Good morning to everyone, welcome to Unicaja Banco second quarter 2018 results presentation. First of all, as we always do, let me confirm you that we have published the quarterly results, including the financial report and the profit before taxes at EUR 62 million in this quarter, reaching EUR 140 million in the first half of the year, which is almost twice the previous year. Attributable net income also grew from EUR 86 million in 2017 to current EUR 105 million, representing a significant improvement of 23%. If we move to customer funds, in slide eight, you can see that total customer funds grew 4% year-on-year. On-balance sheet funds grew EUR 1 billion or 3% year-on-year, and off-balance sheet funds grew by 7% in the same period.
Regarding on-balance sheet funds, as you can see in the right-hand side of the slide, sight deposits showed a strong growth this quarter, and the mix between sight and term deposits continue a steady improvement. Sight deposits in the second quarter this year represent 77% of total private sector deposits, which compare with 70% one year before. In slide nine, we have the credit and loans trends, which for second consecutive quarter were quite positive. In the left part of the slide, we show the gross loans, and in the right-hand, the performing loans. As you can see in the left side, total gross loans were stable this quarter, even increasing a little bit year-to-date. Total private sector loans grew 1.4% year-to-date, and public sector gross loans increased by 8% in the same period, compensating the 14% decrease in non-performing loans.
These left, as you can see in the right side of the slide, total performing loans growing close to 2% year-to-date. In the right bottom of the slide, we show the private sector performing loans by segment. Consumer loans grew a significant 18% quarter-on-quarter owing to the EUR 367 million of seasonal advances that we have every second quarter. Excluding such advances, consumer loans grew 2.3% quarter-on-quarter or 4% when excluding employee loans and mortgage classified in this segment. Corporate loans also grew close to 1% quarter-on-quarter, compensating the decrease in mortgages. It is worth noting that every quarter, the mortgages trends looks more positive, and despite still decreasing, as you can see in the chart, every quarter, the decrease is slower.
Something that confirms the expected positive trend that is explained by the continued improvement of the new production as you see in the next slide. In this slide, you can see the new loan production grew 42% in the first half of 2018 compared with the previous semester, reaching EUR 1.8 billion. New loans to individuals in the bottom left grew 36% to EUR 645 million year-to-date, and the average yield was four basis point above the second half of last year, mainly due to a significant increase in non-mortgage lending, which grew 43 basis point to 5.64%. Regarding corporates, the increase remained high. The EUR 1.1 billion of new loans was 45% above the previous semester. Regarding corporate yields, new corporate and SMEs loans were formalized at an average yield that was eight basis point above the previous semester.
While corporate yield was stable at 161 basis point, SME yield grew almost 20 basis point during the first six months of the year. In slide number 11, we start to review the P&L. As you can see, net interest income fell 1% quarter on quarter, and the net interest margin decreased four basis point. The lower income from the performing loans was close to EUR 3 million, partially compensated by a small improvement in the debt portfolio and the cost of liabilities. If we look to the customer spread in the bottoms of the slide, this quarter, we have two different trends. On one side, the back book decreased in the quarter owing to the lower performing loan yield, which was impacted by the seasonal advances at zero cost and the lower balances of mortgages with floors.
On the other hand, the front book customer spread grew 25 basis points owing to the improvement of the new production yields, but also because we exclude from the front book performance the seasonal advances at zero cost. In slide 12, we have the regular info regarding our debt portfolio. Total balance fell almost EUR 1 billion to EUR 15.1 billion, mainly owing to additional forward sales. The big bulk of the portfolios are sovereign bonds, and if we include the SAREB bonds, almost 84% is classified in the amortized cost portfolio, something that is explained by our structural excess of retail funding. Regarding its contribution to net interest income, it was pretty stable this quarter at EUR 59 million.
However, as we explained in the previous quarter, the contribution will remain at this level until we realize the latent capital gains of the fair value to other comprehensive income, the former available for sale by the end of the year. Once the gains are realized, the contribution will go back to levels closer to the ones we had during 2017, between EUR 50 million and EUR 55 million per quarter. If we move to slide 13, you can see the fee income evolution in the quarter. Total fee income grew 5% quarter on quarter, helped by seasonal factors, but also owing to close to EUR 3 million of non-recurrent fees booked this quarter.
On top of this, as we explained last quarter, following the full acquisition of Unión del Duero in the first quarter 2018, there are some fees that are not considered in this P&L line anymore, representing more than EUR 3 million year to date. Reported fee income in the first half of 2018 fell 1% compared to 2017. If we adjust this Unión del Duero impact, fees grew more than 2% year to date. Moving to cost, as you can see in slide 14, operating expenses fell 3% in the first six months of 2018 compared with 2017, and almost 6% compared with 2016, driven mainly by lower personal expenses. As we said in previous occasions, we expect to continue to reduce personal costs, although this will be probably compensated by higher general expenses.
As you all know, we are reviewing the potential synergies coming from the legal integration of EspañaDuero and analyzing additional potential cost savings. We will give you the details in the coming quarters, probably at 2018 final year results. So far, we can just confirm that our idea is to mitigate the restructuring costs with the realization of gains from our debt portfolio. In slide 15, we have included the details of the impairments. As you can see, total impairments improved significantly compared with 2017. In the first six months of 2017, we booked EUR 165 million of provision, including the ones related to the reorganization of the life insurance business of the group. This has fallen to just EUR 41 million in 2018. It is worth noting that in this second quarter, we released some provision related to both loans and foreclosed assets.
Such a positive trend has enabled us to further reinforce other type of provision during the quarter, mainly the legal provisions. On costs of risk, for a third consecutive quarter, we have released some credit provisions. This was partially explained, as it happened in the previous quarter, by the disposal of a small written-off portfolio. In the first six months of 2018, we have released EUR 18 million following these written-off disposals. As you can see in the right-hand side of the slide, the annualized cost of risk year-to-date, excluding such disposals, was just two basis points, well below the 15 basis points booked in 2017 and the 25 basis points of 2016. Such a positive trend is a result, among others, to the relative higher coverage level, but also to the continued improvement of the asset quality of the sector that is translated in higher recoveries.
Regarding foreclosed assets, we have also released EUR 7 million of provision this quarter, which is a very positive number. As we discussed in previous occasions and confirmed in previous quarters, in 2017, foreclosed assets provisions were higher owing to the impact of updating foreclosed asset appraisals. We don't expect these provisions to become material again in the coming quarters. If we move now to asset quality, in slide 17, we have details on the evolution of our non-performing loans. The trends remain positive, even more positive than in previous quarters. On the top of the slide, you can see the steady reduction of NPL balances and the NPL ratio. In the second quarter, NPLs fell 9% quarter-on-quarter, or 14% year-to-date, or an impressive 20% year-on-year.
In the bottom of the slide, you have the details of the quarterly NPL variation, where you can see that the pace of reduction has accelerated farther this quarter. Gross entries continue to decrease one more quarter, something that, together with higher recoveries, explained the positive trend of the quarter. In slide 18, we updated our NPL coverage position that remained pretty stable at 55% in the quarter. In some segment, coverage is even much higher, like in developer loans, which it is almost 78%, or in other individual loans, which is 72%. It is worth noting that in this segment, called other individual loans, 94% of the EUR 490 million of non-performing loans are mortgages that are classified in this segment and not in mortgages because we apply a prudent accounting approach.
This also explains, as you can see in the right of the slide, that 92% of our non-performing loans balances are secured, of which 80% are secured by finished building. Something that leave us in a very comfortable coverage position. It is also worth noting that the regional appraisal of collaterals represents two times current NPL balances . Again, something that summarize pretty well the strong coverage levels of the group and the flexibility that this situation gives us. If we move now to foreclosed assets in slide 19, you will see an update of its situation and the main trends. In the left side of the slide, we have an update of the coverage ratio of our foreclosed assets by type. Overall coverage remains at 64%, with land having the highest coverage above 80%, although land now only represents EUR 129 million.
On the right side, we have included the trend and results of the real estate asset disposals. In the first semester, we have released EUR 46 million of provisions from disposals, representing 32% of the net book value of the assets sold. In the bottom right, we show the outflows. In the second quarter, we haven't sold any portfolio, but outflows represented almost EUR 100 million. In slide 20, we summarize the non-performing asset trends. As you can see, we have reduced by 10% year-to-date the non-performing assets gross balances to EUR 4.1 billion gross. NPA coverage remains stable at 59%, and in net term, foreclosed and NPL balances represents only 3% of total assets. As Enrique explained before, a figure that summarize pretty well the progression of the asset quality of the group is the Texas ratio.
Such ratio, as you can see in the bottom of the slide, has decreased one more quarter to 66% among the lowest of the domestic listed Spanish banks. In terms of liquidity, we update the details in slide 21. Our LTD ratio remains low at 75%, and the net stable funding ratio and the liquidity coverage ratio continue to be well above the requirements and among the highest of the sector. In terms of wholesale maturities, we don't have significant or expensive maturities this year. However, as you can see in the slide, between 2019 and 2020, almost EUR 1 billion of cover bonds at an average cost of 2.5% will mature. Finally, regarding the amount of liquid assets, as you can see in the bottom left, they continue to represent more than 25% of total assets. Finally, moving to solvency in slide 22, you can find our capital ratios position.
As you can see in the top left, current regulatory capital ratios are well above the SREP requirements, with a EUR 1.7 billion buffer over the CET1 and slightly above EUR 900 million buffer in total capital. CET1 phase-in reached 15.3% in June 2018, while total capital was 15.5%. It is worth noting that we are not including as Tier 2 normal risk provisions anymore. Bear in mind that for us, the regulatory solvency is very relevant because the phasing calendar that we apply finish in 2023 rather than the regular 2019 deadline. In other words, our regulatory capital ratios will not meet the fully loaded ones until 2023. In fully loaded terms, the CET1 reaches 13.5%. However, if we deduct the unrealized capital gains from our debt portfolio, something that will probably happen in the coming quarters, the ratio remains quite high at 13%.
Finally, as we used to do, we have included our credit risk weights in the bottom left of the slide. As you all know, we continue to apply a standard approach, as a consequence, very conservative credit risk weights. I will now leave the floor again to Enrique for some final remarks. Thank you.
Thank you, Pablo. As we usually do, let me finish the presentation with some final comments that you have in page 25. These remarks remain the same than last quarter. For us, it's quite important that they remain the same because it means that we are going in the right direction. We have been able to show resilient results generation capacity one more quarter, with the bottom line growing to EUR 105 million, almost 23% above the previous year. This has been possible owing to the improvement in the top line, cost control, and lower provisions. The commercial activity continues to improve, with credit and loans starting to stabilize owing to the higher new loan production and more stable mortgage trends. Something very important, such an improvement is taking place with the right pricing. It's also worth noting that NPAs continue to decrease.
This quarter, with a very relevant decrease of NPLs. On top of the pace of decrease, it's also important to realize that we are doing it with a positive contribution to the P&L, partially explained by a best-in-class coverage of the problematic exposure. Finally, as we have been doing since we became listed, we are generating capital and keeping an extraordinary comfortable liquidity position quarter after quarter. Thank you very much.
Thank you, Enrique. Thank you, Pablo. We will now start with the Q&A. There are some questions, and Enrique, this one probably is for you. Mari Paz Ojeda from Banco Sabadell, also Carlos Peixoto at BPI. They're asking us if we can provide the expected impact on our views on the potential new taxation, sorry, for the sector.
Well, it's really very difficult to estimate the potential impact of something that has not happened and that has not been confirmed yet. It's true that during the last weeks, there have been a lot of different alternatives analyzed in research reports and in the press. All we can say is that, of course, if Spanish banks' taxes finally increase, it won't be good news. However, if it happens, we are analyzing different measures to adapt to this situation. That's all I can say.
Thank you, Enrique. Pablo, we've got one regarding the debt portfolio, the decrease in the quarter. They're asking us that it is not reflected in the balance sheet, if we can elaborate a little bit. Thank you.
In the balance sheet and in the NII breakdown, the balances include the forward sales that we don't include in the presentation. That is why there are some difference between the balance sheets and the presentation. Regarding this quarter changes, the debt portfolio, in particular the fair value to OCI portfolio decreased in second quarter because of the forward sales, while the structural portfolio increased its size slightly. As core rates moved lower during the second quarter and we had message from the ECB related to the end of the QE and the potential rate hikes in the second half of 2019, we decided to reduce the risk of this portfolio, switching some interest rate swaps into forward sales, so that the size of the forward sales has increased.
In terms of size and depending on market conditions, we can expect to increase the exposure to our Spanish sovereign debt in the structural portfolio to replace part of the forward sales already executed and to invest the excess liquidity of our balance sheet. For the fair value to OCI portfolio, as we mentioned previous times, the size will not be linked to our liquidity position, as this is an opportunistic portfolio to obtain additional gains. The size and risk sensitivity of this portfolio will depend on our view of the evolution of the financial markets.
Thank you, Pablo. Jialin Liu from Ahorro Corporación is asking us on the contribution from the debt portfolio to net interest income and expected trends.
As we explained in previous quarters and already mentioned in the presentation, as soon as the forward sales that are currently yielding in the NII reach the settlement date, the contribution from the debt portfolio to NII will decrease. The final timing is not decided yet, and we cannot confirm it, but it will be done throughout this year. The potential new purchases of bonds for the amortized cost portfolio to invest the excess liquidity and to replace some of those forward sales should smooth the decrease of the contribution to NII. Timing and yield of the new purchases will determine the final impact, but we have already explained the normalized contribution to NII is more close to the last year levels than to the one achieved in the first half of this year.
Thank you, Pablo. There is another one for you, Pablo, on the interest rate sensitivity and the expected impact from the recent flattening yield curve.
We remain, as last quarter, positively positioned toward an increase in interest rates, specifically for the 2020, 2021, and not in the short term. Close to our view on rates. The impact in NII of a parallel increase of 100 basis points of the rates curve from the month 12 to the 24 month, so the second year after the rate hikes, remains similar as the first quarter at around 13% of NII. Let me remind you that this is obviously using a lot of assumption, but we think it's a conservative number, but realistic assumption. For example, we consider changes in the mix between term and sight deposits, and we consider in this a constant balance sheet. We can face impact in the coming quarters in NII versus our projections if the current implied curve remains for the next few quarters.
We remain comfortable with the consensus of some potential increases of the refi rates from the ECB in the second half of 2019, which should push indices up, and so helping the NII in that sense.
There is one question coming from Francisco Riquel at Alantra. He's asking us if we can explain the decrease of the customer spread in the quarter, and the difference, why the trend is so different between the back and the front book.
The net interest margin fell in the quarter owing to the lower loan yield, mainly in mortgages, and that, as you know, continued to decrease due to the lower balances of mortgage with floors. The different trend between the back and the front book is mainly explained by the mix of the new production, but also because in the new production customer spread, we didn't include the seasonal advances that we have every second quarter, and this explained some basis point of the customer spread decrease. On top of that, as I said, the back book reflects the lower balances with mortgage floors.
Thank you, Pablo. There is a couple of questions coming from Nacho Ilargi from Deutsche Bank and Carlos Peixoto at Banco BPI on the net interest income guidance for this year. An update.
As we said in previous occasion, we reiterate our expectation that the NII will grow this year. Once we realize the gains from the fair value to OCI portfolio, the interest income from such portfolio will be lower. Despite such an impact, we continue to expect NII of 2018 to be above the 2017.
Thank you, Pablo. Mario Ropero from Fidentiis, Francisco Riquel from Alantra, Nacho Ilargi from Deutsche, and Carlos Peixoto from BPI are asking us on an update on mortgage floors.
The balance of mortgages with floors continued to decrease one more quarter, but every quarter the decrease is lower. Balances with active floors were EUR 2.8 billion at the end of last year. These fell to EUR 2.5 billion in the first quarter, and they have decreased some more in the second quarter to around EUR 2.3 billion. Bear in mind that the decrease is not only explained by removal of floors, it is also explained by the natural amortization of the portfolio. As we explained in the presentation, the lower contribution from these mortgages explained around EUR 2 million of lower interest income in the second quarter compared to the first quarter, while it represented almost EUR 3 million in the previous quarter. Trends are starting to stabilize a bit further, although it will continue to be a headwind in the coming quarters.
Thank you, Pablo. Probably, Enrique, you can take this one. Francisco Riquel from Alantra, Nacho Ilargi from Deutsche, and José Abad from Goldman Sachs are asking us on the guidance for loan growth. When do we expect to see clear lending growth ahead?
Yeah. Okay. We expect to see the inflection point this year. As we explained in the presentation, new production continued to improve in the second quarter of 2018. New mortgage production is growing every quarter, but it's still not enough to compensate the natural amortization. Every quarter, the decrease is lower. In the second quarter of 2018, performing mortgages fell less than 1% quarter-on-quarter. This compares with quarterly decreases close or even above 2% during the last couple of years. Little by little, the mortgage book is starting to stabilize. Something that is required to report clear overall loan growth. In corporate loans, we grew 1% quarter-on-quarter and 2.5% year-on-year. In consumer loans, excluding the seasonal advances and the runoff mortgage portfolio classified in this segment, the growth was 4% quarter-on-quarter and above 5% year to date.
It's also worth noting that the trend in new production yields remain very positive, and we continue to focus in quality lending growth with right pricing policies. Far, the trend continues to improve every quarter, so we reiterate our guidance for an inflection point this year. If this trend is confirmed in the coming two or three quarters, the balances should start growing at least at low single-digit rates.
Thank you, Enrique. Pablo, Nacho Ilargi at Deutsche Bank and Carlos Peixoto from BPI are asking us an update on fees.
Sure. First of all, it is important to remember that from first quarter 2018 onwards, fee income does not include some fees related to the insurance company, Unión del Duero Vida y Pensiones. Such fees in 2017 represented around EUR 8 million. This quarter, there are also close to EUR 3 million of non-recurring fees related to the insurance business. However, despite the mentioned impact, fee income in the first half of 2018 grew 2% year to date, excluding the impact of Unión del Duero. During the first half of 2018, the market volatility hasn't helped, really, the asset under management. Even with that, asset under management grew 7%, and non-banking fees more than 6%. For the second half of the year, if we have more positive market conditions, the trend should also be positive in terms of fees gathering.
Thank you, Pablo. There is one coming from Francisco Riquel at Alantra, asking us if we can explain the breakdown of other income and expenses.
Yes. On the positive side, we have EUR 3 million from real estate rentals, plus EUR 8 million from our real estate business, from sales of the real estate business, plus EUR 5 million from Unión del Duero. Some other small contribution that represents around EUR 2 million. All these positive impacts mitigated in full the negative of this quarter that were close to EUR 17 million from the contribution to the resolution fund and the DTA levy at around EUR 1 million, and around EUR 1 million of real estate maintenance cost.
Thank you, Pablo. Enrique, Mario Ropero from Fidentiis is asking us if we can update the expected cost synergies and savings for the coming years.
Well, as Pablo said in the presentation, we are currently reviewing the potential savings and the related and needed restructuring costs. These costs will be mitigated by these unrealized gains in our fixed income portfolio. Well, probably we will update the situation soon in coming quarters.
Thank you, Enrique. Another one for you on EspañaDuero. When do we expect to fully and legally integrate EspañaDuero?
Well, as you all know, this was approved in our annual general meeting. What I can say is that we are now completely ready and just waiting for the final authorizations and formal and required approvals. We will execute the final integration once we receive them, probably after the summer.
Thank you, Enrique. Pablo, we got several questions on the provisions. Starting with probably the loan loss charges. Mario Ropero at Fidentiis, Mari Paz Ojeda from Banco Sabadell, Juan Tuesta at JB Capital, Carlos Peixoto at BPI, and Jalan Tauro are asking us what can they expect on the cost of risk going forward in loan loss charges, and if it's still the three basis points cost of risk a good reference?
Okay. As we explained in the presentation, in the first half of the year, we sold some small written-off portfolios that explain around EUR 18 million of provision release. Excluding such disposals, the cost of risk was very close to zero, but we were not releasing provision as the reported figures show. That is why despite such low charges, we don't expect to report continuing releases in the future. We have a relative high coverage level and asset quality trends are positive. In the short term, cost of risk could remain low, which is very positive for our P&L trends, but we prefer to be prudent on net the overall provisioning effort, including credit for closed assets. Another provision should remain close to our 30 basis point guidance, excluding any extraordinary restructuring cost, as we mentioned.
Yeah. We can move, Pablo, now to foreclosed assets provisions guidance.
Okay. As I said during the presentation, the big bulk of provision for foreclosed assets booked in 2017 were a consequence of the reappraisal of the assets. Once the prices are updated, and considering the level of coverage that we currently have, foreclosed assets provision should be below previous year. As I said in the previous question, we look at an overall provisioning effort as a reference, so some quarters, one type of provision could be better or worse than others, but at least for this year, we expect to reduce the overall P&L provision.
Pablo, finally, on impairments, Mari Paz Ojeda at Banco Sabadell, Paco Riquel at Alantra, Juan Tuesta from JB Capital, and Carlos Peixoto from BPI are asking us what did other provisions include and what we expect for this type of provisions going forward.
In other provision, we book impairments related to off-balance sheet guarantees, legal risks, and other type of provisions such as the restructuring cost. In the second quarter, the provisions were mainly related to legal risks. Following the positive trends in loan losses and foreclosed assets impairment in this quarter, we have decided to consider an even more prudent approach for this type of risks, in line with the conservative management culture of the group. As we have said in the past, we will probably continue booking these types of provision on a regular basis going forward. However, going forward, as I said before, total impairments of around 30 basis point of gross loans, excluding the extraordinary restructuring cost, should remain a good reference.
Thank you, Pablo. Enrique, we got also several analysts like Carlos Peixoto at BPI, Mari Paz Ojeda at Sabadell, Mario Ropero, Fidentiis, Paco Riquel, Alantra, Ilargi from Deutsche, and Juan Tuesta from JB Capital, asking us on our NPA disposal policies, if we can elaborate our views on our strategy.
Well, our strategy regarding NPAs is to continue reducing balances while preserving our shareholders' value. In the second quarter of 2018, we sold a small portfolio of NPLs. Going forward, we will continue to analyze alternatives, including disposals, as we have done so far. We do not expect to change this strategy, among others, because it has been very positive so far. This quarter, the big bulk of the decrease came in the form of NPLs. While, for example, last year, we reduced more foreclosed assets than NPLs. We always analyze different options, and we formalize those deals that we believe make more economic sense.
Thank you, Enrique. There is another one for you, coming from Mario Ropero at Fidentiis and Mari Paz Ojeda at Banco Sabadell on our solvency on a Common Equity Tier 1 fully loaded, that excluding the capital gains from the portfolio continues to increase. The question is, what will be the level at which we will start analyzing a higher payout?
Well, we have a CET1 fully loaded target of 12%, and our current CET1 fully loaded is 13.5%, which is 150 basis points above such a target. However, excluding the realized gains of our debt portfolio, the CET1 fully loaded is 13%, leaving the buffer with our target at 100 basis points. We do expect to realize a significant part of our current unrealized gains, as we have said. We focus on the ratio without such gains because it's the medium-term reference. As we explained last quarter, we continue to generate organic capital significantly, among others, because our NPA balances are decreasing at a good pace. However, there are no changes to our dividend target so far. That is to pay in cash dividends of 40% of the net income by 2020.
Thank you, Enrique. José Abad from Goldman Sachs is asking us on our views on M&A and sector consolidation.
Well, really nothing new on this matter. We continue to see a lot of comments and reports related to sector consolidation. As we said in the past, we understand that it's a sector topic. For us, really nothing has changed. We still have synergies to crystallize from the acquisition of EspañaDuero, which is one of our priorities. We work every day to improve shareholders' returns, taking conservative and prudent risks with the idea of generating as much value as we can. We believe that we can do it in a standalone basis without acquiring or merging with any other bank. However, as we did in the past, and as everyone does, we will analyze whatever opportunities appear. At this moment, our priority is to deliver on our business plan.
Thank you, Enrique. One final question for you, Pablo. They're asking us if we can update our exposure to the SAREB, please.
Yes. We initially had an exposure of EUR 61 million, of which EUR 43 was equity, and the remaining EUR 18 million was subordinated debt. In June 2018, we have fully provisioned the equity, and for the subordinated debt, we currently have EUR 10 million of provision. The remaining total potential exposure to this has been reduced to only EUR 8 million.
Okay. Thank you, Enrique. Thank you, Pablo. We will now finish the webcast. If you need further details or you want to discuss some other issues, please do not hesitate to contact the IR team. We wish you all a deserved and great summer break holidays. See you next quarter. Thank you.
Thank you.