Good morning, everyone. Thank you for joining our audio webcast today. My name is Cecilia Romero. I am the Head of Investor Relations. Today I am here with our management team who will be presenting our first quarter results. Our presentation this time will follow a slightly different structure to previous quarters. Our CEO, Jaume Guardiola, will start by going through the key highlights of the quarter. I will provide details on our commercial activity. Our CFO, Tomás Varela, will discuss financial results, capital, liquidity, and asset quality before our CEO comes back to conclude with some closing remarks. We plan to spend a maximum of 30 minutes on the presentation. We will give you the opportunity to ask questions. You should have already received details on how to participate in our live, this time is live, Q&A session.
I will hand it off to Mr. Guardiola to kick off our presentation. Good morning, Mr. Guardiola.
Good morning. Thank you, Cecilia. Good morning, everyone. Let me begin by highlighting that we are starting the year with a strong set of results. We have improved our profitability, and we remain focused on increasing shareholders' return. We recorded a net profit of EUR 258 million this quarter and a 2% increase in our tangible book value per share, which sets us on the right track to achieve an increase of more than 5% in our tangible book value per share in 2019. Return on equity in the quarter was 7.2%, while return on tangible equity was 8.9%, both of which are higher than one year ago. Let me share a quick recap on our year-end guidance. On this page, you can see that we are expecting to generate 50 basis points of organic capital in the year.
This guidance currently assumes a cash dividend payout of 50% of recurring profit. At the same time, we expect to increase tangible book value per share by more than 5% in the year, as I have said a moment ago. These results will be achieved by increasing group net interest income by between 1%-2% and attaining an increase in fees in the high single digits. Trading is expected to contribute between EUR 80 million to EUR 100 million to our 2019 results. Cost to income will end the year at a maximum of 55%, which includes efficiency initiatives that may be carried out at TSB this year. We anticipate that cost of risk will fall to 40-45 basis points, and we expect TSB to have a neutral contribution, excluding items such as potential fines or insurance recoveries, but including cost for efficiency gains.
However, after Debbie Crosbie joins May 1st , she will work on updating the TSB plan, and the guidance will be updated after this is finished. All of this implies that we should finish the year with a return on equity close to 7% and a core equity Tier 1 fully loaded at or above 11.6%. With regard to the summary of our performance in the quarter, we saw positive volume growth momentum at group level, with both gross and performing loans increasing year-on-year. Core banking revenue continued to rise steadily, supported not only by a good performance in volumes, but also by a solid delivery on fees, which were up nearly 9% year-on-year. We have also continued with our efforts to digitalize and transform our business model to make it more efficient.
At the end of the quarter, our cost to income ratio stood at 52.1%, which was significantly lower year-on-year. Our risk profile continues to improve, with our key asset quality ratios down further this quarter. The non-performing loans ratio stood at 4.1%, and cost of risk continued its downward trend to 51 basis points. Liquidity remained strong with liquidity coverage ratio at 163% and loan to deposit of 101%. In terms of capital, our position was stable in the quarter. Our fully loaded CET1 came to 11% after factoring in the 48 basis points impact of IFRS 16 and TRIM, which were accounted for this quarter. Finally, our fully loaded CET1 was pro forma 11.3% if we include the impact of the disposals of institutional NPAs, which was agreed as announced last year, and the disposal of Solvia Servicios Inmobiliarios, which closed earlier this week.
Moving on to business performance. In regard to performing loans by region, you can see that this quarter's growth was mostly driven by the strong performance of Spain, which includes foreign offices, and of Mexico. Volumes in Spain grew by 0.2%, 4.5% in the year, while in Mexico, they were up 1.2% quarter-on-quarter and 28% year-on-year. TSB volumes remained stable in the quarter and fell 3.4% year-on-year as a result of the slowdown of commercial activity before and after the IT migration. Overall, group performing loans increased slightly in the quarter and were up by 2.8% in the year. The following slide shows a summary of the different figures related to the commercial activity ex-TSB. On the left-hand side, you can see the breakdown of performing loans by customer segment. Overall, performing loans were up by 0.4% in the quarter and 5.3% in the year.
As you can see in this graph, SMEs and other lending to individuals were the main drivers of credit growth in the quarter, more than offsetting the deleveraging in other segments. On the right-hand side, in customer funds, we registered a 0.5% increase in the quarter, representing an increase of more than 3% in the year. The growth in our balance sheet funds was driven by side accounts, which increased by 11.7% in the year, demonstrating the strength of our banking franchise. Off balance sheet funds decreased in both the quarter and the year, impacted by the decline in mutual funds performance, which in the quarter was partially offset by positive dynamics in pension and insurance. In Spain, commercial momentum across products remained strong in the quarter.
Compared to the first quarter of 2018, we can see a slowdown in new lending to individuals, basically mortgages, caused by regulatory uncertainty at the end of the year in relation to the allocation of mortgage costs. That aside, we continue to show significant growth in new lending to companies, and we achieved double-digit growth rates in other significant areas, such as credit cards and retailer payment service turnover. This positive performance was reflected once again in market share increases. We increased our market share in both customer loans and customer funds. In addition, we continue to improve our share year-on-year across other products, and we also increased our market penetration in SMEs by 125 basis points. A key factor in sustaining this positive commercial momentum in Spain is our continued focus on customer experience and service quality.
In this regard, we perform better than the industry average in terms of service quality, and we retain our place at the top of NPS ranking, both in SMEs and large enterprises. In the U.K., TSB core business show growth this quarter, showing a renewed commercial momentum for the bank post-migration. On the asset side, in terms of net loans, quarterly growth was driven by core mortgage volumes as a strong applications performance in Q4 impacted completions this quarter. Core mortgage growth was partially offset by the runoff of the bank's Whistletree portfolio, and lower unsecured lending loan volumes. Year-on-year performance, as I explained before, suffered as commercial activity declined before and after our IT migration. On the liability side, current accounts increased by 2.4% in the quarter and 2.5% in the year, driven by higher balances.
The reduction in saving deposits, both quarterly and in the year, reflects pricing decisions taken early last year to manage deposits volumes given the TSB's strong liquidity position. On this slide, we can see several indicators that show how TSB has regained its commercial momentum. In regard to new mortgage lending, we performed better in the first quarter of 2019 than in any of the quarters of 2018. On the personal current account side, we continue to see a positive trend in switch-ins and current accounts openings. Bank NPS, as well as mobile NPS, continued to improve. In this regard, it should be noted that the bank's NPS has returned to positive figures in this quarter. Moreover, mobile NPS is almost back to pre-migration levels. Finally, it would like to highlight that all the complaints related to migrations have now been resolved.
To finish this part of the presentation, a slide regarding digital transformation, where we can see how the performance of our key metrics was very positive. For example, the group digital and mobile customers were up 7% and 14%, respectively, year-on-year. Digital sales of unsecured loans in Spain increased by 72% on a year-on-year basis. Meanwhile, digital sales in the U.K. are still below pre-migration levels, showing a decline of 11 percentage points. However, they have been steadily rising since migration. Lastly, I would also like to highlight that we have recently launched two new digital initiatives, Blink in Spain and Digital Franchise Loans in the U.K. Blink is a digital insurance platform that allows our customers to acquire insurance through online and mobile channels, while the Digital Franchise Loans initiative allows our TSB customers to contract and secure loans via digital channels.
Well, I will now hand over to Tomás, who will discuss financial results, capital, liquidity, and asset quality.
Thank you very much, Jaume, and good morning, everyone. Regarding our quarterly results, our reported net profit in the quarter was EUR 258 million, representing a significant growth quarter-on-quarter. It is also important to note that this comparison has been impacted by the year-end payment to the Deposit Guarantee Fund and the deposit tax, things that always are paid in December. Most importantly, results were flat year-on-year, despite significantly lower trading results. This performance was possible thanks to the positive underlying performance of our core business, in particular, fees on lower operating costs and significantly lower impairments. NII, operating expenses, and amortizations were impacted by the implementation of IFRS 16 in this quarter.
You can see the details summarized on this page on the lower left-hand side. Overall, the impact of this reclassification, so to speak, is neutral in the quarter.
Moving now on to the quarterly evolution of net interest income. Group NII decreased by 1.7% in the year and by 3.8% in the quarter. This was, in the quarter, negatively impacted by fewer calendar days that represented a negative of EUR 19 million. The cost of our Tier 2 transaction that corresponds to the issue that we did last December, which has impacted EUR 5 million, a lower contribution of a fixed income portfolio given its smaller size during the quarter, that was a negative of EUR 5 million, and the impact from IFRS 16 which impacted in EUR 4 million. We were already expecting this seasonality in Q1. Overall, we are on track to meet the group guidance of growth between 1% and 2% in the year. This will be driven by healthy volume growth and broader resilient yields.
We've included, to illustrate this further, a chart in the lower right-hand side of this slide, where we see that the average balance of lending of the loan portfolio in the first quarter stands at EUR 138 billion. That is, of course, higher than all the four quarters of last year. We show also the path of growth, leading to a level circa EUR 142 billion in the last quarter of this year. This expected path is supported by the growth that we've seen in the quarter already year-to-date. In terms of front book pricing in Spain, we have continued to defend yields across segments. We've grown more in segments with higher yields in the quarter, such as SMEs and consumer loans. At the same time, front book yields continue to be higher than back book yields across most products.
Overall, these are positive dynamics that have helped our yield ex-TSB to increase quarter-on-quarter. Overall, also our customer spread was three basis points lower in the quarter, driven by an increase in yields at ex-TSB level. This was offset by the higher cost of Forex deposits, except in Spain, where they remain stable, and by lower yields at TSB, which were brought down by increased competition and a greater weight of mortgages in TSB's business mix. We've included an additional detail in the slide showing the evolution of the deposits in Spain. Of course, the increase that we see in evolution of ex-TSB deposits is mainly driven by deposits in Mexico and in America in U.S. dollars.
In Mexico, what we are seeing is an enhanced performance in deposit growth, which is set at a cost level that is improving the average cost of funding because it's replacing more expensive funding, such as markets or wholesale funding in U.S. dollars, and also the funding provided by the Agencias de Desarrollo in Mexico. The NIM of Mexico stands at 3.62% in the quarter and shows a positive trend. Additionally, net interest margin was also impacted by higher wholesale funding costs. We can see the pickup here in the quarter, caused by the issuance of our Tier 2 back in December, as I just mentioned, and an increased liquidity in the quarter that of course, in this situation, in this environment, has an additional cost. Group fees were lower in the quarter, impacted by seasonality and fewer calendar days.
In the year, fees increased 8.8% in line with our year-end guidance. In terms of segment evolution, it is worth highlighting that services were also down in the quarter due to lower syndicated loan fees, which have a more volatile nature and were especially high last quarter. Year-on-year, service fees grew at 14.7%, and we expect them to lead or drive the overall growth of fees in 2019. The decrease in asset management and credit and contingent risk was mostly due to the seasonality in the quarter, and TSB's fees also increased both quarter-on-quarter and year-on-year as we continue to reveal commercial momentum. Group total costs, both recurrent and non-recurrent, declined significantly in the quarter.
The fall in recurring costs in the quarter was driven by lower general expenses, which here is worth noting that, in this case, was affected by some positive seasonality and lower year-end bonuses. As I explained earlier, the impact of IFRS 16 also has been a positive for general expenses, but negative for amortizations, although the overall impact on total costs was not material. The bottom line here is that we are on track to meet or beat the year-end efficiency guidance of 55%, which already includes the costs of any TSB efficiency initiatives to be taken in the year. Cost of risk continued its onward trend in the quarter and currently stands at 51 basis points.
As you can see on the left-hand side, provisions have decreased significantly since the announcement of the institutional non-performing asset sales in Q2, as we have started to accrue a good part of the savings. Overall, provisions were down by 22.5% year-on-year and are expected to fall further during the rest of 2019, as credit conditions or the behavior of the portfolios will continue to improve. In this regard, it is worth noting what we show in the slide. In the quarter, provisions were impacted by two items that will not occur during the rest of the year. The first one is a single name impact of EUR 8 million. Sorry, it is the other way around.
It is an EUR 80 million effect due to seasonality on a specific portfolio that decreases significantly in the other quarters, and a single name impact of EUR 9 million that will be recovered probably in the second quarter. We have made significant progress, and we can confirm that we are on track to achieve our 45 basis points year-end target with the visibility that we have today. Moving on now to the balance sheet section of our presentation. Starting with liquidity, the group has a strong liquidity position with an LCR of 163%, a loan-to-deposit ratio of 101%, and a high-quality liquid assets amount of circa EUR 43 billion. Another point to highlight is that Fitch has initiated its rating coverage of Sabadell this quarter. They assigned a long-term issuer default rating of BBB with a stable outlook.
In fact, all debt instruments are rated investment grade by Fitch, including our Tier 2. Furthermore, we currently have EUR 20.5 billion of TLTRO outstanding, and around 80% of this, i.e., EUR 16 billion, is deposited back at the European Central Bank. In order to repay the outstanding amount, we are planning to use part of our excess cash, as we can see in the lower right-hand side chart. Also, the cash received from the NPA portfolios and the Solvia sales, the cash received as payment for the Deposit Guarantee Fund receivable related to the asset protection scheme, and also net debt issuance, so the inflows coming from the net debt issuance that we undertake in this year and the coming year. LCR will remain comfortably above requirements at 140% after the TLTRO-2 repayment.
With regard to our funding plans, we received an MREL requirement based on our December 2016 balance sheet, which was 22.7% of RWAs, and we are on track to meet the requirement before year-end. The funding plan that we have prepared in order to do this is outlined on the right-hand side of the page. In terms of AT1 and Tier 2, the brackets are nearly completed, so we are expecting no new transactions in 2019. We will launch our inaugural senior non-preferred transaction in Q2. Overall, we expect to issue EUR 1.5 billion annually over the next three years of senior non-preferred. In terms of senior preferred debt, we have already issued EUR 1 billion in the domestic market year-to-date with an average cost of 0.6%, and we plan to issue an additional EUR 1.5 billion in 2019 and smaller amounts in the following years.
In terms of covered bonds and securitization, TSB has issued GBP 750 million year to date. Overall, there will be additional issuance of EUR 1.5 billion combined GBP and EUR in the rest of the year. With regard to maturities, also important to highlight that EUR 1.8 billion will mature during the rest of 2019, at an average cost of 1.42%. We have continued to make progress in terms of asset quality. The non-performing loan ratio fell further to 4.1%. The non-performing asset reduction was EUR 93 million in the quarter, which brings our NPA balance to EUR 8.2 billion, and a year-on-year decrease of almost 50%. The NPA coverage was largely stable. As usual on this slide, we also provide details on the assets currently included in the available-for-sale portfolio, which will be completely removed from our balance sheet once the institutional sales are closed later this year.
Those are shown in gray, as well as details on the pool of assets that are managed by our developer, Solvia Desarrollos, that are shown in orange. On the following slide, we have included details on the quarter-on-quarter evolution of the group's fully loaded CET1 ratio, as well as the expected capital path to the end of 2019. We ended 2018 with a reported fully loaded CET1 of 11.1%. We can follow on the graph to the right, going to the right, we can see the different drivers that have impacted capitals in the quarter. We have seen 20 basis points of organic capital generation in the quarter, including net profit EUR 81, so the payment of EUR 81 coupons, dividends in intangibles and organic RWA reduction.
This reduction in RWAs, in organic RWAs, have been driven by DTA recoveries, so the RWAs related to DTAs, that decreased because of the recoveries. Lower equity investment related to insurance due to the fact that we received dividends from our stake in the insurance joint venture that we have, and other balance sheet dynamics, such as a reduction in other risks RWAs. The decrease in capital deductions were in connection with the recovery of mature assets that were in connection with related parties. Tax loss carry-forward and capital threshold that in total meant a contribution of 14 basis points of capital. Finally, the impact of the regulatory RWAs growth was 48 basis points in the quarter. That included 15 basis points for IFRS 16 and 33 basis points for TRIM. The impact of TRIM includes a review of the SMEs and corporates portfolios in this quarter.
The review on our mortgage portfolio had occurred already last year, therefore, the total impact of those reviews that are the most part of our portfolio has been already absorbed to date. The review of TRIM, as I said, is largely covered or completed. There is one portfolio with EUR 3 billion in RWAs and a 50% density, which is a low default portfolio, that is still pending conclusion of the process. Given the nature of these amounts, we don't see a significant potential impact coming from this, and this is likely to close in 2020. Taking all of this into account, our fully loaded CET1 ratio was 11% at the end of Q1. Going forward for the rest of 2019, there are a series of additional factors that are expected to impact capital positively.
The capital gain on the sale of Solvia Servicios, which was announced last year and settled earlier this week, will add a total of 15 basis points. The institutional disposals of NPAs, also announced last year and expected to close later in 2019, should add a further 18 basis points, as shown in the slide. The organic capital generation that we expect for the rest of the year should add a further 30 basis points or so for the next nine months of the year. This, together with what we generated in Q1, is in line with our organic capital generation guidance of circa 50 basis points for 2019. It is important to highlight that this organic capital calculation, as you can see also in the slide, assumes a cash dividend payout of 50%.
Considering all of these impacts, we expect our fully loaded CET1 to go from 11%, as reported at the end of Q1, to 11.6% by year-end. Additionally to this, as also shown in the slide, there are other opportunities, potential measures, some of them are ongoing, that include Solvia developments and the disposal of other small assets or divestitures. This doesn't include any sale of businesses, and those could increase our capital level further by year-end above the 11.6%. On the following page, you have the details of our current reported capital base in both fully loaded and phase-in terms versus requirements. As at the end of Q1, our reported phase-in total capital ratio stood at 14.89%, which was 175 basis points above our requirements of 13.14%. Our phase-in leverage ratio was 4.94% as at end of March.
As you know, TSB is primarily a mortgage bank, and as such, it has a lower leverage ratio, which impacts the ratio at the group level. We are comfortable with a group leverage ratio at about this level. With this, I will hand over to Jaume to close our presentation today.
Well, thank you, Tomás. To finish our presentation today, I would like to reiterate that with this quarter set of results, we are back to increasing profitability, and we are fully focused on creating value for our shareholders. We have a clear set of targets for the year linked to both capital generation and shareholder remuneration, which are supported by high commercial dynamics in Spain and Mexico, core revenue growth, lower impairments and costs, and renewed momentum in TSB. I can also now confirm that TSB new CEO, Debbie Crosbie, will join the company this upcoming May 1st. In regard to our capital position, we have a strong commitment to continue to grow capital during the year, and we are set to reach 11.6% or above by year-end. With that, we open the floor to questions. Cecilia?
Thank you very much, Jaume, and thank you, Tomás. We are now going to start the live Q&A. I would like to remind our audience that we will be limiting the questions to a maximum of two per person, and this is in order to give you all more time and chance to participate in the Q&A. Please kindly take this into account when participating during the session. With that, operator, please, can we have the first question?
The first question is coming from the line of José Abad. Please go ahead.
Hello. Good morning. Thank you, Tomás, for the presentation. I have two questions. First one is on IRPH. If I remember well, your exposure, the one you reported to the market, was around EUR 1.4 billion. That was as of Q2, Q3 2018. Could you please give us, I believe that you've been reducing this, what's the exposure as of today, and what's the strategy that you are following here? Maybe if you could also comment, if you can, on expectations ahead of actually the ruling, which is expected for actually Q3. The second question is on the NP sale, which I believe was expected to be closed by Q2. Just to make sure that this is still the case, and also with regard to the negotiations, you have to negotiate with two different parties. One is the investors, the other is the possible warranty fund.
I guess the question here is whether, given that the slowdown that we see in the Spanish economy and in particular in the real estate sector, whether we should expect there is any risk for any change in the terms with either of these two parties, and whether we should expect, or there is a possibility of some sort of unexpected one-off impact to P&L or even a lower positive impact to capital from a potential change in terms. Thank you very much.
Okay. Regarding the first question about the IRPH. Well, first of all, it's important to note, to remark that the index, the IRPH index, is a transparent index calculated and published by the Bank of Spain. I think that it's quite difficult to consider this index as abusive. We have one of the lowest exposure of the IRPH in Spain, which comes basically from our acquisition of CAM and Caixa Penedès. Our current exposure to the IRPH mortgage is below EUR 800 million. You know that we have been permanently, during the last years, offering to our customers that have this index or even the Euribor, having or no floors. We have offered the alternative to move their mortgage from variable to fixed.
This strategy has been very successful in terms that there are a lot of customers that have made this change, and obtaining a very cheap pricing because of the very low interest rates that we are having in the last years. Well, we don't know what's going to be the final impact. Obviously, we have to expect to wait for the final court ruling. That's expected to happen in September or October. Regarding the NPA sales, at the end of my answers, if you can, Tomás, add anything. The deals are now waiting for the antitrust approval. In fact, we expect to close the deal regarding NPLs in the next month of May. The deals regarding NPAs coming in the second part of the year. The process of obtaining the antitrust approval from the government is longer than the case of the NPLs.
We don't expect any kind of change in the deals that we have announced last year. I think that there is not the expectations about any kind of impact, for potential change. You want to add anything?
No, I don't have anything else to add.
Thank you.
Operator, please, next question.
Next question is coming from the line of Francisco Riquel. Please go ahead.
Yes, hello. Two questions also from me on the capital side. I wonder if you can comment on the plans for asset disposals beyond Solvia Desarrollos Inmobiliarios, and in particular, the asset management business. On the dividend, I wonder how committed you are to the 50% dividend payout, given the depressed valuation multiples, and that you are still below the capital, the targets that you have for the year-end. Sorry, a follow-up on the capital. You have included on the slide 27 on the bridge to get to the 11.6 on the positive tailwinds. I wonder if we should expect any headwind beyond the IRPH, that we should take into account, this year or next. Thank you.
Paco, you refers to the asset management business. We are in the process of selling of Solvia Desarrollos Inmobiliarios, if finally the transaction is done, we will have a positive impact in capital. We do not have any plan to sell more assets, but obviously, the different businesses that are related with alliances and thus that are evolving in strategic terms could be analyzed. In this sense, the asset management industry is evolving very quickly. We have been different processes of consolidation in different countries, and we are analyzing which options we have. My view is that is not done in terms of capital, is more done in terms of our strategic view about how these kind of businesses are evolving.
Regarding the second question, we really are committed to this. We have done the figures of the presentation with a 50% payout ratio. Our traditional commitment is more between 40 and 50 payout ratio. Obviously, it is a decision that has to be taken by the board, our view is that the situation of the bank allows perfectly to reach this level of payout.
There is an additional thing in the first question, is whether we are expecting potential headwinds, since we are showing the tailwinds to build the capital ratio. Paco was asking if we have any views on IRPH.
No.
I think-
No, Tomás.
Well, as Jaume said, we think there are many reasons for considering that any adverse ruling shouldn't happen. Anyway, if it happens, there are a number of potential scenarios. The thing is that our exposure today to this kind of index is EUR 800 million. Therefore, we don't know what can happen. In any case, in our case, as I said, this corresponds to one of the lowest exposures in Spain, and any potential impact coming from this would be manageable.
What, Tomás, what Paco was asking is if in addition to IRPH, if you think there is any other headwinds for the rest of the year in capital.
In addition, no. In addition to this, I don't see any other things.
Perfect. Thank you very much.
Next question is coming from the line of Britta Schmidt. Please go ahead.
Yeah, hi there. Good morning. Thanks for doing the live Q&A. I've got two questions as well, please. On the TLTRO-2, you've detailed how you will confront the repayment, and you've included in there the 3.1 billion APS account receivable payment. How confident are you that you're going to receive the cash payment over this time frame? If not, what other measures could there be? Maybe you can comment also a little bit on your views on TLTRO-3. My second question is on the non-recurrent costs. There were some non-recurrent costs in TSB in this quarter, EUR 25 million or so, I believe. Could you tell us what this was related to? Were there any other charges still related to the migration? What is the outlook for non-recurrent costs at TSB this year? Thank you.
Thank you, Britta. For the first question, on the quarter, we received already EUR 1 billion, as you mentioned, from the Deposit Guarantee Fund. The amount of the receivable that previously was standing at above EUR 4 billion has now been reduced to EUR 3 billion. The payments, the inflows, will come with the usual process of authorization of the sales, recognition, settlement. Therefore, we are fully confident that we will receive the whole amount of the receivable within the timeframe that we need to consider for TLTRO repayment. In terms of the additional things for TLTRO repayment, we have the funding that we will be doing in the rest of this year and also in the coming year. We have other potential sources of the repo market, which are, as you know, very usually used by us and very accessible to us.
In terms of costs of TSB in the quarter, I think you referred to the extraordinary cost or non-recurring cost, right? There is a total non-recurring cost of EUR 28 million. three of them are for severance payments in ex-TSB. The remaining 25 are TSB's. A significant part of those are related to legal costs, still helping throughout the investigation processes in TSB. These are more than 50% lower than they were in the fourth quarter. There is some other item there as costs related with the continuation of some business banking agreements in the quarter. Those really don't have a recurrence and neither are related to the post-migration situation. Cecilia, what was the TLTRO-
Britta, did you also ask about TLTRO3? Am I mistaken?
Yes, that's right.
Yeah, about the TLTRO3, we don't have a special view on that. We will be just vigilant to it. This is not part of our plans today.
Thank you.
Thank you very much, Britta.
Next question is coming from the line of Alvaro Serrano. Please go ahead.
Good morning. I want to thank you as well for doing the live Q&A. It's very helpful for us. Two questions for me. First of all, on capital, I realize that you have Solvia, Sabadell, Inmobiliaria still to close, still to agree, but it looks like that's obviously going to take you comfortably above 11.6%. Considering your SREP is in 9.6%, is 12% the capital you can run with, that you aim to run with? Or should we expect next year a further buildup of capital? I just want to get a feel of, is there any further journey, and if you could end the year closer to 12% if you do close Solvia or somewhere in the middle, just a bit of color on where the end journey is, given where we are now and given the pipeline of disposals.
The second question is on NII. Apologies if you've gone through it in the presentation because I had to skip out, but the run rates on my numbers point to a -2%. If I annualize Q1 to -2% for the full year versus growth versus 2018. I realize obviously there's seasonality in Q1, but can you maybe give us a bit more color on why you're still confident to grow NII? I think you said 1% or 2%. Is volume growth going to recover? Is it just seasonality? Is there anything else? Thank you.
Thank you, Alvaro. In terms of capital, what we've seen after the capital formation that we've experimented in the quarter and our views for the rest of the year, of course, I think this shows that further capital formation on normal course of business would lead us to above 12% next year. We are not considering necessarily to build, so the formation could take us farther north of 12%. We don't have a specific target to build above the 12%. 12% appears to be, these days, the new normal in the market. Since our capital formation capacity take us there, is where we will find ourselves comfortable. Nothing else to highlight farther in this space. In terms of NII, if you take into account the impact of the EUR 19 million of the seasonality, actually, I take it that your numbers should take you to a different level.
On top of this, you need to take into account that, of course, there are things there that are permanent for the year, like the impact of the wholesale funding cost increase by the issuance of the subordinated debt, and the lower contribution of the ALCO portfolio. The loan growth that we've seen in the first quarter, the fact that we've included this information for your benefit, on where we stand in terms of average balances, because actually, average balances is what drives the NII growth. You can see the relevant progression that we've had in the quarter in comparison with last year's last quarter, but also the other previous quarters. Also, the behavior we've seen in the quarter in terms of loan growth, supports our view to end the year with an average of circa EUR 142 billion for the last quarter of the year.
This drives NII growth to the levels that we are guided to.
Thank you very much.
You're welcome, Alvaro. Thank you.
Next question is coming from the line of Mario Ropero. Please go ahead.
Hello, good morning. Thank you for taking my questions. My first one is on TSB NII. You mentioned margin pressure. If we assume that the NII just keeps constant in the U.K., it would be down by 2.5% in the year. Since there is margin pressure going on, can we expect significantly south of this? Can you give us some color there? Also, you mentioned, if I'm correct, that TLTRO3 is not in your plans. Does this mean that the size of the fixed income portfolio should reduce significantly in 2020 in line with the TLTRO-2 maturities? And finally, if I may, a very quick follow-up on the Solvia Desarrollos sale, if you could comment on the timing of this deal. Thank you.
Mario, we didn't get your second question on the TLTRO2. Sorry. Can you repeat?
No. The second question was that, if I'm correct, I think that the CFO said that TLTRO3 is not in your plans. If this is the case, does this mean that you are happy to see a reduction of the fixed income portfolio in 2020 and 2021?
Thank you, Mario. Thank you very much. In terms of TSB, the margin pressure we've already seen. We've seen loan yields for mortgages reducing significantly in the market since 2014, for instance. Still, this is a business that is done in the U.K. market at double-digit ROE. It's a profitable business. Of course, there's been this compression. To give you an idea, the TSB NIM in the quarter is being 2.12%, if I'm not mistaken. We could precise this more in detail, but I think it's that. We see potentially an erosion of five, six basis points for the whole year. This is the intensity of the pressure.
It could be that this is reduced because, of course, in terms of volumes performance with what we've seen in the quarter is been an increase of the weight of mortgages due to the fact that still some business banking lending products in digital are going to be launched and haven't been available in the first quarter, and therefore, there's been a decrease in the business banking lending portfolio. Those, of course, have higher margins. This is the landscape in terms of what we expect from TSB in this regard. In terms of the TLTRO. You asked about whether us not having plans for using the TLTRO3 would mean that we are happy reducing the size of the portfolio. We don't need it. We don't need this.
As we show in the presentation, we can repay these with the cash flows coming from the sales of the assets, with the inflows coming from the unwinding of the receivable from the Deposit Guarantee Fund. Also using part of the excess liquidity, which is cash that is deposited now at the ECB, less than half or circa half of this. The buffer still will be very significant. We don't need to reduce, we don't need to act on the size of the ALCO portfolio. The size of the ALCO portfolio, we expect it to remain stable throughout this year. The contribution to NII in the quarter has been slightly above EUR 100 million. We expect it to be stable. This is basically a 12% of total NII, and actually remains very similar to what has been in the It's a little bit less.
It always stands around between 12%, 15%, 16%.
For the last question about the Solvia Desarrollos sales. Well, as I said before, we have launched the sale process. The perimeter in consideration for sale has a net asset value that ranges between EUR 700 million-EUR 900 million, we expect to close the sale during this year.
Thank you. Thank you very much.
Next question is coming from the line of Carlos Peixoto. Please go ahead.
Hello. Good morning. Just a couple of questions as well. The first one is a bit more on the specific side, which is related with other income. I saw in your release that there was a positive effect from the renegotiation of some banking contracts at TSB, namely the Visa contract, with positive impacts on other income. My doubt is whether this is a recurrent positive impact that we saw in the quarter. Should we expect it to maintain over the coming quarters, or was this more of a one-off? This would be on the other income. On fees, I was wondering as well if you could give us some color on how do you expect it to evolve throughout the year. First Q was, I would say, particularly or quite a good performance, considering the market environments.
I was wondering how you expect it to evolve throughout the rest of the year. Thank you very much.
Thank you, Carlos. Thank you very much for your questions. Regarding the first one, what we see in other income, is basically fees, revenues coming from the recurring activity. We should expect that this level, not exactly this level, but more or less the activity is maintained throughout the year. Actually, we are expecting growth in TSB for this line of the P&L throughout the year.
Is TSB or total?
Total.
Regarding fees, as I said before, this year we are targeting high single-digit growth, driven by several factors. I think that the first quarter reflects this evolution. Basically, we are having a very good commercial moment in Spain with higher transactionality and increasing our customer base. We have also, since last year, launched a strategy to increasing customer loyalty. This first quarter, we are launching new policies, developing this strategy of increasing customer loyalty. We are also doing very well in terms of insurance production. We are optimistic about achieving this target of a high single-digit for the end of the year in terms of fees.
Thank you. Next question, operator, please.
Next question is coming from the line of Darragh Quinn. Please go ahead.
Hi. Good morning. It's Darragh Quinn from KBW. One question on the U.K., if you could just maybe highlight again your outlook for the year in terms of one-off or non-recurrent items that we need to consider in both revenues and costs. A question, maybe more of a medium-term question relating to Mexico still showing very strong loan growth. It's now roughly, what, about 2.5% or just under 2.5% of the performing loan book. Over the medium term, how much bigger should the Mexican business become in the context of the group? Thank you.
Thank you, Darragh. Regarding the U.K., in terms of revenues, I think we shouldn't be expecting any non-recurrent in particular. I think what we've seen in the first quarter has been, again, catching up with path towards loan growth. We are expecting further loan growth in the U.K. in the coming three quarters. A behavior of a performance from other income, more or less similar to this quarter. In terms of costs, we see that there's been some reduction in the recurring costs and that we still have some non-recurrent, and these non-recurrent are linked to what I just explained, so some legal costs are still running in parallel to the investigations. In the guidance, we've included, but we don't disclose, in the guidance, we've included costs related to the efficiency initiatives that in theory will be undertaken or are being undertaken.
This makes part of the guidance. More details, of course, the guidance and the outlook will be updated when the new CEO that starts 1st of May, Debbie Crosbie, reviews the plan and updates it. In this moment, there will be, as I said, communication on the targets of the plan and more disclosure and more details on how it is going to look like.
Regarding Mexico, I think that the quarter, in fact, has been better in terms of income and profits than in terms of growth, of lending growth. Our view is that at this moment in Mexico, we are beginning to benefit from the increase of the offer with more cross-selling activity, offering more products and services. Also obtaining a cheaper funding because we are consolidating our position in the market. Looking forward, I think that, this year, probably we will see that, better performance in terms of income and profit in Mexico and lower level of growth that we have experienced the last years. We are thinking a lending growth above 5%, taking in account the economy and the situation of some kind of uncertainty that there are in the market.
My view is that Mexico now is more an asset that is going to contribute positively in terms of income and profit. Probably we will see a more slow path of the lending activity.
Next question is coming from the line of Ignacio Ulargui. Please go ahead.
Yes. Hi. Good morning, everyone. Just have one question on the margins in Spain. You have gone through the new production and the offering that you have had. In the 1Q, my question is more on the recent offering that you have done in the mortgage market, where you are just offering like the 190 flat margin for all fixed rate mortgages, which looks to me like a very competitive, particularly on the long end of mortgages above 25 years. Do you see this is a temporary offer ahead of the new mortgage law or that's something to stay, and what would be the impact that you see of the new mortgage law in terms of the cost of the product itself, going forward? Thanks.
Well, I think that this offer was done just to targeting our best customers, with a strong consumption of other products and very loyal. I think that was more, let's say, was offering a commercial and ad aim that really the average of the offers that we are doing. In terms of mortgages, what we have seen in the quarter and probably also in the second quarter, is an increase of the average spreads of the mortgage activity. I think that, in general, the market, because of the new law and because of the new situation of the market, we are going to see better spreads in the future.
Thank you very much. I believe this gives us time for just one last question. Please, operator.
Next question is coming from the line of Andrea. Please, go ahead. Thank you. My questions have all been answered already.
Okay. Well, one more, operator, please. Thank you.
Next question is coming from the line of Stefan. Please, go ahead.
Hi, guys. Good morning. Thanks for this inaugural live Q&A. Much appreciated. A couple of questions, hopefully pretty quick ones on my side. Number 1, on the TSB. From what I understand, you are assuming some of the GBP 160 million of synergies coming through this year, but you are not disclosing how much. If you can just confirm that. Number 2, on the IRPH mortgages, could you just comment when you convert these mortgages, what is the rate that you offer to the people, versus the 190-200 basis points that is available in the market? How comfortable do you feel with the legal risks embedded in the waivers that you ask your clients to sign? Lastly, on the ALCO portfolio, there was another reshuffle from fair value through OCI into HTM.
Can you just explain what the reasons are for that and what we should expect going forward? Are we eventually going to see most of the ALCO portfolio and the securities portfolio as HTM rather than fair value? Thank you.
Thank you, Stefan. About TSB, no, we are not assuming the total GBP 160 million synergies coming this year in TSB. I confirm this. Yes, some of them are already built in the cost base. The extent of the synergies and the cost efficiency achievements will be part of the disclosure that will be made, as I referred to earlier, when Debbie Crosbie reviews and updates the plan. We should expect that at least she will need three, four months, and the plan will be communicated. We think that the potential for synergies remains there, and the timeline will be confirmed with the finished plan. In terms of IRPH, Jaume is going to answer.
We are doing this strategy of offering fixed rates instead variable to customers since the moment where the interest rates were very low. We have followed this strategy with all types of variable mortgages, what are rated to Euribor, what are rated with or without floors, and also IRPH and other variable index. At this moment, more or less, the offer is about a 2% rate for mortgages that have a maturity of 15-20 years, more or less. Obviously, the offer depends on the different type of customers and the different type of assets and the loan to values and all these kind of things that are material in the decision of pricing.
Thank you very much. Stefan, about your last question on ALCO. There hasn't been any reclassification between the OCI and the HTM portfolios. What happened was that there has been sales on the OCI, and there's been purchases on the HTM, but no reclassifications. As you know, the HTM corresponds as a perimeter that is a different business definition and ring-fence, and it has its own dynamics, but there haven't been any reclassification.
All very clear. Thank you, guys.
Thank you.
Thank you, everyone. Thank you very much for listening. Thank you for participating. I'm afraid this is all we have time for today. We'll reconvene next quarter. Again, thank you for listening. In the investor relations department, we are obviously available to answer any other questions that you have throughout the day, and have a great day.