Good morning, thank you for joining Sabadell's results presentation for the second quarter of 2019. My name is Cecilia Romero. I'm the Head of Investor Relations. Presenting today is our CEO, Jaume Guardiola, and our CFO, Tomás Varela. During our webcast today, we plan to spend around 30 minutes presenting the results and another 30 minutes answering your questions, which you will be able to ask live. You should have already received the instructions to participate in our live Q&A. We'll appreciate if you can limit your questions to two questions per person only. Our presentation will follow a similar structure of the previous quarter. Our CEO will start by going through the key highlights of the quarter, and then will provide details on commercial activity, and financial results. Our CFO will then discuss financials, capital, liquidity, and asset quality before our CEO concludes with some closing remarks.
I will now hand over to Mr. Guardiola to kick off the presentation. Good morning, Mr. Guardiola.
Thank you, Cecilia, good morning, everyone. This quarter, we recorded a net profit of EUR 273 million, circa 6% higher than the first quarter of the year. Year to date, we have generated a 5% increase in our tangible book value per share, placing us on track to achieve our target of an increase of more than 5% in 2019. Return on equity in the first half of the year was 6.9%, while return on tangible equity was 8.5%. Both figures represent a significant year-on-year increase of our profitability. At the start of this year, we set out clear guidance to help analysts and investors understand how we expect to perform. On this page, we show how our first half results contribute to achieving the guidance and our updated expectation for the year.
Since we published our 2019 guidance, the interest rate environment has deteriorated. Our business, like any other bank, is impacted. We are updating our targets to reflect this and the impairments in the quarter of our exposure to Sareb's debt, which impacted this quarter results by EUR 47 million before taxes. As a result, we now expect our return on equity to reach 6.5% or higher by year end, which is lower than our internal business plan target, which was above 7%. We are working towards offsetting these negatives. We'll be able to give you more details later in the year alongside the business plan from our U.K. CEO. Going through the targets in detail, in the first half of the year, our NII was lower by 0.5% in constant effects and 2% reported year-on-year.
This places us below our annual target due to lower than expected interest rates. We now see the NII to be flat or have a small decline of 1% from an increase of 1%-2%. In addition, the impairments of Sareb, subordinated debt in the quarter has impacted both our trading and efficiency targets, which are both in line with our year end when excluding this impact. Furthermore, cost of risk remains in line with our expectations for the year. This will moderately impact our organic capital generation by 4 basis points this year, which we expect we will be able to compensate with the sale of Solvia Desarrollos and other initiatives such as securitizations. Therefore, our fully loaded CET1 remains set to reach 11.6% or higher by year end.
Finally, our tangible book value per share remains on track, and we delivered 5% growth already in the first half of the year. Overall, our business performance in the quarter was good. We saw positive volume growth momentum across geographies, with both gross and performing loans increasing again year-on-year. Core banking revenue continued to rise this quarter, supported by a good performance in volumes and a strong evolution in fees, which were up nearly 11% year-on-year. At the end of the quarter, our cost to income ratio stood at 54.7%. Our risk profile remained sound. The non-performing loan ratio went down slightly to just over 4%, and the cost of risk continued its downward trend to 48 basis points in the first half.
It is also important to note that we are closed this week, one of the asset protection scheme NPA sales, which were announced last year, Makalu. The remaining two transactions are on track to be closed by year end. Furthermore, our liquidity remains strong with a coverage ratio of 157% following a EUR 5 billion early repayments of TLTRO II in the quarter, while the loan to deposit ratio stood at 101%. Our fully loaded CET1 capital ratio increased in the quarter by 20 basis points to 11.2%, having already factored in the impact IFRS 16 and TRIM in the first quarter. The fully loaded CET1 ratio pro forma increased by 11.4% in the quarter, including the full benefits of announced disposals, and this pro forma ratio assumes a dividend accrual of 50% of recurrent profit of the first half of the year.
Now moving on to business performance. Looking at our performing loans by region, you can see that this quarter's growth was mostly driven by the strong performance in Spain and Mexico. In addition, TSB lending performance also improved considerably in the quarter. Volumes in Spain, which includes foreign branches, grew by 2.6%, 3.65% year-over-year, while in Mexico, they were up 5.1% quarter-over-quarter and circa 16% year-over-year. TSB volumes grew by 0.9% in the quarter, but fell by 2.7% year-over-year, due to the slowdown of commercial activity after the IT migration. Overall, group performing loans increased by 2.3% in the quarter and were up by 2.2% year-over-year. The following slide shows customer balances ex-TSB. On the left-hand side, you can see the breakdown of performing loans. Overall, performing loans were up by 2.7% in the quarter and 4.1% year-over-year.
Our performance was better than the Spanish sector loan growth, which was 1.3% year-on-year in the first quarter. Corporate and SMEs drove credit growth quarter-on-quarter. Volumes were higher across the entire product spectrum. Public administrations also contributed positively in the quarter as we gained market share in this segment. Other lending to individuals was impacted by positive seasonality, as it included EUR 0.6 billion related to social security payments, which are expected to reverse next quarter. On the right-hand side of the slide, you can see that our customer funds increased by 1.8% in the quarter and 2.1% year-on-year. This growth was mainly driven by on-balance sheet funds, which increased by 2.5% in the quarter and 6.2% year-on-year.
The growth of on-balance sheet funds was driven by sight accounts, which increased by 11.7% year-on-year, as customers continued to prefer customer accounts over low yield term deposits. Off-balance sheet funds remained stable in the quarter and fell circa 7% year-on-year, impacted by the decline in mutual funds performance. In Spain, commercial momentum across products remained strong. In regards to new mortgages and consumer loans, we ended the first half of the year with a positive year-on-year evolution, despite having experienced negative momentum in the first quarter due to the regulatory uncertainty related to the distribution of mortgage costs. Moreover, we continue to increase new loans and create facilities to SMEs, and we are still achieving double-digit growth rates in credit cards and retailer payment services turnover.
Once again, this strong commercial momentum is reflected in the year-on-year growth of our market shares, such as customer loans, customer funds, and other relevant products. In addition, we improved our market penetration in SMEs by 60 basis points. Customer experience and service quality continue to be one of our key focus areas. We continue to perform better than the industry average in terms of service quality. We retain our place as the highest ranked bank in Spain by NPS for SMEs, while we are in the top two for large enterprises and personal banking. TSB continued to regain commercial momentum this quarter. In fact, the last six months have been a turning point for TSB, with improving business growth and a stable technology performance.
On the asset side, net lending increased by 1% in the quarter as strong growth in mortgage applications in February through April generated higher levels of completions. Core mortgages saw the highest quarterly growth post-migration at 1.6%. Secured lending recorded a smaller decline in the quarter as the bank resumed its offer to existing customers through digital channels. Year-on-year, net lending was down 2.1% due to lower commercial activity post-migration, with core mortgages up by 0.3%. In regard to mortgages, it is important to note that TSB has a powerful service-led offering with a new IT system that allows applications to be completed in half the time that has historically been the case. This, together with market-leading switch capabilities for broker products, is providing TSB with a strong mortgage pipeline, which should help the bank continue to regain commercial momentum.
On the liability side, customer funds grew by 2.1% in the quarter, driven by both current accounts and term deposits. Business current accounts balance also increased by 8.2%, mainly due to the incentivized switching scheme, but also due to improvements in our digital offering. SMEs customers have now access to a faster digital service, which has reduced the average time for onboarding from 20 days to under three days. We also launched a mobile app for business customers and a market-leading business saving accounts. Year-on-year, customer funds increased by circa 1%, driven mostly by current accounts. TSB current accounts franchise is a key differentiation factor that sets the company apart from other challenger banks. On these slides, we can see how TSB commercial activity continued to improve year-on-year. New mortgage lending reached GBP 1.4 billion in this quarter, and first half-year-on-year increase stood at 13%.
In addition, the launch of digital franchise loans, which allow our TSB customers to contract these unsecured loans through digital channels, has resulted in a significant increase in new lending during the second quarter. Finally, I would like to highlight that TSB's NPS, as well as mobile NPS, continue to improve. Actually, mobile NPS is almost back to pre-migration levels. Regarding on our digital transformation, more generally, our key metrics continue to be positive. The group's digital and mobile customers were up 3% and 12%, respectively, year-on-year. Moreover, digital sales of unsecured loans in Spain increased by 47%. Whilst digital sales in the U.K. are still below pre-migration levels, they have been improving since migration, and are now just eight percentage points below last year.
TSB mobile apps users have increased by 10% during the first half of the year, and the apps rating have improved significantly with a 4.8% and 4.7-star customer rating on the App Store and Google Play, respectively. I would also like to highlight some of our most recent digital initiatives. We are the first Spanish bank to integrate Amazon Pay in our payment services. We want to position ourselves as the leading payment services provider. Just as we improved our credit card offering, integrating Samsung Pay and Apple Pay, now we improve our offering to retailers with Amazon Pay. We have launched a new mobile app feature in U.K., which allows customers to give proof of their identities and open a current bank account remotely via selfie. Well, I will now hand over to Tomás, who will discuss financial results, capital liquidity, and asset quality.
Thank you, Jaume. Good morning, everybody. Financial results. Regarding our quarterly results, our reported group net profit was EUR 273 million, representing circa 6% growth quarter-on-quarter. This comparison has been impacted by three items. The capital gain on the disposal of Solvia Servicios, which contributed EUR 135 million. The other two items that partly offset this, the first one is the payment to the Single Resolution Fund. This is typically incurred in the Q2, amounted EUR 59 million. The Sareb subordinated debt impairment of EUR 47 million, which impacted the trading line in the quarter. Post this quarter's impairment, the coverage of our Sareb gross exposure of initially EUR 321 million now stands at over 91%.
It is also worth noting that when we discuss cost to income, ROE, and ROT trends, we distribute the Single Resolution Fund, the Deposit Guarantee Fund, and the tax on deposit payments expected for the year equally across quarters to be more reflective of reality. Year-on-year, the group net profit comparison was impacted by also the 2018 NPA institutional sales, the provisions that it generated, and also the one-off related to TSB's post-migration issues. Moving on to the quarterly evolution of net interest income. The group NII increased by 0.4% in the quarter and decreased by 0.5% in the year. Most of the quarterly increase came outside TSB, where NII was 1.1 higher in the quarter, although slightly lower year-on-year.
Looking at the quarterly evolution, NII was positively impacted by having one more calendar day in the quarter, which contributed EUR 8 million, as we can see on the upper right-hand side of the chart. Also by higher volumes, which added EUR 6 million, as well as an increase of our ALCO portfolio contribution of EUR 3 million. Other factors which negatively impacted NII in the quarter were, firstly, wholesale funding costs, which increased by EUR 5 million as a result of the senior non-preferred instrument that we issued during the quarter, and the covered one and senior preferred instruments that we issued in the middle and the end of last quarter, respectively. Secondly, also, lower interest rates and fees and recoveries, which impacted NII by EUR 4 million each.
Overall, the group average volumes continued to be on track to achieve our end of year or fourth quarter expected EUR 142 billion average volumes. It reached, in this quarter, EUR 139 billion, as can be seen also in the chart. In regards to lower rates, as discussed at the beginning of the presentation, we expect that changes in all the relevant yield curves since the announcement of our 2019 guidance will impact our year-end target NII negatively by EUR 58 million, out of which EUR 16 million have already been incurred during the first half. Furthermore, in terms of sensitivity to rates, thinking of next year, an additional decrease of 10 basis points in all relevant rates will impact NII by EUR 18 million in the 12 months following the rate cut.
Looking at front book yields across products, this quarter yields have been lower, mostly impacted by movements in long-term interest rates. In particular, the lower rates have impacted new fixed-rate mortgages as well as SMEs and corporates longer-term loans. There we are growing the most. It is also important to note that spreads didn't decrease despite the movements in rates for these specific segments. Credit lines were impacted by higher competition and the slight compression in shorter-term rates during the period. consumer loan yields suffered due to the problem is, such as a higher proportion of auto finance. Nevertheless, front book yields continue to be above the back book in all products. Overall, the group's customer spread was five basis points lower in the quarter, driven by lower yields at ex-TSB level and the higher cost of deposits, except in Spain, where they fell quarter-on-quarter.
In addition to rates, the higher proportion of lower-yielding products in our front book this quarter, such as loans to public administrations, also drove ex-TSB yields lower quarter on quarter. At TSB, it's shown here that the customer spread was up three basis points in the quarter. This partially had to do with some improvement in mortgage pricing, as compared with the last quarter. Basically, here is a currency effect because in Sterling, actually, there was a decrease of 2 basis points, as is the case in general in the U.K. market. Additionally, the group's net interest margin was also impacted by higher wholesale funding costs after having completed successfully our MREL issuance plan of the first half of the year. As for group fees, they were significantly higher in the quarter, increasing by 6%.
Year-on-year, the increase was even stronger at 10.8% above our high single-digit year-end guidance. This performance compares very favorably with the industry. In terms of segment evolution, it is worth highlighting that we saw growth in all products in the quarter, with service experiencing the highest increase, driven by CaaS and syndicate loan fees. TSB fees also increased both quarter-on-quarter and year-on-year as we continue to rebuild commercial momentum. We've included this slide here. We can see that our focus on our core banking revenue evolution ex-TSB. With this, we mean NII plus fees, and we show it since 2012. You can see, this core revenue base has proven to be resilient over the years, defying rates and economic fluctuations.
The compound annual growth was 6.7% in the 2012 - 2019 period, and is above 2% year-on-year as of the second quarter of 2019. These positive results are possible thanks to our high exposure to SME and corporates, where we have a very high penetration and cross-selling rate, and also thanks to our efforts to defend pricing, which we will continue to do. Moving on to costs. Efficiency continues to be on track to meet our year-end target of circa 55%. As expected this quarter, group total costs increased slightly by 1.5% after having experienced a significant decrease in Q1. The increase has been driven by higher recurring costs at both TSB and ex-TSB level, and in particular in Mexico. Non-recurring costs were lower in the quarter and included legal costs at TSB, as well as restructuring charges at both TSB and ex-TSB level.
Impairment provisions declined in the quarter by 3%, and our cost of risk for the first half was down to 48 basis points. Year on year, our provision charge, excluding extraordinary provisions in the second quarter of 2018, has improved significantly and decreased by circa 54%. Moving now on to our balance sheet and starting with liquidity. The group finished the quarter with a strong liquidity position with an LCR of 157%, a loan-to-deposit ratio of 101%, and high-quality liquid assets of EUR 41 billion. Our credit rating by DBRS on Banco de Sabadell's long-term credit rating was raised to A low from BBB high with a stable outlook. In terms of the TLTRO II, we currently have EUR 15.5 billion outstanding after having repaid EUR 5 billion ahead of time in this quarter. This amount was deposited in the ECB as excess liquidity.
The decision has been mostly driven by the interest rates environment. In order to repay the remaining outstanding amount, as can be shown in the lower right-hand side part of the slide, we are planning to use part of our excess cash, the cash received from the NPA portfolios that we sold, and the cash received as payment for the Deposit Guarantee Fund receivable related to the asset protection scheme. Also, with net debt issuance. LCR after this will remain comfortably above requirements at around 140% after the total repayment has been done and complete. With regard to our funding plans, this quarter we made good progress on reaching our MREL targets. As you know, we received an MREL requirement based on our December 2016 balance sheet. This was 22.7% of our RWAs. We are now at 21.4%, and we are on track to meet our requirement before year-end.
The increase in our MREL ratio was derived from the issuance of EUR 1 billion in overall senior non-preferred transaction in May, and EUR 1.3 billion senior preferred that we issued both in July and April. The funding plan for the rest of the year consists of EUR 0.5 billion of senior non-preferred and EUR 0.5 billion of senior preferred, in addition to EUR 1.5 billion of covered bonds and securitization to meet debt targets and replace debt maturities. In terms of asset quality, our risk profile remains sound. The non-performing loans ratio fell slightly to 4.05% in the quarter, these were a bit higher quarter-on-quarter due to a couple of one-off single names, and recoveries were a bit lower as we focus more on our institutional portfolio transactions. Consequently, the stock of NPLs remain flat and non-performing assets increased marginally by EUR 67 million in the quarter.
NPL ratio and coverage remain broadly stable. We also highlight here the closing of the APS loan and foreclosed asset portfolio disposal announced last year, and which represents a decrease of EUR 1.6 billion in non-current assets held for sale. On this following slide, we have included details on the quarter-on-quarter evolution of the group's fully loaded CET1 ratio, as well as our pro forma position and the expected capital path to the end of 2019. We ended the first quarter of 2019 with a reported fully loaded CET1 ratio of 11%. From this, following the graph to the right, you can see the different drivers and capital impacts in the quarter. In the first place, our organic capital generation, including net profit, AT1, dividends, intangibles, and other reductions and organic RWA growth, added nine basis points in the quarter, as per guidance.
The decrease in capital deductions driven by the fixed-income portfolio fair value, amongst others, added 7 basis points of capital. Decided that impairment impacted core capital by 3 basis points, and the Solvia capital gain added 7 basis points. This taken into account in the case of the Solvia capital gain, that we show it here accruing 50% payout, and as necessary to follow the regulation requirements in terms of disclosure. Taking all this into account, our reported fully loaded CET1 ratio was 11.2% at the end of the quarter. Furthermore, following to the graph to the right, there are a series of additional factors to be considered in the pro forma capital position. Firstly, the remaining Solvia capital gain, which is expected to be converted from accrued dividend to capital at year-end, and this will add eight additional basis points.
The institutional disposals of NPAs, also announced last year and expected to close in 2019. This should add, as you know, a further 18 basis points. These elements bring our fully loaded CET1 pro forma ratio to 11.4% as at end of Q2. Going forward for the rest of 2019, organic capital generation should add a further 16 basis points or so for the next six months of the year. Also important is to highlight that this organic capital calculation assumes a cash dividend payout of 50% of recurring net profit. Considering all these impacts and the potential sale of Solvia Desarrollos Inmobiliarios and other actions such as small divestitures, this doesn't include business sales. We continue to expect our fully loaded CET1 to go from 11.2, as reported at the end of the quarter, to 11.6 or higher by year-end.
On the following page, you have the details of our current reported capital base in both fully loaded and phasing terms versus our requirements. You can see, our MDA buffer has increased by 18 basis points in the quarter. At the end of the quarter, our reported phasing total capital ratios stood at 15.07%, which was 193 basis points above our requirement of 13.14%. Our phasing leverage ratio was stable in the quarter at 4.95% as at end of June. With this, I will hand over to Jaume to close our presentation today.
Thank you, Tomás. To conclude our presentation today, I would like to reiterate the strong commercial dynamics that we are seeing in all of our geographies. Specifically in Spain, we are growing volumes and fees above the competition. We have generated a track record of resilient core revenue growth thanks to our strong franchise in SMEs and personal banking. This is especially important in the current lower for longer interest rate environment. TSB is gaining commercial momentum. Its new CEO will present a new business plan in the second half of the year, which will bring renewed ambition and a very strong focus on improving efficiency. Our risk profile has improved significantly in the last year, and our cost of risk continued to fall quarter on quarter. To conclude, we made good progress towards achieving our target CET1 fully loaded of 11.6% by year end.
We are at 11.4% pro forma in June, and we generated circa 30 basis points of organic capital in the first half of the year. We remain firmly committed to reaching 11.6% in 2019 and 12% in 2020. With that, I pass on the work to Cecilia.
Thank you very much, Jaume. We open now the line for a round of questions. Operator, please, first question.
It's coming from the line of Andrea Filtri from Mediobanca. Please go ahead.
Yes, good morning, all. Just two questions. The first is if you have got any savings left from the integration of the IT platform at TSB to come in the following quarters. Secondly, can you please isolate the part of fee income growth that is related to repricing, and where do you see fees evolving next year? Thank you.
Savings coming from the integration of TSB, of the TSB platform, are coming in, since we needed last year to deploy additional arrangements to have buffers of security on stability in the platform and also dealing with customers, so serving the customers. These are coming into the P&L progressively. Actually, the new CEO, Debbie Crosbie, will present a new plan, where the combination of the full extraction of these savings and other optimization or cost efficiency measures and policies will be disclosed in the new plan for TSB, then we will be able to be more precise on that. In terms of the fee income growth coming from repricing, we don't disclose it, this year actually is only a fraction of it, because the increases in pricing really happened over the last two years.
In fact, part of this year's growth has come from tails of last year increases. Basically what is driving the growth this year is an increase in transactionality.
Thank you, Andrea. Operator, please, next question.
Next question is coming from the line of Mario Roberto from Finantis. Please go ahead.
Hi, good morning. Thank you for taking my questions. The first one is, please, could you tell us how much of your mortgage and not mortgage book is fixed rate? The second question is, if you could please update on the timing you are expecting to close the Solvia Desarrollos deal. Thank you.
Regarding the first one, the book now. One thing is the new flow, the lending. About 70% of the new lending in mortgages is fixed rate, and the rest is variable rate. In terms of the stock, 2/3 of the stock are variable rate, and 1/3 is fixed rate.
Regarding the update of the close of Solvia Desarrollos Inmobiliarios, the process is doing well, is progressing well. I think that we'll sign the transaction in the next weeks.
Thank you.
Thank you, Mario. Operator, please, next question.
The next question is coming from the line of Francisco Riquel from Alantra. Please go ahead.
Yes, thank you. Two from me, first on NII. I appreciate the revised guidance for 2019. The fall in interest rates has just happened recently, so I wonder if you can give more colors on what happens after 12 months, repricing the balance sheet to the forward Euribor rate. You mentioned in the presentation a potential negative impact in NII of EUR 18 million after 12 months for 10 basis points additional. Is this all that what we should expect for 2020 after the lower base revised down for 2019? EUR 18 million is just, say, less than 1% of NII. You can please comment on the moving parts on the NII and any mitigating measure that you may implement in terms of pricing of loans and deposits. Second question is about the dividend.
Bank of Spain has been vocal about the need to be prudent in terms of dividend distribution. You are still accruing a 50% payout. I wonder if it is worth paying out such a high dividend in the context in which you are still building up capital ratios, and you can update on your dividend policy. Thank you.
Yeah. About NII. This is, of course, the way in which we found probably more effective for you to receive information on the sensitivity. What we see after the impact of the rates for next year is an increase from this year. Of course, the rates have this sensitivity impact. Actually, there is a number of rates at play here. Of course, the short-term, the 12 months Euribor, but also the long-term swap rates that basically drive pricing for fixed mortgages and also fixed lending to other segments. All of this is all in here in this sensitivity analysis. Things to take into account. We still see a strong growth in lending. Our ALCO portfolio, only less than 10% of our ALCO portfolio matures over the rest of 2019, 2020, and 2021. The contribution of the ALCO portfolio is quite stable.
Over the next three quarters, we have EUR 1 billion of subordinated issues on the liability side that mature at an average cost of 5%. At some point, if the rates environment remains the same, I think all banks will try to find ways to actually translate more to the liability side, the impacts of rates. Going beyond the 12 months or beyond next year, I think is now difficult to be precise given that we see this scenario of finding ways to offset more. Of course, in terms of the maturity of the EUR 1 billion, EUR 500 million are Tier 2, and EUR 500 million are covered bonds of high coupon. In the schedule of maturities that you have in the appendices, you can see when those mature. Other offsetting management actions that we are considering include a range of them.
Some of them are difficult to disclose now, but we also have, as Jaume Guardiola referred to, actions on costs scoped already. There is a number of things that we are scoping and taking into account.
Okay. Well, regarding the question about the dividend policy. We understand that dividends are a key part of the capital equation for the bank, as well as an important matter also for our shareholders. As you know, we have accrued on the basis of 50% payout. You can see that in our numbers. As you can appreciate, dividends are a board decision, and we don't review our dividend payments at this moment in the second quarter stage.
Thank you very much, Paco. Operator, please, next question.
Next question is coming from the line of Alvaro Serrano from Morgan Stanley. Please go ahead.
Hi, good morning. I just wanted to follow up on the NII question from Paco as well, because you've taken down the guidance a couple of percent this year, which give or take, call it EUR 70 million, a bit more. You give that EUR 18 million sensitivity and 10 basis points. I just wanted to understand what has changed in your modeling to reduce 2%, because the long-term rates, given the pricing, has not coming down as much. I would think it's a positive, the swap rate coming down more than your fixed income offering. That would be a positive if I'm not wrong. I just want to square the EUR 18 million versus the EUR 70 million downgrade in the guidance.
Something else has happened that has made you reduce that. If you can walk us through what has happened so we can sort of make our minds up on what to expect for 2020. The second question on costs. This is for you and for the whole sector. To what extent you can do material cost-cutting at this stage when all the banks are investing in the absence of M&A? What areas can you actually tackle in costs that can make a big difference? Thank you.
You're right, Alvaro. Out of this number you came up with, the impact of rates is circa EUR 55 million. This is for the whole year, taking into account that the guidance was based on the rates situation, the rates environment at the end of last year, beginning of this year. Now the situation for the average rates for the whole year are more than 25 basis points lower. That's the reason for this impact for the whole year, while the sensitivity we are given is for 10 additional basis points going forward. The rest of the impact, there are some other things, but basically related to less contribution than expected from the ALCO portfolio, as we can foresee it now for the total year. Because there weren't opportunities to use the portfolio to contribute more to NII in 2019.
Regarding the second questions on cost and to what extent we can do material cost-cutting at this stage. Well, as we have seen in the presentation over the first half of this year, we have already run at an annual rate of cost, which is EUR 10 million better than budget. Looking forward in this second half of the year, I think that we can continue with this positive deviation, and probably even more than these EUR 10 million. We have also the cost reduction initiatives of TSB. TSB new plan will focus on efficiency. Mrs. Crosbie, the TSB new CEO, she has plenty of experience in a good track in this regard. I think that this will be, TSB, another area for really having material cost-cutting in the second part of the year and the next years.
Thank you very much, Alvaro. Operator, please, next question.
Next question is coming from the line of José Abad of Goldman Sachs. Please go ahead.
Yes. Hello. Thank you for the presentation this morning. I have a question, only one, on your efforts to defend, protect the pricing that you mentioned before. I realize that it may fall under what you mentioned before that you couldn't disclose, but let's try. Some of your competitors are already charging actually large corporates for the non-operational deposits. What would be the rationale actually for not already pass the lower and increasingly negative rates to your SME and household depositors? Thank you very much.
Well, in fact, we have really having negative deposits in the institutional activity. It means the insurance companies and other institutional clients. We are trying to also have negative yield deposits in the corporate world. It has been difficult in the last year, but I think that the newest scenario, probably, I think that the mood now is that this is changing, and probably we will see in the corporate clients, the negative yield deposits. Probably it's going to be very difficult to do that in more small corporates or more small businesses and also in individuals. If you want to add anything more, Tomás?
No. The only thing would be only that this is what we’ve experienced so far. Really the environment has changed dramatically as the expectations have changed, and this could drive some change in practice in the market. This is to be seen. As we mentioned before, we will be committed to take any opportunity to offset the impact of the scenario.
With regard to households, what is your thinking in particular? You mentioned this is very difficult. Why is this very difficult? There's a number of ways you can instrument that. Through fees or other instruments, not directly through negative rates.
Yes. Definitely, fees would be a way, too. It's true that we are in a scenario that is different from what we all have been used to. It's very difficult to understand for the household everyday life to be paying for keeping their money in an institution. Yes, one of the alternatives in this segment might be just fees and commissions for deposits that actually hold their savings. This is an option that could happen. Still, we cannot commit and be sure of where the industry will go. Thank you.
Thank you, José. Operator, please, next question.
The next question is coming from the line of Britta Schmidt from Autonomous. Please go ahead.
Hi there, I've got two questions, please. Could you give us a little bit more color on your bond portfolio management? What size do you envisage this to have over the next 12 months? Where do you think with the maturities that you mentioned, the yield outlook is going to go and the contribution to Net Interest Income? My second question would be, we still have a float on mail review for TSB outstanding. Can you give us any update on the timing of that, please? Thank you.
Thank you, Britta. Our management focus for the portfolio over the coming 12 months, as I said, is pretty stable. The maturities are basically short-term issues, so variable rates. Our mindset is to keep the portfolio stable and as a way of keeping the support that this gives to NII. The contribution to NII keeps being now increasing, probably since, given the nature of the fixed rate, it's kind of contribution from this part of the asset, but a little bit higher than the usual trend. In terms of timing of the TSB restructuring, so it's on, it's going on. It's, at this moment, a little bit slower than what probably had been anticipated because it's being refined. You will understand that I can't give more details until the plan is presented at the beginning of the fourth quarter of this year.
Can I just ask then, you do not expect the bond portfolio to increase in size? I'm just asking because the bank is generating more liquidity, in theory, by issuing more senior non-preferred. There's also some customer fund increase.
It could increase tactically, but we are not planning on follow an aggressive strategic usage, a different usage of the portfolio than so far.
Thank you very much, Britta. 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 was wondering if you could just give an update on where you stand with all the NPA sale transactions, what approvals you have received, what are you still waiting for, and a little bit more details around that, please. My second question would be, on the TLTRO III take-up, are you planning to take any of the TLTRO III? Lastly, if you could just give a little bit more explanation around the loan growth that comes from foreign branches on slide seven. What are these foreign branches? In which countries are those? What type of lending is that? Thank you.
Sofie, in the first place, just welcome back. I'm glad to hear you. Thank you for the questions. In that, I will answer the second. We are not planning to take any TLTRO III. The other two, Jaume, is all
About the update on NPA sales? Well, about the update on NPA sales, as I said in the presentation, we have closed the last NPL portfolio last week or this week. There are only remaining the two repossessed assets portfolios that we call internally Challenger and Coliseum. All the plan regarding these portfolios is progressing well, and we will see the closing in the last part of the year. Explanation about the loan growth. The foreign branches, they are basically London, Paris, and Miami. They are inside our CIB area, and they are growing in the corporate customers, especially corporate customers that are related with the Spanish corporates. The growth is positive, but also the rest of Spain, because they are branches, the rest of the activity in Spain is also growing well in a very similar pace. About the TLTRO III .
No, I already said that we are not planning to take any.
Okay.
Thank you very much, Sofie. Operator.
Yeah. Thank you.
Operator, please next question.
Next question is coming from the line of Carlos Cobo from Société Générale. Please go ahead.
Carlos, are you there? The next question is coming from the line of Carlos Peixoto from CaixaBank. Please go ahead. Okay, operator, please next question.
Next question is coming from the line of Fernando Gil Santi for Barclays. Please go ahead.
Hi, good morning. Thank you for taking my question. Can you hear me well?
Yes. We can hear you loud and clear, Fernando. Thank you.
Okay. Hello. Just a quick question on Mexico, because all the questions have been answered from my side. You have grown quite successfully the quarter and the year. What are the plans and what are the cost of deposits on the Mexico franchise, please? Thank you very much.
Well, what we are doing in Mexico is reducing very quickly the funding gap. In the sense, in pesos, at this very moment, we are not using any funding from the headquarters. We are obtaining all the funding from customers. There are two sources of funding. One came from the retail banking or the individuals, and that is in an average of 4%. That's the price of our remunerated current account. At this point, it's relatively small in comparison with the wholesale funding coming from corporates and SMEs that is relatively similar to the TIIE. That is the internal Mexico funding price, is relatively lower than the TIIE. In average, the average funding cost is relatively lower than the TIIE.
Yeah. For the quarter, it's been 7.7%, and the impact that can be seen. The slide breaks down the total cost of customer funds evolution for Spain. In Spain, we can see that it has decreased a couple of basis points. The increase in total ex-TSB comes from the fact that this cost is higher, as I said, around 7.7%, but also due to the fact that volumes grow significantly in Mexico, and these averages, the increase in the contribution of these deposits on the total drive the increase in average cost at group level. Thank you, Fernando.
Thank you, Fernando, and thank you, Tomás. Thank you, Jaume.
Thank you very much.
That was our last question. We wanted to thank you for joining our webcast today. We remind you that the investor relations team and myself remain available throughout the day to keep answering your questions. Have a good day.