Thank you for joining us for Sabadell's results presentation for the fourth quarter of 2019. My name is Cecilia Romero. I'm the Head of Shareholder and Investor Relations. Presenting today, we have our CEO, Jaume Guardiola, and our CFO, Tomás Varela. During our webcast, we plan to spend around 30 minutes presenting the results and another 30 minutes answering your questions. We kindly ask you to limit your questions to two per person. Today's presentation will follow a similar structure to last quarter. Our CEO will start by going through the key highlights of the quarter and the main milestones of the year. I will then provide details on our business performance. Our CFO will then discuss financial results, capital, liquidity, and asset quality before our CEO concludes with some closing remarks, including the outlook for 2020.
I'm now handing over to Mr. Guardiola to kick off the presentation. Good afternoon, Mr. Guardiola.
Thank you, Cecilia. Good afternoon, everyone. This year, we have earned a total net profit of EUR 768 million versus a net profit of EUR 328 million in 2018. During the fourth quarter, we recorded net results of EUR -15 million. This followed the closing of EUR 8.2 billion of real estate disposals that entailed extraordinary provisions totaling EUR 72 million net, as announced last December, which affected our results. Return on equity for the year was 5.9%, while return on tangible equity reached 7.4%. Tangible book value per share increased by around 6% above our guidance. Furthermore, I'm pleased to announce that our Board has approved a final dividend of EUR 0.02 per share, which brings the total yearly dividend to EUR 0.04 per share.
This is EUR 0.01 higher year on year and implies a circa 40% dividend payout on profit, excluding the capital gains from Solvia and the consumer loan securitization. Overall, our core banking performance in the quarter was good. Gross loans and performing loans both increased once again year on year. Core banking revenue show ongoing resilience to the current interest rate environment and continuing with its positive trend, supported by increased volumes and a strong growth in fees, which were up 7.6% year on year. Our efficiency ratio for the year was 55.6%. Our risk profile also continued to improve. Sabadell Group's NPA ratio was brought down once again and stood at 4.8% at year-end, while NPL ratio was 3.8%, both improving considerably year on year.
Recurrent cost of risk for the year stood at 52 basis points, following an increase in the fourth quarter, due mainly to a higher level of NPL write-offs and provisions related to a specific single-name NPL exposures in the period. This quarter, we made significant progress in our balance sheet de-risking, closing several institutional real estate portfolio disposals, which mean that a considerable amount of problematic assets were transferred out of our balance sheet. All NPL disposals announced to date have now been closed, with the single exception of our real estate developer disposal, which we are on track to close this year. Furthermore, our liquidity remained strong with a coverage ratio of 172%, which was up quarter on quarter, despite a TFS early repayment of GBP 1.5 billion, while the loan-to-deposit ratio stood at 99%.
Our fully loaded CET1 ratio continued to show good progress in the quarter and increased by 34 basis points to 11.7%. The pro forma ratio increased by 76 basis points to 12.1% in the quarter, including the benefits of the disposals of our asset management unit, which I will review in more detail later on in the presentation. Looking at the year as a whole, I'm pleased that we have achieved our key priorities in 2019. Overall, our business performance has been good, and core banking revenue has shown resilience in the current interest rate environment. We execute our NPA plans by decreasing our NPA stock by approximately EUR 1 billion in the year, which brought the group NPA ratio down by 78 basis points to 4.8%. We also delivered on our commitment to close all of the institutional real estate disposals announced in 2018 before year-end.
Our cost of risk also improved significantly year-over-year. We have rebuilt our capital from CET1 ratio of 11.1% in December 2018, adding more than 100 basis points in the year. Sabadell's fully loaded CET1 pro forma stood above our medium-term target of 12% at the year-end. In the U.K., TSB regained commercial momentum and is rebuilding its reputation. Moreover, in 2019, TSB made several changes to its leadership team and presented a new strategic plan. TSB is now ready to start a new chapter of growth. Finally, we have delivered on our promise to increase tangible book value by more than 5% in the year, and we have also declared a dividend of EUR 0.04 per share. Moving to slide six, here you can see our results versus our year-end guidance.
Our NII ended the year in line with the lower end of the guidance range when excluding the securitization of a consumer loan portfolio, which reduced net interest income by EUR 19 million in the year. Our fee revenue continued to post growth in the high single digits, in line with our expectations. We also achieved our trading income guidance, even when excluding the gains on the securitization and the impact on trading income of Sareb's subordinated debt impairment incurred in the year. Our recurring cost of risk was slightly above the guidance of 45 basis points, mainly due to an increase in NPLs provisions for specific single name exposures and for write-offs. TSB's contribution in the year fell short of our guidance for TSB to make a small positive contribution.
This was driven by restructuring another one-off charge in the year, some of which were still related to migration, as we explained in the presentation of TSB business plan in November. Taking all of these developments into account, we ended the year slightly below our return on equity guidance at 5.9% reported, and 5.2% excluding one-offs, but ahead in terms of the guidance for tangible book value per share growth and capital. Moving on to business performance. Looking at our performing loans by region, you can see on page eight that loans grew quarter-on-quarter and year-on-year across all geographies. Volumes in Spain, including foreign branches, increased by around 1% in the quarter. In the year, volumes in Spain increased by almost 3%, including a strong growth in foreign branches, both in the quarter and over the year.
TSB volumes grew at a similar pace to the group as a whole, by 0.7% in the quarter and by more than 3% year-on-year, showing that TSB commercial momentum is increasing. Volumes in Mexico returned to growth in the quarter at almost 3% and were up by approximately 8% year-on-year. Overall, group performing loans grew by 0.8% in the quarter and by almost 3% year-on-year. On the right-hand side of this slide, we show our business distribution across geographies. The UK represents 26% of our performing loans and 15% of our risk-weighted assets, so it is currently not contributing to profit. As explained in our TSB business plan presentation last November, we expect the UK to achieve a 7% recurrent return on equity by 2022, which will significantly boost the group's profitability. Slide nine shows customers balance sheet excluding TSB.
On the left-hand side, you can see the breakdown of performing loans. Overall, performing loans increased by 0.8% in the quarter and increased by 3% year-on-year. Corporate SMEs, mortgages, and consumer lending were the main drivers of growth, both in the quarter and in the year. On the right-hand side of the slide, you can see that our customer funds increased by over 1% in the quarter and by 3.5% year-on-year. On balance sheet funds increased by 2% in the quarter and by circa 6% year-on-year. This growth is mostly driven by site accounts. Off-balance sheet funds decreased by circa 1% in the quarter and by circa 2% year-on-year, as a result of the smaller volumes of both pensions and mutual funds. In Spain, we have delivered some business momentum across products during 2019.
New loans and credit facilities to SMEs amounted to nearly EUR 19 billion, growing by 2%, excluding real estate development. Together with working capital loans granted, we achieved a 4% increase in new lending to SMEs. Sorry. Thank you. The other main activity indicators show high single digit or double-digit increases. Our commercial momentum is reflected in our market share growth in the main product segments. For instance, customers loans were up 7 basis points, excluding EUR 1 billion of consumer loans securitized in September 2019. Retail payment services turnover was up 70 basis points, life insurance premiums increased by 98 basis points. You can see that our market share of customer funds has continued to fall slightly by 2 basis points year on year.
This is an improvement on the previous quarter, as the change in mutual funds was partially offset by an increase in the market share of customer deposits. In particular, as we'll explain in the next slide, the agreement with Amundi will be a key lever to improve our performance in this segment. As you may already know, on January 21, we announced the disposal of our asset management unit, as well as long-term strategic partnership with Europe's leading asset manager, Amundi. This transaction will allow us to further build out our position in the savings and investment segment in Spain. It would also help us to increase penetration and accelerate growth in the medium term. By providing our customers with access to a stronger, broader, and more diversified investment proposition than the one we had before.
This includes an outstanding ESG offering as we step up our commitment to responsible investment. It also provides us with access to Amundi world-class expertise on retail networks and will allow us to leverage their scale. This will reduce investment needs and expenditure in the future. By joining forces with Amundi, we will also be able to strengthen our digital capabilities for this specific segment, and have more time to fully focus on client acquisition and relationships. The perimeter sold includes EUR 21.8 billion of assets under management and earn a net income of EUR 34 million in 2019, including EUR 65 million in net income and EUR 17 million of operating and staff expenses, among others. The transaction represents a capital gain of EUR 351 million net of taxes, adding 43 basis points of fully loaded CET1. Additionally, an earn-out of up to EUR 30 million may be received and will be payable in 2024.
EUR 15 million of this capital gain is subject to specific guarantees over the length of the agreement. Accordingly, 7 basis points out of the total 43 basis points impact on CET1 will be accrued over the next 10 years rather than realized at closing. Closing of this transaction is expected for the third quarter of this year. Regarding customer experience and service quality, this continues to be one of our key focus areas, and one of our main competitive advantages. We continue to perform better than the industry average in terms of service quality, and we retain our place as the bank with the highest net promoter score in Spain for SMEs, and the second highest NPS for personal banking. Turning now to TSB, which continued to regain commercial momentum this quarter.
On the asset side, net lending increased in line with last quarter, posting an increase of just over 1%, as strong growth in mortgage applications continued to generate higher completions and customer retention levels improved. Core mortgages, once again, saw one of the highest quarterly growth rates post-migration at 1.5%. Unsecured lending was stable in the quarter as we continued to increase our product service offering through digital channels. Year on year, net lending was up 3.6%, driven by an improved service offering and a wider product range in mortgages. On the liability side, customer funds increased both in the quarter and the year with growth across products. Business banking deposits increased by 9.4% in the quarter, partially reflecting the incentivized switching scheme, part of the RBS incentives, but mainly due to a new competitive savings proposition.
Year-on-year, customer funds increased by around 4%, with growth across segments, driven mostly by current accounts and also by savings. On these slides, we show TSB's improvement in business momentum through the year. As expected, due to the end-of-year seasonality, new mortgage lending and new unsecured loans decreased in the last quarter. Year-on-year, new mortgage lending increased by over 21%, and new unsecured loans by 37%. Regarding the bank's net promoter score, we are pleased that both bank and mobile NPS experienced significant growth in 2019 of around 20% points each, as TSB continues to rebuild its business reputation. On these slides, you can see that our digital transformation is progressing at a good pace. The group digital and mobile customers were up 5% and 14%, respectively, year-on-year.
Moreover, digital sales of unsecured loans in Spain increased by 50% compared to the previous year and accounted for 39% of the bank's total sales. Digital sales in the U.K. also improved compared to last year. They represent 45% of TSB total sales and have grown by 42% year-on-year. Regarding strategic alliances, I would like to highlight that we have signed a 10-year agreement with IBM, that we are consolidating our IT suppliers. This partnership will make things easier for us because it simplifies our operating model. Furthermore, the deal improves our IT scalability, resilience, and security, and enable us to launch new digital products faster and more effectively. Finally, the agreement will result in annual IT savings. I will now hand over to Tomás, who will discuss financial results, capital, liquidity, and asset quality.
Thank you, Jaume, and good afternoon, everyone. Regarding our quarterly results, as Jaume said, we reported a net result of EUR -15 million in the quarter. Reported results were impacted by seasonal items typically incurred in the fourth quarter, such as the tax on deposits in credit institutions and the deposit guarantee fund payments, as well as unusual items such as the provisions associated with the closing of the NPA disposals and the earn-out received on our insurance business disposal. In total, these items amounted to EUR -143 million net. You can see the detail on the lower left-hand side of the slide. In terms of the performance of our recurring business, the commercial dynamism within the bank continued. Expenses were higher in the quarter, although the annual total was in line with expectations. The same thing as per the expenses being higher in the quarter happened in 2018 last year.
It's a seasonality effect, nothing that signals any change in trends or any structural factor. There is some degree of seasonality here, as I said. Also in terms of provisions, they were also higher. In this case, mostly driven by single name NPL exposures and higher NPL write-offs. Overall, we reported an annual net profit of EUR 768 million, which is significantly higher year on year. Reported net profit was positively impacted by a net EUR 97 million of unusual items. It is also important to highlight when looking at year-on-year comparisons, that net interest income, operating expenses, and amortizations were influenced by the implementation of IFRS 16, as we explained already at the beginning of the year. It started on January 1st, and it's gone all the way through the year. You can see the detailed summary on this page.
Moving on to the evolution of net interest income. Group net interest income dipped by 0.9% in the quarter, and by 1.8% in the year in constant FX. Looking at the quarter, NII was positively driven by volumes, by FX, and tiering-related savings, and cheaper wholesale funding. Factors which reduced NII included our securitization and the interest rates levels. Overall, group average volumes ended the year slightly above our latest guidance, reaching EUR 142 billion, as you can see on the right-hand side, and excluding the execution of our securitization in the third quarter. Finally, as I will explain in more detail shortly, in terms of sensitivity to interest rates, based on the balance sheet as of the end of this quarter, an additional decrease of 10 basis points in all relevant rates would affect NII by EUR 18 million.
This is EUR 18 million, one, eight, in the 12 months following the rate cut. Frontbook yields across products this quarter have been lower, influenced by the mix of new lending and the interest rate environment. In particular, in mortgages, frontbook yields reflected a lower contribution of fixed-rate mortgages to the new volumes in terms of weight on new volumes, along with falling long-term market rates, which hit a new low in the second half of 2019. It is important to note that some of the new mortgages here were priced in Q3 when rates were lower, since it takes some time for mortgage granting to be completed. In addition, SMEs and corporates' new production included a higher level of corporate transactions this quarter, which are usually priced at lower yields. Finally, consumer loan yields were affected by a larger proportion of loans to Expansion current account .
You may remember that this is a prime customer current account. Loans to these customers usually are priced lower on average. Also, auto finance loans, which typically have lower yields as well. The group's customer spread was 3 basis points lower in the quarter, driven by lower yields in Spain, which were mostly explained by the securitization that lowered the average, and rate cuts in Mexico, as well as lower yields in the U.K. In this case, it's as a result of the extraordinary effect of waivers on commissions. Group cost of customer deposits improved considerably quarter-on-quarter, as TSB repriced its current non-savings accounts and as reference rates were cut in Mexico. Overall, group net interest margin remained stable quarter-on-quarter, thanks to tiering-related savings and cheaper wholesale funding.
In addition, it is also worth noting the early repayment of GBP 1.5 billion drawn from the TFS. In this next slide, as we showed last quarter, we highlight the different features that make our balance sheet more resilient to further interest rate cuts. Starting with the asset side, in terms of sensitivity to interest rates, around two-thirds of our lending is not sensitive to decreases in EURIBOR. In addition, the ALCO portfolio, we continue to have a very low reinvestment risk, as only 11% of the portfolio will mature over the next two years. In fact 7% of the portfolio will mature in the first quarter of 2020, yielding 1.2% on average. Moving on to the liability side, it is worth highlighting that the bank has different levers at its disposal to mitigate the effects of interest rates.
Thirdly, we have EUR 39 billion in wholesale deposits, and there is a possibility that there could be a gradual repricing of these deposits. Currently, we pass through negative interest rates to EUR 3.7 billion of these wholesale deposits, which is EUR 1.2 billion higher in the quarter. Secondly, we still have some expensive outstanding wholesale funding liabilities maturing over the next few quarters, of which here we highlight a EUR 400 million Tier 2 issuance with a coupon of 6.25%. This should help us make our wholesale funding cheaper in 2020 despite new issuances. Finally, the new ECB measures that were put in place from October 30th in 2019 are already helping to reduce costs on excess cash balances. In our case, tiering will exempt more than EUR 6 billion of deposits currently at the ECB. Tiering-related savings amount to EUR 32 million in the year.
Based on the details in this slide, our ALCO portfolio's contribution to NII is expected to fall in the first quarter as a consequence of what I just said. The EUR 2 billion maturing, it is then likely to remain broadly stable. On the left-hand side, we show how the amortized cost portfolio has increased over the quarters, limiting the sensitivity of capital to changes in the valuation of the fair value OCI portfolio. On the right-hand side, we show the maturity profile of our fixed income securities portfolio, which shows that only 11% is due to mature over the next two years, with the bulk of these maturities occurring in the first quarter of 2020, as I said.
If we look at the proportion that matures over the next five years, including the 11% that I just mentioned, only 20% matures over the next five years. The average maturity of the overall portfolio continues to be nine years. Group fees increased in the quarter, driven by the positive effect of asset management fee seasonality. The performance year-on-year remained strong at + 7.6%. In terms of the segment evolution, it is worth highlighting that in addition to asset management growth, we saw growth in credit and contingent risk fees in the quarter. Service fees were down slightly as price increases in this segment had already been fully accrued in the fourth quarter. There is a new pricing plan for service fees, including further price increases, which is effective from January 1st, so the beginning of this month.
In the year, fees had a positive performance across all segments, including a modest rise from asset management. On the following slide, we show the positive evolution of core banking revenue excluding TSB. The compound annual growth has been 6.8% over the period 2012 to 2019. Despite EURIBOR , in the same period has dropped by 2019 basis points. Year-over-year at the end of the fourth quarter of 2019, core banking revenue growth was 1% or 1.5% if we exclude the effect of the securitization. These positive results are possible, thanks to our improved structural resilience to interest rates, which we explained earlier on in the presentation. Moving on to the next slide. Group total expenses increased by 4.2% in the quarter, driven by higher general expenses ex-TSB, in particular related to marketing, IT, as well as third-party advisory services.
Also at group level, there was the influence of the appreciation of the pound. Sorry. Amortization was also higher quarter-on-quarter due to a higher level of IT investments. This as expected happens as IT programs tend to start at the beginning of the year and end in the second half. Amortization and investments are usually higher at year-end. On the other hand, non-recurring costs were also higher in the quarter as expected, driven by EUR 26 million of restructuring at TSB. It's worth remembering or highlighting that in the year, non-recurring items included EUR 85 million of TSB-related items, EUR 50 million for restructuring, and EUR 35 million in other charges.
As we outlined at the TSB investor event in November, going forward, about GBP 45 million, in this case, of TSB restructuring will repeat every year up to and including 2022, while the remaining non-recurring of EUR 35 million will not repeat from this year onward. Finally, for those of you looking at the year-on-year changes, it is worth remembering once again that the implementation of IFRS 16 distorted year-on-year comparisons, particularly here between general expenses and amortization. Recurrent provisions increased in the quarter at both ex-TSB and TSB level. In the year, cost of risk improved by 14 basis points. As explained briefly before, ex-TSB provisions increased by more than the average level reported quarterly this year, so in just above EUR 60 million, so higher EUR 60 million than the average quarterly charge of the year.
This was due to higher write-offs, single name exposures, and to a lesser extent, seasonal revaluation of collaterals. The increase at TSB was driven by the recalibration of models, which is policy there, which takes place every quarter. This is what, among other things, the policy consists of for different products and can make provisions a bit lumpy in any single quarter. Overall, the annual charge for TSB was EUR 74 million, which implies 20 basis points in line with expectations and is 4 basis points better year-on-year. On the following slide, in this line on the left-hand side, we show a detailed evolution of both historic and future cost of risk. This is the first time that we provide this breakdown that we hope helps to understand better the dynamics of cost of risk.
As you can see in the chart, while it has improved considerably year on year, we ended 2019 at 52 basis points, which was higher than our 45 basis points guidance for the year. The bulk of recurring cost of risk in 2019 was driven by new NPL entries and NPLs with vintages of less than two years. You can see how this was 27 basis points in 2019, 26 basis points in 2018. Pretty similar. NPA-related expenses contributed 12 basis points in the quarter, sorry, in the year. Excluding this NPA-related expenses charge, which some of our peers don't include in provisions, our cost of risk in 2019 would be 40 basis points. In addition, it is also worth noting that expenses and foreclosed assets provisions have been an important driver of the improvement year on year, thanks to the strong progress made in reducing the NPA portfolio.
Going forward, we expect the recurrent level to improve slightly in 2020, driven by fewer NPLs and foreclosed assets as we continue to clean up our balance sheet. The regulatory item to consider in 2020 is the ECB expectation for prudential provisioning for NPLs. Part of this requirement will be covered by our recurring cost of risk in the year, as every year. It's part of the ordinary course of business. In addition, new actions to manage NPL exposures proactively may reduce the requirement and add anywhere between 5-10 basis points of non-recurring cost of risk. Depending on these two components, and on the final scope of the application of the guidelines. The guidelines may have exceptions on the application of the stock, depending on a set of criteria established by the regulators.
The final effect on CET1 could be up to 20 basis points, so less depending on how it's been dealt with through cost of risk within the ranges that I just explained. This will be absorbed by capital generation in the year. Moving on to asset quality, this slide shows a snapshot of the details of the final closure of the portfolios, commercially known as Coliseum, Challenger, and Rex to Cerberus. The transaction involves 61,000 units with a gross value of EUR 8.2 billion. Of these, there is a small amount of EUR 1.8 billion corresponding to 15,000 units that is subject to third party's right of refusal. This right can be exercised during approximately six months following the closing date of the transaction. If the third party doesn't exercise its right to acquire the asset, the asset will be transferred to Cerberus under the agreed terms.
Exercising this right cannot alter the financial impacts of the transaction for Sabadell, as the disposals have been now closed. In terms of the balance sheet, as a result of the deal, our assets available for sale have fallen considerably in the quarter. In addition, we have created an amount receivable to reflect the value of the assets with rights of refusal, which will be liquidated once these rights expire. Finally, as we have already discussed earlier in our presentation, there was an impact on results of a net EUR 72 million from extraordinary provisions related to the closing of these transactions. This comprised a net EUR 52 million, due to the implementation of certain contractual clauses relating to the assets involved in the transaction, and a net EUR 20 million in costs related to the assets being transferred, but not attributable to the sale. Moving on to the next slide.
Our NPL and NPA ratios have improved once again this quarter to 3.8% and 4.8%, respectively. The non-performing loans ratio improved in the quarter as recoveries exceeded new NPL inflows. The stock of NPLs was reduced by EUR 250 million. In terms of foreclosed assets, as explained earlier, we closed a number of NPA disposals, which means that the corresponding amount of assets available for sale, highlighted in gray, has been completely removed from our balance sheet. Overall, our foreclosed asset stock increased by EUR 153 million to EUR 1.2 billion in the quarter. It is also worth noting that the foreclosed asset stock composition improved once again this quarter, and that is the reason for the lower coverage. Overall, the stock of NPAs, which includes NPLs and foreclosed assets, was down by EUR 98 million in the quarter, while NPA coverage was at 47%.
As you can see on the slide, our asset quality metrics are in line or better than those of our peers in Spain. Turning now to liquidity. At the year-end, the group continued to have a strong liquidity position with an LCR of 172%, a loan-to-deposit ratio of 99%, and high-quality liquid assets of circa EUR 46 billion. In terms of TLTRO II, we currently have EUR 13.5 billion outstanding, and in terms of TFS, we have GBP 4.5 billion outstanding after having repaid GBP 1.5 billion ahead of time this quarter. With regard to TLTRO III, no funding has been drawn at this point, and we have no plans to use it at the moment. Future withdrawal will depend on our euro balance sheet evolution.
With regard to our funding plans, our eligible MREL securities as a percentage of the TLOF stands at 9%, which is above the new requirement of 8.3%. Our funding plan for 2020 will consider the following objectives. First, AT1 and Tier 2 issuances, as needed to keep these capital buckets full. Second, senior non-preferred debt issuance of approximately EUR 1.1 billion-EUR 2 billion to build up our additional MREL buffer. Third, EUR 2 billion-EUR 3 billion of covered bonds issuances, mainly subject to our euro balance sheet evolution. Moving on to capital. On the following slide, we show the evolution of the group's fully loaded CET1 ratio in the fourth quarter, as well as our pro forma position at the end of the year.
Starting from the reported fully loaded ratio at the end of the third quarter, in the left, and following the graph to the right, we show the different drivers and capital impacts in the quarter. First of all, the organic capital generation, including net profit. Net profit, in this case, excludes extraordinary provisions associated with the closing of our NPA disposals that are deducted from the contribution of these disposals in the slide. It includes also dividends, intangible assets, other organic deductions, and a decrease in organic RWAs. This total added 1 basis point in the quarter. An increase in deductions, driven mainly by fewer tax loss carry-forwards being reverted in the quarter, deducted 3 basis points. The closing of the NPA disposals added 16 basis points.
Additionally, the remaining capital gains on Solvia and the securitization, which were converted from accrued dividend into capital at year-end as expected, added 8 and 4 additional basis points, respectively. Finally, the payment of the treasury shares dividend announced last quarter added 7 basis points in the quarter. Taking all of this into account, our fully loaded CET1 ratio on a reported basis stood at 11.7% at the end of the year. In addition, there are a number of factors that bring us to the pro forma ratio. Firstly, the sale of our real estate developer announced in August and expected to be closed this year, will add 5 basis points. Lastly, the disposal of Sabadell Asset Management will add 36 basis points by closing, excluding the future value from the earn-out. These elements will bring our fully loaded CET1 ratio to 12.1%.
This is around 100 basis points higher than our reported CET1 a year ago. To conclude my part of the presentation, on the following page, you have the details of our current reported capital base versus requirements. The strong capital generation in the quarter has allowed us to increase our MDA buffer by 40 basis points. Our reported phase-in total capital ratio stood at 15.7% at the end of the quarter, 256 basis points above our requirement of 13.1%. Our fully loaded total capital ratio stood at 14.99%. Both of these ratios would be around 37 basis points higher on a pro forma basis, as indicated in this slide, if we take into account the new Tier 1 transaction completed in January this year. Our phase-in leverage ratio stood at 5.01% at the end of the quarter.
With this, I will hand over to Jaume, who will conclude our presentation today.
Thank you, Tomás. To end our presentation today, I would like to give some key highlights of the outlook for the year ahead. In 2020, there will continue to be challenges that put pressure on the sector's profitability. Negative rates are pushing banks to find new sources of income and to rethink the way in which we have traditionally operated. Expenses will continue to be linked to compliance, regulations, and technology. NPL trends have ceased to improve materially, and regulation is still consuming a lot of management time. Key regulatory developments this year include ECB provisioning guidelines, EBA guidelines, and CRD V Article 104, among others. Finally, competition to capture and retain customers is not getting any easier. With this context, our priorities for the year are as follows. First, preserve revenue growth and keep up our business momentum, including containing costs. Second, continue to improve our non-performing exposures.
Third, deliver on the restructuring of TSB, as outlined in the plan presented last November. Fourth, maintain adequate capital levels. Last but not least, continue to create value for our shareholders. With this in mind, we have a clear strategy to help us overcome the market's challenges and deliver on our priorities. In Spain, our objective is to continue to focus on our core businesses. We aim to contain costs in a number of ways, including branch closures in the year. Last year, we closed more than 40 branches, and in 2020, we will close about 145. We will also continue to find ways to remove residual problematic exposures from our balance sheet at a reasonable speed and an appropriate cost.
At the same time, we will focus on retaining our place at the top of the leaderboard in terms of customer experience in key segments by continuing to digitalize and improve the way we interact with our clients. In the U.K., first and foremost, our aim is to improve the cost structure of the bank in a sustainable way by executing on the restructuring plan launched last year, which include more than 80 branch closures. We will also develop new digital capabilities that will simplify and improve customer experience. Finally, we will also focus on growing our revenues by building on the momentum of our retail business and expanding our business banking proposition.
In Mexico, our main objectives are to increase the profitability of our existing businesses, to focus on providing best-in-class services to corporate and SMEs customers, as we do in Spain, and to develop our retail banking business through new strategic partnerships. It is also important to highlight that this strategy lays the foundation to realize the significant potential for improvement in the U.K. and Mexico return on equity in the medium term, which will be a key driver of group profitability. In this regard, we have normalized return on equity of 7% in Spain, and therefore normalized levels of TSB profitability will raise the group's overall return on equity to a higher level. To finish our presentation, I will explain how all of this should translate into our financial performance. Our expectation is that fee growth and cost containment will support returns next year.
We expect core revenue and expenses to grow in the low single digits. As explained by Tomás earlier in our presentation, we expect recurrent cost of risk to be slightly improved. Taking all this together, recurrent return on equity is expected to remain broadly stable. Finally, our intention is to continue to grow tangible book value and maintain our CET1 at around 12%. With that, I will now hand over to Cecilia for the Q&A session.
Thank you very much, Jaume. Operator, can we now open the line for a round of question, please?
Thank you. The first question is coming from the line of Álvaro Serrano from Morgan Stanley. Please go ahead.
Hi. Good afternoon. Two questions, one on provisions and the other on TSB, please. On provisions, you've just closed the EUR 8 billion transaction. I think there was an expectation, or at least I had the expectation, of a material reduction in provisions, and they're actually going to go up. Can you maybe explain to us in a bit more detail the ECB supervisory expectations, how that plays? I thought most of the charge would have been via capital directly. Maybe if you could spend a bit of time telling us, explaining what the underlying sort of changes there are and why the recurrence is not going to go down as much. Maybe beyond 2020, how that's going to change your basic steady state or normalized provision charge. The second question on TSB.
As you know, there's changes on overdraft fees, and also of late, the competition in mortgages has been particularly sort of intense. The Bank of England didn't cut rates today, but it does look like there's a bit more pressure on margins than we previously anticipated. Can you maybe explain what the updated dynamics for this year in TSB are, and if you're going to be able to remain profitable this year? Thank you.
Thank you, Álvaro. As for the first one, the dynamics you refer to, the views on how the expectations of the ECB would play out, particularly pointing out to the views where they would play out through the direct charge on capital. This is true, and no change or in any way, maybe more clarifications will be made. Of course, it's always above the level that is provisioned for or over the stock that remains outstanding in the balance sheet. This doesn't correspond to a change in the ECB expectations. The ECB expectations are clear, are provided or shown through the policy or the requirements of complying with the specific percentages of coverage of the stocks as per the rules. There is no more change or more interaction than this.
The increase, it's true, we expected to the cost of risk, the recurring cost of risk to be lower this year. The reality is, we've seen this increase in the fourth quarter. It doesn't have to do directly with an expectation of an increase in the cost of risk per se. It has been due to, as I said, we have policies to examine, assess the different portfolios, the different exposures. Over the models in a different set of criteria. We also apply the policies of assessment and review over exposures and these basically two things, and another third that I've mentioned, have occurred, and the outcome of these reviews is known when it happens. On average, it doesn't change things. Actually, the impact of this is upfront in maybe effects that could have been seen over time.
As you can see in the slide that we show, there is an implicit view that the recurring cost of risk will continue to improve, and also that there can be some add-on in terms of non-recurring cost of risk due to proactive actions of improving the stock. The reality is that we had an expectation of cost of risk in 2020 that we've exceeded. Also in 2019. It was before knowing a number of things. It's true that it's clear that emphasis needs to be put on quick reduction of NPA volumes. This means sometimes to, in this proactivity, to upfront charges and losses, and it has an effect of saving potential impact on capital of the stock regulation. It's always been so. The business as usual and recurring management of the stock always saves volumes and coverage once the policy is there, right?
In this environment, of course, all things considered, and after having heavily de-risked the portfolio, a number of new strategies appear. On average, the speed up of reduction should be quicker. This may need or may mean some additional, so to speak, non-recurrent charge. This is the rationale behind all this. It's not that there's been a change in the ECB expectations other than what we already know. Since the moment that the requirements or the guides were issued. In terms of the TSB overdraft fees changes, when we issued our strategic plan presentation, of course, we were very conscious of this, and this was taken into account. Different scenarios on the level of impacts were considered, also mitigants. It was all embedded in the outlooks that we presented. The situation doesn't represent a change from what we presented in the strategic plan day.
Pressures on margins are still there, more or less the same. For some time, they appear to ease a little bit, but keep being challenging. Yes, today's decision by the Bank of England is a positive, and we'll see how, in the future, this unfolds.
Thank you. Next question, please, operator.
Next question is coming from the line of José Abad from Goldman Sachs. Please go ahead.
Hello. Good afternoon. Thank you, guys for the presentation. Two questions from my side, credit quality and capital. On credit quality, a follow-up question here. I know that you made a point that you don't see a genuine deterioration in credit quality, actually the expected decrease in cost of risk is due to policies and single name exposures and so on. Could you tell us at least whether this is actually taking place in specific sectors? If I can be more concrete, if you could tell us where the cost of risk for your consumer book is today and where it was in Q4 2018. A follow-up question on this as well is, are you planning to make any further consumer securitizations going forward, like the one you closed in September last year?
My second question is on capital, whether you could give us some color on your potential Basel IV exposure impacts. Thank you very much.
Okay. Thank you, José. No, we haven't seen changes in patterns as compared with 2018. You see in the breakdown that actually, the most significant proportion of cost of risk comes from the ordinary course of business in terms of dealing with new entries and vintages lower than two years. This is where we put the focus to keep saving cost of risk. In particular, you were asking about consumer lending. The asset quality of the portfolio of consumer lending that we sold actually was outstanding, and we haven't seen changes in this. We are now disclosing further and more granularity on the segments, but I can tell you that we haven't seen changes in the pattern of cost of risk in consumer lending. Of course, we have, and we've talked about this in our interaction often.
We have a high weight of corporates and SMEs, and therefore, cost of risk for us needs to reflect this, as we have also the highest customer spread, and NIM, and so on. The net is positive and rewarding. Particularly in consumer lending, we haven't had a change in pattern, and not a particular change in pattern in any other segment. In terms of, can we do more consumer securitization in the future? It will depend on circumstances. I won't say we won't, because we see it as a particular effective tool to keeping our strategic position with our customers and finding a very profitable way of optimizing the use of our capital, so optimizing our asset composition. There is nothing definitive, but I won't say that we can't do more in the future.
Capital Basel IV, a s nothing changed there in terms of my view is that, in Spain, in general, as for credit risk, impact should be none, or I don't know, for someone, very little. For us, all our analysis projections is no effects from credit risk, neither from market risk. Operational risk is always a question mark. The straightforward application of the known regulation could have some impact in terms of 35 basis points, something like this or above. This doesn't take into account all the national discretionalities that we don't know how they will unfold. The expectation is that there will be a mitigants to this, and therefore, we keep being in the same place. This anyway is for 2022 onwards with phase-in and so on and so forth. Still, I think Basel IV is not a significant issue.
Thank you very much, José. Please operator, next question.
Next question is coming from the line of Carlos Peixoto from BPI CaixaBank . Please go ahead. Your line is open.
Hello. Good afternoon. I'm sorry, just to take a step back again on the cost of risk and the guidance on cost of risk that was conveyed. Putting it in numbers, should we assume that basically you expect cost of risk in 2020 to be somewhere between 52-62 basis points, with the second one being the figure including that leeway of 5-10 basis points that you mentioned for additional NPA management procedures? On the second question, I would like to touch M&A. We have seen some recent comments from the group chairman pointing towards M&A as a sort of a solution for the banking sector and something that apparently Sabadell would be interested in, or at least that was my interpretation of it.
I would like to have more details on what type of operations would you be contemplating, and whether indeed that's the only pathway you see at this stage to improve profitability. This year, you're guiding us towards 5% return on tangible equity, my quote on return on equity. My question is basically, in the absence of M&A, what layers could you have to improve profitability in a way to cover your cost of equity? Thank you.
Thank you, Carlos. I will answer the first one and the last piece of the second one. Jaume will answer the second one. In terms of cost of risk, we haven't given the precise number in terms of guidance as you've seen. I think using the proportion of the bar, more or less, you all can come up with a range of numbers, and note that in terms of the add-on, we are saying between 5 and 10 basis points. It means between 5 and 10 basis points, not necessarily the 10 or the 5 basis points, the range. Note also, please, that with this in mind, taking this, including this, and embedding this, we've given guidance on recurrent ROE for the year. We are seeing with this, the ROE broadly stable, and the CET1 to remain around 12%. I think it's important to consider all these factors together.
Actually, if we see this higher cost of risk than what we had thought of, is linked to more proactive management of the stocks of the portfolios. We should see a relevant reduction of the level of the portfolios. The focus is on managing this. We don't want to get the cost of risk wrong. We are not allowing any risk of going off track on this. This comes up to the ROE. Please note that we've been talking about ROE in Spain being around seven or slightly above seven. Of course, we have TSB not contributing, and we have Mexico around 3%. I think the plan in TSB and the evolution in Mexico are drivers to improve this. These are probably the main drivers to make ROE grow. Jaume is going to answer the.
Well, regarding these questions about the comments done by the chairman, I think that his comment was more a theoretical approach to consolidation, in line that consolidation makes sense from an industrial point of view, especially in a moment of the very low interest rates. I think that the position of the bank is that for us, consolidation has always been an instrument driven by strategy, in the sense that it requires a strategic sense. We are creative for our shareholders.
And having an execution risk that is manageable. The position of the bank at this moment is that we are absolutely focused on the delivery of our strategic plan, and we are not contemplating any specific M&A in Spain.
Thank you, Jaume. Thank you, Carlos. Operator, please, next question.
Next question is coming from the line of Sofie Peterzens from JP Morgan. Please go ahead.
Yeah. Hi, here is Sofie from JP Morgan. I had a question on your NII bridge that you give on slide 19, quarter and quarter. It looks like the volumes helped your NII by EUR 14 million, while the securitization reduced your NII by EUR 15 million. The securitization, I guess, was EUR 1 billion, and the volumes are slightly above EUR 1 billion in this quarter. Does that mean that the new volume growth that you're putting on your book has over 7% yield because the securitization basically had 7.4% yield? How should I read this graph, especially the volumes and the securitizations? Can you also talk about your NII? Are there any one-off items or any extraordinaries that we should be aware of? Just a quick follow-up.
On the cost of risk, when you mention the ECB prudential provisioning, do you refer to the calendar provisions that you basically need to provide 100% of the unsecured book within three years? Is that the impact that you basically expect it, or the cost of risk to basically be driven by the new regulation? Thank you.
Thank you, Sofie. The volume figures in slide 19 show the average volumes. The securitization wasn't there for the whole quarter, and therefore, around EUR 1 billion of the securitization hasn't appeared at all in this. It's not included there at all. Therefore, the EUR 142 billion includes new lending. Please note that we have created an exposure for the closing of the portfolios of around above EUR 1 billion for what we described is the fair refusal right, and this is included here. It's been excluded. It has very little impact in the average volumes because it was towards the end of the quarter. Actually, those volumes come from the evolution of the business.
They have contributed not very much to NII, given that they are average volume. There is a delay in contribution to NII, and therefore, it comes more into the first quarter of next year. It's true that the 7.4% yield of the securitization, and I refer to this in the presentation, is higher than the average yield of the new volumes, and therefore, we've noticed this in the loan yield, as is shown in the slides. No other one-off items on NII. Nothing in particular. In terms of cost of risk, you are asking, what about the calendar? Actually, it is the calendar that was set by the ECB in their expectations, which drives the impacts on those volumes that are older than the given vintages in the calendar expressed by the regulators, and that don't get to the coverage level required.
The regulation on capital fills this gap. It applies to the remaining volumes that are older than the vintages required, and by the gap from the coverage to the required coverage. All this is factored in the guidance that we gave. In the slide where we provide the breakdown of cost of risk, and we refer to the different impacts and the absorption of these in cost of risk of the year for next year, and the potential up to these 20 basis points, that is up to, probably less, depending on how much we've absorbed through cost of risk and the efficiency in doing so. This is all, of course, the calculation is done granularly.
The first year of application of the calendar, of course, takes on all the stock and therefore, all the reduction on a stock and all the catch-up in the coverage done through cost of risk makes all the effects disappear going forward. From the second year on, the impacts are significantly lower and the management of the stocks keeps reducing and reducing the impacts.
Thank you very much, Sofie. Just reminding you, please.
Next question is coming from the line of Marta Sánchez Romero from Bank of America. Please go ahead.
Thank you, operator.
Thank you very much for taking my questions. On your guidance on capital, what are you factoring in terms of dividends? Do you expect to return to full cash in 2020? Do you have a cash payout target? I've got lots of questions. On the deposit cost improvement this quarter, is it largely related to Mexico? You still have EUR 3.6 billion loans in the country, roughly EUR 1.1 billion, if I'm not mistaken. Do you plan to close that funding gap? Just a clarification on your guidance. Could you split the revenue growth between Net Interest Income and fees? Are you keeping your ALCO portfolio flat next year? How much do you expect the new pricing policy to add to the fee line? Finally, a clarification on costs.
The low single-digit growth applies to the reported cost in 2019, so to the EUR 3.3 billion you've reported. Thank you very much.
Thank you, Marta. The dividends, for the guidance on capital, what we are factoring is the continuity of our current policy. As we expressed it already in the past, so between 40% and 50% dividend payout, excluding the positive capital gains, in cash, no changes. In the future, regarding cash, it could be dividends, or now that the path of share buybacks has been clarified, it could be either of the two, but the policy is in cash, and there is nothing decided on that. As I said, as per the payout, the policy remains the same. Deposit cost improvement, Mexico, as I said, plays out, also the other geographies as well. Mexico, the closing of the funding gap keeps going the same way that we've been doing. Nothing particularly material or no structural change, particularly material to highlight there.
Revenue growth, not in breakdown, not precising figures, but volumes support NII stability throughout the year, and fees have a higher growth than the average that we are guiding here for. The ALCO portfolio, as was implicit in the presentation, will not suffer significant changes. There is this maturity in the first quarter. We will be opportunistic in the market, seeing options. We might refill this, but we are not thinking of changing dramatically the size of the portfolio. In terms of reported costs, so the guidance on cost is on the reported.
Thank you very much, Marta. Next question please, operator.
Next question is coming from the line of Britta Schmidt from Autonomous Research. Please go ahead.
Hi there. A couple of questions, please. Coming back to the provisioning guidance. How much of the non-recurring cost of risk will therefore recur in 2021, 2022, 2023? The capital impact of -20 basis points, shall we expect that something will come in the following quarters as well to build up to an overall provisioning level? Do you expect there to be an offset by the non-recurring elements in loan losses? Slightly related to that, the return on equity guidance to a stable recurring return on equity, am I right in assuming that this then excludes any non-recurring items from the cost of risk, and the base for that is the 5.2% reported for 2019? Lastly, just wanted to know, how do you treat the asset management operation in your revenue and your cost guidance?
Am I right in reading that a half year of contribution is included in that guidance of these cost rates? Thank you.
Sorry. I realized that the micro was off. Sorry, Britta. Original guidance, this is for 2020. As we keep managing down the portfolio even quicker, we reduce the cost of risk. You see that we've reduced a number of items in the breakdown. We've reduced related costs. We expect to keep reducing the component of less than two years of vintage in the portfolio. You will have noticed that in terms of the portfolio older than two years, the contribution to cost of risk is small. Maybe it's worth clarifying that there is a charge there, and also, netting it, there is the amount of recoveries from write-offs. This, anyway, keeps being a reduced amount. The portion of the non-recurrent that we are giving as guidance for 2020, we don't see it, I don't see it, to be replicated in 2021 and going forward.
This needs to be taken into account in the framework that we are not providing guidance for 2021 onwards, because this will be part of our new strategic plan that we will present in due time. Okay? In terms of the quarters, I think the most appropriate way to look at it is to consider the quarters as average, the quarters of this year, for 2020, as an starting point. Return on equity, we clarify that is recurring ROE, that it's aligned with recurring cost of risk. In the guidance that we give around capital, there is a margin room for parts of the non-recurrent. Everything is quite aligned. How would we treat the asset management operation? Assuming that, as we said, we expect it to close likely in the third quarter.
We think that up until that moment, the contribution of the asset management business will be accounted for through the different lines of the P&L. Then when the transaction is closed, the accumulated net income coming from these months that the operation will have kept going, will be deducted from the level of capital gain that we've announced. The contribution, either to revenue or costs, therefore, to the guidance, is relatively limited, but because half of the year is already included in the P&L going forward. Anyway, the amount of it is limited. This is not a material impact.
Thank you very much. We have time for one more question. Operator, please.
The last question is coming from the line of Andrea Filtri from Mediobanca. Please go ahead.
Thank you for taking my question. I wanted to ask, first of all, about capital. Why do you guide CET1 at 12% in 2020 if you start from 12.1% and you consider 20 basis points of hurdles from NPL guidelines? Are you changing the dividend policy, which I think before you said you aren't, or are there other hurdles that you are embedding within your guidance on capital? Then wanted to ask you about Article 104a of CRD V. You have hinted at that. Just wanted to understand, in light of your capital repair of 2019, how were you considering using this instrument? What do you need to see to put it into place? Is it more of a potential buffer against further hurdles like Basel IV, or could that change your capital return policy in the future? Thank you.
Thank you, Andrea. In our guidance, we are saying around 12% for capital. Starting, as you said, pro forma in 12.1%, you need to consider the guidance we are giving in terms of recurring ROE, cost of risk. With this, and with our track record in how our RWAs evolve with volume growth, you can come up with some views on capital generation. The 20 basis points we are saying is, as I said, is up to, and depending on how much we absorb within the guidance we've given in cost of risk and how efficient we are in reducing the stocks. With all this, I think you can get to the 12% that we are not giving us a precise and absolute target. We are saying around.
It's not that we are saying that if we are above 12% a little bit, we will give back the excess, or if we are a little bit below, we will do something to get back to the 12%. If we are 10 basis points up or 10 basis points down, it doesn't mean that we will do something very quickly and very proactively. This is sort of a corridor averaged in the 12%. For the future, until something changes that makes us as an industry and particularly us, seeing that the levels of expected required capital change and we need to consider a number of things. The guidance, I think, you know that, and probably you've done already, if you put all this together, the around 12% makes sense. There are no other things that are not ordinary course of business.
In terms of Article 104, we are not saying anything because what we just wait for is to see how eventually this is confirmed and precise. Of course, the ECB have done some signal in favor of, or in favor meaning that they would go forward with this. Still, how needs to be precised and it needs to be translated into a specific legislation. That's why we are prudent and we are not saying anything. Of course, depending on how this was, for banks in general, it would mean that a different coverage of the capital requirements with a different mix of instruments would sort of ease the requirement on CET1. That is, of course. We are prudent because we think that around this, which is marginally positive or is positive, some precisions need to be done by the regulators.
Thank you very much, Andrea. That was our last question, and this brings our webcast to an end. We thank you very much for joining us, and obviously our Investor Relations team will be available for what's left of the day to answer any questions that you may have. Have a great evening all. Thank you.