Good morning to everyone, and welcome to Unicaja Banco first quarter 2018 results presentation. I am Jaime Hernández, the Head of IR. First of all, please let me confirm you that we have published the first quarter results documentation, including the quarterly financial report and this presentation this morning before market open in both the CNMV and our corporate website. Today, our Chief Financial Officer, Pablo González, will go through the slides to review with you the main trends of the quarter. After the presentation, we will answer the questions received through the webcast and the IR inbox. As always, for further info, the IR team will be available after the webcast. Pablo, whenever you want.
Thank you, Jaime. Thank you all for attending this presentation. As we usually do, we have split the presentation in four sections. I will start summarizing the key highlights of the quarter. We will review the results and main business trends. We will continue reviewing the asset quality, liquidity, and solvency. We will finish with some final remarks. Let me start in page four, summarizing the main trends of the quarter. First of all, let me confirm that in first quarter 2018, we have received the formal authorization for the acquisition to Mapfre of the 50% stake that we didn't own of Unión del Duero Vida y Pensiones. This is the first quarter that we book 100% of the business compared to the previous 50%.
As we will see later, the acquisition had an impact close to 30 basis points in CET1 and explains some minor changes in our financial statements. For example, in fee income and other operating income. Regarding the business, in first quarter 2018, we saw some positive trends on volumes. On one hand, performing loans grew quarter-on-quarter, slightly below 1%, which is quite a positive considering the deleverage we saw in the previous quarters. Such trend was supported in additional increase of new loan production. Continued to improve a significant 55% in corporates and 31% in individuals compared with the first quarter of last year. Customer funds also grew close to 3% year-on-year, with off-balance sheet funds increasing above 8%. Although at a slower pace, the mix between sight and term deposits continued to improve this quarter.
Moving to results, net income reached EUR 57 million in this first quarter, which is 13% above last year. Net attributable income grew 12% year-on-year to EUR 58 million. Net interest income continues to grow for a second consecutive quarter following the repayment of CoCos FROB in August of 2017. Total costs fell 2% year-on-year. Finally, I would highlight the significant improvement of impairments, although partially explained by some specific issues that we will explain later. Finally, on asset quality, liquidity, and solvency, I would like to highlight that we continue to reduce NPAs one more quarter. Gross non-performing assets fell 5% in the quarter and almost EUR 1.2 billion year-on-year. The non-performing assets coverage also improved in first quarter from the previous 56% to the current 59%.
On liquidity, we continue to have a very comfortable position with net liquid assets representing slightly more than 23% of total assets. In terms of solvency, despite a negative impact of around 30 basis points owing to the acquisition of Unión del Duero, which was fully integrated for the first time this quarter, our regulatory CET1 grew from 14.6% to 15.4%. In fully loaded terms, the CET1 improved more than 70 basis points to 13.5%. It is worth noting that these ratios are not considering close to 20 basis points of organic capital generation related to the first quarter 2018 retained earnings. As you probably know, we do not include in our solvency ratios retained earnings until they are audited.
However, as we will see later, such a significant improvement despite not considering first quarter 2018 retained earnings, was benefited by the positive mark-to-market of the unrealized gains in the fair value to other comprehensive income portfolio. Moving to results and business, I will start with the P&L in slide six. Net interest income grew 1% quarter-on-quarter in first quarter 2018. As we will see later, the improvement was explained by stable interest income from loans and a slightly higher contribution of the debt portfolio, but also owing to additional improvement in the cost of funding. Fee income fell 6% quarter-on-quarter and was pretty flattish compared with the previous year. However, if we adjust the impact from the full consolidation of Unión del Duero, fees were 3.5% above first quarter last year.
Associates grew 20% compared with fourth quarter 2017, despite not including Unión del Duero for first time this quarter. The year-on-year increase is much higher because we formalized the reorganization of the insurance business in the second quarter of last year. Trading income was slightly below the previous quarter and do not include gains to compensate the expected provision for restructuring costs. That, as you know, will be booked in the coming quarters. Other operating income and expenses include EUR 6 million from Unión del Duero and other EUR 14 million from our real estate to the DTAs levy, explain the EUR 17 million book this quarter. It is worth noting that in the first quarter 2017, other operating incomes are booked that quarter. All in all, gross margin reached EUR 250 million in first quarter 2018, slightly below 2017, mainly owing to the mentioned extraordinary gains and lower trading income.
Total costs were pretty stable in the quarter, although decreasing 2.5% compared with last year. Total impairments were slightly below the previous quarter, although significantly lower than the previous year. It is worth noting that the cost of risks includes EUR 9 million release from a disposal of a small written-off portfolio. However, despite such disposal, total impairments were well below the previous year. Such trends left the profit before taxes at EUR 78 million and net attributable income at EUR 58 million, 12% above the previous year. If we move to customer funds in slide seven, you can see that the total customer funds grew 3% year-on-year. On-balance sheet funds were pretty stable, growing 1% year-on-year, and off-balance sheet funds growing above 8% in that same period.
Regarding on-balance sheet funds, as you can see in the right-hand side of the slide, sight deposits were stable this quarter and represented 75% of total private sector deposits, which compares with a 68% one year before. On the other hand, term deposits went from 32% of total deposits to the current 25%. In slide eight, we have the credit and loss trends, which were more positive this quarter than in previous quarters. As you can see in the top left of the slide, total gross loans were stable compared with the balance at the end of the year. The 5% decrease in non-performing loans balances was compensated with stable private sector loans and a 7% increase in public sector loans. In the left bottom, we show private sector gross loans by segment.
While individuals' gross loans fell close to 1% in the quarter, corporates grew 1% and SMEs close to 2%. In the right-hand side, we have the performing loans details. As I said before, total performing loans grew 0.5% quarter-on-quarter, helped by a 7% increase in public sector loans. Private sector loans were more stable in the quarter, as you can see in the bottom. If we look at the segment breakdown, you will see that corporate loans compensated the still decrease in mortgages. Corporate loans grew 3% quarter-on-quarter, while mortgages, consumer, and other loans fell by 1%. Slightly better trends compared with the previous quarters. All in all, loans were stable this quarter, and such trend was mainly explained by the continued increase in new lending that you can see in the next slide.
In this slide, we can see that private sector new lending grew by 45% in first quarter 2018 compared with the previous quarter. Individual new loans in the bottom left grew more than 30% to EUR 304 million this quarter. The average yield was 15 basis points higher compared with last quarter, mainly to a significant increase in non-mortgage lending, which grew from 500 basis points to almost 570 basis points. Regarding corporates, the increase was even higher. The EUR 528 million of new loans was more than 50% above the previous quarter. In terms of yield New corporate loans were formalized at an average yield slightly below the previous quarter, owing to the relative higher weight of corporates versus SMEs. However, while corporate yield was stable, SMEs new lending yield grew 15 basis points compared with fourth quarter 2017.
In the next slide number 10, we start to review the P&L. As you can see, despite the calendar effect, the top line increased in the first quarter by 1% or 5% compared with the first quarter of 2017. Net interest margin improved a couple basis points quarter-on-quarter to 108 basis points and almost 10 basis points in the last two quarters. In the right top side of the slide, as we usually do, we have included the detailed bridge with the quarterly evolution. On one side, we have a negative impact from mortgage floors of around EUR 3 million, and other EUR 3 million of lower non-performing loans recoveries compared with fourth quarter 2017. However, performing loans, excluding the impact from mortgage floors, improved by EUR 2 million, which are very positive news, supported by a four basis points increase in lending yields this quarter.
On the liabilities, we also had some positive news, with the overall cost decreasing by EUR 2 million. Regarding the debt portfolio, its contribution increased EUR 3 million this quarter. Bear in mind that we have not realized most of the capital gains from the fair value to other comprehensive income portfolio yet, partially explaining such improvement, and that will be a headwind in the coming quarters. If we look the customer spread in the bottom of the slide, this quarter, the trends were also positive. Starting with the back book, the lending yield grew for first time in many quarters to 209 basis points, which are really good news. Such trend, together with a slightly lower cost of deposits, lead a customer spread quarterly increase of four basis point to 188 basis points. On the right-hand side, we have the customer spread of new production.
As you can see, it was slightly below the previous quarter, owing to a small decrease in new lending yields. However, both lending yields and customer spread of new loans is above the back book, which is quite positive for NII trends. In slide 11, we have updated the details of our debt portfolio for first time under IFRS 9 rules. Total balance grew to EUR 16.2 billion in first quarter 2018. As we explained in the previous quarters, despite increasing the structural excess of retail funding owing to the deleverage, we did not increase the size of the portfolio until now. Among others, this decision was taken because we wanted to take advantage of the higher flexibility under IFRS 9 in the amortized cost portfolio, because as you know, under IFRS 9, we can hedge this portfolio and position ourselves to what we expect in terms of interest rates evolution.
The big bulk of the portfolios are sovereign bonds, almost 80%. Regarding its breakdown, we have two-thirds of the portfolio under the amortized cost, and the other third splitted between the fair value to other comprehensive income and the Sareb bonds. The overall debt portfolio grew EUR 1.3 billion in the first quarter 2018, with the following breakdown. The fair value to other comprehensive income grew by EUR 1 billion. The structural portfolio in amortized cost grew by another EUR 0.5 billion. Finally, the Sareb bonds fell slightly by EUR 0.2 billion. As a result of these changes and the actively management on hedging of the portfolio, the overall yield improved to 1.38%. Regarding its contribution to net interest income, it was slightly higher this quarter. It grew from EUR 56 million to EUR 59 million.
However, once we realized the latent capital gains of the fair value to other comprehensive income, the previous available-for-sale portfolio, its contribution will go back to levels more close to the ones of the previous years and the one that we have guideline. If we move to slide 12, you can see fee income evolution in the quarter. Total fee income was pretty stable compared with last year. However, it is worth noting that from first quarter 2018 onwards, fee income is not including Unión del Duero fees, which last year represented around EUR 8 million, and in the first quarter, it had a negative impact of around EUR 2 million. If we adjust the evolution of fees by the contribution of Unión del Duero, fees grew almost 4% year-on-year, although they decreased by 3% quarter-on-quarter.
Bear in mind that this impact will be reflected through the whole year. Moving to costs in slide 13, operating expenses fell 2.5% year-on-year, driven by lower personal expenses. That decreased by 4% in the period. As we anticipated last quarter, we expect to continue to reduce personal costs in 2018, although this will be probably compensated by higher general expenses. Also, as you all know, we are reviewing the potential synergies coming from the legal integration of EspañaDuero, and we will give you the details in the coming quarters. As a reminder, the restructuring costs needed to crystallize further synergies will be compensated in P&L by trading income, as we explained in the fourth quarter 2017 result presentation. Moving to slide 14, we have included the details of first quarter 2018 impairments.
Total impairments improved significantly in the quarter to EUR 60 million. For a second consecutive quarter, we released some credit provisions. In this quarter, this was explained by the disposal of a small written-off portfolio that enabled us to release EUR 9 million of loan loss charges, explaining the EUR 5 million reported release in the quarter. Even adjusting the cost of risk for such disposal, the trend continues to be quite positive and well below the medium-term target of 30 basis points. In the right-hand side of the slide, the annualized cost of risk in first quarter 2018, excluding this disposal of written-off loans, was eight basis points, slightly below the 15 basis points booked in 2017 and well below the 25 basis points of 2016. Such a positive trend is a result, among others, to the relatively higher coverage level.
Foreclosed assets impairments were EUR 4 million in the quarter, compared with the EUR 20 million in first quarter 2017. As we discussed in previous occasions, in 2017, foreclosed assets provisions were higher owing to the impact of updating the foreclosed assets' appraisals. Now that appraisals are already updated, the additional provisions required are relatively lower. We move to the asset quality section, we have in slide 16, details on the evolution of our non-performing loans, non-performing loans' positive trends are even improving. On the top of the slide, the continued reduction of non-performing loan balances and the non-performing loan ratio. The non-performing loans fell 5% quarter-on-quarter and 15% year-on-year.
In the bottom of the slide, you have the details of the quarterly non-performing loan variation, showing that the pace of reduction has accelerated farther this quarter. Gross entries continued to decrease during the first quarter 2018, something that, together with the stable recoveries, led to a positive quarterly reduction of EUR 141 million. In slide 17, we updated the non-performing loan coverage. That following IFRS 9 provisions grew from the previous 50% to the current 55%, a very comfortable coverage considering the high level of collateralization, and that the original appraisal of collaterals represents two times the current non-performing loan balances. We move to foreclosed assets in slide 18, you will see that the trend remained positive, too. In the table on the top left, we show the details and results of the real estate assets disposals.
Since last quarter, we have included a line in the bottom of the table to show other portfolio sales formalized with third parties that also enable us to deconsolidate part of the real estate assets. In first quarter 2018, we sold and deconsolidated EUR 178 million of gross foreclosed assets, and we released EUR 14 million of provisions. The percentage of provision released over the book value, excluding the deals classified as other portfolio sales, continued to grow slightly above 30% in first quarter 2018, although we don't expect it to improve further going forward. In the chart on the top right of the slide, we show the quarterly evolution of net foreclosed assets. In the last 12 months, we have reduced the net exposure by 32%, leaving total foreclosed assets at EUR 631 million, representing 1% of our total assets. These are the net exposure.
We have also updated the chart in the bottom right, where we show the quarterly gross outflows, which is the amount of foreclosed assets sold and rented. During the first quarter 2018, gross outflows, including disposals and rentals, reached EUR 187 million, of which 22% were land assets. On slide 19, we show you the coverage ratio of our foreclosed assets by type. Land continues to have the highest coverage ratio, above 80%. However, land assets only represent EUR 129 million in the first quarter 2018. The overall coverage remains close to 64%, a coverage level that, as it happens with non-performing loans, makes us feel very comfortable, among others, because the updated appraisal value of our foreclosed assets represents almost two times their net book value. All in all, in slide 20, we sum up the NPA trends.
As you can see, we have reduced by 5% quarter-on-quarter the non-performing assets balance, and almost 22% on a yearly basis. The outstanding amount of non-performing assets in net terms represents now 3% of total assets. The coverage ratio grew from previous 56% in fourth quarter 2017 to 59% in the first quarter 2018. These coverage levels, as I said before, make us feel quite comfortable and reflect the prudent approach of the bank regarding its problematic exposure, something that is also reflected in the continued decrease of our Texas ratio, that in the first quarter 2018 further improved to below 68%. In terms of liquidity, you have the details in slide 21. Our loan to deposit ratio remains low at 77%, and our net stable funding ratio and liquidity coverage ratio continue to be well above the requirements.
In terms of wholesale funding maturities, it won't be something significant this year. However, between 2019 and 2020, almost EUR 1 billion of CoCos FROB bonds at an average cost of 2.5% will mature, something that will continue to reduce the medium-term cost of funding. Finally, regarding the amount of liquid assets, as you can see in the bottom left, they represent close to 23% of our total assets. Now moving to solvency, in slide 22, we show the quarterly evolution of the CET1. We decided to include a detailed explanation this quarter following the significant improvement of the reported ratios owing to different factors. On the top, we have the CET1 fully loaded details, where you can see that grew from 12.8% to 13.5%. On one hand, we have a 40 basis point negative impact from the higher deductions related to the acquisition of Unión del Duero Vida y Pensiones.
However, this was more than compensated by the 30 basis points positive impact of IFRS 9 and the 20 basis points from the decrease in risk-weighted assets, mainly explained by the reduction of non-performing assets. Other positive impacts of 60 basis points that includes the mark-to-market of fair value to other comprehensive income portfolio during the quarter, and other positive effects, mainly lower DTAs deductions explained by these higher deferred tax liabilities as a result of the higher unrealized capital gains. All these impacts left the reported CET1 fully loaded ratio at 13.5%. However, as you probably know, we don't include retained earnings in the solvency ratios. If the results are not audited. If we consider this retained earnings of the first quarter, the CET1 fully loaded increased to 13.7%.
However, it is worth noting that this is including 90 basis points from the impact of the unrealized capital gains. Excluding such impact, the CET1 fully loaded was 12.8%, which is pretty stable compared with the fourth quarter 2017. At the bottom of the slide, we have the same details but for the phasing ratio, where you can see that on top of the already mentioned impact, we have a positive phasing effect from the IFRS 9, and a negative phasing effect from Basel III deductions. Putting all together, the regulatory CET1 ratio grew to 15.4% in the first quarter or 15.6% when considering the retained earnings. If we exclude the impact from the unrealized capital gains considered in the ratio, it goes to 14.7%, slightly above the 14.6% of the end of 2017. In slide 23, we include some more details on the solvency 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 CET1, and slightly above EUR 1 billion buffer in total capital. All these buffers are under standard approach that, as you can see in the bottom left side of the slide, are considering quite conservative credit risk weights. Finally, as we usually do, let me finish the presentation with some final remarks that you have on page 25. One more quarter, we have showed resilient result generation capacity, with quite positive NII trends, cost control, and much lower impairments. From a commercial point of view, credit volumes are starting to improve with new production increasing further. Mortgage loans are still decreasing, but we are on the right path and with the right pricing policies.
Non-performing assets continue to decrease at a very positive pace, and more important, we are doing it with a positive impact in P&L. Such trends is supported and explained by very ample coverage levels, as we discussed. Finally, all this is achieved generating organic capital and keeping a very comfortable solvency and liquidity position. Thank you very much. We will now answer your questions. Jaime?
Thank you, Pablo. Starting with the integration or the acquisition of Unión del Duero, we got some questions. Asking us if we can explain since when will be fully accounted Unión del Duero. Can we explain the main P&L and balance sheet impacts of the full integration?
Thank you, Jaime. This is the first quarter that we accounted for 100% of Unión del Duero. Although its acquisition is very straightforward and impacts are not really material, it does explain some of the trends and changes in the quarter. Starting with the solvency, as you probably know, it has a negative impact on regulatory CET1 of close to 30 basis point, owing to higher deductions from insurance stakes. Regarding the balance sheet, consolidated liabilities will now include slightly more than EUR 700 million related to the insurance contracts. On the asset side, it will be reflected in an increase in the debt exposure in a similar amount of the liabilities. It is also worth noting that goodwill will increase by EUR 63 million. In terms of the P&L, from now onwards, we will book a EUR 6 million charge per annum for the amortization of the mentioned goodwill.
On top of that, gross margin will have a negative impact on fees and associates and a positive impact on other operating income. Finally, it is worth noting that the NII, the interest income of the insurance company, that portfolio is not included in our net interest income. It is consolidated, as I mentioned before, in other operating income.
Thank you, Pablo. There is one more on Unión del Duero Vida Pensiones related to the first quarter. What is the contribution of Unión del Duero to P&L in the first quarter?
As I mentioned, it's not really material, the net effect, because in fee income, as I said, we have EUR 2 million lower fee income, and we have other operating income of EUR 6 million, which is higher. The rest of the impacts are very small. In net income, the impact is just EUR 1 million. As you can realize, there are some changes in the P&L classification structure, but in the bottom line, the quarterly impact is not a material one.
Thank you, Pablo. Let's move to the P&L. We got lots of questions on NII, on different topics. Let's just start with the portfolio, with the ALM portfolio strategy, if we can give some more color on what they can expect going forward.
Okay. In order to sum up it in one sentence, we can say that our ALM strategy is to position the balance sheet towards a potential increase in the interest rate curve in the medium term, without losing the short-term current income, and to use our structural excess liquidity. The target is to keep a stable contribution to NII, even if interest rates do not increase. The idea is to keep this contribution stable if interest rates remain, as they have been doing in the last few years, and take advantage of the potential increase in rates in the medium term. That's why we usually hedge our debt portfolio with forward start swaps, starting in two, three years' time, where we think that rates will still be quite low. This forward start will allow us to maintain this income stable in the next quarters.
In case we perceive a change in the macro and rates projections, we can manage the current position, reversing this strategy. This strategy also enables us to protect the debt portfolio with a lower duration from negative valuation that could arise from increasing long-term rates environment. All in all, this contribution, as I said before, it's going to be higher in this quarter, and probably one or even more than one quarter ahead. Going forward, the stable contribution should come down to what we have guided in the past. It will depend on when we realize the unrealized capital gains on the former available-for-sale portfolio.
Thank you, Pablo. There is one more on the size of the portfolio, why we decided to increase it now and not before.
I already mentioned some of the answer. I think the size of the structural portfolio depends on our structural excess liquidity, and the different strategies that we adopt on the fair value through other income portfolio, which is, as you know, trying to keep advantage of changes in market conditions. In the last two years, the debt portfolio size has been quite stable, with a small difference at the end of each quarter as we have presented in the different investor presentation. Having said that, in fourth quarter 2017, we sold some positions, and we will analyze to buy again, depending on the market conditions. We already bought some of the positions sold previously. Obviously, we still have to realize and sell some of the former available-for-sale portfolio going forward.
All in all, as I said, the strategy will be to maintain a stable contribution from the debt portfolio, while maintaining a positive bias toward higher interest rate for the overall balance sheet.
There is one more, I think with that, we reviewed overall the portfolio situation related on the size. If they can expect to see the size growing forward.
I think I already mentioned this, but just to be clear, there's no specific right size for the portfolio. I think the size of the structural portfolio depends on the excess liquidity, as we said in the past, and I said before. This portfolio could be higher, and as we mentioned before in the last two quarterly presentation, this should be higher. In the past, due to the incapacity and that we were unable to hedge the portfolio, so we prefer to wait for IFRS 9 to come to force this year. Now, because we have a very large fair value through other comprehensive portfolio, until we realize the capital gains. The size of this portfolio is larger than it should be going forward, and the other, the structural portfolio could be higher going forward.
On the strategy, there is one more on the latent capital gains that we have in the ALCO or the ALM portfolio. If we are expecting to realize all of them or just one part?
As we already confirmed, a relevant part of our current capital gains will be used to compensate some extraordinary charges in P&L, mainly the ones related to expected restructuring costs. However, the current latent gains are significant, so we will continue to manage actively those gains, but it will depend on the evolution of market conditions and P&L trends.
Thank you, Pablo. On net interest margin, let me put together some questions. NIM grew for a second consecutive quarter. Do we expect such trend to further increase net interest margin, customer spread and lending yield all grew in the quarter? Do we expect them to grow further?
All the metrics improved in the quarter. I think it's worth noting that the NIM grew relatively more because the average total assets didn't grow as much as total assets at the end of the quarter, owing the integration of Unión del Duero. That will be a headwind of additional growth in the net NIM in the second quarter 2018. We haven't provided a specific guidance on customer spread or lending yields. However, we expect some growth for 2018 net interest income compared with the 2017. It is soon to be more specific than that. This quarter, we managed to compensate the lower contribution from the floors, from the mortgage floors, and lower non-performing loans related to the income, with higher interest from performing loans and lower cost of the retail and wholesale funding.
Above everything, the EUR 3 million of higher contribution from the debt portfolio, as I explained. Going forward, if interest rate income from performing loans does not increase, it will be difficult to improve the net interest income. All in all, will be higher than last year, as we said.
There's some specific questions on the NII guidelines for this year. It is almost, I think, answered. Something related also to NII on the mortgage floors, if we can, Pablo, please update the situation on mortgage floors.
I think, as we anticipated, mortgage balances continued to decrease this quarter. The balance with active floors decreased to EUR 2.5 billion from the previous EUR 2.8 billion. As we explained in the presentation, these have an impact of close to EUR 3 million in the quarter NII. We still expect some mortgage balances to continue to decrease in the coming quarters, and that will continue to be one of the main headwinds for net interest income going forward. We will try to compensate it, but it will depend on the size, obviously, of the impact. There is always a lag effect, just to remind you, on this, it won't probably change significantly in the next couple of quarters. That said, during the last two quarters, we have reported net interest income that is close to 10% per quarter above the average NII for the 9 months of 2017.
That is why we still expect some NII increase this year compared to the previous year.
Thank you, Pablo. On interest rate sensitivity, if we can update our sensitivity to interest rates, please.
We remain positively positioned towards an increase in interest rates. As we have always mentioned, this will be not in the first 12 months. It will be more in 2019, 2021, depending on when the rates are up. The impact won't be in the short-term. Using our quite realistic assumptions, or we think realistic, obviously, this is always hard to come to a clear number. In the numbers that we work, considering the changing that we expect in the mix between term and sight deposits when rates go up, and a constant balance sheet without any assumption of new business, an increase of 100 basis points will have a positive impact in NII from the 12th to the 24th months of around 13%, which is slightly above what we used to have in mid-2017, last year.
This is due to the hedging of the amortized cost portfolio that we have hedged after IFRS 9. I think if we have a look on what we think on rates, we remain comfortable with the consensus, and we think the end of the QE in Europe will be at the end of this year. The potential increase of the reference rate will be more sometime in the second, third quarter of next year, which then should push the [arrival] up. This scenario obviously is being carefully watched and followed by our department.
Thank you, Pablo. Moving to loan growth, what is the guidance for loan growth? When do we expect to see clear lending growth?
As we said last quarter, I think we expect to see the inflection point this year, but we don't want to be very specific and saying that we already crossed that line. In the first quarter 2018, the new production continues to improve, and lending balances stabilize further. New production, although it grew, not enough to compensate the natural amortization, something that we will need to change in order to see the overall book growing on a stable manner. Corporate loans and individual secured loans trends are much better, but in order to see clear loan growth, we will need to stabilize further the mortgage book, something that could probably take some more quarters.
Thank you, Pablo. There is one very specific on the percentage of the new mortgages signed with fixed rates.
I think it's quite similar to the last quarter numbers, and it's slightly below 40% of the total new mortgage production, which is actually done in fixed rate.
Thank you, Pablo. Moving onwards through the P&L. On fee income, if we can explain the decrease of the fee income in the quarter. I think in the presentation we have explained, but if you want to give a little bit more color, and what can we expect for the rest of the year.
The fee income?
Fee income, yes.
Yeah. The fee income has been compared to the last year, quite flat. Although growing 3.5% year-on-year if we exclude the impact from the integration of Unión del Duero, as I mentioned before. However, on a quarterly basis, it was 3% below the previous quarter. When adjusted by the acquisition of the insurance, it's around EUR 1.7 million. We have room to further improve the fee income in the coming quarters, but you have to bear in mind that this year, for the whole year, we will have an impact of EUR 8 million, following the acquisition of Unión del Duero, as we mentioned. That represent around 4% of fee income of last year. This will be quite a headwind for the evolution of fee income this year.
We still are positive, especially on off-balance sheet and other banking products fees going forward, and more flattish and conservative view on payments fees.
I think we explained it throughout the presentation, but we got several questions asking it, so probably to be a little bit more clear, if we can explain the other operating income and other operating expenses details, Pablo.
I think I mentioned, but just to remind you, the EUR 17 million are split. We have EUR 14 million coming from our real estate servicer, and EUR 6 million coming from the contribution of Unión del Duero. These are the positive ones. On the negative side, we have the EUR 4 million related to the DTAs levy. That explains most of the numbers. Just to mention that this contribution from the real estate servicer in the last year was EUR 21 million, which explained that we have a lower contribution compared to last year.
Thank you, Pablo. Very straightforward. On trading gains, what would be the recurring level of trading gains?
We don't have a recurring trading gain, so will depend on market condition, and obviously, as we mentioned, we will use them to compensate the extraordinary restructuring provision that we might do in the coming quarters.
Moving to costs, if we have identified additional capacity to generate potential savings.
We have just approved the full integration of EspañaDuero. It was one of the proposals approved in last week AGM. Now we're working on identifying the final synergies to be implemented after the merger. In the coming quarters, we will update the situation with more details. Now, we don't have specific details to give you now.
Yeah. Moving to impairments and provisions, if we can explain the release of loan loss charges, and what expectation we have for the cost of risk going forward.
As we explained in the presentation, we have sold a small written-off portfolio that had a positive impact of around EUR 9 million this quarter. If we exclude this impact, the annualized cost of risk was, as I said, eight basis points. We don't expect to report continued releases. It is true that during the last two quarters, the cost of risk has been quite low, and that is very positive. However, we do expect to increase volume trends in the future, and if it happens, the cost of risk should be higher going forward. We continue to see the business plan guidance of below 30 basis points as a good reference for the medium term. There could be some quarters with much positive trends compared to our medium-term view, and similar to the last two quarters. The medium term should be higher than this.
I think the major reason is the high level of non-performing loans coverage, and especially if we consider, as we have said, a high level of collateralized non-performing loans, almost 90%. For the back book, we feel quite comfortable with the level of provision. However, the new loans and the new rules of IFRS 9 make us to be more prudent on giving guidance on cost of risk going forward.
Regarding real estate or foreclosed assets, Pablo, the impairments going forward.
I think, as we said, last year, we did what we think are the bulk of the provision for foreclosed assets, and this was due to the reappraisal of all of the assets. Now, with the current real estate prices trend and our coverage level, we don't expect to have large provision in the foreclosed assets.
We can, Pablo, please update the litigation risk provisions.
I think, in the litigation risk provision, we have a general provision for different legal risk of EUR 334 million, which obviously are mainly related to the mortgage floors, which remains our major contingency.
Okay. Moving to asset quality, Pablo, we saw a positive quarter. I'm reading as I have the question in front of me. Another satisfactory quarter in terms of NPL reduction. Are you planning to continue selling at the same pace or to accelerate through bigger transactions, Pablo?
We keep on selling, and we did on average above book value. This is done on an asset-by-asset case. When we do portfolio sales, obviously, this is tougher, as we can see in the numbers. Although so far it has been similar, it will be difficult to repeat the positive numbers of last year. We continue to analyze the different alternatives with the objective of reducing as many non-performing assets as possible while preserving the value of our shareholders. We maintain with the same guideline that we have been giving.
There is one question on NPL disposals, if we plan to sell NPL disposals.
We have already said that we prefer to sell foreclosed assets and written-off loans. Non-performing loans, we prefer to manage them ourselves, especially the individuals on mortgage non-performing loans. In the future, we could analyze different options regarding some small corporates portfolio or real estate-related portfolios, but nothing really relevant.
Okay. Moving to questions on funding liquidity and solvency. On MREL, if we can update any potential issuance of hybrids, Pablo.
I think on MREL, we haven't been confirmed the level yet, one more year to wait. Regarding the potential issuance of hybrids, our solvency position is very comfortable and enable us to have flexibility on the timing. We meet with all requirements, and we have ample management buffer, nothing has been decided on the timing. Under our view, we have plenty of time to meet with the MREL requirements, it won't be an issue at all. On the opposite, we believe that the final MREL issuance could be cheaper than that we have considered in our business plan, and that is good news.
On solvency and the capital position, Pablo, it has increased significantly, the regulatory ratios in the quarter, in excess of the 12% target. They're asking us if we are planning or what we are planning to do with the excess of capital.
Yes. Sorry. The CET1 is well above the target. We want you to bear in mind that the fully loaded number includes 90 basis points of unrealized capital gains that we will realize to mitigate some of the restructuring cost going forward. Most of the gains currently considered in the CET1 are only temporary ones. That said, and even with that, it is true that our solvency position is above the target of our business plan. One of the reasons is that our loan book is not increasing significantly yet. We continue to have ambitious plan, and I think it's too early to decide on what to do with the excess capacity. We will look with excess solvency position.
The last one, Pablo, is our views on the sector consolidation and M&A.
We saw a lot of comments and research published related to consolidation during the last months. We understand that it's a sector topic. For Unicaja, nothing has changed. We continue to have to execute our final integration of EspañaDuero in the coming months. That is our priority, and that is Unicaja Banco consolidation deal. It is important because we still have synergies to crystallize from such acquisition. Regarding other plans, I will answer again what we have said in the past. Sector consolidation or M&A is not a priority right now for us. We work every day to improve shareholder 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 other bank.
As we did in the past, and I understand that other banks do, we will analyze whatever opportunity appears, as we have always done. At the moment, our priority, as I said, is to deliver on our business plan.
Thank you very much, Pablo. Thank you, all, for attending the presentation. Just as a reminder, the IR team is available at the phone for further follow-up questions. Thank you very much, and see you next quarter.
Thank you very much.
Bye.
Bye.