Hello, good morning, and welcome to CaixaBank's results presentation for the Q2 2018. Presenting today is our CEO, Gonzalo Gortazar and our CFO, Javier Pano. Please note that figures for the quarter are now fully comparable both quarter on quarter and year on year. Also, just a brief reminder of the format for our first time viewers. We plan to spend around 30 minutes presenting, with 45 minutes available after that for live Q and A, for which you should have received instructions on the screen.
And with that, let me hand it over to our CEO, Mr. Gortazar.
Thank you, Heidi. Thank you very much, and good morning, everybody. Thank you for taking the time to be with us. I will start with, as always, highlights for the quarter. You've seen the figures.
But I would say results, very satisfactory. We actually reached the double digit return on tangible equity for the first time, And we reached it, as you can see, with significant growth both year on year and quarter on quarter from our core revenues, be it NII, fees, other insurance revenues. So net income is up year on year, 36.1%. Volumes, very strong quarter, as you will see in some detail later on across the board. I would say both on the asset side and the liability It's been a very good quarter.
2nd quarter is usually seasonally positive, but this one has been particularly positive, I would say. Asset quality. Highlights were no doubt the agreement to sell our real estate business to Lone Star. But as you can see, the reduction in NPL ratio has been very significant in the quarter year to date, standing now at 5.3%, which is also very encouraging. And the cost of risk is lower than what we had been forecasting for the year so far.
The liquidity in solvency remained strong. Obviously, on the solvency side, we are at 11.4%, which is down from the Q1 due to mark to market, as Javier will elaborate later. But pro form a for the real estate sales actually were back at 11.7 and in a very comfortable position. Starting, giving you some color on commercial activity. I think the chart is quite telling.
2nd quarter is always very strong. You can see that 2018 is particularly strong, almost €15,000,000,000 of new actually, we have a problem now with the presentation. It's now back, so no problem. But anyhow, €14,700,000 of additional customer funds gathered In the quarter, as you can see, heavily weighted towards on balance sheet, particularly side deposits, but also, I think quite relevant, €3,300,000,000 of additional funds in insurance and N AUM. Despite the, I would say, volatility in the market is a good indicator certainly of the strength of the franchise.
It's, as you can see, as strong or stronger than ever. Some details on the deposit on savings products. You can see net inflows on the saving products, €3,900,000,000 in the first half of the year, up 5% from last year. Very strong quarter and semester in terms of life risk with 26% growth and £611,000,000 in premia, a continuation of sort of pluri annual growth trend that we have in non life insurance, where we have grown by 6% our premiums and reached a 28.5 percent market share in health insurance. So I would say trends that we have Been seen for actually a good number of years continue during the quarter and the semester.
On the lending side, I would say a very positive quarter. You see the highlights of our performing loans, growth of 1.6% both year to date and quarter on quarter. As you remember, we tend to adjust these for seasonal impacts, particularly approximately €1,600,000,000 of lending to individuals associated to payments and advances of pensions at the end of the quarter, which just last few days. Once we take away that impact, we still see some growth around 1%, just south of 1% in the quarter year to date. And if we look at segments, I would say pretty positive figure as well.
Mortgages. We obviously continue to come down, but quarter on quarter, you can see that the second quarter has been very positive relative to other quarters. 2nd quarter, again, seasonally is strong. You can see how 3rd Q4 of last year were actually more negative than the Q2. So we cannot expect a continuation of this trend line between the Q4 of last year and the Q2 of 2018.
But clearly, what we see is a much better environment now also on the mortgage side. It's early to tell. It's 1 quarter, but it's building on an improvement in the Q1. I'm Hans. We'll have to watch closely how the market continues to perform on this front, besides mortgages, strong growth on consumer lending, 5% in the quarter, similar level in the Q1.
So year to date, it is 10.6 Seb. We grew businesses after a sort of weaker Q1. 2nd quarter has been much stronger. And public sector has been flat in the quarter after a very strong very strong Q1. So all in all, loan growth is certainly experiencing good trends across the board, but I would say it's fairly early days.
And we still want to remain cautious, but certainly, figures from the Q2 are encouraging on these fronts. New production continues to grow, whether it's consumer lending, residential mortgages or businesses. In the case of businesses, we had a very strong first half last year, and we've actually managed to slightly growth from that level, which is pretty good after a weaker Q1. I would say the strategy. We're following this segment is working nicely.
On the consumer lending, again, very strong growth over very strong growth, as you can see, these 3 years. We still feel that the dynamics are positive. We are, I think, managing well risk in this area. We continue to invest in the business with new commercial agreements with vendors. And Javier, our CFO, will show that actually, in the short term, it's actually costly to the P and L, but it is very important to ensure mid- and long term growth, which we expect to have in this area.
I discussed the good trends in residential mortgages, So I will not extend myself on that one. In terms of transformation of the business, we announced a few weeks ago reorganization of a very large area, global customer experience, which including people that work with us, affects over 200 people into a new team, which is basically aiming at being faster in the way we bring new developments to clients. We respond to their needs, working on a more agile way from that format and ensuring that we actually maintain our long term leadership in this area. And certainly, very much having our people focused on clients. The new organization is based around client experiences.
And obviously, we expect that, that will result in even better outcomes. We had recently recognition from Euromoney as the best digital bank in Western Europe, which pleases us. But obviously, We're going to continue to invest heavily in this area. We have among the largest banks in Spain, the highest level of digital clients, the highest level of digital penetration. And internally, we have transformed already the bank in terms of all our employees operating with the smart PCs.
All our processes being digital and our physical branches being more and more levered on technology as per our new store branches, which already give service to 15% of our clients and even a higher proportion of our business volume. We have reached agreements fintechs and other companies to offer services to our clients. We had a few examples there, and we certainly continue to invest for the future and explore new areas of activity. On the mobile side. We actually have a very large lead in the Spanish market.
We had 10,000,000 payments, mobile payments in the first half of the year, over 2,200,000 Justin Yun and continue to actually lead the payment market in Spain and expect to continue doing so in the future. Moving on to financial results. Again. Obviously, the highlight is the strong increase in year on year profits. The most important factor behind those or the one that I would like at least to highlight is that our core revenues are supporting The strength, NII, fees and insurance grow, whether it's quarter on quarter, year on year in a good pace.
We have, on top of that, some seasonal positive impacts from noncore revenues in terms of the dividend from Telefonica and income from associates. But we also had this quarter to offset that the resolution fund charge and the 204,000,000 of laws that we have recorded for the repurchase of Serbia Vittar, which was a necessary action in order to sell the real estate business. So very strong growth in net income but at the same time, not dependent on seasonal impacts but on recurrent core revenues and return on tangible equity, reaching finally the double digit figure. Looking at it by segments, I think the picture also looks nice. Bank Assurance with very strong growth, 12% now return on tangible equity, of which Approximately half comes from nonpure banking business, and being Insurance and Asset Management, the most relevant one, but also payments and point of sale consumer finance being helpful there.
On the noncore real estate, we have negative result due to the Servia Habitat acquisition. As I mentioned, if we exclude that one off, the losses were actually 33% lower than last year, so good trends. Investments up 20% and BPI presented actually in its results on Tuesday with very solid numbers, as we will discuss later on. In fact, you have some detail here on BPI. The numbers are obviously public.
I think to highlight strong commercial trends, the growth in mortgage lending and then in particularly in consumer and in business lending, very strong growth in Portugal, gaining market share. Also on the client deposit side, 7.5% and the bank reaching already a 9% return tangible equity in Portugal. Obviously, this is excluding the investments in the African business, particularly in Angola. We are in the process of acquiring 100 percent for of BPI. We have bought a stake from Allianz, And we are now actually moving ahead in the process of delisting and then squeezing out minorities, which we are looking to finalize before year end, but we obviously depend on the timing from supervisors.
We also announced our reorganization our BPI announced the reorganization of their alliance with Allianz in Portugal and the future alliance they will have with BPI Vida Pensores for the Life Risk business. So I would say VPI is moving very nicely and, I would say, ahead of what we expected, both in terms of commercial success and in terms of financial results. Javier, maybe Now it's your turn. Thank you.
Thank you, Gonzalo, and well, good morning to all of you. As usual, I will continue making some brief comments on different lines of the P and L and then the balance sheet. Starting as always with net interest income, where we have had a strong quarter, It is up by 2.3%. There are a number of different factors supporting net interest income. Client yields first, mainly due, in this case, to the early redemption of expensive retail subordinated bond.
Also, we have had larger asset volumes this quarter. As commented, loan growth is doing better probably than expected on that front. And on wholesale activities. I would mention also lower average funding costs and also slightly larger ALCO portfolio. And on top of this, very good performance coming from Portugal with BPI that has a loan book that is growing at 4% year to date and that is also supporting on that front.
So all in all, we reconfirm our guidance on NII, and we think that we may be at the upper bound of that 2% to 3% we guided at 1 quarter ago. Looking into further details on time deposits. We see that in euros, we are rolling those almost at 0. When looking to the back book yield, we have to consider that this includes our foreign exchange deposits. And as U.
S. Dollars yields are going up. This has an impact on our bad book yield. Otherwise, the bad book yield would be almost flat. On the loan book.
This quarter, we have very strong production, more than €10,000,000,000 of new production of loans. And of those onethree coming from CIB, from Corporate Banking, thus you may see that the front book yield comes down to 2 62 basis points, but this is due mainly to this mix effect. While looking to different segments on a like for like basis, I would say debt performance is in line with recent quarters. The above book yield stands at 231 basis points after a sharp step up one. We introduced the impact of IFRS 9 in the Q1 of last year.
And this bad book yield is set to gradually trend upwards as negative variable resets keep fading. As commented, loan volumes slightly up during the quarter. Turning to the our wholesale activities, funding costs that have an uptick to 122 basis points on our wholesale funding, but this is mainly due to a new issue of a wholesale subordinated bundle in the quarter. But on average, those costs have been lower than the previous quarter. On the ALCO portfolio, on the structural portfolio, we have taken profits on some long term Spanish bonds wrapped into floating earlier in the quarter, crystallizing some trading profits, around €66,000,000 of trading profits from this.
And well, as a result of this, you may see that the average life of the portfolio It comes down, but the average duration as those bonds were swapped come slightly up. The yield is Mostly unchanged. And on the liquidity management portfolio, we have taken advantage of some market volatility at some point to try to drain our excess cash reserves, part of ECB, making some investments into short term bonds. All in all, stability while you analyze the portfolio globally. As a result of all this, both customer spread and net interest margin remained broadly stable, just down by 1 basis point.
But as I commented before, We expect that this will gradually trend upwards in coming quarters as the arrival resets fade. Now we turn to fees, where we have had a strong quarter really. Fees up by 6.7%, Ivan over performing the Q2 of last year. I would say that the Q2 is always a strong one, but In this Q2, we have had a strong contribution on banking fees from CIB during the quarter. Also, recurring banking fees have been have done really well during Q2.
Year on year, you have the impact, as I was commenting previously, the CEO,
of
the impact of investments in consumer lending distribution agreements. Otherwise, those recurrent banking fees would have been almost stable. On mutual funds, where we have had around €2,000,000,000 of inflows, continues to do well despite market volatility. Non life insurance, it's an engine for growth. And on pension plans, You have a slight negative impact, but this is because, as you know well, a new gap on fees was introduced from mid April.
And in BPI, you have a slight impact because there is the transfer of some business, the Asset Management business or PPI to Caixabank Asset Management. With all this, our what we call our long term savings business continues to do well with revenues from our insurance and asset management business up by close to 10% year on year. Now Those revenues represent almost well, represent 25% of our bancassurance revenues, up by 3 percentage points from a year ago. And as in recent quarters, we disclosed details on the P and L account of our insurance company. And as you may see, improvement.
It's across the board at different lines and reflecting solid activity trends. I turn to costs. Costs grow as we continue to support the business. You see that quarter on quarter, costs go up by 0.5 percent. Personal costs, almost flat.
We have €5,000,000 more of cost on general expenses and amortizations. And well on costs. You know that we are always looking for opportunities, for business opportunities, looking for wider jaws in the future. This is the way we are planning to run the business for the future. And as you may see, In past years, we have been able to deliver on that front, and we think that we'll continue to do so.
On well, Summarizing all this, I would say that core revenues doing well, up by 10% at the group level, at 4% at Caixabank. And we think that we are fully on track to reach our guidance. Remember, we guided for our core revenues to grow around 4% for this year. Our core operating income also doing pretty well. Some comments now on loan loss provisions that have clear reduction this quarter.
On annualized basis, Our cost of risk would be has been, sorry, 18 basis points this Q2. On a 12 month trailing month, 12,000,000,000 basis, 24 basis points. So clearly, well ahead of our guidance. Remember, we guided for cost of risk to be below 30 basis points for the year. I look at our real estate activities.
It has been a really strong Q2. The Q2 is always seasonally strong, but this time, even more. We have sold EUR 611,000,000 of real estate. On top of this, we have sold a portfolio to Testa of rented real estate assets. Thus, you may see that a sharp increase.
Capital gains on disposals continue to do well, 17% over the cost price. And while looking to our gains and losses on asset disposals, If it not were for the before mentioned fair value adjustment on the service, we have it at the servicer, world would have been flat. Now a few comments on the balance sheet and first with the our nonperforming loan exposures that clearly are trending down this quarter, down by €1,000,000,000 maintaining more or less the same coverage. Actually, it's up by 1 percentage point. This reduction is clearly consistent with a clear inflow reduction.
And on top of this, you know that year to date, we have Sold €470,000,000 of nonperforming loans. And as a result of all this, we make a strong push downwards to our nonperforming loan ratio down to 5.3% and set to trend downwards in coming quarters. And on NPA's comment on our recent agreement with Lonestar. As you know well, we have reached an agreement to dispose to a new company all our available for sale assets as of real estate assets as of October last year, together with some other real estate assets, plus 100% of Serbia Habitat, as I say to sell all those assets to a new company that will be held 80% by 2 Lone Star Funds and 20 percent by Caixabank. The initial valuation of all those assets is €7,000,000,000 But this figure will be adjusted according to disposals from October last year to the closing of the transaction that is expected to be or late this year or early next year.
As commented, this transaction is expected to be P and L neutral and to have a positive impact on our fully loaded CET1 ratio of around 30 basis points. On top of this, we are estimating cumulative cost savings for the 3 year period from 2019 to 2021 of around €550,000,000 As commented before, organically, our real estate exposure is already being reduced by the close of the Q2 standing at €5,600,000,000 But on a pro form a basis, while including the real estate transaction with Lonestar. Our real estate exposure available for sale of real estate assets would be only €500,000,000 now. On liquidity, a few comments. Record liquidity levels, €80,000,000,000 of liquid assets.
At cash above level, €71,000,000,000 sorry, euros 71,000,000,000 I said well. And liquidity coverage ratio that is well above 200%. We have been active in wholesale markets issuing different instruments. We are done with AT1s and Tier 2s. And going forward, probably, we'll tap senior nonpreferred as we build our MREL requirements.
And finally, on capital. We have many one offs this quarter, but the big picture is that the pro form a figure For our CET1 fully loaded ratio after the real estate transaction, it's 11.7%. We have 14 basis points of organic capital generation during the quarter. Then we have 23 negative basis points Due to the transactions on BPI, the minorities that we are purchasing and also the share we have it at acquisition. And then we have value adjustments for 9 basis points, mainly due to the poor performance of Telefonica in the stock market.
And as commented, that would lead to 11.4% and as commented, 30 basis points more coming from the real estate business sale, up to 11.7%. It's a quarter where we also issued a wholesale subordinated bond and also, as commented, We early called retail subordinated bond also. Our total capital is standing at 15.7% on a fully loaded basis. To wrap up, some final remarks from my side. We feel that we continue to move with confidence towards our strategic targets, mainly on profitability with an RoTE already within our long term range.
Our long term target between 9% and 11%, now we're standing at 10.4%. This is thanks to a continued improvement in our core operating income and also this year, a sharp reduction on our cost of risk, all this based on volume growth and stable customer spreads. I would remark also what we consider a landmark transaction on our real estate disposal that drastically reduces our NPA exposure and all this together with strong liquidity and solvency metrics just commented. And before ending, please save the date. All of you are invited to our incoming Investor Day to be held in London, November 27.
So I think that with this, we may be ready to take questions. Thank you very much.
Okay. Thanks, Javier. Operator, can you please proceed with the first question, including the name and the company of the
caller. Your first question comes from the line of Carlos Cobo of Societe Generale. Please ask your question.
Hello. Good morning. Thank you very much for the presentation. A quick comment on Portugal, if Jaime, and your thoughts around the market there. It looks interesting that with similar private sector leverage levels and indebtedness of sovereign.
I mean, you are managing to get some more traction in lending volumes than in Spain, And it's also something at system level. So is it why do you see that more positive or easier to lend in Portugal? Is it because peers are in weaker shape? Or what are your views there? And then secondly, but I guess that you'll address that in the Investor Day.
Regarding your 9% to 11% RoTE target. I would like to confirm that your latest number. And if you feel confident to be towards the high end of that range towards year end due to lower cost of risk below your kind of guidance and stronger volumes and BPI.
Thank you, Carlos. If I may comment, obviously, the numbers for Portugal are very promising. It's a very good the market is certainly experiencing a rebound there. And what we have is a bank like BPI that now has all the enablers to grow, has a very good, comfortable capital position, liquidity position, stability around it. And that has not been necessarily the case in the past.
And what is being able now on BPI is to play with all its strength in the Portuguese market. I am convinced I mean, followed the Portuguese market for over 25 years. It is the best bank in Portugal. And I hope that the numbers here are the beginning of a very positive road in which the bank will gain market share because it has an edge and now has all the necessary tailwinds to capture that rebound in Portugal. Obviously, the difference with Caixabank.
Those are different markets, and Caixabank has not had that process and has been trying at its full strength to capture the opportunity for now many years. I think BPI has untapped potential, And they are showing it very, very quickly. We continue to build on the future capabilities. The BPI We'll have above and beyond the ones that they have already. And hence, we are optimistic of that long term trajectory for BPI.
With respect to guidance on the strategic plan, 9% to 11%. At this stage, we've maintained that guidance, 9 to 11. And I think it's premature to be more specific than that. This is the guidance we gave some years ago. We're obviously very well positioned to be comfortable in that range.
Okay. And sorry, What do you see BPI as a progression of the whole group contribution normalizing over the next 1 or 3 years?
Well, I would like to say, and certainly, my expectation for BPI is that they compete with Caixabank in Spain to show a higher level of return on tangible equity. As you know, BPI is approximately 10%, 11% of the group. I would like to make sure that over time, they actually contribute that proportion of profitability or more.
Okay. Thank you.
Thank you, Carlos. Can we move on to the next question, please?
Your next question comes from the line of Alvaro Serrano of Morgan Stanley. Please ask your question. Hi,
good morning. Can you hear me? There's a bit of background noise, but hopefully, you can hear me.
We can.
Just on the first question is on
the general environment. You've obviously had a very strong quarter and fees, in particular, in banking. But the market activity. Well, the market environment has deteriorated during the quarter. We now it's difficult to expect higher rates anytime soon, probably not this year or next.
So can you maybe give us some color on loan on revenue growth expectations. And is that recovery in loan growth that you're pointing out enough to grow revenues? And the second question is around costs. You've obviously sold the portfolio, the entire base in To the Real Estate, but there's about EUR 120,000,000 operating costs in that Real Estate division. Is there a real ability to cut that down?
And when we look forward, What should we be looking forward to in terms of cost growth or cost reduction And costs to get the cost base down, is that not going to happen? Just a general commentary on costs.
Thank you very much, Alvaro, if I may. And I'm sure Javier will be able to complement some of these topics. In terms of trends and revenue, we obviously had a very strong quarter. Satisfied with the quarter. Quarter doesn't make a year and doesn't make a trend.
So as always, we want to be cautious. But certainly, we have given some guidance for core revenues growth for 2018. We are comfortably reconfirming that guidance. We expect that growth in core revenues 4% to be something that we can meet. And the reality, as you say, the year is not easy in terms of the environment.
But we continue to think that our model is a model that provides with higher potential in terms of capturing market share and more revenues than our competitors and continue to invest and plan for the future on that basis that we can grow faster than the market and certainly for this year. What is was ambitious at the beginning, I would say the market circumstances are making it a bit more difficult. But our results are showing that even if it's more difficult, we can actually get there. In terms of lending activity, You saw, I think, the segment that is most promising based on the 2nd quarter figures is certainly the residential mortgage area, But it's just 1 quarter. And we know and we've seen in this crisis that at some point in time, we had very strong quarters, and they Didn't necessarily create a trend.
So we will have to see how things developed on that front. On the real estate, obviously, we disclosed what our savings It should be €550,000,000 as you saw a few weeks ago when we published. And anyhow, whether they are recorded in one line or another of the income statement, this is a very significant amount of savings going forward. In terms of how we manage the cost base, we will have at the Investor Day, as Javier mentioned at the end of the presentation, giving some details of what we plan to do in the next 3 years, and we are actively working on that. Uncertainty, managing the cost base is one of the most important tasks that management has these days and always.
And hence, we're going to need some time until we can provide you with some more details. But generally, What I would say is we're going to continue to be obsessed with being efficient in what we do. But this obsession of being efficient in We do, which should result in cost savings, at the same time, needs to live with inflation expectations on salaries, which certainly are going to be present for all our competitors, our whole company, certainly, in Spain as the economy has been on a run positive path for 4 years, 3% growth. Clearly, society expects salaries to grow certainly in nominal terms but also possibly in real terms. So this is going to be effect, which we cannot avoid.
It should be positive, on the other hand, general salary increases for our business. When we look at the cost base of others. They are our clients as well. And then we'll continue to make efficiencies, but that will need to leave also with the investments we are making, we have been making and we'll continue to be making in making sure that we continue to build delta, positive delta, when we speak about revenues versus our competitors. Anyhow, how does all this add up is something that we are working on, and we will certainly be in a position to give some detail or a good level of detail when we present our 3 year plan, where we expect cost inflation, but cost inflation based on cost reduction on running the bank to fund cost increase in changing and growing the bank.
And I think those are the general lines. The more detailed view will obviously be updated on that Investor Day in November.
When we look at the bank, it is relatively clean. From a sort of kind of one off top ups and things like that, Should we expect restructuring costs as here to stay as you try to sort of Be more efficient while you invest in other areas.
Again, the details, we will certainly provide in due course. But While this year, we have not if we're talking about restructuring costs associated to people, You look at our history. We have had a number of instances in which we have done specific actions, early retirements and others, in order to reduce costs. And I think if you think of us longer term, you could expect that we will find opportunities to do so again. But it's early to speculate on exactly what and when.
We will certainly not rule out further actions. Certainly, don't expect them this year. But over the long term, this is something that is part of the management of our business.
Thank you.
Okay. Thanks, Alvaro. Can we move on to the next one, please, operator?
Your next question comes from the line of Jose Abad of Goldman Sachs. Please ask your question. Hello.
Thank you very much for the presentation. I have two questions. The first one is on is a follow-up from a previous question, in particular on loan growth. I guess we can conclude that this is one of the key takeaways from this resulting season that the number of seems to be back. So I mean, I was wondering whether you could actually provide us some visibility of what is actually driving growth in this quarter.
Is it actually a bit of seasonality? Is it a change in pricing policies by yourself and by yourself and competitors given that we also see some compression in from good yields or it is actually genuine demand? Based on this, whether you could give us some visibility or you could share with us your expectations with regard to loan growth for the second half of the year. My second question is on the bank tax. I'm sure you are involved in conversations with the government, so I'm not sure whether you could give us some visibility here as well on in which direction this Olivier here as well on in which direction this debate is heading.
This tax could take many forms with different impacts depending on the form. So not sure whether you could comment anything here. And a related sub question here is whether Regardless of the final form of this tax, do you think that you could pass it through in the form of higher fee income interest rate Or rather, in the form of higher efficiency gains. Thank you very much.
Thank you, Jose. Maybe I'll give your response on the second question, and Javier can elaborate further than the first one because I already gave Sam views there. We obviously do not know what, if anything, will eventually happen with respect to a potential tax, Whether it will affect banks in particular or corporates in general, this is a decision for the new government to propose and obviously for the parliament to support or not in due course. And we are there's nothing much we can do. Obviously, we've been vocal that we do not think it's appropriate to have a specific tax On banks, we don't see that there is a specific reason for doing that.
And in any case, it's not in our hands. We do not control it, and it's very difficult for that reason to make any projection or prediction. Depending on what happens, if anything, I think the ability for us to pass that cost will be different. And we have it's obviously unfortunate having, at this point, this uncertainty, We have to continue focus on running the business, doing what we're doing nicely. And as long as we become more and more profitable, if there is an adverse event.
We will have, obviously, a higher degree of cash to compensate for it. Sorry to not to be able to be more specific, but there's nothing more I can really say on that topic at this moment in time.
Jose, just to give you some more color on loan growth. It's still what you say. We have had a good quarter. It's early days to tell you if this is sustainable at the same pace for the rest of the year and for the years to come, but you're right that we are a little bit more upbeat than earlier in the year. It's a combination of from the many little things, I would say, but clearly, we have shown figures on new production across different segments.
It has been improving across all segments, I would say, this quarter year to date on mortgages also, on consumer loans, on SMEs and this second quarter especially on Corporate Banking. There is another factor you should consider while analyzing all this, which is the steady and consistent reduction of NPL inflows. And that means that the performing loan book has much more support in volume because there is much less loans going into nonperforming. And this is happening across all sectors, even on mortgages, That partially also the improvement on the deleveraging process is done precisely thanks to slower pace of inflows into nonperformance. On prices, I would say that we are not changing things.
It's a extremely competitive environment across all segments. On mortgages, mainly on SMEs, as has been since many years ago. As you can imagine also in Corporate Banking with all players willing to lend to large Spanish corporates. So far, we are being able to maintain our margins. It may be up or down a few basis points, 1 quarter versus the other.
Generally speaking, this Q2, nothing much different to something that we had seen in previous quarters. So let's see. Positive more positive than probably than what we were a couple of quarters ago, but still early days, but anyhow, encouraging.
Thank you.
Thanks, Jose. Can we move on to the next one, please, operator?
Your next
questions. First of all, you mentioned in one of the slides that you have FX deposits. Could you just remind us how much FX deposits and FX loans, Diham and also in which currencies and if you see any potential for additional provisions for These loans, in particular, given that one of your competitors took quite big provisions this quarter. And the second question is around BFA. Could you just update us on your strategy around BFA and how we should
Thank you, Sophie, and I'll answer the second question. There's nothing new on BFA. I only see good things happening around Angola in terms of the, I think, orthodox economic policy they are undertaking, agreement with IMF, the fact that they tapped the capital markets for over $3,000,000,000 in terms of foreign currency. And obviously, the oil price is also helping the country. So I am fundamentally optimistic that The country is moving a very along a solid path.
BFA continues to do in the country very well In terms of the indicators for BFA, whether it's efficiency, solvency, margins, nonperforming loans is by far the best bank in the country. And with those ingredients, we are happy. We are obviously interested in due course in reducing our stake but with no urgency, and we will continue to see when and how that make sense without any other pressure. The bank is obviously showing results that are volatile, particularly because of the impact of devaluation, which, as you know, when the Quanta comes down, we have an adjustment for that devaluation against shareholders' equity. But the bank itself has appropriate hedges, which create actually asymmetry because the value from these hedges is reflected in the P and L.
You have all that detail in the presentation. We have to I will continue to be very transparent of the contribution, both in terms of P and annual and book value to our results. Obviously, there will be some quarters where the contribution will be particularly higher, thus it would be lower. We had a very significant contribution in the Q1, as you know. But when you look at what has been this quarter, the recurring contribution has been lower.
It's been €27,000,000 in the quarter, of which €13,000,000 are negative associated to hyperinflation, IAS €29,000,000 And I think it's probably better way to look at these as taking these kind of results as the recurring levels and sort of isolating impacts from devaluation, which I think it has largely run its course in any case, but it's difficult to forecast.
As of previous commentors on foreign exchange deposits, Well, the size of our balance sheet in foreign exchange currency is small. It's of less than €10,000,000,000 The main part, I would say, around half of this is U. S. Dollar and the rest are hard currencies like British pound, Japanese yen, Swiss franc, etcetera. On time deposits, we have a small part that is deposits in mainly in U.
S. Dollars. If I remember well, it's less than €1,000,000,000 And thus, the U. S. Dollar has a yield of around 1.5% or close to 2%.
When this compares to 0%, that leads to an increase of the back book yield. So that's it. So it's that nothing important. We fund all our activities in foreign exchange with customer deposits or wholesale funding. And everything is matched assets and liabilities with no foreign exchange risk open.
Okay. Thank you.
Thanks, Sophie. Let's move to the next one, please.
Your next question comes from the line of Ben Toms of RBC. Please ask your question.
Good morning. Thanks for taking my questions. 2 for me, please. How do you see your CET1 ratio progressing for the rest of the year? And can you just remind us the guidance you've previously given on potential for buybacks or special dividends and the timing of when this guidance could apply from.
Thank you.
Thank you, Benjamin. In terms of CE Tier 1, we expect to be close
to 12% or around that figure at the
end of the year. Percent or around that figure at the end of the year. We had to set up this level in our previous strategic plan as a level With after reaching this level, we had said that we will look to return capital to shareholders. Given that this is going to be unlikely before year end and that in November, we will present a new 3 year plan, we will obviously update on our capital plans in the context of the 3 year plan. I think obviously, when we look at the next 3 years, we'll have to take into account the levels of profitability that we have already achieved that are obviously much more attractive than they used to be, what we can do to improve those levels in the next 3 years.
And then on the negative side, also the need to start planning for the impact of other things like Basel IV in particular because as you know, Basel IV will start in January 20 2022. Our next strategic plan will finish in December 2021. So certainly, up fronting Those impact during the next 3 years will also be needed. But all in all, we continue to see a story of, I would say, generosity in terms of returning capital to our shareholders based on a combination, certainly, of an attractive payout ratio and, if appropriate, all the means of returning capital. Nothing in the second half of this year, being practical and an update on what our strategy should be for the next 3 years during November.
Okay. Ben, I guess that answers your question. Let's move on to the next one then, please.
Your next question comes from the line of Britta Schmidt of Autonomous Research. Please ask your question.
Yes. Hi there. Thank you for taking my question. I've got 2 questions, please. One is, apologies if I've missed it, There seems to be some reference to a one off regarding Repsol in the equity line in the quarter.
Maybe you can just clarify what that is and how much it is? And then I'd also like to have your view on the rest of stake. At a price of £16.80, I think we are beyond the kind of breakeven price in capital terms. How do you think about the future of this? And maybe you can also confirm that it's still about 50% hedged?
And my second question will be on the securities yield. According to your yield and cost table, it has gone up again in the Q2 after being up in the Q1 as well. And in the presentation, I can see that on part of your ALCO portfolio, the yield has increased on the structural ALCO portfolio, but not on the Liquidity Management portfolio. So Maybe you can just explain the kind of technical details behind why the securities yield has gone up.
Javier, maybe you can take
Okay. On the structural on the last question, on the structural portfolio. Well, as commented, we took profits on some long term bonds that were swapped into floating, And this has resulted into a trading profit close to €17,000,000 this 2nd quarter. This was done early in the quarter before all the sovereign spreads started to widen, where Spanish sovereign bonds And I will also note of this, as you remove this part from the portfolio, this had a low yield than the overall or the remaining part, the average goes up. This is just if I remember well, it's just ascent from 2% to 2.1% as you keep the legacy portfolio with higher yields.
I hope that this answers your question. On the management portfolio or the liquidity management portfolio, sorry, Well, you know that we have a lot of cash, record high liquidity metrics. We are trying to find opportunities to deploy this cash into, let's say, short- to medium term securities in order to reduce or to drain cash balances. We are parking at DCB at minus 40 bps. And this is why this portfolio has increased by more or less EUR 1,000,000,000.
On Repsol, if I may, they are not more news. So where we were. We did some hedges. Those hedges, as you know well, there is a pass through effect through trading profits, And we have an impact this quarter on this of around €40 something,000,000 And there are no further plans. We did this hedge when Repsol was trading around €15.5 And now we don't have further plans.
We are managing all those stakes for value, and we see those hedges as part of the normal cost of business in order to try to protect value as the way to manage those positions. So I will not add much to this, if I may. And you had a question, the first one, on the equity line. I [SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] I think that you were asking about perhaps something you are missing on our CET1 ratio.
Yes. My question was referring to the footnote on Page 11 saying there was Non recurrent impacts in BFA, which we know, but also in Respo, which contribute to the at equity accounted income.
No, actually, there is not this there are not much news. So I think that I gave This is,
I think, the impact of the sale of Gazanetrol in Repsol
Okay. Also, you're asking about the equity the income from associates, okay? This comes from well, Sol had published results. Now we can comment. And this had a positive impact, what the CEO was commenting, the disposal of gas natural.
And then as commented also on BFA, there were some extraordinaries Due to a structural position that BFA has long U. S. Dollars that, at the end of the day, results in, from an accounting point of view, trading profits. And this is an extraordinary that also goes on this line.
€39,000,000 the impact of the sale of Castellatorral in our income statement on the Equatorial Court.
Perfect. Thank
you. Okay. Thanks, Bridget. Can we move on to the next one, please?
Your next The next question comes from the line of Andrea Viltri of Mediobanca. Please ask your question.
Yes, good morning. Two questions, 1 on cost of risk and 1 on insurance. What is your updated cost of risk guidance following the sale of the real estate portfolio? And what would be the new normalized run rate in light of a cleaner balance sheet. And on insurance, what is the right way of looking at the return of your insurance operations in your view?
And what is the rebated placement fees cost for VIDA Caixa to selling products via Caixabank branches? Thank you.
I'm not sure I understood the second question. The question
is how much is Birracaixabank for the distribution agreement,
Which is right, which is not relevant because it is an
It's an intercompany It's an intercompany company transaction. And you can see it in the VIDA Andrea, you can see it in the VIDA Caixa accounts. But from a group perspective or a Caixabank shareholder perspective, it's irrelevant since we own 100% of the company. But I guess beyond that, Juan Carlos' question is asking how should they look at profitability of the insurance company in isolation.
And Got it. Obviously, figures are public for the insurance company, and we have even added in our presentation yet what the quarter is. It's a very profitable activity, but obviously, it's difficult to think of the insurance company in isolation because it's an entire an integral part of Caixabank Group. The main distribution channel by far is the branch network. And even though there's obviously the separation of what the profitability is of each Of the 2 units, what is clear, if they were not together, there would be significant negative synergies and and Value Distraction.
Contribution to revenues, and you can see this in the presentation, has moved From 22% last year to 25% in the Q2 of this year. So we continue to grow 146 €1,000,000 of net attributable profit in the quarter. And one of our or probably the most important engine of growth for us. We're talking about, and I simplifying it, this is, 1, a very large market 2nd, a market in which we are by far the leader and 3rd is a structurally growing market given the trends in terms of aging and the need for protection. So it's a great opportunity that we are exploiting.
It's a great opportunity that we will continue to exploit in the next years. And we're certainly planning to provide further detail on what we're doing on insurance, both savings and protection, during our next 3 year plan. If you see when we I explained at the beginning how we have reorganized the bank, And we said we are reorganizing this area of global customer experience around clients. One of the 4 client experiences or the key client experiences under which we have organized is Protect. We already had identified by the one off savings, which is led by our Private Banking and Premier Banking unit.
We wanted also to put a lot more focus on protection, where the opportunity is very significant.
Another question on cost of risk. Just to clarify that real estate provisions are registered in other gains and losses on disposal of assets. Thus, this disposal will not effect much our cost of risk guidance that only affects our provisions to our loan book.
Okay. Thanks, Andrea. If you have any questions, call me afterwards. Can we move on to the next one, please?
Your next question comes from Martha Sandford of BAML. Please ask your question.
Good morning. Thank you. I've got a couple of follow-up questions on your bond portfolio. The first one is about size. In the past, you've said you've mentioned that you were targeting to be at around €30,000,000,000 in Spain, and then you've got €3,000,000,000 SEK 3,800,000,000 in Portugal.
Is that still the target given that you keep accumulating liquidity and that's finalizing your P and L. Are you willing to increase the size of that portfolio? And more or less, again, what's The average life of new bonds that you're buying. And the second one on of your 11.39 And we'll go to Q1. How much is coming from unrealized gains in that AFS portfolio?
And then finally, it's more It's a general question I'm trying to understand. So under IFRS 9, are banks fully free to sell their bond portfolios that are at amortized cost? Or is there a penalty if you decide to change your strategy and sell before the maturity as we've seen in other banks. Thank you.
Well, on the many questions on the bond portfolio. On the size, Would we like to increase the size? The answer is yes. The problem is that the market is not there to do so. We don't think that structurally, it's a good time to increase the size of the portfolio.
Long term yields are, we think, too low and hopefully, set to be higher in I don't know when, but at some point. So yes, we are being penalized because we are holding cash and parking this cash every day at the ECB at minus 40 bps. And but this is something that is suffering all the sector, I would say. So Difficult to tell you which is our target, but no doubt that as We will hold cash. We will have to think about TLT overall redemption in 2020.
But Ivan, despite this, we'll hold cash. And all banks, we need to hold cash for regulatory purposes and just for products. So yes, we should have a higher portfolio, but I don't know when. So this is my short answer. Our exposure is mainly on Spanish government bonds.
I would also take the opportunity to clarify that at group level, we only have well, have less than €2,000,000,000 in Italian bonds, €1,100,000,000 in CasaBank and around €700,000,000 in BPI. Thus, the sensitivity to Italy has not affected us much during this quarter. And so far, this is the position. Unrealized profits on this portfolio are around €300,000,000 So I think that this was your second topic. And on IFRS 9, we did not change anything on our portfolios on IFRS 9.
I know that Other banks to the opportunity to account things differently, but it was not our case. We have, let's say, our hold to maturity portfolio. And then we have a portfolio that was formerly the available for sale portfolio that is now fair value with impacts in OCI. And I think that you have a detailed breakdown of our exposures in all the information. So no major changes expected from IFRS 9 on that front.
Thank you, Javier. My question was more Are you free to move your portfolios around without no consequences? Because in the past, once you reclassified a portfolio from Health Maturity back into AFS. You can reclassify it back again for a number of years. And so do we have the same now?
Or is
No, it's true what you say. You have a little bit more freedom to do so, but You have to justify those circumstances, as far as I know, with auditors. And so far, we have not used this option. So this has not been the case in our case.
Thank
you. Okay, Marta. Thank you. Can we move on to the next one, please, breeder.
Your next question comes from the line of Ignacio Alaurghi of Deutsche Bank. Please ask your question.
Yes, hi. Just have one question on the cost of risk guidance. I mean given the performance that we have seen in new NPL inflows, which keeps on going well and recoveries, You're going better in 2Q versus 1Q. I mean, do you think that I mean, just to confirm that you can be below 30 and not further down given the performance that we have seen in 2Q? Or you see scope to deteriorate in the second half?
Office.
In Arthur, I think in a nutshell, we did say less than 30 basis points because we anticipated that it could be clearly less than 30 basis points. This guidance that we obviously maintain how below 30 basis points we'll see. But certainly, obviously, the figures so far are encouraging, but we're not moving our guidance yet.
If I just make a follow-up on the net inflows, you change a lot on the net inflows You changed a lot in the recovery process. Do you think that the cruise speed has been achieved? Or there is a scope to keep on improving in terms of the recovery phase of the NPLs.
It's a very good question. We have, as you can see in our report. Approximately €400,000,000 less of net entries, both first quarter, second quarter and even the Q4 of last year than what it used to be. And that is not a coincidence. It's obviously reflective of a better economic environment but of a new push that we've made to the whole process.
We continue to make changes and add initiatives. Every time we do something, it's more difficult, obviously, because there's a limit to how much we can reduce. But we're going to keep working on trying to make that number even more attractive.
Thank you very
much. Okay, Ignacio. I think basically we have one more person on the line. Could we have the last question, please?
Your last question comes from the line of Javier Echanove of Santander. Please ask your question.
Hi, good morning. Couple of very quick questions. First one, you have a 14 basis points organic capital generation in the quarter. Could you Give us an idea of what is the nature of that organic capital generation. Is this retained earnings?
Or is there any element of risk weighted asset optimization within it. I just want to get an idea of how sustainable this is. And second question is, After the sale of your or most of your real estate assets, I think that you still keep substantial portfolio of rental assets. I'm not sure what the size of that is now, but I don't know if you could tell us where your plans are with that specific portfolio.
On capital. Well, organically, what we do is The pro rata of our the payout is deducted from what we consider our organic capital generation. And this quarter on RWAs, I could say that from an organical point of view, Actually, have gone up slightly because you know that we have had downgrowth. Thus, We have had a small uptick on risk weighted assets related to our organic capital generation. You may see that risk weighted assets are fairly stable, slightly down quarter on quarter.
But I would say that the reduction we have had due to, let's say, our impacts coming from mistakes Here during the quarter, we have deducted the risk weighted assets from the disposal of Viacer, the stake that was holding BPI. And also as Telefonica has corrected in markets, risk weighted asset Telefonica also have come down. And this, I would say, that has more or less been compensated by risk with asset growth on more organic more coming from organic concepts, the main one being the growth of the business.
In terms of the rental portfolio. The book value, net book value is currently €2,800,000,000 gross yield is around 5%. We're going to continue to manage this portfolio for value. It's not a problem portfolio. We have the opportunity, given the environment in the market, to optimize that portfolio, sometimes by increasing yields where appropriate, sometimes by when rentals expire, actually moving on and selling those in the market.
Thank you.
Welcome. Okay. I think that's all we have time for today. Thank you all very much. We'll see you next quarter and hope that you enjoy the summer break for those of you that are taking it now.
Thank you. Have a good summer.