Good morning, and welcome to CaixaBank's results presentation for the first quarter of 2018. Presenting today is our CEO, Gonzalo Gortázar, and our CFO, Javier Pano. Please note, for comparison purposes, that this quarter includes three full months of BPI versus Q1 2017, where only two months were included, and that we have also changed our segment reporting to include BPI's investees within the investments segment. Also, just a brief reminder of our format for first-time viewers. We plan to spend around 30 minutes presenting. That is slightly less than in the past, and leaving more time for Q&A, around 45 minutes. You should have instructions to participate in the live Q&A on your screen. Let me end with reiteration that my team and I are at your full disposal after this event. Without further ado, let me hand it over to our CEO.
Thank you, Eddie. Good morning, everybody. Summary of the quarter, obviously, is the bottom line in terms of ROTE at 9.8%, in line with our targets for 2018. A very significant improvement in net income, as you have seen. How do we see it and how has it happened? Core revenues and lower impairments are the drivers. You can see how NII, and also fees and insurance, have done fairly well year-on-year. Obviously, you have the impact that Eddie mentioned on the two months versus three months on BPI. So you can also look at the quarter-on-quarter where that impact disappears. Comparison is positive on both sides. Core revenues up 6.5% year-on-year, 1.8% quarter-on-quarter, and a significant fall in provisions as well. In terms of the business, we have had a good quarter on both the liability and on the asset side.
AUM and insurance funds up almost 1% despite negative market evolution. In the quarter, consumer lending in particular up 5.3% and, as always, strong discipline on the way we are conducting our lending. 13 basis points of uptick in front book in the quarter compared to last year. Non-performing assets, we had a meaningful reduction of non-performing loans, 21 basis points year-to-date from 6% to 5.8%. Continue and will continue along this road. Cost of risk at 29 basis points on a last 12-month basis, and we will continue to sell actively real estate with significant capital gains. You can see that 16% number is the result on average for the quarter. Coverage has gone up, mostly as a result of IFRS 9, as you would have expected. Solvency and liquidity maintained at very high levels.
I would particularly highlight the LCR, the last 12-month average at 194%, which is a good indication of our always liquid position. Getting to some of the details on customer funds. It is again, a similar story to what we have seen in the past. Time deposits reduction, increase in demand deposits, and increase in insurance and assets under management. Again, in this quarter, we have had negative market impact on this part of the business, EUR 1.1 billion. So the growth of EUR 1.3 billion, I think, has to be seen as particularly positive because it is despite this negative EUR 1.1 billion. We will see how the market evolves during the year. April looks certainly better than the previous months in terms of market impact. All in all, that 0.6% growth in customer funds. I would also highlight that the end of the year is seasonally high for us, December.
The fact that we're growing in the comparison March versus December, it is quite a good indication that the business is firing on all cylinders. Long-term savings up 5% compared to last year, EUR 148 billion, where we include both insurance pensions and mutual funds with a good level of net inflows and a market share that is, as you know, very high at 21%. Life risk has been particularly brilliant, I would say, with this increase of 24% in premia compared to the same quarter of last year. Production and market share are moving in the right direction. Again, one fairly important driver of profits for the insurance business. The non-life business continues to grow nicely, 26%, if you look at how premia has evolved over the last three years versus the sector.
Obviously, this is largely due to the branch network of CaixaBank, which is responsible for 70% of the new production. Technology, just a brief note. In the quarter, we have launched Smart Money, our robo advisory service. Obviously, it is early days, but it is another indication that we continue to be at the forefront of developments on the technology side. In Spain, we have 56% of our clients now are digital. A very, I think, visible imaginBank, our mobile-only bank, has now crossed the 1 million client line. We have 120,000 clients active every day. The average age of people using imaginBank is 26.
That targeting to particularly millennials has been quite effective and certainly is, I would say, an extraordinary lab for us, not only to provide service to this client base, but also to test a number of initiatives that we can then export very quickly to the rest of CaixaBank digital offering. We have also started a new virtual assistant for employees based on IBM Watson on AI, which is already solving 80% of the questions that our employees used to have to the call center, obviously. Significant improvement in terms of efficiency, and also agility for our people to have their problems sorted out. On the loans side, stable portfolio, which in the current context in Spain and Portugal, I think it is a good achievement. As you can see, mortgages continue to come down as per the existing trends.
A very good showing on consumer lending, up 5%, EUR 500 million in a quarter. Some reduction, which reflects some seasonality as well on the business side, and which has been offset by some higher level of activity on the short-term lending side for the public sector administration. If we include the non-performing loans, there is a reduction of 0.3%. Obviously, the performing loan, which is what we are trying to manage and grow, is stable. In the current context, we are happy with that development. We will see how we can get this loan book to perform on a positive side during the rest of the year. The first quarter has been, I think, reasonably good for what we were expecting. New lending, the dynamics are very strong on the consumer lending, as you can see, EUR 2.1 billion in the quarter. We are producing significantly more.
It already happened in 2017 on the consumer lending and on the residential mortgage side. The residential mortgage new lending is stable, in line with our market share. Here, what we see is a higher emphasis on our side on the fixed rate production, where we are producing 60% of our new mortgages, is something that the market is actually doing in a fairly different form, because the majority of the other institutions still have a floating rate offering mostly. We think our proposal makes more sense for consumers, and that is most important. Also, I think it provides also a better result for the bank, both in terms of margins and also particularly for future asset quality issues when rates rise. Consumer lending, we continue to make progress on the various initiatives that you know.
During the quarter, we announced the JV with the supermarket chain, DIA, which we will develop during the year. We have continued to make strong growth on funding the consumption of products that are commercialized through us, like Samsung, the newest nine TVs, et cetera. The results, as you see, are dominated by that strong increase in terms of net attributable profit to the group. That round number, 75%, we're showing in this slide, both year-on-year and quarter-on-quarter, CaixaBank only, mostly because the year-on-year has that difference between three months for BPI in 2018 versus just two in 2017. You can see, particularly on core revenues, that the evolution is pretty positive on all fronts. We look at CaixaBank itself to avoid this comparison impact. NII fees and particularly insurance are significantly up versus last year. So is the case for the group.
On quarter-on-quarter, it's the same story with the exception of fees, where we have had less activity on the CIB side on this first quarter. The other revenues are up strongly, boosted by some one-offs that you know well because BPI published results last week, both on BFA in Angola and BSR, the sale of our stake in the peer company in Portugal. Both figures, you can see EUR 60 million for BFA and EUR 54 for BSR, the impact on the net attributable profit of those two items. We have also generated some capital gains in the ALCO level, which I'm sure Javier will go through. Costs are up 1.8% for CaixaBank, in line with what we expected. As you know, in the first quarter, we also have the property taxes, and all matters on this front are developing in line with the guidance we provided at the year-end results presentation.
Return on tangible equity, as discussed, very close now to 10%. Core revenues, sort of the longer trend, we continue to see improvement, both at the group level and at the CaixaBank level, up 6% in one case and 15% on the other. The proportion of core revenues as a percentage of the total gross income are increasing to 93%. The core operating income, when we deduct recurring costs from core revenues, continue to grow in a very solid and positive manner. I think the substance of our model continues to show it is working, and the numbers are improving quarter after quarter. Looking at the segment reporting and reemphasizing what Eddie said at the beginning, we have made some changes to make sure that this represents more the reality of the group.
All investments that should be in the investment segment are there, whether they come from CaixaBank or BPI, and that includes BFA and BFA RE as the most 2 relevant investments in a quarter. That means that BPI contributes EUR 40 million from their sort of recurring banking business in Portugal, up until the EUR 169 total contribution. We have the impact of BFA, BFA RE, and some smaller items. Total investments are EUR 211. Very high contribution for this quarter, which explains the very sharp increase in the bottom line. The real estate non-core items are still contributing negatively, but much less than they used to in the past. Bank assurance at EUR 520 million is actually providing a ROTE of 12%, which is obviously quite relevant. The comparison with last year is negative because we actually included the badwill from the BPI acquisition, which was EUR 256.
Once you exclude that, the actual trend, or the actual increase rather than trend, is 84%. Obviously, a very relevant number. Banking and insurance asset management are contributing basically the same 40% on the quarter, with the rest being mostly payments and some contribution from our specialized consumer finance subsidiary. Obviously, there is more of the consumer business that we do directly within the banking business. To finalize on my side, just a reminder, BPI, and the figures as per the consolidation into CaixaBank's accounts. As I said, EUR 40 million in the quarter compared to EUR 22 last year. The comparison here has the problem of 3 months versus 2 months, so it is not obvious to spot the trend. You can see that in a better way in terms of activity.
Basically, every category on the lending side is up, in a meaningful way, 3.5% business sales, consumer lending 4%, mortgage lending 0.4%, gives you an indication that BPI is already capturing the opportunity that we think we have in Portugal. Client deposits are also up 3.1%. The economy continues to help. We have, I think, a solid environment for this year and the coming ones. With that, Javier, floor is yours.
Thank you. Thank you very much. Well, good morning, you all. Briefly, I will make some comments on the P&L before shifting to the balance sheet. On the P&L, first on net interest income, that we see that it is up quarter-on-quarter by 0.6%. The main drivers being on the positive side, higher loan yields helped by a front book that is accretive compared to the back book, and that clearly helps to offset lower arrival resets. On top of this quarter, higher NPL accrual. On the positive side, I would remark lower wholesale funding costs, despite intense activity on that front, and lower average loan volumes, although by the end of the quarter, we had a bit tone. We have a negative contribution from BPI of minus EUR 13 million.
In this case, due to the fourth quarter sale of businesses to CaixaBank, also some changes in accounting criteria, being mainly the reclassification of some interest rate hedges from NII to trading results. We look at the client activity that impacts net interest income, first on the liability side, on time deposits, we see that we are repricing those deposits in EUR at ultra-low levels, just one basis point last quarter. The back book is impacted this quarter upwards by some foreign exchange deposits impacts, but this is absolutely not a new trend upwards. With this front book in EUR at those low levels, we should keep a back book at very low levels. Loan yields, as commented, a front book that this quarter has yielded 324 basis points, clearly accretive compared to the back book.
You may see, for many quarters in a row with a front book over 3%. In this case, this quarter, there is always the mix of the new production that affects positively, but also on SMEs, we have had good quarters in prices. The back book yield goes up to 228 basis points by nine basis points, also impacted by this higher NPL accrual. Lower loan balances during the quarter, slightly this impacting a little bit on average net interest income. As I say, more a bit tone even on the mortgage segment by the end of the quarter. We look at the impact of our wholesale activities on net interest income, despite intense issuance activity during the quarter, we have lower funding costs, 120 basis points over six months Euribor, six basis points less.
This, as I mentioned before, has been helping NII improvement during the quarter. Some comments on the ALCO portfolio. On the structural ALCO portfolio, we have taken advantage of the sovereign spread compression to dispose and crystallize some profits on some long-term bonds that were asset swapped. A result of this, we have made a trading gain of close to EUR 60 million, and this has resulted into now a portfolio with a slightly higher duration as we remove this short duration part of the portfolio, as I mentioned, as it was swapped into floating. Going forward, our activity on this portfolio will depend on market circumstances. Anyhow, we don't see current levels as ones to add much to this structural portfolio. On the liquidity portfolio, we have been buying some short-term and medium-term notes, matching the maturity around the TLTRO disposal.
This portfolio is set to grow. You know, we are accumulating cash in order to face the TLTRO redemption in 2020. A result of all this, the spreads improve both customers. The customer spread goes up by eight basis points, as a result of a much better back book yield on the loan book, and net interest margin also improved by seven basis points as we overcome the small setback we had on that front during the fourth quarter of last year as we accumulated extra cash balances. We turn to fees. On fees, I would say that we are down quarter on quarter by 0.9%. We compare CaixaBank with the first quarter of last year, we are slightly upwards. The first quarter always being more slow on fees.
I could mention here that BPI is down on fees for the first quarter, but this has more to do with the fact that during the fourth quarter of last year, BPI was positively impacted by the distribution of retail sovereign bonds. So this was an extraordinary revenue. At CaixaBank, we are flat. As CEO was commenting, we have had a slower CIB activity during this first quarter, compared to what is usually the case in the first quarter of the year. Volatility from markets has affected somehow. This, in any case, has affected assets under management fee revenue as we have had a EUR 1.1 billion mark-to-market impact on our assets under management balances. Also in the first quarter, we have to remember that there is always, while comparing with the fourth quarter of the year, the impact in the fourth quarter of success fees.
All in all, we have an upbeat view on our fee revenues going forward, and we reiterate our guidance for the year. A focus, as always, on our insurance and asset management activities. You see that revenues continue to improve steadily year-over-year, up by 22% at group level, 20% at CaixaBank. Those revenues are every quarter more important for us, now representing 35% of our total revenues on our bank insurance business, 3 percentage points up in a year. This time, we take the opportunity to further disclose information about our insurance activities. Here you may see the complete P&L account of our insurance business. You may see that the improvement is across all lines, from NII to all revenue lines, and for a final net attributed profit for our insurance business of EUR 144 million, up 17.1% year-over-year.
That represents already slightly more than a quarter of our bank insurance business. I turn to costs. On costs, we don't have much news. We say that everything is going as expected. Quarter-over-quarter costs up by 2.3%. As you may see, personnel costs are broadly stable as cost synergies offset wage inflation. We have extra costs on general expenses and amortizations, mainly reflecting the seasonal property tax that is registered in the first quarter. Expenditure, as commented the previous quarter, on revenue opportunities. All in all, a positive jaws. As a result of this, our recurring cost-to-income ratio improved to 52.7%, down by 1.6 percentage points in a quarter. A few comments on loan loss provisions. Continue to do well. On a 12-month trailing basis, the cost of risk is already at 29 basis points, already below our guidance for the year.
Remember, guidance to be below 30 basis points. 2 quarters in a row with a cost of risk on an annualized basis at 24 basis points. Within that, in this front, everything is going as expected and on track. Some final comments on the P&L for our real estate disposals. We continue to make profits on disposals, 16% over the cost price during this first quarter of the year. That sharply contrasts with the situation of 2 or 3 years ago. You know that we have made a profit of EUR 40 million. As much as it is possible, we have been providing further for this portfolio to make a net real estate result of EUR 2 million in order to smooth disposals in coming quarters as much as possible. Now some comments on the balance sheet. First, starting with our non-performing loan exposures.
We have reduced NPLs by around EUR 600 million. The NPL ratio down by 20 basis points to 5.8%. Well, after IFRS 9, sound coverage ratio 55% at group level. I would remark that the coverage ratio for the uncollateralized part of the non-performing loan portfolio is standing at a very sound level at 80%. Some comments on our real estate exposures that are gradually trending down. The OREO book coverage ratio is stable at 58%. The pace of inflows into this portfolio gradually trends down, 11% down this quarter compared to the first quarter of last year. The pace of sales, in any case, only organic disposals this first quarter, EUR 306 million, up by 3.4% compared to the first quarter of the year. Always the third quarter of the year slightly more slow during the year.
Remember that we have already reached an agreement for a portfolio sale to Testa of a portfolio of EUR 228 million to be executed from this second quarter. Finally, on liquidity and solvency. On liquidity, not much to comment. Continue to have a really sound liquidity position. EUR 73 billion of liquid assets at group level, EUR 65 at CaixaBank level. Our liquidity coverage ratio standing at 206% by the end of the period at CaixaBank. As you know, intense activity in wholesale markets with 2 coverage bond issued, five years senior preferred, I would remark, $1.25 billion, AT1, that already fills our AT1 bucket together with the issue we did last year. Finally, on solvency, we closed the quarter with a CET1 ratio at 11.6%.
We have had this quarter the well-flagged impact of IFRS 9 minus 15 basis points, positive organic capital generation 24 basis points, and other value adjustments minus 17 basis points. Amongst them, I would remark the impact from the devaluation of the Angolan kwanza that has obviously had an impact on this. Improved credit ratings, well known, and also I would remark here a total capital position that is now already over 16%, standing at 16.1%. I would make some final remarks from my side. We feel that we are moving with confidence towards our targets with a return on tangible equity that is already at 9.8% within our targets.
This is supported by high core revenues that result into positive yields, that result also into an efficiency improvement, a cost-to-income ratio that is down by 1.6 percentage points, thanks to a good business mix with higher margins that reflect the strength of our franchise, and this together with a continued decline in NPAs, as always with the DNA of CaixaBank, which is a strong solvency and liquidity metrics. With this, I think that we are ready for Q&A. Thank you very much.
Thank you, Javier. As you rightly point out, it's time to move to Q&A. Operator, can we please have the first call, including the name and company of the caller?
Certainly. As a reminder, ladies and gentlemen, please press star one if you wish to ask a question, and you can use the hash key to cancel your request. Your first question today comes from the line of José Abad from Goldman Sachs. Please go ahead. Your line is open.
Hello, good morning. Thank you for the presentation. I have a question on consumer lending. I think maybe you could give us some data on the yield of the consumer lending in Spain and how that has evolved over the last few quarters. Maybe two data points would be enough, like Q1 2018 and Q1 2017. We've seen that once again, the NPL ratio has increased to 4.4%. This is probably the ninth quarter in a row. This is not a CaixaBank specific issue, this is a system issue. The question is, beyond which NPL ratio would you consider to slow down the origination of NPLs? My second question is on if maybe you could give us an update on your strategy for real estate asset disposals, given there's been a lot of noise in the press about a potential large transaction down the road.
Thank you very much.
Thank you, José. I'll take the second part of the question. On the NPLs and asset quality, I maybe let Javier give any figure on the lending. The NPL obviously has been slightly increasing in consumer lending associated to a very significant increase in the activity. We have a policy in which we look at every vintage that we produce, and we see what is working and what is not working well, and we adjust immediately. This is not a process in which we wait until NPLs reach a certain level, and then we change. It is obviously every action that we take after we start doing it, because the portfolio is obviously very granular. We have the appropriate monitoring follow-up, and we fine-tune. We stop certain actions, we emphasize others. We move the scoring line at which we would produce new lending. We will change the terms.
We would emphasize certain channels or others. This is a constant development. What you see in evolution of the NPLs is obviously with some lag effect, earlier vintages. We are actually very satisfied of the course that we're following here. We have found plenty of very attractive activities that are obviously giving the margins that are above 9%, are always contributing to shareholder value. We are also actively learning from what we do. There's a lot of test and learn, particularly when we look at new initiatives, new world, digitalization, et cetera. We're actually quite happy, and we feel the NPLs on the consumer lending portfolio are completely under our control. We continue to feel the significant growth, and we plan to exploit it without an impact on NPLs that will be not bearable. There is no limit, I think, at this stage.
It will obviously more depend on what is the market demand, consumption growth in the economy, which continues to be positive, particularly the evolution over the next three years. It may suggest that the overall demand for consumer lending will continue to grow, maybe at a slower pace than it has been lately. Maybe, Javier, you want to add something on the margins?
Hi, José. Well, I was looking to the figures, and actually, there are not many changes. The latest figure for our front book on that front is around 9% yield. If I look to the different vintages in recent quarters, I would say that is somewhere between 9% and 9.5%, depending on the quarter. It's true that there is more and more focus from our peers on this segment. So far, we are being able to defend our position, our margins, and you know that we are making new or reaching new initiatives with different vendors, et cetera. No doubt that this is helping on that front.
If I may, very quickly, if you could remind us the contribution to NII from consumer lending.
Well, it's around a EUR 10 billion book, with those yields, you can make the numbers pretty easily. As well, the back book yield is, as I say, more or less at the same level, around 9%.
Thank you. Your next question comes-
Operator, can you please hold? We had one question pending on José on the real estate strategy.
Well, on real estate, we have not any change to explain. We continue with our strategy. We want to reduce our burden of non-performing assets. We want to do it as we have been doing in the past, selling organically and complementing that with some smaller portfolio transactions, like we announced earlier in the quarter. We have sold approximately 3.4% more than the same quarter last year, as Javier explained. We have also announced this portfolio sale of another EUR 228 million. Javier, anything you would like to add on this front? It's just, does that cover your question, José?
It's clear. Thank you.
Okay. Thank you.
Thank you, José. Can we move on to the next one now, please, operator?
Thank you. Your next question comes from the line of Alvaro Serrano from Morgan Stanley. Please go ahead. Your line is open.
Hi. Good morning. Two questions. On NII first, I think you were very clear at the end of the Q4 that NII should recover already in the first quarter, and you've delivered. When I think about your targets for the full year, you need further growth in NII. If you can give us some commentary if this is going to be a linear process or should be back-end loaded depending on rates, something along those lines. Can you link that answer to comments from Gonzalo? I think you said at the beginning that loan growth flat year-to-date, given seasonality, is off to a better start than you expected. It feels like you're more positive on loan growth. Is anything you can add on your NII guidance given the better loan growth?
Second, similarly on fees, they were a bit lighter than consensus in the quarter. Understandably, they are quite difficult in banking, as you've mentioned. You've also mentioned the market impacting the asset management business. Obviously, Easter as well in Q1 this year. Can you also give us some color, given the pipeline, given the market volatility in the last couple of months? Is that going to affect the fee line in the short term or just give us a sense of how the markets are affecting, because Q2 last year was also very strong. I just wanted to get a feel for development during the year. Thank you.
Hi, Alvaro. I take the NII question. Well, we guided for NII to grow between two and three. Obviously we confirm this guidance for the year. If you look to the ladder of the NII evolution, you may see that during this first quarter, we had a small negative impact coming from lower average loan volumes. I said also that we had a more upbeat tone as the quarter progressed, also on the mortgage segment. I would say that obviously we expect that this negative average impact will not happen again, and this obviously will support NII going forward. When I gave guidance last year for this, I said, look, if rates do not go up, we have a sensitivity on this, on NII of around 50 basis points, five, zero. We gave you a range between two and three.
We think that it's early days in the year, we'll see. We are confident that we will be there. Obviously, loan growth, if it happens or if it helps, will be good news. Obviously, which is mainly the driver for NII in our case, the fact that the front book is clearly on a sustained basis, accretive compared to the back book. Once negative ALCO resets fade, thus has an immediate positive impact into NII. Hopefully this would be the case from mid-year on. Those are the main drivers, and together with trying to manage our cash balances obviously on a smart way, in order to have the smallest impact possible of the minus 40 basis points from the ECB. I would say that those are the main levels for NII management for the rest of the year. On fees-
Javier, just a follow-up. Is it fair to say that at the beginning of the year you were not factoring loan growth, now loan growth is coming better than expected? Is that a fair comment?
Well, if it is better than expected or not, we will have to confirm. What I say is that we had a small negative impact from average loan volumes, that by the end of the quarter, we had a more positive tone. It has to be confirmed that this positive tone continues during the year. Obviously, our initial guidance was made on the assumption that we had a stable loan growth. That's right.
Okay. Thank you.
Alvaro-
Sorry, on the fees, I interrupted you.
No, no problem, Alvaro. On fees, I think we are on the right track in terms of what we are doing with respect to our guidance. I would highlight particularly on the insurance front, we have been actually doing very well. On AM fees, we have had the impact of negative market development, and that has also had some impact on our CIB business. For the rest of the year, I think the quarter indicates that we will be meeting our guidance, obviously the market may help us or not, depending on what happens in the next few months.
As I said, April, in terms of AUM's market valuation is quite positive, it's very difficult to make a judgment on the full year that from nothing of what we have seen both in NII and fees, some things are slightly better than what we expected, as you were indicating, others are slightly worse. All in all, I think we are making good progression towards meeting our guidance. We will have to obviously monitor how the developments go during the year.
Thank you very much.
Thank you, Alvaro. Can we move on to the next one, operator, please?
Thank you. Your next question comes from the line of Sofie Peterzens from J.P. Morgan. Please go ahead. Your line is open.
Yeah. Hi, here is Sofie Peterzens from J.P. Morgan. I was just wondering if you could share with us your plans for BFA in the future and also Repsol. How should we think about the equity method contribution from these holdings? Are they long-term holdings or should we expect potentially lower kind of ownership in future? That would be my first question. My second question is around the real estate division. The pre-tax loss was almost EUR 100 million this quarter. What kind of loss should we expect in this division going forward? Could you elaborate if you plan to do slightly bigger portfolio sales than the EUR 228 million that you have already announced? Just if you could give details on IFRS 9. Provisions went up by almost EUR 760 million, but the core equity Tier 1 impact was only 15 basis points.
Could you just give details what explains the delta? Thank you.
Thank you, Sofie. I will try and deal with the first two questions. Javier can give the details on IFRS 9. With BFA and Repsol, there are no news in terms of our strategy. We have been quite clear with respect to BFA, that our interest would be to reduce our investment in BFA. At the same time, that we do not have a certain deadline to do it, because we obviously depend on the environment. BFA is a fantastic bank, and we want to make sure that we do this at the right time and in the right conditions. Angola is going through a period of change. Angola has recently requested, as you will know, to the IMF, the implementation of a program of the Policy Coordination Initiative.
Basically, without asking or getting money from the IMF, Angola is offering or trying to comply with certain policies that are, I think, orthodox from a macro point of view, which is I think very good news. I think these will be followed by further openness of Angola to the international capital markets. Plenty of good developments. This is what is most relevant. Obviously, the oil price is also helping the situation of the country, and we are cautiously optimistic and certainly willing to work with our partners there in order to find a solution at the right time. In the meantime, as we have 48%, we will be receiving the 48% of the income from the bank. The bank continues to do well. Obviously, there is a change now in terms of accounting for high inflation, which is reducing the bottom line.
We saw that in the last quarter. That continues to impact the recurrent profitability, which is significant, but less than it used to be. We had these particularly high result this year associated to the hedges on the devaluation that has taken place with the kwanza. No change in plans really here. Our long-term expectation is certainly to be at a lower level, but we depend on some of the circumstances. These circumstances are clearly evolving in the right direction. With respect to Repsol, there is absolutely no change. We have a significant hedge aimed at reducing concentration risk on one given investment, which we think is sensible as a bank to do. There are no further plans. We have protected value. We continue to believe that there is significant upside in the company, particularly now that the oil price is going up quickly. Javier?
Yes. On the IFRS 9 impact of minus 15 basis points, this was very well disclosed a couple of quarters ago, but I summarize the key numbers. There is an increase of provisions of around EUR 750 million. I am giving you round numbers. Net, it is around EUR 460 million. That would be the impact on our regulatory capital. You have to consider that before this, we already had a deficit of provisions that was already deducted on our CET1 regulatory capital ratios of around EUR 400 million. The net impact is the difference between the new provisioning levels and this deficit that we already had on our capital ratios. Together with this was a negative impact on risk RWA. If you put together, there is the impact of minus 15 basis points. This is the only impact.
We have not taken other decisions related to bond portfolios, et cetera, evaluation of bond portfolios, other than the pure impact of the increase of provisions. That, by the way, have resulted into a coverage ratio that goes up by five basis points to 55%.
Coming back to your second question, Sofie, on real estate. You ask whether we couldn't research further portfolio sales. We're going to be opportunistic. The environment is one in which more and more people are quite keen to get into. We have plenty of real estate. We have strategy to dispose of it. We are always open to hear to people that want to invest in the market. If at some point someone comes with attractive proposals, then we will react positively. This is the case with Testa, and I obviously do not discard that we will have some others that will come, and where we will find some point at which we will trade a larger portfolio, like in the case of Testa.
We are clearly going to be considering at all times this strategy versus the granular one of continuing our sale through mostly our branch network in order to evaluate whether it makes sense or not. If you ask me, it's more likely than not that we will find further pockets of money interested in buying some of our assets. If that happens in attractive terms, we will obviously communicate that in due course.
Thank you.
Thank you, Sofie. Can we move on to the next one, please?
Your next question today comes from the line of Javier Echanove from Santander. Please go ahead. Your line is open.
Hi. Thank you. Thanks very much for taking my questions. I have two. First one is, where you could quantify the impact of NPL recoveries in the NII in the quarter, and what would have been the yield on the loan book, not taking into account these NPL recoveries. What do you expect to see in future quarters coming from NPL recoveries? That's one. The second one is on capital. Taking out the IFRS 9 impact, capital quarter one generation in the quarter has been about seven basis points. I was wondering whether you think that is a good run rate for the rest of the year, or do you expect more or less, and on what basis or on what factors? Thanks very much.
Thank you, Javier. Maybe Javier.
Hi, Javier. Well, the accrual on NPLs has had an impact this quarter, close to EUR 20 million. I would here want to highlight the following. With IFRS 9 in force from earlier in the year, we are required to accrue interest on net Stage 3 past due balances. The same amount is being provided as loan loss provisions, thus resulting into an offsetting amount with no impact on net income. There is a reclass from NII to loan loss provisions. As we have already guided for, cost of risk, lower by the way. Everything is in the pack. The impact this first quarter is around EUR 20 million. We think that this is more or less sustainable, and this has had an impact on our bad book yield of around four basis points.
I would say that this is four or five basis points, is the impact we have had. I don't know if you want to comment me on capital.
Sure.
Well, on capital, you know that we have a ladder explaining the different impacts, organic, inorganic. On the inorganic front, I would remark the devaluation of the Angolan kwanza. This has an impact on OCI of around EUR 130 million. That explains close to eight basis points of this impact. We have other impacts. Amongst them, we have the IFRS 9 impact of Erste Bank, which is two basis points. There are always some noise here and there. On our recurrent organic capital generation, I would say that without extraordinaries, but because obviously this quarter is affected by some extraordinaries, I would say that a figure between 15 and 20 basis points can be a good run rate.
Thank you.
Thank you, Javier. Can we move on to the next one, please?
Thank you. Your next question comes from the line of Marta Sanchez from BAML. Please go ahead. Your line is open.
Thank you very much. I've got two questions. The first one is on asset quality. The workout of your mortgage NPLs remains very slow. Why is that? When do you expect to see a significant reduction in mortgage NPLs? The second question is more on strategy. You are the masters of cross-selling. Do you think rising regulatory and supervisory scrutiny could have a negative impact on the revenue power of your franchise? Do you think we'll see rising conduct risk provisions, and that will become structural as we've seen in other countries like the U.K.? Thank you very much.
Thank you, Marta. On the second point, we are spending a lot of time in making sure that what we do is properly done. I think a clear example is our focus on advisory in the selling of mid and long-term advisory products. Obviously, we do cross-selling of many other things. We are, I think at this stage, quite comfortable that the conduct that we are following here is appropriate. It's certainly a big priority for me. Actually, I made organizational changes around three years ago to have all the conduct compliance reporting to me directly and making this a top priority for the organization. As you say, we are very successful commercially, and we just want to make not only be very successful commercially, but also make sure that every part of the process is appropriately managed and appropriately done.
At this stage, I'm very comfortable, I'm very comfortable also compared to what I see is market standard in Spain. I'm convinced that the regulations will sort of raise the bar, I have no doubt. We want to be ahead of the regulations, and so far we are. We have at this stage all reasons to believe that we will continue to develop our activity quite successfully and complying with applicable regulations and regulatory standards. Also even the demands from society, which are significant in that front. I'm saying, I do not think this is going to be an issue mid to long term, not because we have an easier road, is because we're taking these things extremely seriously. We have now a way of conducting ourselves, which is actually very strict. We'll continue to be investing on that front.
With respect to NPLs and mortgage NPLs, obviously, yes, you are right. The NPL ratio for mortgages is not coming down as we would like it to come down. Obviously, the mortgage portfolio is coming down on the other hand, so there's a question also of the denominator. What's happening? Well, you know that there is a new mortgage law in Spain that is going through parliament that hopefully should be approved and will certainly have an impact. While that mortgage law is not approved, what we have had is a situation in which most courts throughout Spain have really stopped executive procedures on mortgages, because there are a number of questions that are pending from European Court of Justice decisions. That means that the reduction, the portfolio is improving, but the reduction is very slow. I think it's going to take some time.
We have not been active in selling NPL mortgage portfolios because there are substantial issues when you're talking about doing this. People in first residence, et cetera. From a reputational point of view, it's complex. We're analyzing some portfolios that are actually not focused on first residence, and we're cleaning up the portfolio to see whether we can, through wholesale markets, accelerate the reduction on that front. There's a significant element also here of, let's say, unlikely to pay, a subjective NPLs that are still paying. We have a portfolio of a significant size which has been subject to the last changes on the Code of Good Practice, as we say in Spanish, they call it [Foreign language] buenas practicas. That is basically allowing people to have a five-year extension of their loan with just paying a small interest amount.
Obviously that immediately becomes as a subjective NPL, and it has to stay that way for five years. There's a lot of things that are just happening in which we have no room for action, this being one example. The portfolio will come down, but will come down slowly.
Thank you very much.
Thank you, Marta. Can we move to the next one, please?
Your next question today comes from the line of Ignacio Ulargui from Deutsche Bank. Please go ahead. Your line is open.
Hi. Good morning. Just have two questions. On type 1, could you comment a bit on how do you see the competitive pressure with some of your competitors lowering mortgage yields by
Sorry, Ignacio, could you speak up? We have a hard time hearing you.
Yeah. Sorry. The first one is on the competitive pressure in Spain, whether you see a lot of pressure coming from competitors lowering lending yields in mortgages and whether this may have an impact on your customer spread assumptions. The second one, it's on gross interest in the quarter. You have seen an almost 50% decline year-on-year in terms of gross interest. Do you think this might be extrapolated to the year? Was there anything particular or just the NPL formation is improving materially, which underlines the improvement in credit quality. Thanks.
Thank you, Ignacio. Two very relevant questions. On the mortgage side, generally, the competition is stronger in Spain. I think you might remember, we had this discussion at year-end results, and I was quite clear that I continue to see a very competitive environment into 2018, and this is what we're seeing. On the mortgage side, I think it's a fact that the competition is actually strengthening and being very aggressive. You can see that actually our results for this quarter, new production for us is stable versus last year. Actually, we're defending very nicely our loan book. To a large extent, thanks to our focus on fixed rate mortgages. There is no question that market is becoming more competitive. At the same time, it is also true that we are not competing on price.
We continue to think that the best advice for clients, for most clients, is to, at these levels, get a fixed rate mortgage, which we normally or tend to manage through ALCO swap into floating, so that we can obviously manage the interest rate risk better than the man on the street. Hence, the strategy for us continues to protect value, and not to enter into a price aggressive strategy to react to others. We are willing, if need be, to sacrifice volume growth. For us to be stable in new production is a good indication of our discipline on that front. The second point in terms of entries into NPLs, I think we will be having good news on this front, on the NPL side in particular.
Obviously, we were also going to be seeing lower entries into real estate assets because we have a lower stock of NPLs. We have made changes later or the second half of 2017. We reorganized our recovery teams, grouped under one head, around 600 people, also directly reporting to me. We have put in place many small but very relevant initiatives when taken as a whole. What we have seen in the first quarter is pretty good results in terms of lower new entries. Obviously, the comparison with last year is a bit more complex because you also have sort of large items here and there. Beyond the specific numbers, the actions that we are taking suggest to us that we're going to go to an increasing sort of low level of new entries, which will obviously be very helpful for NPL evolution going forward.
The least costly way to reduce NPLs, obviously, is not to have them become NPLs in the first place. The effort of these 600 people team that existed before but was directly reporting to the various directores territoriales, various regional managers, but now they have one single sort of management line, I think is going to yield good results for us this year and contribute to a good reduction of non-performing loans. We're expecting to be around 5% by year-end. That's our target, and this is a critical part of it.
Thanks very much.
Thank you, Ignacio. Can we have the next one, please, operator?
Your next question today comes from the line of Britta Schmidt from Autonomous Research. Please go ahead. Your line is open.
Yeah. Hi there. I've got two quick questions, please. One is on the insurance business, which had a very good quarter, in Q1, both in the add equity and the other income contribution, as well as the fees. Is there any sort of seasonality that we should bear in mind when we model this out? Or are you confident that these lines can grow from here throughout the year? Then the second question, can you just update us on the swap stops that you've taken out on Telefónica and Repsol? I think the Telefónica swap has been closed. Is there any sort of impact that we should expect in the trading income? On Repsol, I think you might have increased your swap. Maybe you can update us on this and any potential plans to further hedge some of these stakes.
Starting with the first question, and subject to Javier, maybe you add something at the end, but at least I cannot think of seasonality in this line at this stage. If there's any other reason, we will let you know. On that line, I don't see it. Where we have a seasonality positive is in the equity accounted income coming from SegurCaixa Adeslas in the third quarter because the month of August is particularly low in terms of claims. As people go on holiday, they do not get sick. One of its marvels. Seasonally, we have a higher contribution on the third quarter. I don't think that the first quarter has been pushed by any particular seasonal factor. It's been a pretty good quarter in a solid trend line. Nothing comes to mind that would suggest a seasonality that may be corrected later on.
On Telefónica and Repsol, we had put a hedge on Telefónica at around 10 and a half euros. We obviously have a significant investment in Telefónica, and we thought that for concentration risks, it was right to take a hedge at a point where we saw that value was attractive. That hedge proved effective, not only as an instrument per se, but also obviously, unfortunately, market price for Telefónica came down and came down to a very low level. After which we decided that at those levels, it was the right thing to unwind the hedge. We did that. Was finalized during this quarter at somewhere just below eight euros per share. Obviously, that makes us economic capital gain, but the way we account for that is against shareholders' equity. Nothing is going to grow through the P&L. We have that EUR 115 million.
We basically hedged at 10 and a half EUR and bought back at eight EUR, and that has made that economic capital gain over EUR 100 million, but it will not go through trading income. In the case of Repsol, we have also a very large position, and we decided to hedge approximately half of our stake, which we have done at around 15 and a half EUR. There is no further plans with respect to more or less hedges or any other decision around Repsol. What will happen is that when Repsol pays dividends, we will, for this portion that we have hedged, just below 5%, we will pass on these dividends to the hedge counterparty. Hence, we will have for the size of that payment, we will have a negative impact on trading income according to the current rules.
There's no, as I mentioned before, no other implication or change. We think we have the duty to manage these positions, and particularly the concentration risk associated with it. The concentration risk is not the only dimension. The value is obviously very relevant as well. As a result of combining these two, concentration risk evaluation, we will continue to, when we feel appropriate, manage proactively our positions.
Thank you.
Thank you, Britta. Can we move on to the next one, please?
Thank you. Your next question comes from the line of Benjie Creelan-Sandford from Jefferies. Please go ahead. Your line is open.
Yeah. Morning, everyone. I guess I just wanted to follow up on that other question around the investments division. Perhaps just a little bit more broadly. Can you give us an indication of how you, as a management team, assess or weigh the benefit of the earnings stream from those investment stakes versus the potential to free up capital and redeploy it into the core banking business? I'm just wondering how you measure the risk/reward, or ultimately, what would lead you to think about reducing those holdings. The second question is just on a technical point. I noticed there seemed to be a restatement this quarter, which has reduced losses in the real estate division but has increased the drag on the core banking division. I was just wondering if you could explain what was behind that this quarter. Thanks.
Thank you very much, Benjie. On the first point, we have been for some years now saying that while we like, and we used to have a lot of minority investments, we would like each of them individually. We have a core business, which is our bancassurance business in Spain and Portugal, and we wanted to make sure that our results were a consequence of our core business and not of extraordinaries or one-offs coming from these investments. Hence, we marked on a program to reduce the weight of these investments that five, six years ago was a quarter of our capital to the levels today, where it's more in the 5% to 6% of the capital.
From that point of view, we were prepared to reduce earnings coming from these investments in exchange for having a clear equity story and I think a lower risk profile, or a risk profile at least that is very well known to our shareholders because it's the business they are investing in, what we do in Spain and also in Portugal. This is the conceptual framework. That does not mean the fact that they are non-core business. That does not mean that we cannot own them, and that does not mean that we can have some of these investments for a certain time.
At this stage, we feel that the best way to serve our shareholder is to keep these investments with the appropriate management of value through the instruments we have normally or what has happened in the last quarters through derivatives. We will continue to do so. The way that the evolution of our bank is going, these investments weigh less and less in our equity story, in our capital, in our earnings, and I think that is going to continue to be the case going forward. Beyond that, obviously, we have also to keep some of our cards close to our chest as we are talking about very relevant and listed public companies. I continue to emphasize that we have a positive view on the upside on both Telefónica and Repsol. There's a second point there.
We have a question on the real estate division. Yeah, Benjie, basically what we had is around EUR 25 million net per quarter being transferred in terms of analytical commission being paid from the real estate segment to the bancassurance segment. Given that was a non-cash item, we've decided to discontinue that. As a result of that, the real estate segment will have EUR 100 million, roughly, less of net expenses in 2018. What we've done is restate 2017 accordingly.
Thank you.
Thanks, Benjie. Can we move along to the next question, please?
Thank you. Your next question comes from the line of Carlos Cobo from SG. Please go ahead. Your line is open.
Hello, Carlos Cobo here. A couple of questions quickly. One is on BFA again, but more about BPI's capacity to upstream dividends, given that in Angola they have some restrictions on US dollars. When you think about the payout of the whole group, do you count with this cash or should we kind of adjust that? Which could make sense. Lastly, you've already touched on this, but quickly, how is your approach to asset disposals moving in the context of the IFRS 9 adjustment? Now coverage looks sounder, higher. Are you going to use that to accelerate the asset disposals, even in the retail segment, being a bit more, let's say, aggressive on prices? Or you still plan to retain as much value as possible? I understand this is a moving thing, but, how is your mind evolving in this topic? Thank you.
Yes. On the second point, obviously, IFRS 9 has had an impact on provisions for non-performing loans, not on real estate assets, foreclosed assets. Somehow, I'm not sure the question you're linking to our sales of foreclosed assets, IFRS 9 will not have an impact on that front. It has had an impact on non-performing loans. We have been selling also non-performing loans portfolios in the past, I think with fairly good impact. I think during this crisis, done over 11 or 12 portfolio transactions. We expect to have a few portfolio transactions during this year as well.
Clearly, from that point of view, IFRS 9 is, I guess, helpful, but it's not going to alter what we have already been doing, which is where we see non-performing loans that we can sell and where reputational impacts or other considerations do not constitute a problem, then we go, because we do not want to own non-performing loans. The exception is when we see a market that values non-performing loans well below where we see the value. This particularly happens with large tickets where there are solves on the market, and when we actually see an opportunity, we hit the market. Sometimes we have a view that the recovery is ultimately going to be much higher. Because we know quite well these situations, in those cases, we keep that.
Our strategy will continue to be one in which we want to accelerate the disposals of non-performing assets. Our budget for this year, in foreclosed assets now, is EUR 2.3 billion, compared to EUR 1.6 billion that we did last year. It's a very significant, almost 50% improvement. Where we are going to include some portfolio sales. An example is the agreement we've reached with Testa, where we will probably, as I was mentioning before, find occasions to do some other similar transactions. Certainly, there's a lot of interest in the market, we think it makes sense for us to explore it and continue on this basis. Javier, you may want to answer the first question.
Yes, on the Angolan dividend. The administrative process for payment of the 2016 dividend is progressing. One news from Angola, as you know, is that the government has presented a macro-stabilization plan that we think can set the good foundations for medium-term growth. The Angolan authorities have requested non-financial assistance from the IMF, thus giving credibility to all the programs. I think that in due time, the Angolan central bank will authorize this payment into hard currency. To your question, if this is considerate on our payout or not, I would say that we have guided clearly for dividends. We have clearly said that you should expect a payout ratio in cash over 50%. From here, obviously, there is not a mechanical approach.
While deciding the management proposing to the board the dividend policy, obviously, many things have to be considered, not only this one. I would say that there is not, as I say, a mechanistic approach related to this. This is the news that we may have on this.
Thank you.
Thank you, Carlos. I believe we have time for one more, and luckily enough, there's one more person on the line. Could we please have that call, operator?
Your next question comes from the line of Ignacio Cerezo from UBS. Please go ahead. Your line is open.
Yeah. Hi, good morning. Couple of quick ones from me. Follow-up on the consumer lending business, if you can sort of tell us actually how the customer acquisition has changed since you started pushing that business more decisively? What is the cost of risk actually you're having on that business to date? Then just a number basically on which is the updated book value of BFA. Thank you.
Thank you, Ignacio. Updated book value of BFA is EUR 513.
Yes.
That is the easiest one of the various questions that you have. The first one is obviously one that is very relevant. It is difficult to summarize, but I will try. We have two ways to acquire customers. One is through our JVs, Telefónica Consumer Finance, or be it hard or virtual JV. The case of Telefónica is a hard JV where we are funding clients of Telefónica that want to buy their mobile phone. This is obviously working quite nicely for us, both in terms of business and in terms of cost of risk. We have similar agreements with Fnac, with Carrefour. We have reached one with MediaMarkt, and we will be launching also this agreement that we have closed with the supermarket, DIA.
In these cases, obviously, we have the advantage that when a new client is acquired, 30% of the cases, it is our client because we have a 30% market share in Spain. Even when we are talking about point-of-sale lending, the information that we have is very significant. When we are not talking about our clients, then we have basically information on every other client because they have actually purchased at our establishments where we are the merchant acquirer. When the client will give us enough detail, we have very quickly the ability to model and understand their payment profile and provide new lending to non-clients, which is all this part with a competitive advantage because we actually have a lot of information.
30% of them are our clients, and the one that are not our clients, we have plenty of information once they allow us, they give us permission to access that data, because they would have been purchasing at establishments where we are the merchant acquirer. Again, we have a 26% market share in merchant acquiring in Spain. The power of data here is quite significant for our customer lending. We are using technology and information and agility to serve all this part of the business. Having said that, the majority of the growth is coming from lending to our own clients. What we are doing is providing for more pre-granted credit limits. We have over 4 million clients with pre-granted credit limits. Some of them pretty obvious because we have their payroll, we know what income they have, and we can fairly accurately establish the scoring.
Thanks to our efforts in advanced analytics and big data, we have been able to now create scoring models that are equivalent to those, including, again, our knowledge of payments made throughout the entire Comercia or merchant acquiring network. A lot of the business that we are doing is business with our own clients, where we have a lot of information. What we are doing is they now know they have that credit pre-approved. They have it in one click, and they have it through. They can go to the branch network, obviously, but they can also get it through the other channels. This is making a difference. We just want to be very quick, very fast, very convenient, and at the same time have the necessary information to make sure we are making sound credit decision.
The progress that we have made on these areas is tremendous. Again, this is related to big data. We actually put all our information data pools into one integrated data pool three and a half years ago. During these three and a half years, we have had a lot of progress in treating this information to our advantage. One of the most obvious places is precisely consumer lending. This is what is working at this stage very nicely for us. There was another part of the question, Javier.
Yes, you had a question on cost of risk. Well, this is a business that is evolving really fast. As people recommended, with different initiatives that we try one way or another. Anyhow, for this year, we are considering a cost of risk for this business around 60 basis points. Obviously, we are perhaps in the good part of the cycle. Through the cycle may be higher than this. Difficult to give you a figure, but obviously more close to probably 100 basis points than those 60 basis points that are now being considered. You see that the yield on this portfolio is sustained at over 9%, that's making really a good profitability.
Very clear, sir.
Okay, Ignacio. Thank you very much. That's all we have time for today. Thank you for watching, I guess we'll reconvene in Q2. Thank you, everybody.
Thank you.