Good afternoon. Welcome to the BCP seminar semiannual results conference call. I will present to you the main highlights, followed, as usual, by the detailed presentation by my colleague, Miguel Bragança, and our investor relations, Bernardo Collaço. The economic and the financial environment remains challenging for the financial sector in various dimensions. I would like to highlight the factor that I consider to be the most prominent, the monetary policy and the recent interest rate developments.
The perspective of an extended period of negative interest rates have had repercussions. It further pressures net interest income and the downward shift in reference yield curves affects the discount rate, increasing liabilities for the pension fund. For this reason, and a lso because the legal framework in Portugal regarding the tax treatment of impairments was finally stabilized, in this quarter, we did recognize the significant amount of DTAs, a net value of EUR 33.5 million associated with projected taxable profits over the longer term and we also had a lower result via our participation in Millennium Ageas, EUR 8.7 million as a result of the application of the Liability Adequacy Test.
BCP's business model remains resilient, continuing to grow and with profitable core activity. As regards profitability, we have and will continue to have a sustainable and predictable model. We continue to focus on improving the quality of the balance sheet and on the rigorous execution of the strategic plan we communicated a year ago, which incorporates a deep transformation and digitalization of the bank. Needless to say, we are highly selective in our options and extremely demanding with the business case of every investment we make.
Incorporating technology into business processes and customer relationships is a central management priority as we want to ensure that from the point of view of proximity and usability, interest, from the point of view of remaining an international benchmark. The bank [audio distortion] in which BCP presented a favorable trend for net profits with an increase of 12.7% compared to the first half of 2018.
Earnings in Portugal were affected by the financial and economic environment and by specific factors, namely the payment of extraordinary compensation to the employees and the approval of the DTAs law. Results in Poland, excluding Eurobank, grew 11% and excluding integration costs increased 16%. In consolidated terms, the improvement in profitability was supported by growth in core income with an increase of over 7% for net interest income. We did this being rigorous in the admission of loans and in the management of the loan book, which led to a decrease of 13% of the impairments compared to the first half of 2018.
We remain strongly committed to improving the quality of the bank's assets, consistently lowering NPEs, especially in Portugal, where we again achieved an important reduction of EUR 700 million this half, highlighting the reduction of almost EUR 350 million in the second quarter alone. Over the last year, we reduced NPEs by EUR 1.7 billion in consolidated terms, reaching a stock of EUR 5 billion in June 2019. This downtrend was achieved alongside a simultaneous reinforcement of impairment coverage to 54% and total coverage around 110%.
The cost of risk continues to converge both consolidated level and in Portugal toward the 50 basis points target we set ourselves for 2021. In this half, we confirm the good pace of capital generation with the Common Equity Tier 1 ratio standing at 12.2, accommodating without any disruption the acquisition of Eurobank, whose impact was in line with our forecasts, as well as the 50 basis points reduction in the pension fund's discount rate. The Total Capital Ratio reached 14.7 in this first half, so we remain above the required requirements for both ratios, having a capital buffer of nearly EUR 700 million.
Business volumes evidence the quality and efficiency of the bank's business model. Credit increased by EUR 3.7 billion in the half, and performing credit increased by EUR 4.2 billion, excluding the reduction of NPEs. We have a robust franchise. Millennium bcp's track record is recognized by private and corporate customers. Once again, the bank has been distinguished in 2019 as customer's bank of choice in Portugal. This widespread recognition is reflected in the rapid pace at which we have been able to attract new customers in Portugal and Poland.
Excluding the recent Eurobank integration, over the last year, we added 237,000 customers worldwide, of which 121,000 were added in Portugal. The transformation process we began with the strategic plan is supporting results as shown by customer engagement. The number of customers interacting with the bank digitally increased by 26% since the beginning of 2018, while there has been an even more significant 54% increase in customers who use our mobile solutions.
As of June 2019, digital customers represent 50% customer base, and we have 37% of our customers using the bank's mobile services. Investments made in Portugal have been effective in accelerating the growth in the number of customers using our mobile application, up by 57% since the beginning of 2018. Our new app is a visible result of well-planned investments aimed at improving the bank's efficiency and providing customers with the best user experience in Portugal. In addition to investing in technology and improving skills, we have changed structures and ways of working, creating multidisciplinary digital labs in which the main customer journeys and their relationship with the bank are being completely redesigned.
We have also incorporated state-of-the-art technology into our operations using robotics and artificial intelligence to increase our efficiency. We are using machine learning to leverage our knowledge of our customers' profiles and consumption patterns, and to refine our propensity models. Our strategy has been evaluated by credit rating agencies, as shown by the several recent ratings upgrades. We are investment grade for senior debt from DBRS since June, and Moody's recently issued the same rating on deposits. I now give the floor to my colleague, Miguel Bragança.
Thank you very much, ladies and gentlemen. As you see here on page 13, our income statement vis-à-vis the same period of last year shows a very positive trend with the NII growing 7.6%, total core income growing 5.3%. The operating costs, on a recurrent basis, increased 6.7%. Both of the core income of the operating costs have one month of Eurobank incorporation. The core earnings, the difference of this grow 4%. Then we have some non-usual items or non-sole recurrent items, if you want, that are at the level of the staff costs. We have had restructuring costs of around EUR 10 million in the first six months of the year.
We have had approved by the AGM a compensation for the workers that had their salary cut during three years of EUR 12.4 million, and we have also had gains on Portuguese government debt that were then partly compensated by the impact of the reduced interest rates in the insurance business. The impairment and provisions decreases, albeit, with the incorporation of Eurobank, according to the new accounting rules, there is always a first-day impairment when you incorporate the bank, as you know as analysts. The impact of all of this is that when you compare with the same period of last year in consolidated terms, we are growing before tax at 20.5%.
As our CEO was commenting, we had to reassess, so to say, the value of our tax loss carry-forwards, and because with a reduced level of interest rates and with a new framework for the impairments deduction, where, in the future, at least five years from now, it will be mandatory to deduct from taxes all the impairment and not only the one that is framed within the former impairments regulation. We derecognize EUR 33.5 of tax loss carry-forwards, which has no impact on capital because these were already deducted from capital. After this one-off effect, we present a growth in terms of net income of 12.7%.
In page 14, you see in graphical terms exactly what was commented in the previous graph. The numbers are slightly different because we present here the numbers after tax so as to reconcile with the net income. As you see, we have here the DTA recognition as a one-off cost. We have also these extraordinary staff costs that were linked to these workers compensation. We've had the mark to market of the insurance liabilities that also had this EUR 9 million impact. We had this first day impairment in the acquisition of Eurobank. It is really a one-off in the sense that when we acquired Eurobank, effectively, what happens right now is that the goodwill is reduced because you effectively revert some of the stage 1 provisions, but then you have to recreate again the stage 1 provisions. This has no impact on capital because it reduces goodwill, but it has an impact on P&L.
There is an increase in mandatory contributions in Poland. In Portugal, they have been quite stable. There was a positive effect also linked to the rate movement of around EUR 29 million. If we exclude all these movements, the positives and the negatives, what we see is a very resilient growth in terms of net income growing by almost 40%. In page 15, what we see is that the NII grows with some compression of the NIM, but with the volumes more than compensating for it.
The NII grows 7.6%, 3.8% in Portugal, albeit a small compression of the NIM, and 12.5% in the international operations. As I was commenting, already reflects one month of Eurobank. I will get in detail into it later on. The commissions stable, albeit the situation that we have in the markets. I would also here like to highlight that the more recurrent commissions, the ones that are more transactionality driven, like the banking fees and commissions, are growing at levels of around 4%, both in Portugal and the international operations.
The ones that are more market driven, like the asset management fees, investment banking fees, and so on, have shown an important downward trend but w e have been able to compensate with the less recurrent ones. In terms of other income, we've had a good half year, as expected, in a scenario of decreasing interest rates in terms of government debt, capital gains, so to say. As you see here, in total net trading income increased from EUR 77 million- EUR 96 million, give or take. The same driver of low interest rates, however, had an impact in terms of the increases of the liabilities in the insurance business. This is around EUR 9 million. All in all, this other income has grown by EUR 45 million.
As you see, this has particularly grown in Portugal by 82%, with the mandatory contributions at a high level, but stable. In international operations, here, basically it's the resolution fund contribution in Poland that's already reflected in the Polish accounts. There was an increase that was an offset by other movements like capital gains. Operating costs. As I was commenting, this already reflects one month of Eurobank, and it also reflects some non-usual items like the compensation for the four years of salary cuts that was approved in the last AGM. There was a EUR 10 million reduction cost, suggesting for these two effects, the recurring costs in Portugal have grown by 2.5%, so below the growth of the income, with positive jaws.
In the international operations, there was this growth of 13.5%, basically explained by the incorporation of Eurobank and also by the salary movement that one is living in Poland. We still compare very favorably with most of the systems. We are able, in this low interest rate environment, to present a 50% cost to core income scenario. I stress it's core income, so it does not include trading gains, and this is what assures the resilience and the sustainability of our business model.
Cost of risk, a good evolution. From 88 basis points to 74 basis points, e xcluding this one-off first impairment, it is 67 basis points. This is very positive. In Portugal, 76 basis points. In the international operations, also corrected for it around these 48 basis points that I was commenting. This allowed us to decrease NPEs, while at the same time increasing coverage vis-à-vis last year.
We are broadly stable vis-à-vis last quarter, a very slight decrease, but vis-à-vis last year, we increased 4 percentage points in terms of coverage by provisions and 2 percentage points in terms of coverage by provisions and collaterals, which we have been able to sell at higher values than the book values. I think this is important. This enabled us to show an NPE ratio based on loans only already at 9%. This is the first time that we go below the two digits. Positive evolution. If we include the off-balance sheet and securities and all the exposure, so to say, the official EBA ratio, we are already at 6.4%. Focusing only on the 90-days past due ratio, we are already at 5.2%.
We are decreasing 31% the NPEs, aligned with the 25%-30% that I commented in the last call, which has been EUR 1.8 billion when we compare with last year. Going here to the business activity, a very resilient activity in terms of customer funds with the funds to individuals growing 11%. We are focusing less and less in terms of growth of funds and client resources from institutions and for corporates, because with the new interest rate environment, this is not necessarily profitable.
In Portugal, our funds to individual have grown 5.8%, and the international operations, they have grown by 21%, around half of it is responsibility of the Eurobank acquisition. Loans to customers. A very positive evolution in terms of the performing loans. I think this is very important to say. In consolidated terms, a growth of around EUR 6 billion. In Portugal, what we see is that the performing loans growth compensating the very high reduction of NPEs. In the international operations, the performing loans basically growing EUR 4 billion, of which EUR 3 billion has been the Eurobank acquisition.
Net loans to deposit, again, no issue, very liquid. The issue may be excess liquidity, but this is another thing. In terms of capital, what I would like here to highlight is that we had here several movements. We had here two challenges. One was the Eurobank acquisition, the other was the impact of the reduction of interest rates in our pensions and liabilities. The Eurobank acquisition had an impact, as I commented last time, of around slightly below 50 basis points, as I was commenting. The pension fund was around 40 basis points, give or take.
This is already net of the positive performance of the pension fund, because a part of the liabilities were hedged, so to say, with exposure to fixed rates. Effectively, we have decreased the pension fund discount rate from 2.1% to 1.6%. The sum of these two effects is around 90 basis points. We were able to compensate this with our activity and with our earnings and with the evolution of the fair value reserve. Leverage ratio, very healthy as you see on page 28. The RWA density is still high. Here you see the numbers on page 29. You see the numbers of our pension fund. You see very clearly here the discount rate and the projected rate of return that have to go in tandem, going down from 2.1% to 1.6%.
You see also on page 29, the composition of the pension fund with an exposure to shares that's around 13%. The conservative profile, considering that it is a 17-year maturity fund. Bonds, 35%. That's why we have been able to compensate partly the impact of the pension fund liability with the performance of the fund t hat was 4.7% comparing with the former discount rate of 2.1%. Now I'll pass the floor here to our investor relations, Bernardo Collaço.
Good afternoon, everybody. It's nice to be with you again and then l et's start from Portugal. On page 31, as you can see in Portugal, net income had increase of 23% to EUR 73 million. It was mainly driven by the reduction of impairments and the higher net operating revenues. In terms of net operating revenues, as you can see, there's an increase of 4.6%, mainly driven by an increase on NII and in commissions as well, in trading, and the lower income coming from equity earnings.
If you look at the operating costs, there's an increase but i f you look mainly at the recurrent costs, you can see that it's quite stable and we have an increase of 2.5% on a yearly basis. Moving to NII and look at the evolution on the different factors. There are as well some positive and negative impacts that we should worth mentioning. If we start on the credit volume, there's an expansion, as it was said, of the credit volume. At the same time, the continuous decline on the remuneration of the time deposits.
At the same time, the lower cost of funding due to the macro environment. On the negative side, some compression on the credit rates effects. Moving to page 33. There's a continuous effort to reduce the cost of deposits. As you can see, we decreased, in terms of spread, to 50 basis points. There's still a difference between the front book and the back book of 10 basis points to capture. In terms of the performing loan book, as you can see, it has been stable at 2.7, and as it was mentioned by Miguel, there's a slight decrease on NIM, but it was compensated by volumes that increased from the coming year.
Moving to page 34. As you can see, total fees and commissions are quite stable, although we should highlight that the banking and commissions fees related have an increase of 4.3%. Still, as the previous quarters, the related fees coming from capital markets still below, and that's mainly driven by the last year bad performance that the markets have. Other income. Sorry, page 34. That's where we were. In terms of other income, as you know, it includes trading, other operating income and equity accounting earnings. There's an increase of 82% and it includes the EUR 8.6 impact of low interest rates from the insurer company.
Moving to page 35. As it was mentioned, in terms of recurring costs. Quite stable. There's a slight increase of 2.5%. If we look at the total operating costs, we have to consider this increase of 7%, that's mainly driven by the EUR 12.4 million of the compensation for the temporary salary reductions that occurred from 2014 and 2017, plus EUR 10 million of restructuring costs that compared with EUR 80 million on the first half of 2018. In terms of employees, we still have these restructuring costs as I mentioned but t he number of employees slightly increased because as we know, we are investing with some people more related with this digital era and transformation that the bank is going forward.
In terms of branches, there is still the trend of some decrease. On page 36, which is quite important looking at the asset quality, as it was mentioned, we had a decrease of EUR 1.8 billion NPEs. Basically, if we look at the NPE buildup, you can see that we have year-to-date a decrease of more than EUR 700 million. That basically comes mainly from cures and write-offs. In terms of loan impairment, the cost of risk still with a trend of decreasing and going forward to the level that we have for the strategic plan of being around 50 basis points.
As you can see, it's mainly driven by the reduction of the loan impairments on the P&L. Moving to page 37, the NPE coverage still overall above 100%, so it's still at 111, the same level of the first quarter. If we look at the NPE, the 90 days past due total coverage, as you can see in companies, the coverage by loan loss reserves is at a level of 70%, and then you have cash and other collaterals that are blocked at the bank of around 24%, and then 25% it's covered by real estate collaterals.
Moving to page 38, and if we look at the foreclosed assets and restructuring funds, you can see a decrease of almost 23% year-on-year. That's mainly a reduction of more than EUR 330 million. It's on a reduction trend as well as on the corporate restructuring funds that it's a slight decrease, but the trend is there and there's a reduction of 3%. If we look at the sales of foreclosed assets, basically the number of properties that have been sold, it's close to the first half of 2018.
The profits that we make on the first half of 2019, the difference between the book value and the sale value, reached EUR 46 million. Moving to page 39, and regarding volumes, it really shows the dynamics of the business model, as you can see, we have been increasing in terms of total customers of more than EUR 2.6 billion, which is 5%, which is really relevant to mention that on individuals we have an increase of almost 6%. If we look on the loans to customers in gross value, I think that the most important thing is to reaffirm that the performing book has grown by EUR 1.7 billion, that was not compensative totally by the reduction of EUR 1.8 billion of NPEs.
Moving to page 40, there's here something that we'd like to highlight. It's the strong credit activity to companies in Portugal. If we look at the new production of the credit loans, you can see that 54% is linked to companies, 35% to mortgage, and to personal and others are around 11%. Moving to international operations on page 42, there is a contribution of EUR 83.7 million to the consolidated P&L. If you look line by line in Poland, there is a small decrease of EUR 4.1, but if we exclude the impact of Eurobank, there was an increase of 16%.
In Mozambique, also a small decrease that's mainly driven by lower margins, but also has a compensation on the reduction of the cost of risk. Moving in detail to the different international operations. If we start from Poland, the net income from Poland, as I said, there was a slight decrease, but it's mainly driven by the Eurobank acquisition. If we're not considering that, the net income will increase by 16%. Return on equity is still at the level close to 10%. If we look at the net operating revenues, mainly driven by the NII increase, we have 18% increase in terms of banking income.
Operating costs. There are some points here to mention. We can see an increase of almost 20%, but it's mainly driven by the Eurobank acquisition and the wage inflation that we are seeing in Poland. Unemployment rate is quite low in Poland, and at the same time, we also have to consider the increase on the contributions for the regulatory funds that increased significantly. Just some highlights about the Eurobank. As you know, in terms of customer funds, there's an increase of EUR 2 billion, and in terms of gross loans, an increase on the balance sheet of EUR 3 billion and s ome of the synergies and the beauty of this acquisition that fits really well on our business model, it is the increase on consumer loans that effectively is the main driver from Eurobank.
At the same time, we expect, as it was mentioned in November 2018 when we announced the acquisition, will be a much more spread presence in Poland, mainly in small cities. Just to highlight that we expect in November of this year to have a single brand operating in Poland. Moving to page 45, and as I said before, the NII shows a very high increase of almost 22%, and NIM also an increase from 2.5%-2.7%, and it is mainly driven by the levels of the consumer loans that are reaching some very high levels in Poland.
Commissions and other income increased by EUR 10.7 but commissions is quite stable, most of the increase are coming from other income. Looking to operating costs. The cost to income are stable. As you can see, there are an increase mainly coming from the contribution for the Resolution Fund. That accounts for more 37% than the previous half year of 2018. In terms of staff costs, as I said, by the integration of Eurobank and some salary inflation, there's also an increase on that. Just the breakdown of the mandatory contributions. As I mentioned before, there's an increase of 21% so i t's quite significantly to the P&L.
Moving to the credit quality in Poland, w e also have to bear in mind, that's on page 46, w e have to bear in mind that already approved the Eurobank integration. The credit ratio of 90 days past due loans, all we know, had an increase from 2.7 to 2.4. The stock of NPLs, there's an increase because of this integration, as I said. In terms of loan loss reserves, quite stable. In terms of balance sheet and the coverage above 110%. If we look on the P&L, as it was mentioned before, the loan impairment increased, so the cost of risk had an increase from 47% to 80%. If we exclude the first day impairment coming from the Eurobank and according to the accounting standards, the cost of risk shoots to that 52 basis points.
Moving to volumes, which also an important part of the business story in Poland. As you can see, customer funds increased by 23%, and the contribution, as I said before, from Eurobank is EUR 2 billion. If you look on the loans, there's an increase of almost 34%, where we are including on these EUR 3 billion from Eurobank. Let me just highlight that in personal and other customer loans, as you can see, there's a huge increase of more than 100%, and mainly driven by the Eurobank acquisition.
Moving to Mozambique. Mozambique, as I mentioned on the previous slide of the Internet, of the contribution from the different operations. There's a normalization of the interest rate, so it pushed NIMs net income slightly down s o that's why you see almost 10% decrease in terms of net income, but return on equity still at the level of almost 21% with a capital ratio of 41%. Operating costs, in Mozambique, also a slight increase of almost 5%. It is mainly due to some staff costs that have increased on the first half of 2019.
Page 49, the normalization of interest rates is reflecting on several issues, mainly on NII, as it was mentioned. That's the reason why you see NII in Poland coming from EUR 95 million to below EUR 19 million. Mozambique, sorry, I mean Mozambique. NIM also with some pressure. Operating costs, as I said, an increase of 4%, mainly related with staff costs that were paid and related with bonuses. The cost to income, still at the level of 38%. There's an increase in Mozambique in terms of commissions and other income for 11.5%.
In terms of the number of employers, you can see, a small decrease and a stable level of the number of branches in the country. In terms of credit quality in Mozambique. As you can see also, the stock of NPLs decreased. It's mainly driven, once again, by the normalization of the interest rates in Mozambique. We also increase the coverage ratio from 55% to 57%. The cost of risk and the impairments that goes through P&L on a decreasing trend. Moving to volumes on page 51. As you can see in customer funds, there's an increase of 3.8% and keeping the trend that we show on the first quarter, the loans to customers decreasing by 17%. Miguel Bragança.
In slide 53, what you see here, once again, is the benchmark that we are presenting to you in terms of what is our 2021 plan and how we are progressing towards it. As you know, the main objective of the plan is to accrue value and to generate sustainable ROE of around 10% within a proper balanced structure. For our business model, which we deem to be a Common Equity Tier 1 ratio around 12%, and a loan to deposit below 100%. We are on track to it because some of the main levers are the reduction of the NPE stock. As you see here, this is going well and according to plan. With the consistent also reduction of the cost of risk, that we are progressing towards our 50 basis points target.
With an important enabler that is the progressive enrollment of our customers in this new digital and mobile world, so that we will reduce our cost to sell and to our cost to serve, so as to achieve our 40% cost to income target. This is the area that will take more time because it depends on customer behavior, it depends on being able actually to implement these new models. We have no reason, even in this new scenario, to review our targets, and we reaffirm here our 2021 objectives. Thank you very much. We wish you a happy holiday for the ones that have not gone on holiday yet.
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For those that are listening to me. Right now I will open to questions and answers. Okay.
Thank you, ladies and gentlemen, we will now begin the question- and- answer session. As a reminder, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star and one if you would like to ask a question. Your first question comes the line of Sophie Peterzens from JP Morgan. Please ask your question.
Yeah. Hi, here is Sophie from JP Morgan. I wanted to ask on net interest income, could you just remind us what your net interest income sensitivity is to 100 basis points lower rate, and could you also talk a little bit about the NII outlook in Portugal, whether you expect net interest income to grow in coming quarter, is how fast your loan book reprices downwards, and how we should think about any hedges that you potentially have in place? My second question would be on FX mortgages in Poland, c ould you just give an update on what the latest is, and how we should think about these mortgages going forward? Thank you.
Thank you very much for your question, Sophie, and for the opportunity to answer them. In terms of FX mortgages in Poland, I would just first like to highlight that our bank in Poland is listed, has a lot of attention, deserves a lot of research coverage. For the ones of you that would like also to do a deep dive on this, there is a lot of information on it. Having said that, of course, I would like also to highlight all these issues regarding FX mortgage is already reflected in the price of our bank in Poland, because it deserves a lot of attention, it deserves a lot of media. All the information should be reflected in the price and in the research documents of our bank in Poland.
Having said that, the latest news in terms of FX mortgages are pointing two directions, so to say. The first thing that I would like to highlight is that there was a project from the president of the Republic of Poland to have a special fund that would cost the bank some tens of millions of euros per year to accelerate, so to say, the conversion of Swiss franc mortgage debt into złoty mortgage. This was a little bit, I would say, aggressive vis-à-vis the banks that had this mortgage portfolio because it effectively forced the banks to use their donations to the funds to convert the credit.
This was there in the parliament for already some years, and in the middle of this month, there was a discussion in the parliament whether this measure should go ahead or not. Unfortunately, it did not go ahead. What went ahead is a measure that treats, in a fair way, all the debt holders from both Swiss franc mortgage holders and złoty mortgage holders. That will, with clearly marginal cost to the bank and a cost that will be probably paid back because it is fair in the way it is structured, and it will really help the ones in need and not necessarily the ones that have a Swiss franc loan originated in 2000 and then later, 2007. This is one piece of the equation.
I would say the legal risk has clearly come down, and this is a piece of good news. Another piece that is not such a good news and on which we don't have a lot of information is in one specific case regarding another Austrian bank that was present in Poland and still has some FX exposure. The client, the judge, in one specific case, asked the European Court of Justice if he decided that the FX spread clause was abusive, the FX spread, so the difference between the bid and the ask, not the FX indexation, what would be the consequences?
Basically, what the European Court of Justice attorney general said, so it was not a judge, it was the attorney general, said is that, in this case, this could contaminate also the FX indexation clause, so b ecause all the indexation and all the link to CHF would be broken, and effectively the loan would not be CHF denominated, would become złoty denominated at the original rate and with the interest rate in CHF, so w hich is a little bit strange, a loan in złoty with interest rate in CHF.
He did not say anything in terms of what was his opinion in the clause. What we can tell from the second case, we have lost less than 7% of the cases up to now. In the 7% of the cases, so in all the remaining ones, we have won the cases very clearly stating that the clauses were not abusive. That's what we can tell you. My personal opinion is that the opinion of the advocate general is a little bit too extreme. Let's wait and see. I think it's totally disproportionate and extreme, but let's wait and see. I don't have the details because it's not a case of ours, but I trust that the judge in the European Court of Justice will make a decision that makes more sense and/or that's more proportionate.
In terms of the NII, our exposure to interest rate movements, as I was commenting and I have commented, after hedges, is around, right now, slightly below EUR 100 million of NII per 100 basis points of movement, roughly proportional for the size of movements. This is the situation which we are. We do have a large hedge in terms of interest rate exposure, because without hedge, this value would be much larger. Right now, the interest rate that is more relevant for us is the short-term interest rates, is the Euribor rate. What we see here, if you ask my opinion, is less than an issue of an immediate impact or negative impact of this lower level of interest rates.
If you see, the short-term interest rates have not gone so much down and i t rolls forward in this way. What went down is the longer-term interest rates. I would say the expectation now of the market is that we will become more roughly at the present levels for a longer period of time. What this will impact is not that much that our interest, NII will go down, is more that it will take longer really to pick up to more sustainable values. That's the way that I look at it.
On the other hand, because we are ranked with the best cost to income and even in low interest rate environments, if they are there for a sufficiently long time, what banks do, what institutions do, is that they adapt their business models to it. I think that a very good cost to income is a good way to start in terms of adapting the business model. Okay? We are working on it. Okay?
Thank you.
Thank you. Next question comes the line of Carlos Peixoto from CaixaBank. Please ask your question.
Hello, good morning. My first question would be on the Common Equity Tier 1 evolution in the quarter. If you could detail a bit further on the evolution. We already know a bit the impact from the changes in the pension fund discount rate and also from Eurobank integration but then o n the remaining impact, it would be good to have some color. Within this one as well, whether you believe that there could be further adjustments in the pension fund discount rate over the year, given the evolution that yields have been or has in recent times.
On a second question, basically a bit in line with what you were discussing on NII, but basically, within this interest rate context, what do you see as a reasonable guideline for NII for the rest of the year and potentially for next year? Should we expect some additional margin compression as a result of these lower interest rates? Do you think that this can be offset by volumes? Just trying to understand a bit, what do you see from here and with the current expectations?
Thank you, Carlos. Thank you very much for your questions. Basically, I would say there are here three effects, so to say, in terms of the Common Equity 1 evolution. As you know, our common equity one in March was 12.7%. We have the impact of Eurobank, as I was commenting, below 50 basis points, so slightly below 50 basis points. We have the impact of the pension fund around 40 basis points. These are two negative impacts that total 90 basis points. Okay. Then we have two positive impacts that are roughly of the same size. That is the evolution of the fair value reserve in terms of our bond portfolio, broadly 20 basis points and we have the impact of the net income adjusted for taxes.
Effectively the pre-tax, because as you know, as I was commenting, the write-off of the tax was paid for does not count for the income. This is the more recurrent part of it that's around 20 basis points. Effectively, the more recurrent activity was able to generate 20 basis points in the quarter, which I think is good. 20 basis points recurrent is good. The fair value reserve was able to generate 20 basis points, which is also good, but not that recurrent because this depends on the market. The pension funds and Eurobank behaved exactly as projected.
Going to the pension fund rate. The pension fund rate has to be defined based on low risk securities of the same maturity. Okay? Low risk has been understood, by the way, corporate securities, not bank securities, corporate senior debt of the same maturity. The maturity of our pension fund is roughly 17 years. Low risk has been understood as A , A A-. Basically what we have to look at is at the senior debt between A+ and double AA- that has 17-year maturity. There are not many of those securities. Your guess is as good as mine. The present discount rates of the pension fund is justified, and I think is the appropriate one for 30th of June of this year.
If I knew exactly where the interest rate of senior debt of 17 years of corporate would be three months from now, six months from now, probably I would be using this insight in the market. What I can tell you is that this is totally appropriate to what we have right now, and future evolution will have to do exactly with this benchmark, and it may go up, may go down. Let's see what happens. It will depend on the market. What we also can tell you is that a part of this movement is hedged because, as you know, more than 30% of the pension fund is invested in long-term bonds, and to some extent, depends, of course, the part that is also invested in equities, to some extent, also varies with the interest rates.
In terms of the NII. The NII, right now, what we think is that in principle, in Portugal, so in the international, I would say, let's start in Poland and then go back to Portugal. In Poland, our view is that the NII before Eurobank, and in general, the income before Eurobank would be growing at high single digits, low double digits, so between 8%-11%, something like that. This is really what the expectation that we have before Eurobank. With Eurobank on top of it, we have to sum the NII in Eurobank, just roughly as a measure, in the one month NII in June was around PLN 58 million, give or take. You have to divide by 4 to get to euros, so t his is where we stand in Poland. This will be a positive contribution.
In net terms, the impact in consolidated terms of Poland will more than compensate the other ones. In terms of Portugal, that is the other large geography. Our view is that the NIM will be broadly stable. If it goes down, it may be a couple of basis points, but not much more than that, and that our NII will grow with the volumes. I am not discussing 1 basis point more or 1 basis point less, but we are not working on the assumption of a decrease of NII. It is a small increase based on the volumes.
Okay, next question, please.
Thank you. The next question comes to the line of Gabor Kemeny from Autonomous Research. Please ask your question.
Hi. I have another question on the pension liability. I understand that the capital impact from the pension revaluation was mitigated by an attractive return of the pension fund in the first half. What should we expect if the return in the second half of the pension fund were to be lower? Let's say, I think you had something like 5% return in the first half. Let's say, what would happen if the return would be zero, potentially negative? Another question on provisions. It looks like you are reducing NPEs more quickly than you initially expected this year, and you have front-loaded some of the NPE reductions without a significant P&L impact. What do you think is the likelihood that we will see a normalization in your provisioning by 2020?
Starting with the pension fund. The interest rates sensitivity of our pension fund is disclosed in our annual report. By the way, it does not change materially. Our annual report will be at your disposal, in principle, at the latest next week. There will be a lot of information there. The impact for each 25 basis points of impact of interest rate increase in terms of the pension fund, the impact is, just check here, is EUR 140 million. Every 25 basis points of increase, you see this in the pension fund note of the annual report, if I'm not mistaken, note 46. You have a lot of information in terms of it. Every 25 basis points of impact is EUR 140 million. It is a good approximation to think of it as broadly proportional.
If it is 10 basis points, or if it is 12 basis points and a half to make my life easier, it's around EUR 70 million of impact. This is the first issue. Second issue. In terms of the pension fund return, the way that we manage the pension fund is with a view to hedge, at least partially, the liabilities. Effectively, we hold long-term debt and long-term corporate debt in the pension fund, exactly to hedge the long-term of these liabilities. It does not make sense to say what happens if there is a decrease in the interest rate of the pension funds, but there is not a capital gain in the pension fund, because it is structured as a way, in an ALM way.
In any case, what I can tell you is the following. The way it works is the following. The return of the pension funds, so the impact of the return of the pension fund, is the effective return of the pension fund minus the discount rate. Give or take, the pension fund right now is around EUR 3 billion, if you want. If the return, the projected return is 1.6%, the difference between the actual return and the projected return, so to say, that is 1.6%, is so to say, a buffer that then absorbs a part of the impact that we have in terms of the liability. Okay? This is the pension fund issue.
As I said, they go in tandem because we do an ALM management. In terms of the NPEs, our commitment is to achieve this 50 basis points rate by 2021. Over the short term, I would say, achieve exactly the 50 basis points by 2021, does not accelerate and to decrease the NPE level faster, so as to go there and to reach this level. The first impact is not necessarily a reduction in the cost of risk, on the contrary. If we want to accelerate and to get to these levels by 2021, this is not consistent with a sharp reduction of the cost of risk before it. Our view is that we should work based on the assumption that the path to the 50 basis point will be a smooth linear path towards it.
Okay. Just to follow up quickly on the pensions, it seems that you are actually less exposed than this stated sensitivity on this basis, because I think you are guiding for EUR 125 million, or EUR 140 million impact. Given the positive return you achieved in this environment, your eventual capital impact was lower than the stated sensitivity.
The sensitivity is only based on the liability part. These sensitivities in the accounting are done based on each factor by itself. If we had no hedge, if the pension fund had no hedge, and if we had the impact only on the liability side, we would have an impact of EUR 140 million. As we are partly hedged, as we have shown to you, in the page in which we discuss the pension fund, we hold more than 30% in bonds, and also around. Page 29. We hold 35% in bonds, and 13% in shares, and 8% in real estate. This part also moves in tandem with the market. Okay? When I speak about EUR 240 million, this does not reflect the asset part, only reflects the liability.
Okay. That's helpful. Thank you.
Okay.
Thank you. Your next question comes from the line of Noemi Peruch from Mediobanca. Please ask your question.
Good afternoon. I have three questions from my side. The first one is on cost in Portugal. If we exclude the planned EUR 50 million restructuring cost and EUR 12 million one-off compensation, how do you see cost evolving next year? Do you expect it to be more driven by hires, investment, or wage inflation? The second one is on fees. Banking fees in Portugal grew by 4% in H1. I was wondering if you could give us an idea of the split between the repricing effect and the business growth there. The last one is on govies. What are the unrealized gains on government bonds left in Q2 at group level? Thank you very much.
Okay. In terms of costs, what we would expect for next year is that the recurrent costs in Portugal, the recurrent ones would be broadly constant with some increase, as I was commenting, in the activity. Second, on fees. We have, as I was commenting, the banking fees and the more market fees, which is not necessarily investment banking. A part of this has to do with asset management products, has to do with placement of bonds in the retail market. An important part of these fees are retail banking fees also, so to say.
Going forward, what we see is the following. We do not see a large space to increase the pace of growth of the traditional banking fees. I think the traditional banking fees are growing at a pace that we think is reasonable. What we see also going forward is that mainly in this lower interest rate scenario, there is some space to increase the fees linked to investment and asset management products to clients. The market is not there yet. If you ask me on a long-term view, this is an area where, this year has been particularly difficult because of the market movements.
I think it is only normal that even the private individuals start investing more and more in investment products and asset management products and bank insurance products. This is the area of growth. The Portuguese government debt, the realized gains, as we were commenting in the year-to-date number, in terms of securities, was around EUR 53 million. The realized ones, in the year-to-date of the two quarters. Broadly equal in the first quarter and in the second quarter. In terms of the unrealized gains, we are not disclosing this number right now.
Thank you. Are you ready for your next question?
Yes, please.
Sorry. Yep. Your next question comes from the line of José Abad from Goldman Sachs. Please ask your question.
Yes. Hello. Thank you very much for the presentation. I have three questions. The first one is a follow-up on the FX mortgages in Poland. To clarify here, because obviously, given that this is a case on the potentially abusive nature of a clause in a mortgage contract, of which actually we've seen a number of cases actually across Southern Europe. Here, there are two potential consequences. One is actually, legally, the natural consequence of this will be actually forcing banks to repay customers all the interest-related payments, associated to the mortgage contract without actually canceling the mortgage contract itself.
That's obviously the extreme scenario. The other scenario would be actually, yes, forcing the conversion from FX actually to local currency. The question here is, under which assumption are you currently operating? Sorry if you explained that before, I just didn't get it. Second question, and it's a follow-up to your previous comment, on actually changing the business model and all this. Here is, to what extent actually you could translate increasingly negative rates to your depositors in the form of actually negative rates to your corporate deposits or even retail deposits, SMBs and households. Is that actually possible? I believe the way to implement this is obviously through fees, but is this something that you are doing, you are planning to do?
The third question, if I may, is that given that the world has changed actually since you announced your targets. It's not that long ago, but actually, the world has changed a bit. Whether you still reiterate your 10% return on equity target by 2021, or, I think as a number of actually other banks in Iberia over the last few days have done, you are planning to revise that target downwards. Thank you very much.
First, just to make it clear, in terms of the FX mortgage opinion of the Advocate General. It is an opinion on one case, and we don't have access to all the information because we are not part in this case. The clause that is being decided or what the Polish judge asked, whether it is abusive or not, is not the indexation clause, is where the banks can make money on the bid-ask of the currency movement of the FX movement. Okay? Each time there is a CHF mortgage, typically, the customer has to buy CHF to repay the mortgage.
The question was very specific of the judge, is the clause whereby the customer buy CHF, or may buy CHF from the bank, and then may pay with this bought CHF, the loan to the bank, is this clause, this specific bid-ask spread on the FX abusive or not? It is not whether loans in CHF are abusive. It is very specifically on this, okay? Our view is the following. Let me just be clear. First, the clause is not abusive because the customer could pay in CHF, getting the money elsewhere.
If he decides to buy CHF in the bank and not elsewhere, it is his choice b ecause he has this choice, the clause is not abusive and should not be deemed as abusive. This is the first view. Second view, even if it were deemed abusive, what could be abusive is the excess spread over a normal bid-ask spread. Thirdly, the Central Bank of Poland publishes bid and ask spreads, and one could do the calculation of what could be the excess spread over the bid-ask spread of the Central Bank of Poland.
Thirdly, if we really wanted to penalize the bank, and if the clause would be deemed abusive, then on top of this excess spread, what you could say to the banks as judge is, "Please give back all the spread and not the FX spread." Please give back as if the transaction would be done at the mid between the bid and the ask that is published by the Central Bank of Poland. We think that the natural solutions to the abusiveness of the clause would be one of these two.
Either to give back the excess bid-ask spread or to give back all the spread. Never, because we don't think it makes sense, but never to say that because the banks could be making, let's say, an excess spread on the bid-ask of the CHF, never to say that because of this, all the loan gets converted to złoty. We think this is clearly disproportionate. It's like killing ants with an atomic bomb. What we're speaking is about the ant, in the contract. We think this is clearly disproportionate. Okay. Fees. We have been changing. We are one of the banks in Europe that has been changing the business model for a very long time.
Okay.
Exactly to become much more fee-based. Even in our retail business, we have more than 1 million customers that have paid accounts, that have package accounts, and that are used to pay a monthly fee in the same way as they pay their Netflix fee or their Spotify fee. They are used to pay their banking fee. Then the additional services that they get, they get a package for free. We have been able to move in this direction very swiftly, so that most of our valuable customers are used to this model, which we think is the model of the future, is a transparent model, is a model that increases the relationships between us and the bank. That typically the customers feel that there is a reciprocity in that.
That in terms of our retail business, we are more prepared for this low interest rate scenario than probably most of the banks in Europe, because we already have a fee-based fee. In terms of the institutional and corporate clients, and here it's a little bit more complex, because we thought, typically institutional clients and financial clients, I would say, do not qualify for this type of business model. In this case, we have been approaching some of these clients to start charging fees when their investments in the bank and when their current account is clearly excessive vis-a-vis the relationship that they have with us.
Yes, we are doing this, speaking with some of these institutional clients to saying them that we will charge them the central bank interest rate as a fee, if their balances in their current account are clearly unbalanced in terms of the relationship that we have with them. In terms of the targets. The world presents us always challenges now and o f course, in a lower interest rate scenario is a challenge b ut it's also an opportunity because when we are in a market that is a low interest rate market, and when we have the best cost to income, I would say the stress that this puts on our competitors in terms of increasing spreads on the asset side, in terms of charging more for clients.
Having the best cost to income also gives us a shield from these movements and t his low interest rate scenario is clearly a much bigger problem for other banks that have a higher cost structure than us. Right now, we are working on the assumption that we will stay with our targets. We think we will be able to do that. To be totally honest, we have not done all the homework in terms of how exactly will be the mitigating actions and how exactly we will have to adjust our business plan to get there. It is normal that when the world changes, we have to change our way of getting there and r ight now we are working on the basis that we will get to this 2021 number.
Thank you, Miguel.
Thank you. Next question comes the line of Mario Ropero from Fidentiis. Please ask your question.
Hi. Good afternoon. Thank you for taking my questions. Firstly, I wanted to ask a follow-up on NII. You mentioned that right now NII should be growing in line with volumes. Could you please also comment on the contribution of the ALCO portfolio? Can this be sustained at current levels, considering that the strong compression in Portuguese yields? The second question would be, if possible, if you can give us an update on the DTA structure and how much of them are covered by government guarantees. Thank you.
Going back here, starting with the last question, so to say. The amount of DTAs that we have that have a government guarantee, so that are good for capital purposes because they do not get deducted from capital. The most that they can have is a conversion in cash of the government, is around EUR 1.8 billion. The amount that we have that are tax loss carry-forwards, so that they are already deducted from capital, if you wanted, are around EUR 220. This is the amount that we typically sometimes derecognize because the tax loss carry-forwards have a schedule to be used.
This is EUR 220 that are not in capital anymore. I think it's important and t hen there are the temporary differences. The non-guarantee is temporary differences, that to a large extent are also not in capital, to a large extent. There is a threshold as to what they are considered in capital, that are EUR 772. Okay. From these, I would say 300 are already not in capital. I would say that, as you see, the large part of our DTAs are government guarantees, but there is also an important part that is already deducted from capital, and it's already shown as such in our statements.
In terms of ALM portfolio and going forward, there are a lot of effects that we manage besides the commercial volumes. When I tell you that, for instance, right now we have around EUR 2 billion deposits at ECB at -40. Of course, we can manage this in a more efficient way. There may be still some positive impact in terms of wholesale funding on our part. Of course, there is also the ALM portfolio, but the contribution of the ALM portfolio is also not that large. What we expect is that these other effects that we have broadly compensate the ALM portfolio so that the growth of the NII grows consistent with commercial volumes.
Thank you.
Thank you.
Thank you. Your next question comes to the line of Hugo Cruz from KBW. Please ask your question.
Hi. Thank you. Three questions from me. On NII, can you talk a bit, in Portugal, about front-book versus back-book margins for the kind of loans you're issuing? The mix between the front book and the back book is quite different, and people are starting to worry about loan rates falling in the front book in Portugal. We just see the system there. It will be helpful to know what you're seeing in your bank. Second, on cost of risk, can you give guidance for the full year, for this year, what cost of risk you're targeting? Third, can you update your guidance for the tax rate also for this year? Thank you.
Okay. In terms of starting with the last one. The normal tax rate in Portugal is around 31%, this would be the tax rate that I would use going forward. We are not expecting, for the moment, any new reductions in DTAs or at least one that could have an impact in capital. We are not expecting anything that could be material for our capital purposes in this way. I would expect the tax rate to be broadly around the 30% using the current tax and the deferred tax. Okay? In terms of the front book versus back book in credits and deposits, what I can tell you is the following.
We expect, as I was commenting, we still have some way to go in terms of the deposits. As you know, we have a positive impact in terms of the front book versus back book in deposits. Of course, there will be some margin compression on the asset side. We expect one to broadly compensate the other one so that going forward, the NIM will be constant. This is what I would like to say at this moment.
Guidance on the cost of risk, please, for this year, if possible?
The cost of risk, what we said is that we would like to go to below 50 basis points by 2021 with a smooth linear movement towards this rate. I would not go more into detail than what I already said. A linear movement towards this rate, you have the rate of last year, should not be very difficult to get there. Okay?
Thank you.
Thank you. Your next line question comes to the line of Benjie Creelan-Sandford from Jefferies. Please ask your question.
Yeah, good afternoon, everyone. Three quick questions from me. First of all, could you just remind us how much your NPL portfolio is currently contributing to net interest income? The second question is on Mozambique. If you could just give us a bit of an update on the outlook for provisions there, because I noticed that the NPL ratio was up again quarter-on-quarter, and coverage was down by quite a bit. The final question was just on capital. You've previously talked about potential optimization measures in terms of risk-weighted assets. I just wondered whether there was any update on this or whether there was anything specific pending for the rest of this year on optimization. Thank you.
Starting with the last one, so I really don't recall. I have to check whether any type of project, any type of, in terms of optimization of capital. What we have said always is that we have a normal course of business way of approaching these capital issues, that typically it is dynamic, it is a dialectic, if you want, between ourselves and the regulator where sometimes there are some issues that they raise and some issues that we raise, but we are not expecting, I would say, in this interaction that we have with the regulator, where we sometimes ask for optimizations and then the reviews of the models in the sign that is positive to us, and they may ask for others that are in the opposite direction. We expect them basically to compensate each other.
I would say this is the normal course of business below the line that we do on a day-to-day basis when we review our models with the regulators. We are not expecting anything, but we do expect a lot of things because there is a lot of work basically to maintain exactly the situation in which we stand. In terms of the NPL, as we commented to you broadly, there are two types of NPLs. There are the ones that are really past due. The ones that are really past due, they typically do not accrue any type of interest, so their contribution is very small. Then there is the one that are unlikely to pay. In this unlikely-to-pay portfolio, the contribution that they have to our NII is proportionate to their uncovered part.
If they have, let's say, a 50% provision and they have, let's say, a 3% spread, their contribution, and think a little bit, is 1.5% spread. A good number to think about is the unlikely-to-pay contribution is around a 1% impact. For every EUR 1 billion of reduction, if you want, of unlikely to pay, there is a EUR 10 million impact in terms of the NII. That's the way that we look at it. In terms of Mozambique.
Okay. In Mozambique, what I think is important to say relatively to Mozambique is the following. The portfolio is very small in Mozambique, and it's getting smaller. In this moment of the situation in Mozambique, we're focusing on the franchise, on having the clients, maintaining the employee base for the moment in terms of general small one at this point in time, with a very rigorous cost of credit. The number of provisions or the size of the provisioning that flows through P&L is becoming smaller.
I would say that more than the cost of risk, it becomes more and more irrelevant as you converge towards a much smaller portfolio. The cost of risk is not a relevant metric. It is to model the provisions. I think it's much more important to model the provisions on a downward trend. Of course, if the portfolio is getting smaller, the cost of metric does not make sense. The provisions is probably the same as this year.
Okay, thank you.
Thank you. Your final question comes from Sameer Adider question.
Hi. Back to the evolution of your CET1. I know you mentioned some of this in the previous question. Intrinsically, in your last conference call, you said your guidance could be 5-15 CET1 impact or even nothing. Could you give a bit more clarity on where your thinking is at the moment? Secondly, looking at subordinated debt or looking at the current spreads of your AT1 and Tier 2, they're trading much tighter than where you issued in the last year or so. Given your MDA buffer is quite modest versus your peers, is there capacity for you to issue or to rephrase that, are you looking at the market to potentially issue more AT1 and Tier 2 here to boost your MDA buffer? Thank you.
Okay. First, the TRIM. We do not have any indications that we have here a negative impact from the TRIM. As I was commenting, there is always, I would say, an interaction with the supervisor in which the supervisor pushes for more conservativeness in the models, and we push for something that we think is more in our shareholders' interest. Right now, I commented a 10-15 basis points yearly impact as a possible impact. Just to say, in this interaction, it's very difficult to anticipate exactly what will happen. It was not linked to a specific question or to specific issues. It was more to give you an idea of size of the type of impact that we could have, just to tell that we are not expecting any sizable impact.
I maintain this view that we are not expecting any sizable impact. Of course, in this normal interaction that we have with the regulator, I cannot anticipate exactly what the outcome is. This is a part of our day-to-day business, and it's a part of our work to push for it. In the global, we think that we have conservative models and that we should suffer much less from any type of model revisions than the average banks in the European zone. That's what happens. To comment on it. In terms of the second question. The way that we look at it is the following. We have a very comfortable, reasonable total capital ratio, okay. When you compare it with the P2R. We are seeing that the bank is improving and its operating are improving and so on.
We have to make it clear that even if we could, it's not because we can do something that we should do something. Of course, we could issue, and we could issue at more interesting rates now than some time ago because we are in a much better position than we were some time ago. We prefer to defend, so to say, within the limits of what's reasonable, the shareholders and the shareholder value creation than to issue at a price that may still be too high when you compare it from two years from now. This is always something that we always measure. Eventually, we may issue when we think that the price duly reflects our risk profile. We think that when we compare ourselves with some of our competitors, our spread is still not totally aligned with the difference in risk so w e still think that we deserve a better price.
Fair too. Thank you.
Thank you. There are no further questions. Thank you.
As there are no further questions, let me conclude by stressing that we continue to face challenging conditions, but we were able to pursue a consistent path with a significant improvement in balance sheet quality and earnings. The digital transformation of our business and our customer relationship processes is resulting in customer acquisition, business development, improves customer appreciation of the bank, and the ability to remain a benchmark in terms of efficiency.
We are converging at a good pace with the goals established in the strategic plan we present to the market. We reaffirm that even in this more challenging environment, we will achieve the targets, the guidance projected in our strategic plan. Thank you for the participation in this conference call, and case may be, I wish you excellent vacations.