Good day, and welcome to the Millennium bcp first half 2018 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Miguel Maya, Vice Chairman and CEO of Millennium bcp. Please go ahead, sir.
Miguel Maya speaking. Good afternoon. As this is my first meeting with you as a bcp CEO, I would like to start highlighting some details before beginning the earnings presentation of the first semester. We just received this week the necessary ECB's authorization to enable the start of functions by the board of directors elected on the last shareholders meeting. The clearance process is complex and demanding, reflecting the supervisor concerns and precautions in the early evidence of situations that may jeopardize the corporate governance of institutions. bcp is now already functioning with the new board, which has members with the proper management skills and sensibilities able to deal with the challenge that will be faced. I underline the Executive Committee is now composed only by six members instead of the previous eight.
In fact, that is due to bcp business portfolio and dimension requires a different function model as a greater specialization of each of its members. We are a cohesive team composed by persons that know each other well and that have different complementary skills. The new member of the Executive Committee, Maria José Campos, is a senior manager of the bank with specific digital and technological skills that recently came from our Poland subsidiary board. The first President of the Executive Committee is Miguel Bragança, that continues to be our CFO. The second Vice President of the Executive Committee is João Nuno Palma, that has the responsibility of corporate treasury and the international areas. Rui Teixeira continues to have as first priority leading the retail network.
José Miguel Pessanha has the responsibility of coordinating the bank's second line of defense, risk office, and compliance, not only in bcp, but also across all the bank subsidiaries. José Miguel Pessanha is now a non-executive director in Poland, Mozambique, Angola, and Switzerland. For the first time, we have a bcp Executive Director with such a wide scope of influence across the whole group, which reflects our concern with the reinforcement of the group internal control functions. My main responsibilities will be the coordination of the Executive Committee and the human resource, trade, and communication divisions. Beside the presentation of the first half of 2018 earnings, I also intend to explain you the revised targets that we have assumed for our term, which I will do after the earnings presentation.
The main role in the interaction with investors and analysts will continue to be assumed by Miguel Bragança and Rui Coimbra. Please, Rui, slide five. Let me go to this semester highlights. We improved in profitability with net earnings of EUR 150 million in the first half of 2018, improved in credit quality with NPEs decreasing by EUR 2.1 billion from June 2017, increasing in business volumes up by EUR 2.89 billion from June 2017, and have additional 103,000 active customers in Portugal from June 2017. What I just mentioned is graphically illustrated on slide six. There was an improvement in the group's profitability with an increase of EUR 67.5 million to EUR 150.6 million. In terms of assets quality, there was a NPE reduction from EUR 8.8 billion to EUR 6.7 billion, which represents less EUR 2.1 billion at group level. That reduction was of EUR 1.9 billion in Portugal from EUR 7.8 billion to EUR 5.9 billion.
In what concerns business volumes growth, I highlight the increase of EUR 2.9 billion this semester compared to the same period last year. Increase that is of EUR 4.9 billion, not considering the NPA reduction. A special mention to the increase in total customer funds that reached EUR 72.5 billion at the end of the first half of 2018. I also want to underline the customer base growth in Portugal, having reached 2.2 million active customers in June, meaning more 103,000 customers than in June last year, which is a good indicator of the value of our franchise and the trust that the customers have in the bank. I pass now to my colleague, Miguel Bragança.
Good afternoon, ladies and gentlemen. I will now do a highlight of the group as it is normal in our presentations, our Chief Investor Relations Officer will present the Portugal and international operations and the key figures. Further down the road, we will present you our new objectives for the 2021 plan. As you see, as we have presented, our consolidated earnings are explained mainly by the very strong growth in Portugal. Basically, last year, we were breaking even. This year, we are already with a sound net earnings in the domestic activity, which is a very good evolution in terms of performance. International operations, in spite of some challenging environments, we have been able to show its diversification and show its stability going forward.
In terms of our P&L, there is a growth in the net income explained by the commission's growth of 3% to a large extent. In terms of the other income, there was a decrease mainly explained by a capital loss in the sale of NPEs and real estate that is associated to our strong NPE reduction. The other operating costs show contrarily to our normal trend, some growth. As you see, a part of it is totally explained by previous commitments or by extraordinary items. Operating Net Income decreases for these reasons that I've just explained. What we are seeing is also as expected, a progressive normalization of our impairments and provisions. This makes it that our net income before tax grows 50% and our net income after tax and non-controlling interest, i.e. minorities, grows almost 70%. In terms of NII, we see a growth of around 1%.
This growth has two halves. I would say a stability in Portugal that decreases around 1% and a growth in the international operations. I would like to point out that in spite of the stability in Portugal, we have been able to maintain the NIM in spite of the progressive normalization of the spreads in Portugal. Our NIM in Portugal is for European terms, a healthy NIM of 1.8%, and this is to a large extent explained by volumes and/or the portfolio of public debt that we will explain further on. In terms of commissions, growing healthily in Portugal, as you see, growing 4%. In international operations, stable for the time. As you see in the column, this is a growth almost in all categories of commissions showing a good diversification. In terms of the other income, it goes down and it has basically two explanations.
One important explanation is that there was a growth in mandatory contributions of around EUR 10 million. One around EUR 1 million in international mandatory contributions and around EUR 9 million in the Portuguese mandatory contributions. This includes the Single Resolution Fund, the Fundo de Resolução, and so on. Another important factor explaining the decrease in the net trading income was the impact of an NPE sale that had an impact of EUR 22 million. On the other hand, as you see, we have been able to show an important NPE decrease that then is well-regarded by supervisors and by the market. In terms of the cost, we have here some unusual items as we explained last year. We had last year kind of curtailment in the pension fund where some employees of ours basically delayed their retirement age.
This had a positive impact of around EUR 24 million in terms of staff cost. This was a one-off, as we explained last year. There are also some costs linked to redundancies at around EUR 8 million. We typically, in the last years, as you know, we have been investing in redundancies around EUR 20 million a year. This is more or less the investment that we do to decrease the headcount. There was an impact from the reversal of the salary cuts. As you know, in the past, we asked our employees not only not to have increases in salaries, but to accept a salary cut. This was reverted in the mid of last year.
When the first half of this year compares with the first half of last year, there is this one-off impact, but that was a commitment from ours that as soon as the CoCos were repaid, the salaries would return to their normal levels. We see here that basically it is this reversal of the salary cuts that explains the increase in Portugal. The intrinsic increase without it is basically 0. What we have in international operations, mainly in Poland, is a very buoyant market where the salaries are increasing effectively at a higher pace, but the whole bank and the whole economy is also proving very healthy. This still makes us able to show very good cost to core income, which shows the resilience of our business model and allows us to generate a sound pre-provisioning profit.
The key factor in terms of the evolution of our P&L is the progressive evolution of our impairment charges. You see that our cost of risk decreases from around 118 to 88 basis points. In the Portuguese operations, they decrease from 133 to around 100 basis points. Still a high cost of risk, with some way to go in terms of the decrease of the cost of risk, but clearly showing a positive trend. The credit quality is possibly the most important factor and one of our key focuses in terms of management. As you see, comparing June of this year with June of last year, we have reduced more than 2 billion of NPEs, mainly in Portugal, around 1.9 billion in Portugal, which enables us to show already an NPE ratio, including securities and off-balance sheet items of single digits, which comes down from 13% to 9.4%.
Even considering the more, I would say, more known ratios, we see a very relevant decrease in terms of this ratio. Business activity. Our franchise is very healthy with an acceleration in terms of the growth of customers in Portugal, both active and digital customers. We have an important process of digitalization and with the transformation of the bank going on. Most of the omnibus studies in Portugal that are independent, regular omnibus studies in Portugal, points to the value of our franchise in terms of being close to customers, being innovative, generating customer loyalty through digital channels. Also in our other geographies, we are able to show a good customer reference, as you will see further down the road. The customer funds growing really very healthy.
These, today, as you know, at least the on-balance sheet funds, are not necessarily very profitable in a scenario of negative interest rates, but mainly when we are in the retail area and in the affluent area, this is a very positive sign for the value of our franchise through the cycle. We do believe that once the cycle turns and interest rates start normalizing, the very strong impact that we are now having of growing almost 6% in one year in terms of customer funds, will prove to be very valuable for our shareholders. This 6% growth, that is effectively 7.5% in Portugal, had a very strong impact, as you may see from off-balance sheet funds and from the demand deposits, showing that we are becoming more and more transactional and we are capturing most of the customers' flows and customer loyalty in Portugal.
In terms of loans to corporations, we have here, I would say, a positive issue this year. Clearly, there were some important large cases in this first half of the year, large NP cases that were solved. This is good. Very good, I would say. Clearly, our NP reduction in this first half of the year was above even our own internal forecasts because of some specific granular cases. Of course, the other side of the coin is when we sum the total credit, it goes down. If it were not for that, so only looking at the performing credit, it is still positive when we compare it with the first half of last year. Liquidity, I won't lose a lot of time on this, just to comment that continues to be very healthy.
Capital, what we are seeing here is that we have here still a healthy capital position with a ratio of 11.7. This reflects in the quarter, a very slight decrease in the quarter that is explained by the positive earnings, but on the other hand, the slightly negative evolution of our government debt portfolio and the slight increase also in the trading RWAs linked to the volatility of the market. Leverage ratio, very healthy as you see when you compare ourselves with the geographies on page 24. Page 25, the pension fund also showing a healthy evolution with a profitability of 3.1% and with a coverage in excess of 100%. Just for you to know, this excess coverage basically means that we have a buffer in terms of capital position.
This means this buffer that we have here basically is deducted from capital, this means that if there is any type of contingency, that the value of the buffer decreases, this is not deducted from capital until the full buffer is consumed. I will now pass the floor to Rui Coimbra.
Moving now to Portugal, the net income of EUR 59 million, an important increase from last year, driven, as already referred, by lower impairment and provisions. In more detail on page 28, we see the NII dynamics from last year to this year. We see here a decrease of 1% year-on-year. This evolution is driven by the positive effect still from the CoCos repayment last year. As well, the continuous decrease on the cost of both retail funding, in particular time deposits, as well on the wholesale funding, and here, in particular, due to the issuance of a covered bond that replaced the previous one, but with much lower rates. On the negative side, still the effect of lower volumes.
The negative effect versus last year of the recovery of interests, this as we explained on the first quarter earnings, is very much related with the IFRS 9, as well, a lower contribution from the securities portfolio. Quarter-on-quarter, we saw a slight increase on the NII, second quarter versus first quarter. When we look to spreads, we see still the spread of the time deposits on the back book, an improvement of around 10 basis points from -68 to 58 this year. Regarding front book, the negative spread is at 46 basis points for the whole period, and this is 12 basis points below back book. Still a way to improve here the retail funding costs.
Regarding loans, the spread is very much stable the first six months this year versus the previous year, as well is the NIM stable at 1.8%. In terms of commissions, up by 4%. We see improvements in all the lines of commissions. Regarding other income, the decrease already explained by the impact of the credit sales and by higher mandatory contributions. In terms of costs, as well, already explained for Portugal, very much related with the agreement with the unions last year regarding the retirement age, and as well this year with the reversal of the salary cuts. When we add all these aspects, the costs in Portugal were very much stable. Moving now to NPEs, first starting with a time series that normally we use from the first moment we actually calculate the NPE.
What we did, it was to go down more or less EUR 1.5 billion every year, but at the same time to go up on the coverage at around 5 percentage points per year. When we put these two topics at the same time, in fact, this led the net NPE to move from EUR 9.8 billion in December 2013 to EUR 3.1 billion today. Looking now more for the six months, the decrease of EUR 1.9 billion we achieved through a contribution of EUR 913 million of net exits, EUR 531 million of write-offs, and as well, EUR 560 million of sales, so from June 2017 till June 2018.
Regarding quarter-on-quarter, the performance was again very positive with a decrease of EUR 369 million in Portugal. This time with a balanced contribution between the exits, sales, and write-offs. Cost of risk at 103 basis points, down from 133 previous year. In terms of the usual picture on the coverage by product, we see that by provisions, 48% now versus 40% last year. If we include the expect loss gap, even in Portugal, we are already at the 50% coverage, and including real estate and financial collaterals, we are already at 106%. Regarding foreclosed assets, an important decrease as well here of 11% from last year, in spite of the large amount of entries that we had, that is, as you know, part of the normal mechanism of decreasing NPEs as well.
We increased sales. We continue to register profits here on those sales. Regarding the restructuring funds, the amount of EUR 1 billion, as well here, down of 6.6% versus last year. Regarding volumes, customer funds up by 7.5%. In terms of loans, the decrease of 3.5%, although due to a combination of a 24% decrease in NPEs and a 2% increase on the performing book. Looking now to this increase on the performing book, this is mainly explained by the dynamics and the growth on the new production of individuals. This grew 50%, the new production. That is a combination of 19 for consumer and 73 increase on the new production for mortgage. Regarding companies, a note on this leadership position that we have in Portugal. In particular regarding the usage, satisfaction, and all the image indicators.
Starting by the overall contribution that this year is at EUR 90 million, an increase of 3% versus last year. As you know, and this has been the case in the latest quarters, that there is always an effect here on the FX and as well on the IAS 29 for Angola. When we exclude these effects, the contribution in fact registered an increase of 13% versus last year. Moving now to Poland, net income of EUR 82 million, an increase of 11% due to the increase on both NII and net commissions, the return on equity at 9.5%. Net interest income up by 6.2% with higher contribution from both loans and securities, the commissions up by 2.4% due to higher commissions on transactional banking and insurance as well.
Costs increased 4%, the cost to income is quite stable at around 46%. Regarding credit quality, stable NPL ratio at 2.7%, with an increased coverage that is now at 133%, the cost of risk at 47 basis points, a decrease from 52 basis points last year. Regarding volumes, customer funds up an important increase in demand deposits of almost 15%. Loans are up by 7%, although reflects a decrease of 10% on FX mortgage. When we exclude this considering just the other types of loans, the increase is 15.6%. Regarding Mozambique, the net income up by 22% with the return on equity at 26%, quite similar to previous year. Income grew 6.8% above the increase in costs.
In more detail, the NII went up 3%, mainly due to the increased contribution from the securities portfolio commissions down 7% with less contribution from loans that we can see actually when we look to volumes and we understand. Operating costs up by 3% cost to income at the very low levels of 36%. Credit quality. After the peak on this that happened in June 2017, since then, NPLs and NPEs are going down quarter-on-quarter and it was again the case this quarter. The cost of risk at the same levels of last year the coverage at 55%, but obviously, well above 100% when we include the respective collaterals for these NPL loans.
Regarding volume, stable deposits a 20% decrease in loans as we already referred in the previous quarters, that has very much to do with the macro environment in Mozambique that makes us to be even more conservative here. Just a final note on the key figures just to compare the two years. When we look to the main KPIs, improved the capital position and liquidity from previous year. A slight deterioration on the efficiency ratios, very much to do with the reversal of the salary cuts this year. Cost of risk better than the previous year, improved profitability improved asset quality, beating our targets for the NPE, the announced targets for the NPE reduction. I'll move again to the CEO to presenting the main guidelines of the 2021 strategic plan.
Entering now in what we want to achieve in the future, I want to begin by summarizing what have enabled us to reach these points. In 2017, we successfully conclude a very important recovery cycle, which was essential to regain trust and rebuild the conditions to assure the bank's sustainability, underline the size of the cost-cutting undergone in the last five years, which permitted us to achieve a cost income below 50%. We adjusted the network in Portugal, closing more than 260 branches and divested from business debt and balance our international portfolio having exit from Greece and Romania. The route already done led today to a much more robust balance sheet with a significant improvement in assets quality, in the liquidity and in the capital ratios. In the last five years, we have organically reduced EUR 6 billion of the NPE stocks.
The shareholder support was very important, allow us to reinforce the capital ratio Common Equity Tier 1 to 11.9% by the end of 2017 and enable us to anticipate the repayment in full of the CoCos, regain our strategic autonomy. In conclusion, in the 2012-2017 cycle, the bank has prepared, setting the conditions to start a new phase, a phase of growth to surpass the transformational challenges that the financial industry is facing, having come from EUR 1.2 billion negative net income to EUR 186 million of positive net income on 2017, and already with a net income of EUR 150 million in the first half of 2018. In the slide 53, I would like to talk about the recovery of Millennium, was based in a set of core competencies. We have today a customer-oriented relationship model, being leaders in the Net Promoter Score in Poland and second in Portugal.
We are market leaders on efficiency across all geographies. We have a diversified and competitive international portfolio. It is also true that we are facing structural changes of context and in the customer's behaviors, which demands the bank to reinforce capabilities in digital and advanced analytics and to increase the integration in the value chain and ecosystems while preserving a permanent focus in the balance sheet quality and in the effectiveness of the governance model with a strict discipline in capital allocation. The Mobilize plan is composed by five strategic priorities: talent mobilization, digitization being mobile-centric for the customers Growth and leadership in Portugal. Growth and profitability in the international footprint business model sustainability. Millennium bcp has the privilege of counting with a very talented workforce, which has resilience, track record, and high levels of motivation.
In what concerns talent mobilization, I would like to highlight the following priorities: restore the engagement and commitment now in a context of growth, empowerment and simplification of decision-making towards reaching the agility required for success, deepening of the merit-based culture, external hiring of new skills in digital and advanced analytics, reward success, and align compensation with performance and strategic objectives. The mobile will be the central technological element of the bank's offer. It is no longer just replicating the mobile offer we have on the branch network. We must take full advantage of the technological potential, being the mobile the element that defines the new customer experience. In our business model, we must evolve from a segment approach to an individual approach.
We have the ambition to triple the weight of digital sales into 2021, providing 20% more time for the branches to dedicate to complex needs, obtaining an efficiency increase of 15% in terms of sales per FTE. All this while achieving a cost reduction of at least 10% in central services. In what concerns growth and leadership in Portugal, we will take advantage of the potential of being the largest private Portuguese bank. We will redesign mortgage customer journey, aiming an increase of EUR 1.2 billion in new business, strengthen market share in high growth segments, namely in consumer lending, ambitioning to increase EUR 470 million in new business. We are estimating that all the measures from this front may have an overall impact of around EUR 100 million in additional banking income.
Still about the growth potential in Portugal, the strategic plan includes a new approach to micro and small companies, actively promoting pre-approved facilities and the more intense use of the digital channels, increasing the loans volumes in EUR 1.1 billion. Increase the loans to SMEs in more than EUR 1.2 billion through integration of the bank financial service in our customers' value chains. I would also highlight the importance of ActivoBank, which has proven to be excellent in customer acquisition and which we are expecting to double the number of customers until 2021. We are estimating that these initiatives may increase around EUR 100 million in the banking revenue. Concerning the international footprint, I must underline the relevance of this portfolio to BCP. We want to grow in Poland according to the strategic plan already presented by that subsidiary.
We want to keep strong and profitable positions in Angola and Mozambique with a strict risk control and high excellence in standards in compliance. In this new cycle, we will pursue the potential of the commercial relationship with China, benefiting from the knowledge that our shareholders have about the business communities that trade with the geographies where BCP is present. This position allow us to estimate an increase in the contribution of the international portfolio, which may reach a net income contribution of nearly EUR 200 million in 2021. Regarding the sustainability of the business model, we have committed to adopt a low-risk commercial and retail banking model, innovating in the management and monitoring of the loans portfolio, supported by a strong governance structure. We will strengthen global risk management and compliance practices in Portugal and in the remaining geographies.
We have the ambition of reducing the NPEs in 60%, reducing the stock from EUR 6.7 billion to nearly EUR 3 billion. We estimate the cost of risk to be below 50 basis points. In conclusion, I would highlight that until the end of 2021, we wish to surpass 6 million active customers, surpass 60% in digital customers, surpass 45% in mobile customers, reach a customer income ratio of around 40%, reach a ROE of 10%, reach a Common Equity Tier 1 of 12%, converge to a dividend payout of 40%, reduce the NPA stock in 60%, coming from EUR 6.7 billion to EUR 3 billion, reach a cost of risk below 50 basis points. We will start the Q&A. I pass to my colleague, Miguel Bragança.
Yes. We are ready for the Q&A, ladies and gentlemen. Thank you very much.
Thank you. If you wish to ask a question at this time, please press star one. If you wish to cancel your request, please press star two. First question, Ignacio Ulargui from Deutsche Bank. Please go ahead.
Hi. Good afternoon, gentlemen. Just wanted to understand a bit what is the outlook that you see for NII in Portugal in the second half? Whether you think that the current cost of deposits has the scope to decline. We have seen other competitors reducing that in the past quarters. Whether you think there is any scope to improve that NII so that you are able to meet the flat NII for Portugal in 2018? Regarding the path of the plan in terms of the progressive reduction of cost of risk, going forward into 2019, 2020, what would be the path of reduction of NPEs alongside with the reduction of cost of risk? Whether there is any way you can accelerate that process through larger portfolio sales as we have seen in other markets. Thank you.
Thank you for your question, Ignacio. Basically what you see here in the NII is, of course, a positive dimension in terms of reduction of the cost of deposits, which we are doing. There is still some scope to go, but as we approach 0, of course, the amount that we can reduce becomes more complex because the 0% barrier is a complicated barrier. Even in our market, it is a legal barrier. We will continue to deliver in deposits, but what we cannot forget is the following. Our absolute priority in terms of banking this moment, and what we think defends the most our shareholders' interest is the reduction of NPEs in an efficient way. This reduction of NPEs has an impact also in terms of margin, because a part of the NPEs, mainly the ones that are unlikely to pay, still pay.
As we reduce it, we have here this impact. Another important impact is that as we increase coverage according to IFRS 9, what happens is that it is unlikely to pay on the remaining unlikely to pay as we increase coverage, the interest that is recognized in our P&L is the interest pro rata of the uncovered part, i.e., if I have a 50% coverage, for the sake of example, and if I have 10 units of interest, I only recognize five units of interest in my P&L. This is the difference vis-a-vis the past also. Because of all these issues, we are trying to maintain the NII vis-a-vis last year, which is an important challenge. We will have, for sure, a continuation of the positive trend in terms of the cost of deposits reduction.
As time goes by, as the credit portfolio increases, as the healthy credit increases, we think that this will compensate some normalization, so to say, in the spread that we have on the asset side. Over the longer term, what we will have is the NII increasing with the volumes. For the moment, the guidance that we give is an NII aligned with last year with the positives offsetting the negatives. Please remind that last year we did not have this IFRS 9 impact. In terms of the path of the cost of risk and the NPEs and so on. Over the short term, I would say there is a trade-off between the cost of risk and the NPE reduction, because when we want to sell, when we want to accelerate an NPE reduction, there is a trade-off with the cost of risk.
Let me give you an example. If I have a credit that is being recovered, if I want to recover it quickly, I have to make some concessions in terms of negotiation that I probably would not make if I would be able to recover it slowly. Effectively, this very strong path that is, I think, second to none without state support in Europe that we are showing in NPEs also has an impact in terms of the cost of risk. Effectively what we see is that our normal business, the performing part of the business, that is performing at the beginning of the year, when we see the type of cost of risk that is performing part of the business has, it is between around 30 basis points.
The amount that we have on top of the 30 basis points is basically to increase coverage or to accelerate the NPEs. Having said that, our best guess, this is of course, the future is always a little bit uncertain, as we all know. Our best guess would be a kind of linear path towards the 50 basis points that we are commenting. In terms of the cost of risk reduction. Okay, thank you.
Okay. Thanks very much.
José Abad, Goldman Sachs, please go ahead.
Hello, good afternoon. Let me start congratulating Miguel Maya for his appointment as CEO of the bank and also to wish him the best of luck in his new mandate. Just two questions from my side. The first one is a follow-up from a previous question. I think you've made a great effort in reducing NPEs. There's no discussion about that. But your NPE on an EBA basis, in order to be comparable with other, remains relatively high at 13%. Even though Miguel Maya's point right now actually makes lots of sense, the reality is that we had a number of other players in the Iberian space, not in Portugal, but in Spain, who were following a similar strategy and who have recently changed the strategy and decided actually to make large disposals. This is probably the case of CaixaBank or the case of actually Sabadell most recently.
I think, what would make you actually change this strategy? There are two, because on the one hand could actually help you meet your new targets actually much faster, by generating actually cost and other potential synergies. Second, maybe you could also comment of how is actually the ECB and the SSM in particular, looking at you on a relative basis to these other Iberian banks who have actually been able to dispose NPEs much more quickly. My second question is on the shareholder structure. There's been rumors for some time now that Sonangol may be thinking about actually disposing its stake in BCP. The reality is that since the change in the Angolan government last year, the new Angolan government has explicitly said that they need cash. One of the ways to get this cash is by disposing some of the stakes they have.
Maybe it would be helpful if you could tell us about your conversations with Sonangol about their willingness to remain as a key shareholder at BCP. Thank you very much.
Okay, thank you very much for your questions, José. In terms of large disposals and in terms of our strategy, our key criterion is to defend the interest of our shareholders, is to defend your interests and the interest of the bank offshore. What could make us do a large transaction that could significantly accelerate the NP reduction? The conviction that this large transaction would be in your interests. This is what it would take. Unfortunately, what we think right now is that with the performance that we have, we are able to preserve more value and defend better your interest by doing it ourselves than by selling it at the prices at which sometimes we are challenged to do. This is why it isn't easy in Spain, probably for several reasons.
One reason may be that in Portugal, probably we are better vis-a-vis the people that approach us, than maybe the banks in Spain vis-a-vis the people that approach them. This could be at least a possible answer to that. Another possible answer to that is that the market here may be less competitive, in terms of the approach, because as the credits and the real estate transactions are significantly smaller in Portugal than in Spain, the type of funds and the type of agents in the market are also less, and it's possibly less interest. We are diligent. We are continuously looking at everything. If we think that we can do better for you than by selling it at a different price, we will continue to defend your interests. In terms of the shareholder, Sonangol, what I can tell you is the following.
In our last shareholders meeting, we had here the chairman of Sonangol coming, the CEO of Sonangol, coming expressly here to our shareholders meeting, which was a very important sign of commitment of Sonangol. One has to understand the culture, and which was the first time in many years that it occurred. It was symbolically a very important fact. Another important fact was that Sonangol was totally involved in this change of governance in the list that was approved in the board for the new board and for the new exco. They have a second vice chairman of the board. They behave very well as shareholders, they want to be informed, they control, they demand ROE. Of course, they're not in the day-to-day management of the bank, we see a strong commitment of Sonangol with the bank.
That's what we see, and that's what I can tell you.
Thank you.
Gábor Kemény , Autonomous Research. Please go ahead.
Oh, hi, it's Gábor from Autonomous. A couple of questions, please. The first one on the NPE reduction, which went pretty well in the first half. The evidence shows that the second half of the year tends to be seasonally stronger. Recoveries tend to be better, possibly also asset sales. Do you see any reason why this would not be the case in 2018? The other question is on the new strategy. Quick clarifications. You are targeting EUR 200 million of additional revenues from your initiatives. I understand that the starting point is your 2017 revenues. Could you give us a flavor, how do you think about your income on the existing volumes for the EUR 1.4 billion of revenues you had back in 2017? How do you think these would develop in the next few years?
The second clarification on the strategy, you outlined several growth targets in each of your segments. Can you give us a flavor, how do you think about loan growth, overall loan growth in the next few years?
In terms of the NPE reduction, we have effectively, as what I told in our last phone call, we had an objective, first of all, slightly above EUR 1 billion for this year. We had raised the guidance for this year to EUR 1.5 billion. Effectively, what happened in this first half of the year was that some important large cases were solved. In spite of the fact that in the smaller cases, probably there may even be some acceleration, these larger cases, because there were more one-offs, will make for sure the second half of the year show less NPE reduction than in the first half of the year. The statistics, when you have some granular large cases, does not necessarily work well. As of now, we are maintaining our guidance in terms of reduction of EUR 1.5 billion during the full year.
I'm sorry, there was a question of José Abad that I did not answer. That was how does the regulator, the supervisor, looks at our NPEs vis-a-vis other banks? What I can tell you is the following. The supervisor looks at the static, looks at the point in which we are, but also looks a lot at the dynamics, looks a lot at what we are doing. The supervisor anticipates, does projections, sees what's going on. Of course, for the supervisor, it's totally different, a bank that has a high level of NPEs but is not reducing them strongly, and another bank that has a high level of NPEs but is able to reduce them at a fast pace. This is a key criterion, and I suggest, if you want to emulate the decisions of supervisors, that you do a little bit the same also.
You have to separate banks that statically are the same but have different dynamics from banks, one from each other. We have very fruitful discussions with the supervisor. Of course, the supervisor is always engaged in negotiations with the bank, we all know what the supervisor wants, and we all know that it's part of our job to defend your interests and to try to achieve solutions together with the supervisors in the interests of the bank and its shareholders that serve best the long-term value of the bank. In terms of the credit growth, what I would say is the following. Over the long term, what we see is that in our international operations, we are more bullish in percentage terms of credit growth than in terms of Portugal.
If you see the credit to GDP in the country as Poland and the growth of Poland, the nominal growth of Poland, it is much higher than that of Portugal. We expect a very strong contribution of credit in Poland, and the number has been already disclosed by Poland. It's a number above 10% CAGR of credit growth a year, which is very important. Over the longer term, we will also expect, not in the next one, two years, but later on, also an important growth in the activity of Mozambique. As time goes by, the credit will also start to grow in Portugal. If you see, one of the key issues that we have in Portugal is the NPE somehow dragging the remaining credit growth. As we approach, so to say, a level of NPEs that is lower, necessarily, the other part starts to increase.
Also this plan that we are doing, all our commitment and investment in what we are doing, will also prove to be useful. We are not disclosing a total credit growth number, but what we can tell you is that over the longer term, with at least half of it done in the international part, which shows a very strong credit growth because the international part is smaller than Portugal. We will see a reversion, so to say, in terms of the volume of credit in our balance sheet, and effectively, this will be an important lever for us to achieve our 10% ROE.
What sort of loan growth would you assume in Portugal for the next few years?
We are not disclosing this number right now.
Just coming back to my previous question on the additional EUR 200 million additional income, which you expect by 2021. I understand this will come from the new initiatives. Can you give us a sense, how do you think your revenues on the existing volumes could develop by 2021? What are your expectations here?
In terms of our total revenues in Portugal, if you want to see our total revenues in Portugal with a strong contribution both from the NII and margin, are expected to grow significantly right now. What we would be expecting is for them to grow something around 30% over this four-year period, looking at the 2017 numbers. This is our current expectation. When we make a four-year projection, this has some degree of uncertainty. In our current projections, this is more or less the type of numbers that we are expecting.
Okay. 30% revenue growth from 2017 in Portugal. Did I get this right? Sorry.
Yes. I don't think it makes a lot of sense to engage in a one-to-one discussion because I'm seeing a lot of people here trying to get in the Q&A. We are ready, of course, to engage in another type of discussion with you.
Okay. That's it from me. Thank you.
Give the list of people. Okay.
Yeah. Thanks.
Carlos Peixoto, CaixaBank BPI. Please go ahead.
Hi. Good afternoon. Just a couple of questions, mostly on the business plan. My first question would be on the full Common Equity Tier 1 ratio, and it will basically split in two items. One of them would be, what sort of RWA evolution are you assuming over the coming years? At the same time, when you refer to a 40% payout ratio, are we talking about just a payout on 2021 earnings, or are we talking already about the payout levels for the years until then? Should we assume a 40% payout ratio already in 2018 and going forward? Or how should we think about it? The other question would be on the interest rate scenarios that you're assuming on the business plan.
If you could share with us how you're seeing interest rates evolving throughout these three and a half years, it would be very helpful. Thank you.
First, in terms of the interest rate scenario, basically what we are assuming is the interest rates evolving more or less aligned with the forward rates. That's basically what we are assuming. A quite low interest rate level for the next years. In terms of the risk-weighted assets evolution, it will be a risk-weighted asset evolution in the consolidated terms of around 10%-15%, depending on several factors. I'm sorry, your other question was the payout. One thing is the strategic payout, where we want to get it. I want to remind you that this is decision of the general shareholders meeting, to which you, if you are shareholders or your firms, will, of course, be invited to give your opinion and your advice and so on. What we think makes sense from the banks.
The other thing is what we think should be our recommendation to the general shareholders meeting. This is, of course, a decision of the shareholders. The dividend payout is a decision of the shareholders, and I want to make it very clear. This dividend payout is what we think, as management, makes sense over the longer term for a bank that is accumulating capital, that is generating risk-weighted assets, and that is exploring opportunities. This is the value for 2021, as all the other values that we have here. In the column of page 61, what we see is the values that we project for 2021. I do think we already give a lot more information than some of our competitors.
We are not disclosing exactly what we intend to do as management 6 months from now, 12 months from now, 24 months from now. We are not doing the projections, and giving them to you, because we think it's in the best interest of the banks to have a long-term target, but then in the path to the long term, that this is determined every year in the discussion with the board members. I have to tell you also that this plan was already discussed in the board with the new board members that represent some of the shareholders and that are also, some of them, independent. In practical terms, representing the market. We have this consensus that is to go towards this number.
We have not yet taken any type of decision in the appropriate governance forums in terms of the path to get there in any of these indicators. Okay.
Sofie Peterzens, J.P. Morgan. Please go ahead.
Hi, here is Sofie from J.P. Morgan. I had a question on your Core Equity Tier 1. You are already at 11.7%. Your organic Core Equity Tier 1 generation in the second quarter, excluding the AFS adjustments, was 16 basis points, and you only had a 5% ROE. On my numbers, you will get significantly above 12% Core Equity Tier 1 by 2021, because just assuming that the current Core Equity Tier 1 generation is, I get that you have 40% dividend payout. You would get at least 40 basis points of capital per year, you would be well above 13%. Clearly you will see probably a higher ROE given your targets, and you could also see RWA releases from the NPE reductions. I'm just wondering, how should we think about excess capital in BCP and what would you do?
Do you have any preference between buybacks or special dividends or however do you think around that? My second question is on the international growth. Would you also consider entering new markets? I know you renewed one of the agreements with one of the Chinese banks in the second quarter. Would you see increasing your footprint to China? How should we think about potentially BCP expanding the new markets? There was also an article a few weeks ago where you were looking at one of the banks in Poland. If you could just comment on that as well. Thank you.
Okay. Starting probably with the international growth. This plan is an organic plan. We do have, right now, a shareholder that is from China, who will try to profit and to leverage on the competitive advantage that this may give to BCP, but mainly in terms of trade flows, investment flows, and so on. It is not in the plan right now, entering into the retail business in China or something like that. What we want to be, we want to be in the markets in which we are, and of course, to leverage on our competitive advantages. One of our competitive advantages is the relationship between these markets and China. We will try to capture flows, synergies, and so on in these markets.
It is not in the plan right now to enter, by the way, in China or in any new market. This plan does not include entering into new markets and does not include any type of non-organic solution. This is a pure organic plan. Having said that, and as you comment right now, relatively to Poland or relatively to other possibilities that may exist, we are diligent. In the markets in which we are, we do our job in terms of analyzing opportunities and in terms of seeing whether these opportunities accrue value for our shareholders and for the bank. We propose, and we decide at the appropriate governance forums what to do.
That's what I can say at the moment, because I don't think it is in the interest of the bank or its shareholders to comment on processes that are going on. What I can tell you is that we don't separate, so to say, the strategy from value creation for shareholders. For us, strategy is value creation over the short term. What we will always do is to make sure that any type of acquisition or, by the way, divestiture only makes sense if it makes sense for the bank and for its shareholders. In terms of the bank and then the Common Equity Tier 1, the way that we see it is the following.
The ratios that we see here, of cost to income, of dividend payout, of type of balance sheet that we want to have, are not meant to be like, and pardon me, to be like, I would say, almost a game to help you fill a projection or a spreadsheet whereby we give you some numbers so that you have to fill it and to try to guess what are the other numbers, almost like a Sudoku. These are not Sudokus for you to fill a spreadsheet, so to say. These are, I would say, intrinsic that we think makes sense for a bank such as ours, strategically and over the long term.
What I do mean is we think for a bank such as ours, a ratio of 12% Common Equity Tier 1 should be the right ratio, because we think that if we have a ratio that are higher than that, probably we will be not being very disciplined in terms of capital. If we have less than that, probably we may face other types of difficulties in terms of this issue. In terms of the ROE, we also think that a bank in Europe, in this type of interest rate scenario in which we are right now, we think we should have a 10% ROE, and that this should allow us to have access to capital, to remunerate adequately your invested capital here, and to have a proper balance in terms of the short term and of the medium term.
We also think that in the markets in which we are, and allowing us to invest in the markets in which we are, that we could live well with a type of dividend payout structurally over the longer term of 2020. These are more, I would say, benchmarks and policy numbers than spreadsheet numbers to see when we say around 12%, this does not mean that we may have, for any reason, a value that is 11.9 in one year and 12.4 in another year. This is the type of value that through the cycle, and depending on what happens in any moment, we think should be a target, an aspiration level. That is not a spreadsheet number. Okay?
Thanks.
Mario Ropero, Fidentiis, please go ahead.
Hello. Good afternoon to everybody. My first question is on coverage in Mozambique. I know that NPLs in Mozambique are relatively low for the group size. Still, coverage seems to be very low, close to that of Portugal, much lower than that of Poland. Why so? Is there the possibility of increasing this in the short term? If so, to which level? My second question is on liquidity. You are increasing a lot the size of deposits in Portugal. Could you please tell us how much you have sitting on the ECB at minus 40 basis points? Why not grow in the loan book much more aggressively? Thank you.
Okay. For us, coverage is an output, is not an input, so to say. What we do is that we look at specific cases. Depending on the cases, the type of guarantees, the type of counterparties that we have, and doing this together with our auditors, we see what is the proper impairment for these cases. We evaluate, of course, every time we present the accounts. The number is then the result of this exercise. It's not done the other way around. We want to achieve at a certain coverage and then trying to force the numbers to get to this coverage. This is the number with which we feel comfortable. What I can tell you is that in Mozambique, the loan portfolio is very small, as you see. It's very small.
It's not really that material in terms of the total loan book of the bank. The cases are very specific and very large. That, I would say, an across-the-board number does not make a lot of sense. Most of our portfolio is to companies that have some type of relationship with the government. These are larger companies, so you have to see it on a case-by-case basis and not based on statistical models. That's what I would say. What, Javier? What the big risk is. We do benefit from a TLTRO of EUR 4 billion right now. Of course, what we do when we do credit, there is always a credit decision in which of what is the alternative investment. What we want to make sure is that we do it diligently and that we don't destroy capital.
Very often, the elasticity of the economic income vis-a-vis the reduction in spread is not positive. Basically, what we try to do, as you have seen in Portugal, we have been able to maintain our NIM in spite of the fact that the country is becoming more normal, so in terms of credit spreads on the asset side and on the liability side. We do think that if we had originated more credit than the ones that we had originated at a lower price, probably, this would have been worse for the bank and worse for the shareholders. We try to balance this, and the elasticity is sometimes negative.
Jonas Floriani of AXIA Ventures. Please go ahead. Your line is open.
Hi, guys. Good afternoon. I will bring back the topic to your business plan and your guidance for increased income. You're talking about this EUR 200 million, which I take as additional revenues in 2021. What I'm looking at here, I'm taking your EUR 2.2 billion in 2017. I'm adding this EUR 200 million. I'm just curious to understand, as the previous question, what is the outlook for the order lines for commissions and also, the existing book and the margin on this book to get to total revenue in 2021? This is the first question. Second question is in regards your international operation and your EUR 200 million expected net income as well for 2021. I just want to understand the rationale behind it because it looks like even in 2018 or 2019, you already be able to be there. Especially, Poland is growing very strongly.
As you mentioned as well in the call, the expected loan growth in the loan book in Poland is high. For me, looks like this EUR 200 million, it's a very conservative bet for considering that it's three years from now. Just understand the rationale from where you deliver your, I think it was EUR 146 million in bottom line from international operations in 2017 going into the EUR 200 million. How we get there.
Okay. As you know, this year, we will, last year, in terms of our international operations, our run rate points more to EUR 150 million. Running from EUR 150 million to EUR 200 million, I would say is significant. I think shows an appropriate degree of challenge. In consolidated terms, what I will tell you is the following. You have here the ROE. You have here the cost of risk, that we want to get to. You have here the cost to income. It's not very complicated. Starting from the ROE Getting the net income. From the net income, grossing it up to the income before taxes, summing to the income before taxes, the cost of risk. Then based on the operational income, trying to see what are the costs and what are the income.
I think it is not very complicated for you to get at these numbers, at this point in time, also for compliance reasons and for the mandate that I have for my board, these are the numbers that we are willing to present to you. I don't think that people that are as versed in doing projections as you are, that based on these numbers, you cannot get to our income. Okay?
Yeah. No, that's fine. I can get it. I was just wondering if there was any more color on the other lines, but that's fair enough. Okay. Thanks, guys.
José Martins, JB Capital, please go ahead.
Hi, everyone. Most of my questions have been answered, but I have one final one. Clearly, you just put out, as you have been reinforcing over the call, the main guidelines for the strategic plan. Do you have any plans, everyone, not just me, but most of my colleagues have been asking for that granularity. Do you have any plans to invite us all to Lisbon to meet not just the new management but also all the new members in the management team? When you feel confident or when you have the mandate from the new board to give us all this granularity that we're all been asking for? I.e., do you want to do an investor day? Do you plan to do an investor day sometime in the second half?
Okay. This is the thing that we have not taken. First, in terms of inviting you to Lisbon and all of you that are in the conference call are kindly invited to come here, to visit myself, to visit Rui, and if it is compliant, I can even offer you some sandwiches.
I hope something better than that.
Okay. This is for the avoidance of doubt. You're all invited. Of course, we only have to make sure that we are all here, and so on. In terms of the granularity of what we are giving, we have been seeing a little bit in detail what we are giving, comparing with what other banks give in investor days. Effectively, I think the type of information that we are giving here, the granularity of the information that we are giving here is perfectly aligned with what other banks also give in investor day. The issue here of giving more or less information is also, it's sometimes not in the interest of the company and of its shareholders to give too much information that can then be used against us by competitors, by people that want to anticipate our strategy and so on.
If we see what we are already doing, this is clearly above what most of the banks in Europe already give in terms of information. We are exposing ourselves in terms of information much more than most of the European banks do in Europe, and we are glad with it. There is also a risk to it. If we exaggerate that, this can turn backwards, that this can make our competitors, because we are not alone in the market, use the information so as to make our mission harder for us.
We have not decided on whether they will do an investor day or not. We can tell you that we are totally able and we are willing to receive whoever comes here to Lisbon to discuss the projections, of course, in a compliant way, and to take even more questions from you and to see what type of doubts you have. Okay.
Understood. Thanks.
José Abad, Goldman Sachs, please go ahead.
Sorry for one last question that I missed and no one has asked, unless I missed it again, which is on M&A very quickly on. How is the current management team thinking about inorganic growth? By the way, part of this could explain why the change in the relative weights within the international exposures of the bank now. How are you thinking about potential acquisitions within your footprint? The second is, would you be open for BCP actually to be part of a larger group in the form of a potential merger with a bank of a similar size, potentially, actually within the Iberian space? This is completely out of the table. Thank you very much.
First, as I commented, the plan that we are presenting here is a pure organic plan. I think this is what we get in an organic way. If there are then inorganic possibilities, this will come on top of this plan. I think this is the first thing that I would like to. They are not considered here. Second, of course, being a bank, and being an institution, we have to be diligent and we have to analyze everything. What we have to do, in any case, is to make sure, and I'm sorry to be so commonsensical, but that any opportunity makes sense for the organization, makes sense for its shareholders. This is our commitment as diligent managers. We analyze everything. We have here teams that do a lot of numbers, a lot of critical analysis, a lot of challenge.
We will only do transactions if we are genuinely convinced that they add value, that they are in the interest of our shareholders. That's our commitments to you. That's what I can say at the moment. Okay.
Thank you. Chris Aristidou Sefton Place Advisors , please go ahead.
Thanks for taking my question. On the presentation of the first quarter, you had a 2018 target for ROE at 10%. I don't see that target on the presentation for the second quarter. Do you still target 10% ROE in 2018? If that has changed, what does that change mean for 2019, 2020? Thank you.
I don't know whether you have followed all our presentations or not. Effectively, we had presented the three-year plan with the three-year targets. For illustration purposes, we have maintained these targets to be totally transparent to you and saying exactly how we were progressing vis-a-vis these targets. Okay? This was our commitment because we think it's important once we present targets to keep them, and it is our commitment also to maintain the targets that we are now presenting for 2021 to you and present to you in a transparent way for progression towards these targets. As it normally happens, or as it may happen in a three-year period, a trade-off that we make in a certain year may not be the optimal trade-off three years down the road.
What happened in these three years was that the market sensitivity, investor sensitivity, regulator sensitivity to the issue of NPEs and NPE stock became much stronger than the market sensitivity to the ROE. Basically, what we did was that we, and I have been explaining this in all our sessions, was that we were trying to defend the interests of the bank and the interests of its shareholders by over-performing significantly in terms of the NPEs, and even if we have to sacrifice some of the other targets. Effectively, this is what happened. As you may know, we had a target of reducing EUR 3 billion of NPEs in a three-year period. We will be reducing around EUR 4.5 billion, so EUR 1.5 billion more than what we had envisaged three years ago.
Of course, this came at a cost, at a higher cost of risk, and consequently, also at a lower ROE. This is something that I have been presenting, but I think that it defended well your interests as shareholders, for the ones of you that are shareholders. Right now, we will be exceeding our NPE target by more than 50%. As I said, instead of EUR 3 billion, around our best expectation, EUR 4.5 billion, and we will be somewhat below our target of ROE for this year. As I commented also, and you may see this in all our presentations, because we were also not sure in terms of what type of capital ratio we would be having, the way that we presented our ROE was an ROE based on a standard capital of 11%.
It is not based on book capital, but on a standard capital of 11%, because three years ago, we did not know exactly where the capital ratios would stabilize, so to say. If you do the numbers, in terms of the ROE based on a standard capital of 11%, you will see that we will be slightly below it, but not much below it. That's what I wanted to comment at this point in time. Our new target is 10% based on the book equity going forward.
Okay. Thank you very much, Miguel.
We will now take our last question in the queue from Benjie Creelan-Sandford from Jefferies. Please go ahead.
Yeah, good afternoon, everyone. Just two quick questions from me. I just wanted to understand in the context of the international business target for 2021, it's effectively a EUR 50 million increase in profits from there. Can we assume that you're embedding Bank Millennium in Poland, their standalone aspirations for 2020 within that? The second question is just around the near-term cost of risk trends. Obviously, the provision charge went up this quarter versus the first quarter. Can you give any guidance on where you think that cost of risk level will finish at year-end? Thank you.
Okay. Yes, in our international operations, we are including Bank Millennium. Please, of course, don't forget that we only have 50% of Bank Millennium, we have to take out of the net income of Bank Millennium and its evolution, of course, 50% of the contribution as is normal because we only own 50% of the bank. We are having Bank Millennium, and effectively, the two most important contributors for our international operations are Poland and Mozambique. In terms of the cost of risk this year. Once you get very fine-tuned, once we want to anticipate exactly how the most volatile parts of your income statement will vary, it's difficult. It's easy for me to anticipate how the depreciation line will evolve. if you ask me about, because we need to, no?
About the impairment charge or for the same purpose about trading gains, it is very difficult for me to be absolutely sure with exactly which basis point we will get. Please beware of institutions that really, in the beginning of the year, can anticipate exactly what number they will present in terms of trading gains or in terms of impairment losses, because it may mean that either they have a lot of buffers or their accounting does not reflect the intrinsic volatility of the reality. The reality is volatile, and the accounts have to translate the volatility of it. Having said that, in the beginning, in our last call, we have provided a guidance for the end of the year of around 85 basis points, which most of it for NPEs coverage. We do not change this guidance because we do not change guidances often.
This is, plus or minus 10 basis points is basically where I would expect our accounts to be. With the caveat that I just mentioned, that reality is volatile and the accounts should reflect reality.
Okay, thank you very much.
Thank you. If there are no further questions, I would like to turn the call back to Miguel Bragança for any additional closing remarks.
Thank you very much for the attention to our project. We are very honored to have your attention and to have your coverage, and in some cases, also for you to be our shareholders. We have presented our plan for the next years. I had told you in the last presentation that we would be doing this over the summer, which we are doing. We continue to believe that this plan is in the clear interest of shareholder value creation and entity preservation. We hope to continue to count with your commitment, with your attention. Taking the opportunity that some of your colleagues commented, I invite you here to come to Lisbon to have further discussions. Thank you very much.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.