Good morning, and thank you for joining Sabada's Results Presentation for the Q2 of 2019. My name is Bethelia Romero. I'm the Head of Investor Relations, and presenting today is our CEO, Chioma Guardiola and our CFO, Tomas Barela. 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 and A.
We appreciate if you can limit your questions to 2 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, and good morning, everyone. This quarter, we recorded a net profit of €273,000,000 circa 6% higher than the Q1 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 and our business like any other bank is impacted. We are updating our targets to reflect this And the impairments in the quarters of our exposure to Sarep's debt, which impacted this quarter results by €47,000,000 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 and will 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 cost and FX and 0.2% 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 We have a small decline of 1% from an increase of 1% to 2%. In addition, the impairments of Sarep, Super United debt in the quarter has impacted both our trading and efficiency targets, which are both in line with our year end, while excluding this impact. Furthermore, cost of risk remains in line with our expectations for the year. This will mostly impact our Organic capital generation by 4 basis points this year, which we expect we will be able to compensate with the sale of Solvio Developments and Other Initiatives such as securitizations. Therefore, our fully loaded CET1 remains set to reach 11.6% or higher by year end.
And 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 the 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, Macau. The remaining two transactions are on track to be closed by year end. Furthermore, our liquidity remains strong with its coverage ratio of 157 Percent following a €5,000,000,000 early repayments of TLTRO 2 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 point 2% having already factored in the impact IFRS 16 and TRIM in the Q1. The fully loaded CET1 ratio pro form a increased by 11.4% in the quarter, including the full benefits of announced disposals. And this pro form a ratio assumes a dividend accrual of 50% of recurring 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 sprawling branches, grew by 2.6%, 3.65% year on year, while in Mexico, they were up 5.1% quarter on quarter and circa 16% year on year. TSB volumes grew by 1 by 0.9% in the quarter, but fell by 2.7% year on 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 on 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 on year. Our performance was better than the Spanish sector loan growth, which was 1.3% year on year in the Q1. 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 gain market share in this segment. Other lending to individuals was impacted by positive seasonality as it included €600,000,000 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, And 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 site accounts, which increased by 11.7% year on year as customers continue to prefer Customer accounts over low yield term deposits. Of balance sheets, 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 Q1 due to the regulatory uncertainty related to the distribution of mortgage costs. Moreover, we continue to increase new loans and credit 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. And we retain our place as the highest ranked bank in Spain for by NPS for SMEs, while we are in the top 2 for large enterprises and personal banking. TSB continued to regain commercial momentum this quarter. In fact, the last 6 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%. Unsecured 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's 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 brokered products, is providing TSB with a strong mortgage pipeline, which should help the bank continue to regain commercial momentum. On the liability side, customers' 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. SMB's customers have now access to a faster digital service, which has reduced the average time for onboarding from 20 days to under 3 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's current accounts franchise is a key differentiation factor that sets the company apart from other Challengers Banks. On this slide, we can see how TSB commercial activity continued to improve year on year. New mortgage lending reached £1,400,000,000 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 Q2.
And 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%. And whilst digital sales in the U. K. Are still below permutation levels, There have been improvements in immigration and are now just 8 percentage points below last year. TSB mobile apps users have increased by 10% during the first half of the year, and the apps ratings have improved significantly with a 4.8% and 4.7% star customer rating on the App Store and Google Play, respectively.
Lastly, I would also like to highlight some of our most recent digital initiatives. We are the 1st 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 improved our offering to retailers with Amazon Pay. Finally, 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 Tomas, who will discuss financial results, Capital, liquidity and asset quality.
Thank you, Jaime. Good morning, everybody. Financial results. Regarding our quarterly results, our reported group net profit was €273,000,000 Representing circa 6% growth quarter on quarter. This comparison has been impacted by 3 items: The capital gain on the disposal of Solvio Servicios, which contributed €135,000,000 And 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 and amounted BRL 59,000,000 And then the Sarepta's subordinated debt impairment of €47,000,000 which impacted the trading line in the quarter. For this quarter's impairment, the coverage of our SADEP gross exposure of initially €321,000,000 now stands at over 91%. And it is also worth noting that when we discuss cost to income, ROE and RoTE 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 therefore the one offs also 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 1 more calendar day in the quarter, which contributed €8,000,000 as we can See on the upper right hand side of the chart and also by higher volumes, which added €6,000,000 as well as an increase of our ALCO portfolio contribution of €3,000,000 Other factors which negatively impacted NII in the quarter were firstly, wholesale funding costs, which increased by €5,000,000 as a result of the Non preferred instrument that we issued during the quarter and the covered bond and senior preferred instruments that we issued in the middle and the end of Last quarter, respectively. And secondly also, lower interest rates and fees and recoveries, which impacted NII by €4,000,000 each. Overall, the group average volumes continue to be on track to achieve our end of year Our 4th quarter expected EUR142,000,000,000 average volumes, and it reached in this quarter EUR 139,000,000,000 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 €58,000,000 out of which 16 have already been incurred during the first half. Furthermore, in terms of sensitivity to rates, an additional decrease I'm thinking of next year, an additional decrease of 10 basis points in all relevant rates would impact NII by €18,000,000 in the 12 months following the write 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 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 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. And consumer loan yields suffered due to the product mix, such as a higher proportion of out of finance. Nevertheless, front book yields continue to be above the above book in all products. Overall, the group's customer spread was 5 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 3 basis points in the quarter. This partially had to do with some improvement in mortgage pricing in respective in as compared with the last quarter. But 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. 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 our products in the quarter with service experiencing the highest increase, driven by cars and syndicated loan fees. TSB fees also increased both quarter on quarter and year on year as we continue 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.
As you can see, this core revenue base has proven to be resilient over the years, Define rates and economic fluctuations. The compound annual growth was 6.7% in the 2012 to 2019 period And it's above 2% year on year as of the Q2 of 2019. These positive results are possible thanks to our high exposure to SME and 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. Nonrecurring 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 Q2 of 2018 has improved significantly and decreased by at FERCA 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 percent and high quality liquid assets of EUR 41,000,000,000. Our credit rating by DBRS on Banco Sabade's long term credit rating was raised to a low from BBB High with a stable outlook. And in terms of the TLTRO II, we currently have €15,500,000,000 outstanding after having repaid €5,000,000,000 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 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, the quarter 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 €1,000,000,000 in overall Senior non preferred transaction in May and €1,300,000,000 senior preferred that we issued both in July April. And the funding plan for the rest of the year consists of EUR €500,000,000 of senior non preferred and €500,000,000 of senior preferred, In addition to €1,500,000,000 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, and these were a bit higher quarter on quarter due to a couple of one off single names and recoveries were a bit slower as we focus more On our institutional portfolio transactions, consequently, the stock of NPL remained flat and nonperforming assets increased marginally by €67,000,000 in the quarter.
NPE ratio and coverage remain broadly stable. We also highlight here the closing of the IPS loan and foreclosed asset portfolio disposal announced last year, which represents a decrease of €1,600,000,000 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 form a position and the expected capital path to the end of 2019. We ended the Q1 of 2019 with a reported fully load CET1 ratio of 11%. So from this, following the graph to the right, you can see the different drivers and impacts in the quarter.
In the first place, our organic capital generation, including net profit 81, Dividends intangibles and other deductions and organic RWS growth added 9 basis points in the quarter as per guidance. The decrease in capital deductions driven by fixed income, the fixed income portfolio or fair value Amongst others, added 7 basis points of capital. The Sared debt 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 a 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.
And furthermore, following to the graph to the right, there are a series of additional factors to be considered in the pro form a capital position. Firstly, the remaining Solvia capital gain, which is expected to be converted from accretive into capital at year end, and this would add We'll add 8 additional basis points. Secondly, the institutional disposals of NPAs also announced last year and expected to close in 2019. This should add, as you know, further 18 basis points. These elements bring our fully loaded CET1 pro form a ratio to 11.4 And as I said, as at end of Q2.
And finally, going forward for the rest of 2019, organic capital generation should add Further, 16 basis points or so for the next 6 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 Solvio Desa Royos in Mobilearios 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% 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 facing terms versus our requirements.
As you can see, our NDA buffer has increased by 18 basis points in the quarter. And at the end of the quarter, our reported phasing capital ratios stood at 15 total capital ratios stood at 15.07 percent, 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. And with this, I will hand over to Joao Wang to close our presentation today.
Thank you, Thomas. 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, and this is especially important in the current lower for longer interest rate environment. CSB is gaining commercial momentum.
Its new CEO will present a new business plan in the second half of the year, which will bring the new 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 had 11.4% pro form a 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 12% in 2020.
And with that, I pass on the word to Cecilia.
Thank you very much, Alamo. We open now the line for a round of questions. Operator, please, first question.
This is 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. And 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.
We so 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 and L progressively. And Actually, the new CEO, Debbie Crosby, will present a new plan where the combination of the full extraction of the savings And other optimization or cost efficiency measures and policies will be disclosed in the new plan for TSB, and 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, but this year actually It's only a fraction of it because the increases in pricing really happened over the last 2 years. So Impact in fact, part of this year's growth has come from tails of last year increases. But 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 Ropero from Ferentes.
The first one is, please could you tell us how much of your mortgage and mortgage book Is fixed rate? And then the second question is, if you could please update on the timing you are expecting to close
And about regarding the first one, The book now so one thing is the new flow, the lending. The new lending, About 70% of the new lending in mortgages is fixed rate and the rest is variable rate. In terms of the stock, twothree of the stock are variable rate and onethree is fix rate.
Regarding the update of the close of The process It's doing well. It's progressing well. So 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
2 for me. First on NII. So I appreciate the revised Guidance for 2019, but the fall in interest rates has just happened recently. So I wonder if you can give more color on what happens after 12 months and re pricing the balance sheet to the forward LIBOR rates. You mentioned in the presentation a potential negative impact in NII of €18,000,000 After 12 months for 10 bps additional.
So is this all that what we should expect For 2020, after the lower base revised down for 2019, which because €18,000,000 is just, Say less than 1% of NII. If 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. And 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.
So I wonder if it is it worth paying out such a high dividend in the context in which you are still building up capital ratios You can update on your dividend policy. Thank
you. Yes. About NII, this is, of course, The way in which we found probably more effective for you to receive information on the sensitivity. So what we see after the impact of the rates for next year is an increase from this year. So of course, the rates have this Sensitivity impact, actually, there is a number of rates at play here.
So of course, the short term, the 12 months you're right, but also the long term swap rates that basically drive Pricing for fixed mortgages and also fixed lending to other segments. This is already All of this is all in here in this sensitivity analysis, but things to take into account. We still see a strong growth in Lending, then our ALCO portfolio is So only less than 10% of our ALCO portfolio matures Over the rest of 2019, 2020 and 2021, so the contribution of the ALCO portfolio is It's quite stable. Over the next three quarters, we have €1,000,000,000 of subordinated issues On the liability side, that matured at an average cost of 5%. And then also, 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.
So going beyond the 12 months or beyond next year, I think it's Now difficult to be precise given that we see this scenario of Finding ways to offset more. Of course, in terms of also offsetting the in terms of the to The maturity of the €1,000,000,000 are Tier 2 and €500,000,000 are covered bonds of high coupon. And 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 Difficult to disclose now, but we also have, as JAMA Guardiara referred to, actions on costs Scoped already, so 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. So and as you know, we have accrued On the basis of 50% payout, you can see that in our numbers. And as you can appreciate, dividends Our Board decision, we don't review our dividend payments at this moment in the second quarter stage.
Thank you very much, Back up, 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 70,000,000 bit more. But then you give that EUR 80,000,000 centity and 10 basis points. So I just wanted to understand what has changed in your modeling to reduce 2% because the long term rates, given the pricing is not Coming down as much, I would think, is a positive, the software coming down more than your fixed income offering. So that would be a positive, if I'm not wrong.
So I just want to square the EUR 18,000,000 versus the EUR 70,000,000 DANGRID guidance. Something else has happened that May you reduce that? And if you can walk us through what has happened so we can sort of make our minds up on what to expect 2020. And the second question on costs. To what extent you can do and this is for you and 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 and A, what areas can you actually tackle in costs that can make a big difference?
Yes. On NII, you're right, Alvaro. Out of this Number you came up with, the impact of rates is circa €55,000,000 This is for the whole year. And 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, and now the situation for the average rates For the whole year are more than 25 basis points lower. So that's the reason For this impact for the whole year, while the sensitivity we are given It's for 10 additional basis points going forward.
The rest of the impact It's basically there are some other things, but basically related to We less contribution than expected from the ALCO portfolio as we can foresee it now For the total year because there were opportunities to use the portfolio to Contribute more in to NII in 2019.
Regarding the second question, so 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 course, which is €10,000,000 better than budget. And looking forward in this Second half of the year, I think that we can continue with this the positive deviation And probably even more than this 10,000,000. And we have also the cost reduction initiatives of TSB. TSB new plan will focus on efficiency. Mrs.
Crosby, the TSB new CEO, he has Plenty of experience and a good track in this regard. So I think that this will be TSB another area for Really having material cost cutting in the next in the second part of the year and the next years.
Thank you very much, Alvaro. Operator, please, Next question is
coming from the line of Jose Abas for Goldman Sachs. Please go ahead.
Yes. Hello. Thank you, Leon, for the presentation this morning. I have a question, only one, on your efforts to defend to protect pricing that you mentioned before. Some of your and I realize that it may fall under the what you mentioned before that you couldn't disclose, but Let's try.
So some of your competitors are already charging actually large corporates for the non operational deposits. So what would be the rationale What was it actually for not already passed the lower and increasingly negative rates to your SME and household deposit?
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 deposits in the corporate Well, it has been difficult in the last year, but I think that the newest scenario Probably, it 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, Tomas?
The only thing would be only that this is what we've experienced so far, but really the environment Has changed dramatically as the expectations have changed, and this could drive some change in practice in the market, And this is to be seen. But as we mentioned before, we will be committed to take any Opportunity to offset the impact of the scenario.
But with regard to households, what is your thinking in particular? You mentioned this is very difficult, but why is this very difficult? Number of which you can instrument, not through fees or other instruments, not directly through negative rates.
Yes. Yes, definitely, fees would be our way too. So it's true that we are in a scenario that is different from What we all have been used to is very difficult to understand for the household everyday life To be paying for keeping their money in an institution. So yes, the alternative 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. But Still, we cannot commit and be sure of where the industry will go.
Thank you.
Thank you, Jose. Operator, please next question.
The next question is coming from the line of Britta Smith From Autonomous. Please go ahead.
Yes. Hi, there. I've got two questions, please. Could you give us a little bit more color on your On portfolio management, what size do you envisage this to have over the next 12 months? And where do you think with the maturities You mentioned the yield outlook is going to grow and the contribution to net interest income.
And then my second question would be, We still have a short term overview 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 It's when as I said, it's pretty stable. The maturities are basically short term Short term EBITS, so variable rates. And our mindset is To keep the portfolio stable and to 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 been refined, but you will understand that I can't give more details until the Plan is presented at the beginning of Q4 of this year.
Can I just ask then, so you do not expect the bond portfolio to increase in size? I'm just asking because the bank is generating more liquidity It's clearly by issuing more fee and non preferred, that's also some customer fund increase.
It could increase tactically, But we are not planning on follow on 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 Sophie Peterson from JPMorgan. Please go ahead. Hi, Louise. Sophie from JPMorgan. So I was wondering if you could just give an update on where you stand with all the NPA sale transactions, Shows what approvals you have received, what are you still waiting for and a little bit more details around that, please.
And then my second question would be on the TLTRO 3 take up. Are you planning to take any of that TLTRO 3? And then lastly, if you could just give a little bit more explanation around the loan growth that comes from foreign branches on Slide 7. What are these foreign branches? In which countries are those?
And what type of lending is that? Thank you.
Sophie, in the first place, just welcome back. I'm glad to hear you. Thank you for the questions. And in terms I will answer The second, we are not planning to take any TLTRO III. And the other 2, Jaime, Yes.
So about the update
on NPE sales. What about the update on NPE sales? As I said in the presentation, we have Close the last NPL portfolio last This week or this week. So I think that and there are only remaining The 2 repossessed assets portfolios that we call internally Challenger and Coliseum And all the plan regarding these portfolios is progressing well, And we will see the closing in the last part of the year. And explanation about the loan growth, Well, the foreign branches that 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 Spanish corporates, And the growth is positive, but also The rest of the Spain because they are branches, the rest of the activity in Spain It's also growing well in a very similar pace.
And about the TLTR IIIII volume?
I already said that we are not planning to take any.
Thank you very much, Sophie. Operator, please.
Yes. Thank you.
Operator, please, next question.
Next question is coming from the line of Carlos Cobo from Societe Generale. Please go ahead. The next question is coming from the line of Carlos Peixoto from Caixaban. Please go ahead.
Okay. Operator, please, next question.
Next question is coming from the line of Fernando Giuseanti 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. Just a quick question on Mexico because all the questions have been answered from my side. So 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 moment at this very moment, we are not using any funding From the headquarters, so we are obtaining all the funding from customers. There are 2 sources of funding. 1 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, but at this point, it's relatively small in comparison with the Wholesale funding coming for corporates and SMEs, that is relatively Similar to the TIE, that is the internal Mexico Funding price is relatively lower than the tier. And the average funding cost is relatively lower than the tier?
Yes. For the quarter, it's been 7.7 percent. And the impact that Can be seen. So the slide breaks down the total cost of customer funds Evolution for Spain, and in Spain, we can see that it has decreased couple of basis points. So 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 Europe level.
Thank you, Fernando.
Thank you, Fernando, and thank you, Tomas. Thank you, Giampa. That was our last question. And we wanted to thank you for joining our webcast today. And remind you that the Investor Relations team and myself remain available throughout the day to keep answering your questions, and have a good day.