Good afternoon. This is Miguel Maya speaking. Welcome to BCP's earnings conference call. Before going into the first quarter highlights, I would like to start with a couple of introductory remarks. This quarter was still marked by the worldwide evolution of the pandemic, although the global economic recovery progress is in good rhythm due to the success of the supporting measures undergone by major economic blocks and by the execution of the vaccination programs. The high pace in which most developing countries are running their vaccination programs was unforeseeable in mid-2020 and is paving the way for an economic recovery that we are confident will start sooner and be bolder than expected. In fact, both U.S. and China economies are already growing significantly, which provides confidence that also Europe will resume its growth as the vaccination levels advance.
As you know, in Portugal, when the vaccination program was still incipient, we faced a spike of the pandemic in the first quarter that reached unprecedented levels, which imposed the need for hard lockdown measures. Nevertheless, in this period, the Portuguese economy exports grew almost 28.8% quarter-on-quarter, showing its resilience and capability to seize the opportunities of a spike in the global economic activity. On the other hand, the intensification of the turmoil around the FX loans on file in Poland has not enabled yet a stable framework towards an equitable solution, driving the need to increase provisions to deal with the uncertainty associated with this matter. Which led us to reinforce provisions in the amount of EUR 112.8 million in the first quarter, a significant amount that compares with the EUR 12.7 million of provisions made in Q1 last year.
Although the legacy of the FX loans is a complex file that is having a significant impact on the profitability of our subsidiary in Poland, it didn't distract the bank from developing its core activity. Bank Millennium has a strong franchise, is well-recognized by the customers for its innovation capabilities and quality of service, recently was awarded by Best Bank in Poland by Global Finance, and is managed by a very professional team that has successfully steered the integration of Euro Bank and is expanding the bank business. We still hope a fair or at least reasonable outcome for the FX loans file. The resilience of our business model and the quality of our franchise in the different geographies in which we operate is reflected in the increase of the consolidated pre-provision profit by 5.8% this quarter, reaching almost EUR 329.5 million.
Standing as a benchmark on efficiency continues to be an absolute priority for BCP. We managed to decrease the operational costs by 9.2%, achieving a cost-to-core income of 47%. The net profit was contained by the significant increase of 20.3% in impairment provisions, which we reinforced due to the economic impact of the pandemic and to deal with the risks associated with FX legal uncertainty in Poland. The consolidated net profits stood at almost EUR 57.8 million, increasing more than 63.8% year-over-year. The activity in Portugal contributed with EUR 83 million for the consolidated earnings of the quarter, a very relevant increase considering the macroeconomic environment. The capital position was preserved in the first quarter with a total capital of 15.5% and Common Equity Tier 1 of 12.2%, both above the correspondent regulatory requirements.
Our loans to deposits ratio remained low. We have high liquidity levels well above regulatory requirements, having EUR 23 billion of assets eligible for ECB funding. We had a very intense commercial activity in this quarter in supporting the customers to prepare for the opportunities that will arise from the economic recovery. The performing portfolio in Portugal grew 5.9% over the last year, an increase of EUR 2 billion that was driven by loans to companies, which increased by almost 11%. BCP stood out as the preferred bank for companies. Customer funds kept increasing this quarter, mainly from individuals, with an additional amount of EUR 2.6 billion. Over last year, the increase of customer funds was persistent, rising more than EUR 7 billion, a growth of almost 9%. In spite of the unfavorable conditions, we pursue our determination of consistently improving the balance sheet quality by keeping reducing NPEs.
Since March 2020, we managed to reduce NPEs in Portugal by EUR 725 million, of which EUR 170 million in the last quarter. As expected, the cost of risk drives upwards, but still aligned with the guidance we provide in our last presentation, having reached 79 basis points on consolidated basis and 94 basis points in Portugal, while we reinforce the impairment coverage by 10 basis points to 65%. The quality of our digital channels is well-recognized by the customers, particularly the quality of our mobile solutions that drives the growth 22% of the number of mobile customers. This quarter, we exceed the three million mobile customers figure at the group level, which represents 51% of our customer base. In Portugal, BCP stands out from the competition, clearly leading in all the digital dimensions assessed by the customers, which reflected on the increase of the 221,000 mobile customers.
Our digital competencies have been particularly valued by our customers in Portugal during the restrictions imposed by the pandemic, which has accelerated the digital adoption trend. Customers are increasingly selecting the apps as their preferred channel to interact with the bank. 89% of the digital interactions of customers are made through the app, and 48% of our digital customers just use the app. This extensive usage of the app by the customers also reflects on the strong increase of mobile transactions and sales. Over the last year, the number of sales made through the app increased 81% and the transfers increased 86%. Our strategy to invest in the digital transformation of the bank and prioritize the mobile approach is being very welcomed by the customers. Portuguese digital customers clearly select BCP as the best digital bank, a distinction that is also reflected in the most recognized market researches.
In the first quarter, we firmly pursue our commitment with innovation. The release of 40 new features on the app, upgrading its usability and convenience, were especially valued by customers as we are constantly providing new service and product design from this platform and fulfill the customer's expectations and foster their relationship with the bank. Since March 2020, we saw an increase of 39% in the number of mobile customers above 65 years, which is an excellent indicator that our app is user-friendly and is an efficient platform to serve customers of all ages. To conclude, I would like to say that we are finalizing the update of our strategic plan, focused in improving the engagement with our clients and supported in streamlining the efficiency of our business models and operational models. We will disclose it no later than next quarter earnings presentation. Miguel, the floor is yours.
Thank you very much. Going on to page 12, as you see, our core income has a 2% decrease in spite of the macroeconomic evolution and the very strong decrease in interest rates in Poland. The operating costs reduced 9.2%, with some contribution of the non-recurring costs, but also of the recurring costs. This was achieved both at the Polish level and at the Portuguese level, a strong contribution from international activity here. The core operating profit grew 5.4%. The other income, including trading and dividends and so on, grew 9%, the operating net income grew 5.8%. Very clearly a positive evolution in spite of the challenging macroeconomic situations. The impairment and other provisions grew 20%, to a large extent explained by the Swiss franc mortgage provisions.
Effectively, this then was the main driver for the decrease of the net income before taxes that we presented. Because of the minority interest in Poland, this is then reversed with a strong increase in net income of 64%, as you may see in this page. At the net interest income level, we see a very strong increase in Portugal. As time goes by, this increase will flatten. As I have commented in the past, our guidance for the year is a low single-digit increase in NII, with some margin compression mainly explained by the mix but also some volume growth. The international operations, to a large extent explained by the sharp decrease in market interest rates in Poland, that decreased from around 160 basis points- 20 basis points in a very short period, decreased 13.8%.
The conjunction of these two elements made the net interest margin at consolidated level decrease 2.5%. In terms of fees and commissions, we were able to show a high resilience. As you see in the Portuguese unit, the fees and commissions even increased with some contribution from market-related fees and asset management commissions. The typical banking commissions decreased somewhat to a large extent explained by transactional fees, which is an area that of course suffers more from the macroeconomic situation and the decrease in consumption. Other income. We see that we have here a good evolution of other income when you compare with a normal quarter. The first quarter of last year, as we had explained, was not so normal in the sense that we had an extraordinary trading gain of around EUR 40 million that we disclosed at the time.
Adjusted for this extraordinary trading gain, this was a good quarter as you see. Basically a stability in terms of other income in Portugal and a positive contribution to a large extent also explained by the reduction of mandatory contributions in Poland. The costs. Of course, the challenge that we had in Poland with a very strong decrease in interest rates and with the risks in the Swiss franc portfolio, made us accelerate the restructuring plan with a decrease of around 1,100 people and a very strong decrease in costs. That's why you see here a strong decrease in cost in international operations that decrease 17% in the period.
On the contrary, in Portugal, due to the good performance of the operations and also to the social consequences of accelerating this decrease to such an extent, we also had a cost decrease, albeit not as large, a cost decrease of around 3%. The conjunction of these two elements allowed us to present a 9.2% cost decrease at consolidated level. In terms of impairments. As you may recall, last year in Q1, we were just learning about COVID and the impact of COVID on the portfolio, and we had created a provision, other impairments to be allocated in Q1 of around EUR 60 million. This was in the subsequent quarters then allocated to credit. The good comparison would be the total provisions of loans plus other compared with loans plus other. We still show a positive evolution here.
This positive evolution is to a large extent explained by the prudence of the COVID provision that we created in the first quarter of last year. Nevertheless, we are here at a prudent level with a cost of risk of 94 basis points in Portugal and 46 basis points in the international operations. Credit quality. In spite of all the difficulties, we are being able to continue this NPE reduction trend that we have shown in the past. As you have seen since the beginning of the year, and in spite of COVID, we have reduced around EUR 170 million only in Portugal and around EUR 100 million in international operations. This is a good evolution, as you may see here.
This makes our NPL plus 90-day past due ratio go down to around 2.8% and the NPE ratio, including all the EBA criteria, including securities and off-balance sheet, already at 3.6%. If we focus only on loans, the value is 5.5%, so much lower than we had in the past. In terms of business activity, page 20. Starting with international operations, in spite of all the challenges in Poland, in Mozambique, our franchises are growing in a very healthy manner with customer funds, mainly individuals growing. In total, there was a growth of 6.5%. In Portugal, we are growing at 9.8%. We have to tell you that in terms of deposits, of course, we are being very conservative in terms of what interest rates we pay. We are very close to zero in terms of what is our interest rates of term deposits.
Current accounts are at zero, nevertheless, the strength of our franchise and the customer loyalty has made it possible to continue to grow in terms of customers, in terms of the most affluent customers. An important evolution in our customer funds strategy is this growth in off-balance sheet funds. As I have commented here in the past, one of the key drivers for the future, not least because of the negative Euribor rates, is the focus on off-balance sheet funds. What you see here is that the off-balance sheet funds have already grown from EUR 17.6 billion to around EUR 20 billion in just one year, so around 15%. The loans. We see here also very healthy performance in terms of loan growth. Our performing loans grew in consolidated terms almost 5%.
The total loans, because of our good performance in terms of NPE reduction, they grew 3%. This was explained to a large extent by our performance in the mortgage market, where we have grown EUR 1 billion and in the loans to companies and SMEs, where we have grown in consolidated terms around EUR 800 million. In terms of capital, as our CEO has already commented, we are clearly above minimum regulatory levels, both at total capital level and at CET1 level. Our leverage ratio, as you see on page 24, also compares and continues to compare very favorably with the leverage ratios of the key sectors in Europe, which is also to a large extent explained by our conservative risk-weighted asset. Liquidity is not an issue in the sense that our liquidity risk is very conservative, very low.
Of course, this has a cost, and this cost is showing its bill in the P&L account. We are trying to manage this to a large extent by focusing on off-balance sheet funds, as we have commented. Another way of looking at it is that once this negative cost of liquidity is fully addressed. There is an additional upside in our P&L. I will pass now to Bernardo, our Investor Relations Officer.
Good afternoon, ladies and gentlemen. On page 27, starting with the Portuguese operation, net income increased year-on-year EUR 67 million- EUR 83.4 million due to the performance on net operating revenues and lower operating costs. Quarter-on-quarter, net income increased 96%, demonstrating the strong operating trends on a very challenging environment. Performance was boosted by an increase of NII, stable fees and commissions, and lower operating costs as well as other provisions. As a reminder, on the first quarter of 2020, domestic operation booked EUR 60 million of provisions related with COVID-19 on other provisions that were allocated to credit provisions on the following quarter. On page 28, looking to NII in Portugal, it stood at the end of the first quarter 2021 at EUR 204.5 million, meaning almost 10% above the first quarter of 2020.
Favorable impacts are the expansion of the credit portfolio supported on loans to companies and mortgage loans, as well as the positive effect of the wholesaling funding, which includes the impact of TLTRO and the repricing of deposits were more than enough to compensate the negative effects of EUR 21 million arising from lower price on credit, lower yields on securities, the NPEs reduction, and the excess of liquidity. NIM on a yearly basis went down 5 basis points. This year-on-year reduction on NIM is explained by the lower spreads related with the guaranteed credit lines. On page 29, regarding spreads on term deposits, back book spreads stood at -58 basis points, more or less at the same level of the first quarter 2020 and almost aligned with the three-month average Euribor.
Spreads on loan book were compressed year-on-year but stable quarter-on-quarter, and as explained before, decrease is mainly explained by the COVID guaranteed lines. Moving to page 30, that presents the evolution of fees and commissions and other income. You can see that banking fees decreased 2.4% due to the lockdown that was in place in the first quarter 2021 in Portugal. Most significant impact came from cards and transfers with a reduction of almost 8% and loans and guarantees with a reduction of 10% due to the lower usage of overdrafts that were more than compensated by the increase on customer accounts related fees with an increase of almost 10% explained by the performance on customer acquisition.
Market-related fees registered a strong increase as a result of the performance on asset management, where we have seen a significant move of customer funds to these type of instruments. All in all, fees and commissions were pretty stable year-on-year at a level around EUR 120 million. Looking to other sources of income, altogether decreased 3.6% explained by lower gains on trading compared with the first quarter in 2020. On equity accounted earnings, there was an increase of more than EUR 5 million related with mostly some one-offs from the insurance company. On other operating income, improvement was mainly from lower sales of real estate compared with the previous year. Going to page 31 regarding costs, there was a reduction of 2.8% year-on-year and of 7% quarter-on-quarter, mainly driven by the lower staff costs.
We have been doing well on costs, there's still some more to do to become even more efficient on this area. In terms of employees, there was a reduction of 189 employees, where the significant decrease occurred in the last quarter of 2020 with a reduction of 139 employees. To what regards to branches, there was a reduction of 25 branches, out of which two were closed in the first quarter 2021. Moving to page 32, which refers to asset quality. Even under a challenging environment, BCP was able to reduce EUR 725 million year-over-year, meaning 25%. NPE stood at almost EUR 2.2 billion at the end of the first quarter. On the last quarter, there was a reduction of EUR 170 million, supported mainly through sales.
Cost of risk year-on-year, due to the pandemic situation and conservative risk models, increased to 94 basis points, which was similar than the level reached at the end of last year. This level is within the range that we estimate and present to the market on the first quarter 2020. Let's move to page 33, which looks at the NPE coverage breakdown. As you can see, total coverage stood above 120%, with a reinforcement of NPE coverage by loan loss reserves to 66% from 55% one year ago. Total coverage for individuals with high levels of real estate collaterals stood at 97% and for companies at 133%, six percentage points above the end of last year.
Coverage by real estate collaterals on companies increased from 37% to 42% and by loan loss reserves from 73% to 76%. On page 34, that shows the evolution of foreclosed assets and restructuring funds, there was a reduction year-on-year of 22% and 10.3% respectively. In terms of property sales, there was a slowdown in the first quarter 2021 compared with the first quarter 2020 due to the restrictions in place in the first quarter 2021 in Portugal. Number of properties sold decreased 28%, sale value was just 4% less than one year ago. As you can see, as we have been presenting from previous quarter, sales value was above book value. Moving to page 35, total customer funds grew 10% to EUR 62.1 billion. The growth was more than EUR 5.5 billion, was strongly supported by the increase of individual funds.
Let me also highlight the increase of more than 10% of off-balance-sheet products, explained by the high level of subscriptions of mutual funds. In terms of gross loans, there was an increase of 3.5%, supported by an increase of 6% in companies and a slightly lower increase of almost 2% on mortgage loans. It is also important to highlight that performing loans went up 5.9% year-on-year, or plus EUR 2 billion, and NPEs were reduced by more than EUR 700 million or almost 25%. Going to page 36, it is possible to see our strong support to companies and also their recognition as the main bank. The growth of the performing portfolio was strongly supported by companies, where this segment was responsible for 84% of the total performing loan growth.
On page 37, you have a picture of our support to companies and households. In terms of companies, the bank increased its presence. Total disbursements from BCP on COVID credit lines reached almost EUR 2.5 billion. Also on this front, BCP signed an agreement with the European Investment Bank and the European Investment Fund to provision EUR 1.2 billion loans with European guarantees to support small and medium-sized companies affected by the pandemic. That already start to be disbursed from the second half of April. At the end of the first quarter of 2021, after the reopening of the moratoriums request during the first three months of 2021, the total outstanding of moratoriums stood at EUR 8 billion, out of which EUR 3.4 billion related with households, where mortgage loans represent 96% of moratoriums.
Let me also highlight that most moratoriums under the Portuguese Banking Association framework expired in the end of March, and we haven't seen a significant impact on overdue loans compared with the total loan book. To what regards to companies, at the end of March, total amount under moratoriums was EUR 4.6 billion, slightly higher than the amount at the end of the year. Although, there was a reduction of more than EUR 500 million from the highest level through a combination of liquidations, cancellations, and moratoriums that have expired. Regarding total amount under moratorium, 91% of the outstanding amount is performing and 67% of loans with moratoriums are covered by mortgages, 46% by residential mortgage and 21% by commercial mortgages.
Moving to page 39, with regards to results of international operations, you can see that there was a significant reduction of the contribution from international operations to consolidate net income. This result was mainly impacted by the Polish operation that booked significant provisions during the first quarter 2021 for potential litigation risk. Bank Millennium had a loss of EUR 68.6 million. Mozambique contribution was around EUR 50 million. Combined contributions from international operations represented a loss of EUR 25.6 million in the quarter, compared with a positive contribution of EUR 90 million on the first quarter of 2020. Moving to page 40, net income in Poland was impacted by CHF provisions that amounted EUR 112.8 million compared with EUR 12.2 million on the first quarter 2020.
Excluding the CHF provisions and due to the excellent operational results, net income from Bank Millennium should stood at around EUR 40 million, even considering the substantial decrease of more than 1.4 percentage points on the three-month reference interest rate. Looking to the operation itself, we can understand how strong is the franchise, where customer funds and loans to customers increased 7.4% and 4.7% respectively. Even with a strong interest rate decrease, net operating revenues went down only 5.8%. It's important to mention the strong performance of new mortgage loan production that reached a record level on the first quarter 2021. Operating costs went down 17.5%, as mentioned, due to the restructuring process in place over last year. CET1 at 16.3% and total capital ratio at 19.4%, well above the regulatory requirements. On page 41, some detailed information about Bank Millennium.
NII down almost 10% year-on-year, reflecting the strong decrease of interest rates, but it has been stable quarter-on-quarter due to the strong repricing of deposits. NIM decreased 25 basis points, but stayed at a similar level at the end of 2020. Fees and commissions increased 5.3% and other income plus 9.1%. Operating costs with a decrease of 17.5% after the strong efforts on 2020 related with the restructuring process of Euro Bank and that we also move a little bit further. Reduction on costs also reflect the decrease of mandatory contributions with what regards to the resolution fund.
Moving to page 42, related with asset quality, NPL ratio decreased 20 basis points and cost of risk continued the downward trend registered since the second quarter of 2020, and it stood at the end of the first quarter at a level of 39 basis points, reflecting the good performance of the loan book and particularly to the good performance of the moratoria that already expired. NPL 90 days past due coverage ratio by loan loss reserves at 122%, meaning an increase of 14 percentage points year-on-year and a stable level quarter-on-quarter. On page 43, you can see the power of the franchise, where customer funds increased 7.4% year-on-year and around 7% quarter-on-quarter. Major recovery was related with the off-balance sheet funds, as the trend of subscription of mutual funds keep on track by individuals, as interest rates are at low levels.
In terms of loans to customers, gross books stood at EUR 16.7 billion, more 4.7%. It is important to highlight again that the new production of mortgage loans reached a high level on Q1 2021, allowing Bank Millennium to achieve a market share of 14.6%, where it was lower than 10% one year ago. On page 44, regarding the FX mortgage portfolio, it now represents 16.6% of total loan portfolio. Bank Millennium, due to the increase of court claims and decisions more favorable to customers, made additional provisions of more than EUR 112 million in Q1 2021, increasing the coverage of the outstanding amount to almost 11%. Cumulative provisions for legal risks on the FX mortgage portfolio stood above EUR 300 million. It is also important to mention the reduction of the CHF portfolio of 2.5% from the end of 2020.
Turning to page 45, with regards to Mozambique, net income increased 5.9% to more than EUR 50 million. Net operating revenues decreased 2.4% and operating costs slightly higher than the first quarter 2020. Capital ratios stood at 45% and ROE above 15%. Moving to page 46, NII was stable year-on-year, but it is possible to see an increase of 7% quarter-on-quarter. NIM decreased too, due to the normalization of interest rates in Mozambique. Commissions were lower than in 2020 due to the pandemic, and other income was also lower than one year ago due to lower gains related with securities. Moving to page 47, NPL 90 days past due ratio decreased almost five percentage points. Cost of risk stood at 306 basis points and coverage by loan loss reserves stood at 67%, which is eight percentage points higher than compared with the fourth quarter 2020.
Regarding volumes on page 48, you can see that customer funds grew 14% and loans to customers decreased 9%, reflecting the conservative approach under the challenging environment of the country. Let me thank you for your attention. Before we move to Q&A, I will return to Mr. Miguel de Bragança for some final remarks.
Thank you very much. As we have been committing to you, we are presenting exactly our key performance indicators in page 50. As you see, the first group of indicators that has to do with our performance are evolving very positively. Effectively, we are ahead of the original plan with more than 5.9 million customers as of today, of which 2/3 are already digital and of which more than half are mobile.
In terms of the NPE stock reduction, in spite of the COVID crisis, of the COVID situation, we are also clearly aligned with the plan. We are doing this, of course, fulfilling our restrictions in terms of Common Equity Tier 1 and in terms of liquidity ratios. In terms of cost-to-income, due on one hand to the lower level of interest rates and to some postponement of more aggressive cost reduction measures, we are with a slightly higher cost-to-income ratio and to a large extent explained by the systemic issue with a lower ROE than what we were expecting. As our CEO was commenting, we will present our new strategic plan in the half-year results presentation. We think that we are clearly on the right track
We think that the key priorities that we have developed until now that have brought us here have to be further identified, but they have been clearly in the right direction, and we hope to surprise you positively with that. Thank you very much.
Thank you, ladies and gentlemen. We will now begin the question- and- answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. The first question comes from line of Maksym Mishyn from JB Capital Markets. Please ask your question.
Yeah. Hi, good afternoon. Thanks for the presentation and taking my questions. Before I start with the questions, just wanted to wish good luck with the new role to Luís Pedro Monteiro and his help over the past years is very appreciated. I have two questions, if I may. The first one is, considering the quarter-on-quarter performance of your domestic loan book, there was an almost 4% increase in gross loans for other corporates. I was wondering if you could give us some color on what is inside these loans and whether growth was driven by large tickets or SMEs, and also whether there was state-guaranteed loans in the new production in the first quarter of 2021. The second one is on the asset quality.
You've made another sale in Q1 2021. I was wondering if you could touch a little bit on how you see the market for NPEs in Portugal in 2021, in April and May particularly. Do you expect to make more sales this year? Thank you.
Effectively, these other corporates are SMEs, and we have had a production of around EUR 100 million in terms of state guaranteed loans. We have had traditionally, in the last month, a very good performance in these type of loans, and we expect to have a market share in these type of loans that is at least as high as our normal market share if there are no limitations. In terms of EIB and loans and similar loans, so loans with other types of guarantees, our production has been more than EUR 1 billion. In terms of market for NPEs, as you know, our strategy in terms of NPE sales is a very focused strategy where we try to have quite homogeneous packages so as not to leave too much value on the table. We are continuously in the market with smaller tickets.
It is a higher effort, but we are continuously in the market. They are part of our NPE reduction strategy. They are included, so to say, in what we have commented to you that we intend to continue, so to say, to have an outflow of NPEs that will at least compensate the inflow of NPEs that are expected in this new COVID situation so as to reach the end of the year without an increase in NPEs.
Thank you.
Thank you. The next question comes from the line of Ignacio Ulargui from Exane. Please ask your question.
Hi. Thanks for taking the questions, and all the best to Luis Pedro in his new adventure within the bank. I just have three questions, if I may. One is on NII. Just wanted to get a bit of what should we expect in terms of NII outlook in Portugal over the coming quarters and whether there's any particular strategy to tackle the excess liquidity that you are handling. The second question linked to the Swiss franc mortgages. We have had several rulings in Poland regarding this topic and also in the Court of Justice of the European Union. How do you see, or could you update us a bit on what are the impacts, what is the potential outcome, what should we expect in terms of other provisions from the incoming quarters? Just a final question on the NII, if I may, coming back to it.
You had a very strong trading this quarter. Do you think there's going to be any impact from the bond portfolio sales in NII in coming quarters? Thank you.
Okay. Thank you very much for your questions, Ignacio. First, a small correction to what I've just said. The more than EUR 1 billion of EIB and similar loans are a line that we have negotiated and that we will disburse to our clients. Actually, the production in this quarter was around EUR 200 million, just to correct the previous question. In terms of NII outlook, we do think that we have, pardon my lack of being humble, the best commercial effectiveness in terms of what concerns the SME sector. We think that we can deliver the best growth in terms of the trade-off volume and margin in the market. We hope to continue to gain market share, mainly in these lines, as I have commented, government guaranteed lines and EIB and European Investment Fund guaranteed lines.
These are really products and areas where we think that we have a competitive advantage. On the other hand, as we are seeing the network and our clients are getting more and more comfortable with off-balance sheet products, as you have seen with the growth year-on-year. As more and more deposits become off-balance sheet products, this contributes to a reduction of the excess liquidity investment in the European Central Bank. This is also another positive element. In terms of the Swiss franc mortgages, it's effectively a complex question to try to anticipate what is going to happen. What we have seen recently in these two important decisions is the following.
The first issue, making things simple, is that none of the decisions, none of the previous and none of the future decisions, is taking a position on the abusiveness or not abusiveness of the clauses. As we have said in the past, all these decisions are about the consequences of a potential abusive nature of the clauses. They are not saying, neither the Supreme Court of Poland nor the Court of Justice of the European Union, which courts are abusive. On the contrary, they say that each contract has to be analyzed on a case-by-case basis because it depends a lot on the contract itself. I think this is very important. A second important element is that they somehow simplify the decision tree, so to say.
They say, if there is an abusive clause or an abusive element, actually, it's important, they actually said an abusive element, not necessarily the full clause, an abusive element, this abusive element is invalid and only the abusive element is invalid, and we should focus on the abusive element. If the element is so critical to the full contract and is so inseparable from the rest of the contract that it cannot be removed alone, then the full contract becomes invalid. Okay? I think they make things simple in the sense that there are some contracts where you can take out, so to say, the FX spread, and in these contracts in which you can remove the FX spread, only the FX spread, the difference between the bid and the ask should be taken care of. These are some contracts.
There may be other contracts, depending on the wording on the contract, depending on the clause, on the denomination or indexation clause of the contract, where you cannot remove simply the reference to the FX spread without losing the possibility of interpreting the contract, and in this case, the full contract becomes invalid. These are effectively only the three possible situations. Either the clause is not abusive, or it has an element that is abusive, and if the element is abusive and it's possible to take it out, it should be removed. If the element is abusive but it's not possible to take it out, then the full contract becomes invalid. All these other theories about PLN plus five, a lot of other possibilities, unless the courts change again their view, but are right now much less probable. Okay? I think this is important to say.
The questions will now be going forward whether the FX clauses, the FX table clauses, are able of being removed from the contracts or not. Up until two years ago, most courts in Poland thought that they were possible to be taken out of the contract. It was possible to remove them out of the contracts. In the last decisions, there was a reversal in terms of this type of decision, but we think that this battle is still a battle. If the clause is not able of being removed, what are the consequences of invalidity? In terms of the consequences of invalidity, there are then two possibilities, effectively. Either the banks are compensated by the time value of money, or the banks are not compensated by the time value of money. This makes a very big difference.
If the full contract is declared invalid and the banks are compensated by the time value of money, depending on how the compensation is done, one gets close to a solution that is the KNF solution. Depending on if you use the KNF rates, of course, you get to the so-called KNF solution. If there is a decision that the invalidity does not mean that banks have to be compensated by the time value of money, then the losses may be higher. This is the situation in which we are right now, and that's why this decision of the Supreme Court of Poland that was scheduled for the 11th of May was so important, because among other things, it was going to decide whether there was a compensation for time value of money in case of invalidity or not.
We will have to wait for this to have a stronger view on that. Our personal view is that, of course, in finance, one has to be compensated by time value of money. In many countries where these type of situations occurs, banks have been compensated by time value of money. Bank Millennium in Poland has already communicated to the market what would be the impact of a solution such as the KNF solution. I believe the number that was disclosed to the market was between 4.1 billion zlotys and 5.1 billion zlotys. At this point in time, what we are seeing is some good news, not least because there were other theories on the play. A theory that clients could get zlotys but at the Swiss franc rate. We think that this is right now much less probable to be decided.
Another group of clients was being motivated to sue the banks, basically with the promise that they could get their house for free because the right of the banks to claim back the capital had already expired. I believe this was made clear in the decision of seven judges of the Supreme Court of Poland that it has ended. To make a long story short, there were some important victories in the last two court decisions. We think that these important victories took out of the way some of the tail events, and that's why you have seen an increase in the share price of our bank in Poland and subsequently also on our share price. We think this is very important. We also think that links to this removal of the tail risks.
There will be less clients suing the banks than that would have been if this had not occurred. To have a clearer view on the final outcome, we'll have to know exactly what will be the decision of the Supreme Court that was last scheduled for the 11th of May. Okay. We have had a good quarter in terms of trading results, not as good as last year, as you know. The type of spread that we have on our present government debt portfolio is quite low. The average yield on our Portuguese government debt is between 10 and 20 basis points. We are not expecting a huge impact of these sales of Portuguese government debt on the margin going forward.
Thank you. The next question comes from the line of Sofie Peterzens from JP Morgan. Please ask your question.
Hi, here is Sofie Peterzens from JP Morgan. Just my first question is a follow-up question. Did I understand correctly that the worst case scenario on the Swiss franc mortgages is that you could potentially face up to or between PLN 4.5 billion and PLN 5.1 billion in compensation? Was that correct? Is that on top of what you have already taken, or should we deduct the provisions that you have taken so far? My second question would be on the moratoria in Portugal. You have around EUR 8 billion of moratoria. When should we expect most of these moratoria loans to expire? Is it in the third quarter or is it later? My final question would be if you could just update us how much TLTRO III you have taken. Did you take any additional one in March.
How should we think about the net interest income impact from TLTRO in the second quarter if you took additional TLTRO in March? Thank you.
Okay. In terms of worst case scenarios, it's almost impossible to know exactly what the worst case scenarios could be in Poland. What I'm saying is the following, is that if the decision starts being invalidity with compensation for time value of money, we will get two values that are similar to the values of the kind of solution that would be 4.1/ 5.1, and these values were before our latest appropriation. This is for invalidity with compensation, which we think the reasonability of the decisions is, how can I say? More than that would be, at least according to our point of view, that is a biased point of view, of course, but it would be very difficult to justify.
Having said that, it is possible that the court decides that if the contract become invalid, its invalidity without any type of compensation, and in these type of situations, the value would be higher than the ones that you are commenting. In terms of moratoria, most of the moratoria expire in September. I would like to say that for the moratoria that have expired in March, as my colleague Bernardo commented, we are not seeing any abnormal behavior not aligned with what we were seeing before. As we have disclosed, of the credits that are in moratoria, we have already classified as Stage 3, i.e., NPEs. In our case, Stage 3 and NPEs are very similar criteria. Almost 10% of the moratoria are already in our NPE stock.
The moratoria would only affect our NPE stock to the extent that more than 10% of the credits in moratoria would fall into NPE. They are evolving as we were expecting. Of course, at 31st of March , we had almost none past due because they expired on 31st of March . Even speaking with hindsight, with what occurred after 31st of March , there are not any special evolutions different from our expectations in the situation. In terms of the TLTRO, our first draft was around 7.55. We did a second one of EUR 600 million. We are now with around 8.1, rounding numbers, and that's the value that we intend to maintain, and we feel very comfortable that we will be able to attain the production levels and the credit levels necessary to get there.
Thank you. Just on the TLTRO, you're accruing it at 100 basis points or less?
Yes, 100.
Okay, great. Thank you. That's very clear. Thank you.
Thank you. The next question comes from the line of Carlos Peixoto from CaixaBank. Please ask the question.
Hello, good afternoon. A couple of questions here. The first one would actually be on moratoria again. Yesterday there were some comments on the press, believe that from the CEO, which seems to mention some pockets of concern within moratoria. I was wondering if you could give us some additional visibility on that. Should we think on the Stage 1 and Stage 2 loans in moratoria as being the relevant pockets here in terms of risk for the bank? Also within this context, what type of solutions do you think could still emerge within the government context, where we saw some news regarding the possibility of Banco de Fomento being a part of the solution for these exposures? The second question would actually be related with overall loan book composition per stages, different for Portugal and for the group as a whole.
Maybe if you could give us the split between Stage 1, Stage 2 and, Stage 3 for both Portugal and the group. Thank you very much.
In terms of moratoria, from the book that we have in moratoria, around 30% of the book is in sectors that we deem to be more affected by the crisis, and 70% of the book in sectors that we deem less affected by the crisis. Within sectors that are more affected by the crisis, such as the tourism sector, of course, there are some companies that are more fragile than others. We do think that many of these companies that are more fragile also were fragile before the crisis, and they typically had less bank loans than other companies. The large touristic groups, they had more bank loans, but we do expect them to survive well, most of them, after the moratoria. There will be more, I would say, more a social problem than an economic problem for the banks, I would say.
Many of these mom-and-pop shops, of course, may face and mom-and-pop restaurants, let's say, may face financial difficulties and may create, I would say, a social challenge. Of course, they don't have a lot of credit in the banking sector because even before the crisis, they were high-risk sectors. Our comment is that, we are quite confident that the Portuguese economy will grow well after the COVID crisis, aligned with the Spanish economy and other economies in Europe. The comment that our CEO made is that in spite of this strong confidence, this does not mean that some segments of the Portuguese population will not suffer and will not need help. That's the way in which one has to interpret this situation. Since the beginning of the crisis, what we said is that we have to be realistic.
We were reducing the NPEs at a very sharp pace before the COVID crisis. We face this COVID crisis. Our base case scenario is that we will somehow delay the further reduction of NPEs so that the inflows more or less compensate the outflows. This is our base case right now. We will continue to have strong outflows, but there will be some inflows, of course. Of course, many of these inflows will come from the EUR 8 billion of moratorium, but they are already in the plan, and they are already in the number that we commented to you, that at least until mid of next year, probably we have a stable NPE. In terms of Portugal, Stage 1, Stage 2, and Stage 3, we have around 80% of Stage 1, 15% of Stage 2, and 6% of Stage 3, rounded numbers.
In terms of the consolidated numbers, we have 82% of Stage 1, 30% of Stage 2, and 5% of Stage 3. The numbers are quite similar as you would expect. It's around 80% of Stage 1. By the way, in terms of the solutions, of course, there are a lot of solutions that may be developed. We as an agent in the Portuguese economy, we are always engaged in trying to find solutions, but our NPE reduction strategy is not dependent on state solutions. We think we have to get involved, we think we have to contribute for the economic growth of the country, but we are not dependent on suddenly a state guarantee or anything similar to deliver on our NPE reduction strategy.
Excuse me, Carlos. Is there any further questions?
No, that was it. Thank you.
Thank you. The next question comes from line of Gabor Kemeny from Autonomous Research. Please ask your question.
Hi. I have a couple of questions on Polish FX and another broader one. Firstly on FX. Just, I would follow up. If the litigation continues, if court cases kind of bumble along in the next few quarters, how do you think about the possible provision requirement for the additional court cases? As I understand, you see a chance of a lower inflow of the new lawsuits going forward. The second question, you mentioned that the impact from the scenario of canceling the contract and receiving compensation would be similar to the KNF settlement solution. I saw the KNF own estimates, which show that the impact for the total sector, the cost for the total sector would be actually twice as much from this scenario of canceling the contract and the bank receiving compensation. EUR 70 billion versus EUR 35 billion.
My question is, why would you not have a higher cost if the sector costs are that much higher? Finally, a broader question on the improving outlook for tourism, at least reading the news, it sounds like there have been promising developments around the situation in the Portuguese tourism sector. How does this impact your business outlook and especially the possible provisioning for 2021? Thank you.
Starting with this issue of the business outlook, of course, it is good news that Portugal performed recently well in what is the COVID situation for many reasons, including the economic reason and the fact that some markets are now open to the Portuguese tourism, such as the British market, of course, is also very positive. We have also to stress that we were expecting already, as I had commented here in my previous presentations, that this summer would be a summer that would be already close to normal. That's what we had already said in the past, as you may recall from my previous speeches here. I would say that for the good and for the bad, I don't think they are behaving as we were expecting. If we were to lose this summer in terms of tourism, I would say this would have been worse.
In terms of the cost of risk, we do think that it's prudent to assume that our cost of risk will remain in Portugal for the next quarters at a level similar to the present cost of risk. In terms of the litigation in Poland and so on. Firstly, I have to stress, the bank in Poland is a listed bank with a special supervisor, with its own analyst conferences. I have to be extremely careful with what I say outside of this context. If some of you want to invest directly in the Polish subsidiary, please feel free to do so. If some of you want to pose specific questions in the context of the Polish subsidiary, of course, feel also free to do so. I think this is important to say.
As I commented before, there is absolutely no decision yet that says that all the Swiss loan mortgages contracts are abusive. We don't have any decision in this situation. Each situation is being judged on a case-by-case basis. The same contracts that one year and a half, the Polish judges were judging as not being abusive or not containing abusive contracts, exactly the same contracts, without any new information in terms of that is abusive content, so to say, some of them are being now judged as abusive. This difference in criteria is very difficult to anticipate. You can go back to a situation that's closer to the previous situation. You can continue with the present situation. It's very difficult to anticipate when there is such a high volatility on the first issue.
First, on whether the clause is abusive or not on one hand, and that if it is abusive, whether the FX table is a separable element to the rest. I think the fact that the European Court of Justice in its paragraph 69, I suggest that you read paragraph 66 and 69, and probably also paragraph 86. At least these three paragraphs, I suggest you to read them in the net because I think they are very interesting. They clearly speak about an element. That if an element is abusive, only the element should be taken out. This in paragraph 69. They also say very clearly in paragraph 86, if I'm not mistaken, that invalidity should not be a kind of punishment for the bank. I think this brings a new light in terms of how Polish judges should decide.
If they decide so or not, it's up for them to see how this will frame their decision process. I confirm you that the bank in Poland, the number that the bank made available was for the KNF solution. I confirm you that, of course, the number of not having compensation in a loan, so that the banks have to give back to the customer all the interest that they earned in the last years, is a solution that is much more costly than the solution of earning interest. Of course, it goes without saying that 20 years of interest are important. Whether it's half or not, I don't have the numbers by heart.
I believe that the numbers are public. I also can tell you that there is not any official disclosure to the market on this type of solutions of not having any interest in the last 20 years, not least because this was not the solution in Hungary, this was not the solution in Serbia, this was not the solution in many other countries.
Okay. Of course, there are many moving parts in this Polish FX story. Just simplistically, if we take the Q1 provision number you took for the FX mortgages, do you think it's a good proxy for the second quarter, or shall we expect lower provisions?
The provision is done based on models and based on the previous decisions and the impact of the previous decisions going forward. Of course, they will be dependent on any decision that may come through by the Supreme Court of Poland. I can tell you that the type of provision that we are doing has to do with the number of claims that we expect to occur in the next years, the percentage of outcomes that we have had in the past, and the impact of this percentage of outcomes. For instance, in the situation of invalidity, so to say, the type of outcome that we are considering is a conservative outcome. It's very difficult for me to anticipate exactly how the courts will evolve in this type of situation.
I would not expect a high number, but it's not up to me now to anticipate what the number could be because it depends on a model.
Okay, understood. Thank you.
Thank you, dear participants. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad. The next question comes from the line of Noemi Peruch from Mediobanca. Please ask your question.
Good afternoon. Thank you for taking my questions. I have several from my side. I see that NPE coverage increased sizably Q1, Q2. Can you share with us if you increased the coverage on performing loans as well, and if so, by how much? Can you update us on the latest data on moratoria, whether you have it in May or April? It is okay. You said that this summer is expected to be close to normal. Is it fair to expect a negligible impairment on the corporate restructuring funds in 2021? On cost. Cost in the quarter were quite good in Portugal. Shall we consider Q1 level as the run rate? Of course, notwithstanding the update of the strategic plan. Finally, on FX mortgage, again, sorry to follow up here.
I just wanted to know if there is a willingness on your side to address the issue in the short term, even if there is no clear decision taken by the Supreme Court, or whether you would prefer to continue with the current strategy, so dealing with the claims on a case-by-case basis. Lastly, if I remember correctly, you can exercise a put option on your stake in the Angolan business. If so, when does it expire, and do you intend to exercise it? Thank you very much.
Okay. In terms of our starting, in terms of our put option in Angola, it ends in 2029, if I'm not mistaken. Of course, as it happens in many options, there is a time value to exercise it. We are not intending at the moment to value the possible early exercise of this option. In terms of costs, yes, we are more or less on this run rate right now in terms of the recurrent cost. If we then decide, and this will be presented in our next presentation, if we then decide to come up with a stronger cost reduction, this may have then a one-off impact of an investment for this stronger reduction. As we have seen in Portugal, typically the paybacks of cost reduction are between 2.5 to three.
That's the type of impact that one can expect from cost reductions in Portugal. In terms of the coverage, the number that we typically disclose is the total number of impairments divided by NPEs. If we want to see then the numbers by stages is in our annual report, and we can send also to you then off the shelf. We can then send it to you off the shelf. We have had a small increase in coverage, but typically the number is the total number of balance sheet provisions divided by NPE. The corporate restructuring funds are not managed by us. They are managed by third parties. I think it is very important.
They are under the supervision of the CMVM, of the CMVM, and they have their own valuations done by typically Big Four companies, or their own audits done by Big Four companies and under the supervision of the CMVM. We typically register in our income statement when we intend to maintain these funds, the value that they give us as the fair value of their participation unit, as long as there is no qualification in the accounts. We have one company that has a qualification in the accounts, and because it has a qualification, as an exception, we have valued it at zero, just to give you an idea. The rule is, for the moment during which we want to maintain in our books the participation unit in the restructuring funds, we value them as we are told to value by the independent valuator.
These are totally independent funds.
Okay. Excuse me, Noemi, do you have any further questions?
Yes. I also asked about the latest data on moratoria, if you have them, and also what's your stance on FX mortgages or your willingness to tackle the problem in the short term, even if there is no clear decision taken by the Supreme Court. Thank you.
Willingness to solve the problem, of course, we have willingness to solve the problem. It then depends on what is solving the problem. It depends on the costs. The question in abstract, whether we are willing to solve the problem, it is difficult to answer because, of course, we are willing to solve the problem. It's very difficult to think that the problem is solvable without a decision from the Supreme Court when there is a Supreme Court decision pending. Because one thing is that if there were no Supreme Court decision, no. If there is a Supreme Court decision pending that may change totally the outcomes, what is solving the problem? It's very complicated. In terms of the moratoria, I believe we have already commented what we could. A part of the moratoria ended in March.
The part of the moratoria that ended in March, there was absolutely nothing there that raised our eyebrows. They evolved exactly as we were expecting. To a large extent, aligned mainly in the consumer segment, which was at least the area where we have probably more concerns, very much aligns with the book that was not under moratoria. I think it's very interesting, this. Of course, we are projecting inflows in NPEs because of the COVID crisis, as we have commented to you, but we also expect, as I have already commented twice, these inflows to be compensated by outflows in our regular NPE reduction plan. There's not much more to say than that.
Thank you.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star and one on your telephone keypad. The next question comes from line of Jonas Floriani from AXIA. Please ask your question.
Yes. Hi, guys. Thanks for taking my question. Just a quick follow-up on cost of risk in Portugal. Just wondering if this, let's say, relatively higher cost of risk that you're seeing is mostly driven by moratoria loans or if there's something else. I've seen that you mentioned in your press release that there has been some individual analysis of customers. Just wondering what exactly is that, or if this is mostly driven by the moratoria loans. Second, also to follow on the question on the staging, do you think we will see any kind of change in the proportion of stages into 2021, mostly migrating from Stage 1 into Stage 2? Is this part of your base case scenario? Are the proportions you mentioned in the previous question are expected to remain the same? Thanks.
Okay. There will be some flows from Stage 1 to Stage 2, from Stage 1 to Stage 3, and from Stage 3 out of the bank through write-offs and through sales and so on. There will be, of course, flows among the different stages. What we are commenting is that our base case scenario is at the Stage 3, the inflows will compensate the outflows. Whether at the end of the year, in Stage 2, we will have somewhat more than what we have right now in percentage of the book. It is possible that we may have a couple of percentage points, but we are not expecting anything extraordinary on this issue. There may be some adjustment there, but we are not expecting anything fundamentally changing on this issue.
As I commented, there will be a strong inflow from Stage 2 to Stage 3 that will be then compensated by the reduction of Stage 3. I think it's important to keep this. The cost of risk is behaving exactly as we were commenting at the beginning of the crisis. This high cost of risk is linked, of course, to the level of Stage 3, i.e. NPEs that we have, and to our efforts to make our balance sheets healthier and to keep on reducing the Stage 3, i.e. NPEs. Of course, the speed of reduction of NPEs that we have shown in the past to be high, bears a cost also in terms of cost of risk. If we want to recover a loan quickly, it costs us more.
If we were to here to highlight any single factor here that we would highlight in terms of the explanation for the cost of risk is the strong focus that we have in terms of the reduction of NPEs, that it bears its impact in terms of cost of risk. Just to give you an example, if we want to recover a credit in a hotel chain that has seven hotels and there's negative equity, if you want to do it quickly, you better speak with the owner of the hotel group and let him keep one hotel and you get the other six. Then you have a quick deal, but probably you may not maximizing the short-term cost of risk. Just to give you an example. There are time compression diseconomies.
That's clear. Thanks, guys. Bye.
Thank you. The next question comes from line of Paul Fenner-Leitão from Societe Generale. Please ask your question.
Hello, everyone. Good afternoon. I just want to know if you've got any intentions of returning to the corporate bond market, and if so, at what level of the capital structure. Thank you.
As you know, we have recently issued in the market. We will continue to be present in the market because we think we shall do so, and we have to maintain a healthy relationship with investors. For the foreseeable future, what we intend to issue, if anything, is senior preferred because we do not have our needs to issue senior non-preferred or subordinated debt that is now more expensive relative to the perception that we have our own risk. If we get to a situation in which we think that the market is evaluating, from our perspective, correctly our risk, we might tap the subordinated market, but for the time being, the only thing that we may consider is senior preferred. Okay. Shall I? Okay. Thank you very much for all your questions. We really appreciate your interest in our equity story.
We are always fully available to take further questions and please feel free to call us. Again, let's meet in the next quarterly presentation. Thank you very much. Bye-bye.