to deliver positive yields, as you may see. So far, we have been able to reduce our recurring cost to income to 52.9%- 1.4 percentage points in the year. Finally, on the P&L, very good quarter on cost of risk.
We have had the help of a credit write-back at BPI that contributes to the improvement. In any case, we close the year with a cost of risk of just four basis points. Remember, we had an extraordinary write-back also in the third quarter. If it had not been this included, the cost of risks would have closed the year at just 16 basis points, well below guidance we gave one year ago. Now I turn to the balance sheet. A few comments on NPAs. First, a year of a clear reduction of our non-performing exposure. We reduced our NPL stock by more than EUR 3 billion, resulting into a final NPL ratio at 4.7%. You may see that the coverage ratio continues to be sound, even if you look it by segments.
You may see that both the collateralized and uncollateralized NPLs do continue to have a very sound coverage ratio. Also, as you know very well, it's a quarter where we have closed the disposal of our real estate exposure to Lone Star, and we closed the year with just EUR 700 million of real estate available for sale. On liquidity, strong metrics. As in recent quarters, EUR 80 billion of liquid assets, liquidity coverage ratio close to 200%. I would remark also that as we established closing the net stable funding ratio at 117%, up by 3 percentage points, the liquidity metrics really sound also at CaixaBank level. As you know, with regular access to wholesale markets and as recent as this January with a new issue, according to our funding plan of a five-year senior non-preferred.
Finally, on capital, I would remark that we closed the year with a CET1 fully loaded ratio at 11.5%. It's a quarter where we have some corporate events that add capital inorganically. As we take control of 100% of BPI, this has a negative impact of five basis points. We have a positive impact of 14 basis points from the final disposal to the real estate portfolio to Lone Star. The fourth quarter always slow in terms of organic capital generation because we have the impact of the deposit guarantee fund. On top of this, as the CEO commented, it has been a strong quarter on the loan side, and we have had some risk-weighted asset inflation.
We don't have organic capital generation for the quarter, but for the whole year it has been, as you may see in the chart, 54 basis points after dividends. I would like also to remark that after the recent issuance of new senior non-preferred, our subordinated MREL ratio pro forma this issue stands at 17.7%. I would also like to remark, you also know that yesterday the board decided to propose at the annual general meeting to pay a final dividend of EUR 0.10 for fiscal year 2018, for a total cash payout of 51%. Now let's shift to guidance. Very briefly, what we have done in 2018, we have overperformed in NII. We have been in line in fees, in core revenues in line.
We have spent a little bit more than expected as we have started to invest in business opportunities we have already identified and explained in our strategic plan. Finally, we have ended with a cost of risk much lower than expected at just four basis points. Now our best estimate for 2019 guidance. We expect that NII will grow around 2%. We'll continue to be selective on loan growth, although we are quite upbeat on recent developments, but we'll continue to apply strict pricing discipline. Also on top of this, in 2019, we will have lower drag from Euribor resets. On fees, we expect them to grow by around 3%. We expect that we'll continue to have growth in assets under management and insurance funds, also we'll start seizing business opportunities in payments, something we explained it to you also on our investor day.
That will result together with our protection business on core revenues growing at a pace of around 3% for this year. On expenses, I would like to make clear that we fully reconfirm what's our guidance in our strategic plan. We expect costs to grow by 3% CAGR from 2019-2 021. The fact is that this first year in 2019, we front-load a large part of our investment and transform plan. This will result into, let's say, a faster recurrent expenses this 2019 at 5% as the bulk of cost savings are expected from 2020. This will result into expenses growing around 2% in 2020 and 2021 for a total cost growth in the three-year period of the strategic plan of 3%. Cost of risk for 2019 is expected to grow below 20%.
We are also slightly more upbeat on this front, as we feel that macro conditions continue to be supportive, and we are comfortable with coverage ratios of our NPL stock. Also on that front, we plan to further reduce our NPL stock to below 4% as we continue to have a very proactive early delinquency management. Well, thank you very much. I think that with this we can start taking questions.
Yep. Thank you very much, Javier and Gonzalo. I think that was a record in terms of all the webcasts we've done. Slightly over 20 minutes. Let's start with Q&A. Please state your name and the company you work for, and for the benefit of everyone, try and keep it brief. Operator, please, let's have the first one.
Thank you. The first question comes from the line of Ignacio Ulargui. If you could please ask your question.
Hi. Good morning, gentlemen. This is Ignacio Ulargui from Deutsche. Just one question on costs. You have just basically reiterated a 3% CAGR for cost guidance. I would just like to work on, is there any degree of flexibility that you may have in 2020 and 2021 if revenue fails to meet today's expectations? Do you have any ability to have positive operating jaws in 2021 and 2020 if revenue growth fails to be in line what you had in the plan? The second question is, in terms of the income growth, whether could you elaborate a bit on what is the sensitivity to markets and whether recovery markets could help on asset management? There's a very small question on trading. What should we expect for trading income?
Do you reiterate the guidance of, I think it was EUR 140 million, for trading income in 2019, 2020, 2021. Thanks.
Thank you, Ignacio. If I may take the first question and let Javier take the other two. Of course, we will continue to manage actively our cost base. Certainly, the more that revenues disappoint, the more that we will keep.
Thinking of how we can do better than what we expected. Hence, that is something that we cannot discard, and we will work on that front. I think it's a bit premature to make conclusions, both on the current restructuring, which is under negotiation with the unions, and also the evolution of revenues, as we have obviously some factors that are suggesting that there might be downside, but others that suggest that there might be upside as well. I'm sure during this call, we'll get into the detail of that. Yes, we will keep working to contain our cost base, and certainly, we expect to have positive jaws over the three-year period.
The fact that the first year we are front-loading expenses is exactly what we expected, we have the same confidence to manage cost for the three-year period, than we had a couple of months ago.
The fee income sensitivity you mentioned, well, probably the best way to give you some color on this is to give you the percentage of the weight of equities in our Assets Under Management. This, in recent years, has very rapidly moved upwards. It was around 25% two, three years ago. Probably now it's closer to 30%. I think that with this, you can make a good feeling on what may go on this front, no? On trading, yes, I remember that on the investor day giving guidance to be slightly below EUR 200 million, probably per year. Obviously, as rates are lower, it's more difficult to make profits on the ALCO portfolios. We think that somewhere around EUR 175 million-EUR 200 million is something that we can manage to.
Thank you very much. Very clear.
The next question comes from the line of Carlos Cobo. If you could please ask your question.
Hi. Sorry, I was on mute. Thank you for the presentation. Yeah, I guess the key discussion today is cost. I was wondering, I was trying to get a better feeling of the type of restructuring that you are thinking this year. Because even after what we've read in the press about cutting headcount, you still guide to a 2% growth in CAGR in 2020 and 2021. Not even factoring a contraction in cost in 2020. Could you help us to understand that a little bit more? What would be the year-on-year potential drop in cost or what would be the different moving parts? Everything seems to be weighted by the level of investments that you are implementing. Could you touch a little bit more on the type of projects that you are discussing and you are trying to launch now?
Why they are so demanding in terms of cost, in addition to the underlying wage inflation that you have to face? Then the change you did in your pricing for mortgages in Spain, I was wondering if you could give us some feeling on how is that affecting the demand. It felt that you take a more proactive approach to the mortgage setup costs, but you increase your prices. Did that spook clients or the demand for mortgages is running at the same levels as before? Thank you.
Thank you, Carlos, and let me start, and Javier, you may add on with some of the detail. With respect to the cost base and evolution for the period, we had guided in our plan for that 3% year-over-year. We obviously explained that we will be taking some actions in terms of reducing branches and headcount. We are in the middle of that negotiation. We need to look at this as a three-year period. We are front-loading the expenses. The benefits of some of the measures we're taking, we're going to see them more in 2020 and 2021. That's why we have now 5% and then a lower level to get to that 3% over the period. Things that are affecting our cost base this year in terms of investments, doubling the store branches or more than doubling the store branches.
We need to again front-load this expense because we're going to let people exit the bank. In order to make sure that from an organizational point of view, we continue to operate smoothly vis-à-vis our clients, because we want to combine close to 20% reduction of the branch network with gains in market share. We have to do it in the right way. We do not have people today that are idle, but we can organize ourselves better to be more efficient. For that, we need to create larger branches. The sooner that we create the larger branches, the sooner we can actually reduce headcount, obviously, after we've reached an agreement with the unions. Naturally, we have to front-load investments.
We are opening a bank in Luxembourg for our private banking effort, which is going to have an impact on costs during 2019 and onwards, but the revenues, we're not going to see them yet. We're having very intense IT transformational program. You may have noticed also that the government introduced a change in the contribution to Social Security, which for us means another 0.7% of growth for this year. This is a sector-wise question. The reality is that, yes, we do have an important increase in cost in this year. We were conscious of that and we are managing it. That's why we have a very complex negotiation undergoing with the unions.
It's a complex negotiation that is not only about reducing headcount, which is obviously an important part of it, but it's also about many other questions which affect the way we operate in terms of having more flexibility to move people around for branch classification, opening hours, and along et cetera, that is supposed to not only result in a headcount reduction and cost savings today, but also in better conditions and higher flexibility going forward. This is underway. It's complex. It will take some time. Certainly, we are conscious of cost-base inertia. We're taking actions, and we're confident that we will deliver on our objectives. As I said in responding the first question, if things become tougher than what we expected, you would not expect us to stay lazy sitting on our seats.
That will be combined, obviously, with the management of the business for the long term. We're not going to be managing the business for the cost income in one even quarter or even necessarily in one year. What we need to make sure is that the trends, widening jaws continue. Even though 2019 is going to be a tough year from that point of view, we're fairly confident that for the midterm, in the next three years, we will be able to continue improving on that front. You had a question also on mortgage pricing, and I think-
Yeah.
The situation has been quite satisfactory for us. The fourth quarter, we've grown 9% or 8%, depending whether you compare it with the fourth quarter of last year or the third quarter of 2018, in terms of new production. We clearly have been able to react to different circumstances. We've created a product that is very simple, fixed rate, no upfront fee, no expenses. We absorb everything, obviously, with an appropriate risk return, for us, in terms of the pricing of the product that is actually being very transparent and successful vis-a-vis clients. I think, we've reacted in the right way and continue to see, obviously, mortgage production, even if we are de-levering our balance sheet on that segment. We continue to see positive trends, and we're going to be a strong competitor going forward. Javier, maybe there's some-
Yes. Only to add, if I may, that-
Of course.
On costs. Remember that also what we said on Investor Day is that we were not planning to increase our intangibles on this three-year plan horizon. That means that at the end of the day, almost all expenses that we are planning for the next three years are gonna be front-loaded through the P&L. I think that this is something important to remember. On mortgages, just to add some numbers on it. I would say that probably last year has been the best year on new production evolution in every single quarter. We have done better than the previous year in every single quarter, including the fourth quarter, where we have been up compared to the fourth quarter of last year. Including the effects of seasonality by around 9% compared to the fourth quarter of 2017.
I would say that so far we have been able to adapt our offer to new circumstances, and we are not having much impact on volumes.
Okay. Thank you. Just to make sure, do you swap the fixed rate, do you swap them back to variable still, right?
Generally speaking, yes.
Okay. Thank you.
Thanks, Carlos. Let's have the next one, please.
The next question comes from the line of Britta Schmidt. If you could please ask your question.
Yeah. Hi there. I've got three questions, please. One is fairly easy. Can you give us any indications already on restructuring costs for the branch optimization program, or tell us when you expect those to be booked? The second one would be on BFA. You've reclassified the stake from at equity into OCI. Should we read anything into that with regards to any disposal or IPO? Maybe you can update us on the plans here. Lastly, I would be interested in your thoughts on the IRPH case in Spain. What are your expectations? Are you looking through your books, and at what point would you be booking any potential provisions for legal contingencies here?
Thank you, Britta. First question with respect to the restructuring costs. In terms of the size, I do not want to advance at this point any estimate. You'll understand we are having a negotiation on that front, and we're obviously trying to get the best possible outcome for that negotiation, and advancing or estimating costs will not be, at this stage, something that will help us. In terms of when, we would like to have this negotiation closed the sooner the better, to make sure that everybody's focusing on the very tough day-to-day business, but the very successful day-to-day business that we have been having. We continue to see our people very focused on that and not distracted. Obviously, there's headlines that come out from this negotiation with the union representatives, which will take some time.
My expectation is that we should close this negotiation during the first half of this year. We can do it sooner rather than later. Obviously, it would be better. As in any negotiation, it's difficult now to pinpoint a specific time. In terms of recognizing those expenses associated to the restructuring, there's no decision yet. We do not discard front-loading of these expenses. It will depend on the negotiation, because we're clearly also going to have people leaving, not all in one go, but gradually during the period to make sure that we actually have no negative impact on client business. I cannot confirm that the restructuring charge is going to come in one given quarter, or if it's going to be only one or split. At this stage, all options are . Again, we would like to close this matter sooner rather than later.
I really apologize, Britta, for not being able to be more specific at this point. Again, our interest is in achieving the best outcome for this process. With respect to BFA, this is an accounting decision. You know we have 48% stake, so the initial assumption has been that that assumed the former sort of associate status and the accounting treatment. What we have seen, particularly during the second half of 2018, is that actually that initial assumption from accounting rules does not really hold. We do not have influence or significant influence as defined by the accounting rules, and hence we've changed the accounting method. I think that is the sole message here. It does help in terms of our future P&L being completely clean, as we will only recognize dividends paid by BFA once we receive them in hard currency.
You will not see in our P&L the equity income from BFA any longer. We will reduce that volatility that in some quarters have been creating a bit of noise. In this quarter, we have this reclassification with an impact, EUR 154 gross million, which is obviously having an impact on the headline profits for 2018. It's not really material because it's a reclass of shareholders' equity adjustment that we had that now goes to the P&L, but doesn't really change book value from that purpose. I think it's the right decision because it reflects the reality, and as a consequence, also it helps the clarity and predictability of our P&L going forward. There is no decision associated with respect to exiting or no change in our position, which we've been discussing in the past around BFA.
This is a pure accounting decision reflecting a reality that we do not have that influence. Finally, with respect to IRPH, there's no news on this front. This is a remote contingency from what we can judge from our legal advisors. Hence, we are not at this stage considering any provision for that remote contingency. We will obviously monitor events and see if things evolve, but it is not our base case that we see this contingency materializing.
Thank you.
Thank you, Britta. Let's move on to the next one, operator.
Next question comes from the line of Jose Abad. If you could please ask your question.
Yes, hello. Thank you for the presentation. Good afternoon. I have a follow-up question on IRPH, if possible. You provided the outstanding amount of this portfolio was EUR 7 billion last time you mentioned that. I was wondering whether it would be possible for you to give us some other inputs that could help us actually maybe fine-tune our estimates on the potential impact. I would ask probably one of these two. One could be actually the number of outstanding mortgages rather than the volume, and the other could be the volumes originated. I think these two inputs are better when it comes to actually estimating potential impacts. The second question is whether you could let us know what the percentage of the original portfolio that was restructured. We know that CaixaBank, for example, restructured 50% of this portfolio in 2013. What is the percentage actually for CaixaBank if any?
The last thing is whether you are actually doing any commercial or having any commercial actions with clients to restructure, to refinance or to renegotiate actually these contracts. Thank you very much.
Thank you, Jose. On this matter, we have again, two big messages. One, which I just said, this is a remote contingency. Second, if we eliminate the remote and we try to quantify the contingency, it's very complex to quantify. We do not think it is helpful to elaborate on that. If we had a good estimate of this contingency, simple to communicate, we would love to guide you through that. In our judgment, it is not practical, and at this stage, we obviously have shared with the market what is the size of the portfolio, that EUR 7 billion. I think it is not helpful to try and provide more details on that front. We respect and understand, obviously, that it is relevant for investors to try and get a feeling of that. From our point of view, it's very difficult at this stage.
As we try to give you some further data points that will appear, some further data points that you do not have, because it is, again, technically complex. I think it's better to say, A, it's a remote contingency. B, we have this circa EUR 7 billion of IRPH in terms of our performing loans, and we obviously will monitor the situation as it develops.
Yep.
Okay. Let's move on to the next one, operator.
Next question comes from the line of Benjamin Toms. If you could please ask your question.
Morning. Thank you for taking my question. Two for me, please. Your insurance income line was a little bit weaker this quarter. Was there any seasonality there or was there some other driver? Do you have any guidance for this line for 2019? The second question is, if you've taken the impact for TRIM on mortgages, are you expecting any impact for your corporate TRIM? Thank you.
Well, you know that we projected a strong growth for our insurance revenues for our strategic plan. We think that this will happen, but this obviously is not always linear. That depends, in many cases, as we develop new products and we change from time to time, the mix of products, it may accelerate. I think that you should not read much on it. On TRIM, I would say that we probably were the first disclosing the impact for our mortgage portfolio, and what we said is that we are just starting the process with our corporate exposure. It's too early to tell you which may be the potential impact, if any. Remember that we precisely set this buffer for capital for the next three years.
That we wanted to build precisely to cushion any potential impact, not only for this, but also for the future Basel IV requirements.
Very much.
On to the next one, please, operator.
Next question is from the line of Marta Sanchez Romero. If you could please ask your question.
Good morning. Thank you very much. I've got three quick questions. The first one is on Erste. Would you consider to close the gap between cash flow and reported income here as well after what you've done with BFA? Would you consider moving the stake into AFS? What's the status of your hedge of your investment here? The second question is on NII, the target for next year, the 2%. How much ALCO do you have? What's the size of your ALCO portfolio? In the past, you've mentioned you would like to increase to EUR 40 billion. We've seen some increase in the quarter. It would be very helpful to have your views there. The third one is on cost of risk. On the target for next year, less than 20 basis points. Is that your recurring cost of risk?
I ask this because you still have quite a sizable mortgage NPL book, EUR 3 billion. You've been slower than your peers in working it out. We know that the ECB is putting pressure on banks to fully cover those books in seven years. Here, what's your view here? What's the average vintage of that portfolio? Is there a risk of having to step up provisions? We've seen some of your peers, Bankia, BBVA, selling wholesale books. Some of them seem to have higher coverage than you and have had to take a hit. It would be very helpful to hear your views on this portfolio. Thank you.
Thank you, Marta. On Erste, we have no plans of reclassifying Erste at this stage. It's a very different relationship, obviously, than the one we have with BFA. In terms of the status of hedges, obviously this is a listed stock and anything we do on that front will be properly communicated to the market. We have to do it through the appropriate channels if and when it happens. On the third question, I obviously let Javier comment on all of this, but particularly on the second one. On the third one, we have given guidance for this year. The cost of risk for the industry through the cycle is a question for everyone. We have different views, but it's certainly not less than 20 basis points. This is through the cycle, better on average.
For us, I'm afraid for all, if not the majority of banks in Spain. The environment that we have, honestly, is one where we are having actually negative entries into NPLs. Last year, we had negative entries. Hence, the fact that through the cycle, we may see a higher cost of risk and are likely to see a higher cost of risk in any model we do, doesn't mean that in the forthcoming quarters and maybe years, obviously it will depend on the economy, we may actually have a lower cost of risk for a good while. We are confident in terms of the coverage that we have on our non-performing mortgage portfolio. It's one where obviously we want to continue reducing. We have plenty of actions on that front, including, why not, asset sales, portfolio sales.
We have actually done some in the past. We will continue to manage this in a proper way. For this year, we're going to reduce NPLs to below 4%, and that is consistent with this - 20 basis points. I am not particularly concerned on that front, neither in terms of the ECB agenda. At this stage, we see a negative impact. Obviously, if the economy were to change drastically, that would be different, but it would be different for the whole industry. Because we continue to see lower LTVs than any of, or most of our competitors, both in terms of new production and existing portfolio, because we know our clients and they usually bring their payroll, et cetera. We expect that the quality of this portfolio is going to be quite resilient through the cycle.
Javier, on NII. Maybe if you want to add anything on this one.
Well, just to add on this, that this guidance for cost of risk includes everything, so ordinary or extraordinary. On NII. Well, NII for next year, we are forecasting to grow around 2%. This is a combination of different factors. We are probably more a bit than in recent quarters on loan growth. You might have seen that on SMEs and corporates, we are doing particularly well during the fourth quarter. This is part of it. We expect a bit with strong competition as always. I would say that we expect the performing loan book to grow slightly or at least trying to match what we have already been able to do in 2018.
On top of this, it's a year where we no longer have negative arrival resets, hopefully, as arrival, as of today, is close to 10 basis points higher than where it was one year ago. This is also a positive. As per the ALCO contribution, we'll see, depending on market circumstances. We feel that we have such a strong base of side deposits that at some point should be deployed into more long-term, mainly government bonds. Markets will tell us, but really we are seeking for this opportunity over time. We have made a conservative assumption while making this guidance. We are quite confident that we may be there.
Thank you very much.
Thank you, Marta. Let's move on to the next one, please.
Next question comes from the line of Andrea Filtri. If you could please ask your question.
Yes, thank you. My questions are around regulation and insurance. First of all, if you could quantify if you have any impact from IFRS 16, and if you could give us a little bit more visibility around those 100 basis points regulatory headwinds that you indicated in the business plan now that progressively we're having more and more disclosure around the sector on the specific items that are surfacing. Also, if you could provide us any sensitivity of cost of risk from IFRS 9, the macro scenario. What does a 1% GDP growth slow down, for instance, do to cost of risk? Third thing is if you have received, as other banks have disclosed, the draft letter from ECB requiring the introduction of the addendum rules on the NPL stock going forward, and if so, by when?
Finally, if you could give us your Solvency II ratio VidaCaixa at the end of the year and the payout ratio to the group. Thank you.
With pleasure, Javier. All yours.
For specific questions, I will try to do my best. If I miss something, we'll come back to you. On IFRS 16, well, this is not actually has to do with insurance business. Our expected impact, as I commented when we presented the strategic plan, was to be around 10 basis points. I think that we will be around this figure. On the 100 basis points CET1 buffer, well, not much news since last November, at least from our side. I had previously a question on potential impacts from TRIM on our corporate loan book. So far as of today, on these two months, we don't have further news. We have just started to work on it. We'll see.
This has to do with the fact that with those 100 basis points, we really feel that we are comfortable ahead precisely of those potential TRIM requirements and also Basel IV. This connects to one of your questions, which is the letter from ECB with the addendum rules on the NPL stock. Precisely this is what this 100 basis points buffer should, in any case, help us to cushion. On the sensitivity to cost of risk, well, this is, as the CEO was commenting before, so which is through the cycle cost of risk? For sure it's higher than the target we have today. So far I really cannot give you a specific figure for every single percentage point of GDP growth, how will our cost of risk change.
What is clearly the case is that as the EBA exercise has showed, is that IFRS 9 is expected to act on a procyclical manner. Probably less pronounced than expected. I would say that this will be the case, and so far now that we are in the good part of the cycle is having a positive impact. As the cycle turns, cost of risk, no doubt that will go higher. I think that you had the question on Solvency II. Well, Solvency II of the company is in the 140 area as it has been in recent quarters.
Okay. Let's move on to the next one, please.
Next question comes from Vanessa Gueye. If you could please ask your question.
Hi. Good morning. I have a couple of questions. You recently had your Investor Day in November, where you provided your guidance for 2019- 2021. I just want to understand a bit your thinking, why there wasn't any intention on giving the 2019 guidance that has been given now? Is there anything that has changed that we should be aware of between November and now? My second question is, in the other provisions line, are you still maintaining the EUR 200 million for litigations? The third one would be, if you could quantify the impact from the reclassification of BFA. Thank you.
Thank you, Vanessa. We provided the three-year plan in an environment that was very similar to the one we have today. There is no inconsistency between what we are expecting for 2019 and us meeting our three-year targets. We maintain our commitment. You may look at 2019 and see now that it's actually a difficult year. We were of that view two months ago. Some of you gave us feedback and said, "Your plan, the 12% return on tangible equity, you're being conservative. You can do better than that." We said, "Well, it's our best judgment and it's actually a lot of hard work to get there, but we will get there." This is exactly the same place where we are now. It may be in the current circumstances that the market appreciates that actually is not easy.
What we have achieved in the last four years, it was not easy either. I'm very confident we will get there. Again, what we're expecting for 2019, is completely consistent with what we want to achieve for the next three years. We have in the last couple of months, some better news and some worse news. Probably the likelihood of lower rates for longer is higher. At least that's what forward markets tell us. The market evolution in the month of December was actually pretty bad. The value of our AUM is worse to start with. January is being pretty good, so we're recovering quickly part of that. We had a tremendous positive close of the year in terms of credit on the credit side, with.
A better performance than what we expected, and we ended up the year with +1.8%, when we had been guiding for slightly over zero. Clearly, good news on that front. I think we have upside on that front for 2019. Yes, we may have lower rates, but actually we may have a higher underlying loan book. Obviously, projection out to three years is by definition wrong, and 1,000 of things will end up being different. At this stage, the mix of where we are make us be confident, as we were confident in November that we will get there. Obviously, it make us also conscious that there's a lot that we need to do. The reclass of BFA and the other provisions for litigation, we're keeping, but maybe Javier you want to add.
Yes, on the last question, it's the reclass of BFA, the impact in P&L is EUR 154 gross, EUR 139 net attributable profit. As per other provisions, well, those provisions are, if I may say, probably more volatile in nature. You cannot forecast exactly which will be the pace, but I think that EUR 200 million was a figure that we have been, as an average, been having during the last year, maybe around this figure, slightly up, but slightly downwards. Time will tell.
Okay, thank you.
Thank you.
Thank you, Vanessa. Can we move on to the next one, please?
Next question comes from the line of Stefan Nedialkov, if you could please ask your question.
Hi, guys. Good afternoon. It's Stefan from Citigroup. Most of my questions have been answered. I do have one remaining question, it concerns restructuring costs. In the past, the average per person that has been let go, I believe hovered around EUR 350,000-EUR 400,000. Given that you are restructuring a different part of your franchise, should we expect the average restructuring cost to be considerably less than the historical? Thank you.
Thank you, Stefan. It's another good question, and I guess probably a poor answer from my side, because I really do not want to elaborate on that. It's a fluid negotiation. We have not yet communicated the proposed terms to trade unions, which we're expecting to next week. Hence, at this stage, I would feel inappropriate to elaborate on the potential upside or downside vis-à-vis the past, because I think we owe it to the other side of the negotiation to have a discussion with them first. Again, sorry, hopefully all these uncertainties will become clear in the following weeks.
Okay, Gonzalo, understand. Thank you.
Thank you, Stefan. I believe we have three more in the queue. Can we have the next one, please?
The next question comes from the line of Ignacio Cerezo. If you could please ask your question.
Yeah. Hi, good afternoon. Thank you for the presentation. Quick couple of questions for me. The first one is, if you can clarify whether 20 basis points cost of risk includes incremental write-backs in BPI. The second question is if you can quantify the positive impact on RWAs coming from disposals this quarter. Thank you.
Well, on cost of risk, there are different aspects here, but so far, as of today, we are not considering any further write-backs. On risk-weighted assets, well, here you have two moving parts. Remember that we released on one hand real estate, and the weight here is 100%. On the other hand, we retain 20% of a new company, which we hold together with Lone Star. If I may, the risk-weighted assets of this new company are not made public.
Sorry, a follow-up on Repsol. I mean, the part of Repsol you have disposed of the quarter. In terms of RWAs, what is the positive impact there?
Asking about Repsol. Sorry.
It's 10 basis points.
It's 10, yes. It's 10 basis points.
Thank you.
Thank you, Ignacio. We move on to the next one, please.
Next question comes from the line of Andrea Unzueta. If you could please ask your question.
Yes. Hi. Most of my questions have been answered as well, I am still trying to understand the message on costs. If I understood correctly, within your 5% growth guidance, you are incorporating the up-fronting of some charges, which I interpret to be restructuring charges. If consensus, or at least I was expecting around EUR 600 million of restructuring charges, is it correct to assume that there is a portion, and I know you are still under negotiation, and it's difficult to give guidance, but is it fair to assume that there is a portion of restructuring charges embedded in your guidance? Thank you.
Thank you, and apologies, I probably have not been clear enough. When we talk about front-loading, the expenses we're doing to facilitate the restructuring, i.e., the opening of new store branches, which allow us to be more efficient, run the same business with a lower number of employees. The cost of the restructuring program in terms of headcount reduction is not included in that 5%. If anything, what has been front-loaded is an amount into the fourth quarter of last year, which is around EUR 40 million, if I don't remember. There's been a small early retirement program that we managed to agree in the fourth quarter that is allowing us to start that program. We're obviously talking about a program that is much larger.
Thank you.
Thank you, Andrea. I think we have the last question now. Operator.
The final question comes from the line of Benjie Creelan. If you could please ask your question.
Yeah. Hi, everyone, it's Benji at Jefferies. Just a question on the 2% NII growth target for 2019. You've obviously mentioned the tailwind on the Euribor reset, continued volume growth, et cetera. I was just wondering if you could perhaps talk about what the potential headwinds that you see, is that coming through from MREL issuance, perhaps lower insurance contribution to NII? In the same context, I know you touched on mortgages, but could you perhaps update in terms of the competitive landscape on the corporate side, on what you're seeing on pricing there? Thank you.
Potential headwinds are mainly that, you know that the forward-year curve is always discounting some rate raises, that at some point, this does not even happen, although it's already flattening, the yield curve. This will be a headwind, no doubt. As per the wholesale funding, I would say that the impact on NII is not that large. It's true that spreads for wholesale funding, mainly for MREL purposes, as you say, have increased in late last year, but also at the same time, in recent weeks, have started to tighten again. We will be recurring issuers. We have better transactions than others. I think, but in this case, does not have that much impact.
I would say that the other factor that may impact NII, it's from volumes, as you mentioned. On this front, as I said before, probably as having a very good, at least comparatively, fourth quarter, we are a little bit more a bid, and we think that we can at least try to repeat a performance like last year. On mortgages and the rest of segments, the environment remains broadly the same. I would say that if you look at our front book yield segment by segment, I would say that we are more or less where we were. Despite intense competition, we are so far being able to maintain strict pricing discipline, and front book spreads are quite stable. This, I have to recognize that within an extremely competitive environment.
Great. Thank you.
Thank you.
Okay. Well, thank you very much. That's all we have time for today. We will reconvene next quarter. Thank you for watching, and goodbye.