Afternoon, everybody. As mentioned, it's Nuno. Let's start with the summary, page four. As you know, we reached net profit of EUR 86 million in the first quarter of this year, against EUR 50 million last year. This was basically due to the improvement of the domestic activity and of the profitability of the domestic activity, also a good performance on the international business in terms of business, but with stable contribution. We will explain later why. Second note, probably the most significant one, is the reduction of the NPEs. In the quarter, we were able to reduce around EUR 500 million, reaching EUR 6.3 billion in Portugal, with a coverage of 48% in consolidation figures and 46% in Portugal, a clear increase vis-à-vis the previous years. If we include collaterals, our coverage is already on the 155%.
This is, I think, one of, if not the most significant fact of the quarter. The third is the businesses being obviously on a stabilization, the credit is on a stabilization trend, and we were able to increase the good book, the loan book, in the same amount as we reduced NPEs. This stabilization, I think is a good also signal. We mentioned one year ago that we plan to stabilize by the end of this last year, beginning of this year. It's stabilizing, and we hope to start to grow later in the year. Fourth comment is generally, we have a very good customer acquisition and customer funds, both in Portugal and abroad, and we reached total active customers of 5.6 million. The increase that we got from one year ago in terms of customers was 380,000 active customers.
We reached total customer funds close to EUR 73 billion, an increase close to 6% in both Portugal and abroad. We invest on that, to be very clear. We also invest on that, but we were able to get a good customer acquisition that is fundamental for the next years. Moving to page five. This is the same, but with a larger view. If we return to the year where we signed the agreement with the European Commission, the DG COMP, you see that we moved from a clear loss in terms of the Portuguese and the consolidated terms, we were able to reach EUR 86 million, what I think is a nice increase, stable, consistent, that we don't see a different trend in the future. The earnings from domestic activity reached EUR 45 million, comparing with the EUR 9 million last year.
Our core net income, it is core net income, as it is mentioned, is basically net interest income plus net fees and commissions, not including trading gains and other type of gains, is the more recurrent and stable part of the P&L, reached EUR 267 million, what moved from a much lower figure before. This is really important for us to have this capacity of growing the operating profit or maintaining it. We present a cost to core income of 48%, 47.3%, 47% without specific items that are not so recurrent, and a total cost to income of 45.7%, maintaining our position as one of the more efficient banks in Portugal and I would say in Europe. Second, the asset quality. That is always an issue for BCP for the reasons that you know.
You can see that we are very stable and very intense on the decrease of this type of assets. NPEs moved from EUR 6.7 billion in December to EUR 7.3 billion, close to EUR 500 million of reduction. This was basically almost half-half between NPEs and other NPEs. Our coverage, as you can see, it moves from three years ago from around 30% to 46% in Portugal. These are Portuguese figures, 48% in consolidated terms. The coverage moved with guarantees from 90% to 105%. A clear, and I think impressive organically capacity of improving the situation of the bank. In terms of credit net growing, as I mentioned, we grew EUR 500 million on the performing portfolio that compensated the decrease on the NPEs, and we were able to have a stable SMEs and corporate loan portfolio.
We are maintaining or increasing our share in key issues such as loans to exporting companies on the Factoring business, on the new program that is Portugal 2020, rated with the European Structural Funds. We are maintaining a strong and great activity and with sound quality. Fourth highlight, as I mentioned before, our evolution on total customers and on the renewal and the growing of our customer base. We were able in the last year to increase 380,000 customers, from which 113,000 in Portugal. From this, basically two-thirds from BCP, one-third from ActivoBank, our more digital bank. In terms of digital customers, we also increased the number, I think with a very nice figure. We reached 2.6 million digital customers, from which 900,000 in Portugal. I think this is also, I would say, a second important highlight.
If we want to have a clear plan for the future, waiting and based on the normalization of the Portuguese market and of the interest rate level in terms of Europe, we have to have more customers. It is important, and we are reaching that figure, as you will see later, on a very stable way quarter-on-quarter. That is all. Now I will move to Miguel Bragança, the CFO of the bank.
Good afternoon, ladies and gentlemen. In page 10, as you see, our net income statement or income statement evolved very positively with a very balanced growth in terms of NII and commissions vis-a-vis the first quarter of last year, growing around 4% each, with operating costs growing 3.2%, which means that the core net income grew by 4.6%. Due to some non-recurrent issues, the operating net income remains around stable with a slight decrease of around 1%, and there is a progressive normalization, as expected, of the cost of risk with the impairment and provisions reducing by around 36%. It is exactly this, the main impact that explains the evolution of our earnings before tax, so that we are able to present an earnings before tax growth of around 75% and a net income growth of around 71%.
Graphically, what we see is that the net interest margin in Portugal was broadly stable for several reasons that my colleague, Rui Coimbra, will explain in the presentation on Portugal. The international operations are growing in a very healthy way around 11%. In terms of the commissions, the growth is more balanced, around 4%, both internationally and in Portugal, with a very diversified base. Both the traditional banking fees and commissions are growing 3%. The market-related fees and commissions linked to securities custody and so on, placement growing around 10%, so that the total fees and commissions grow around 4%, as I commented, in a very balanced way. The other income is composed here by three parts. The equity earnings and dividends quite stable at around EUR 20 million in any of the two years.
The net trading income also quite stable at around EUR 34, EUR 35 million in both of the years. The other operating income with a decrease vis-a-vis the first quarter of last year. This has basically two explanations. I would say half of it comes from a normal mark to market in some of the funds that have real estate of around EUR 5 million, so not very relevant. The remaining was a non-recurrent issue that we had in the first quarter of last year, as explained, of another EUR 5 million. Both of them, I would say, less recurrent. Operating costs growing 3.2%, in a symmetrical way to the margin, what we see here is that in Portugal, they are very contained, basically stable at EUR 152 million in spite of the normalization of the salary. The salary cuts have been totally revoked, as you may know.
The international operations, mainly in Poland, due to the very healthy growth in the job market in the country, explain a growth of around 8% in the cost structure of the international operations. Still, this assures us a very healthy benchmark in terms of cost to core income. Comparing ourselves with our peers in Portugal, we are still second to none. Even in the Eurozone, I would say that our ratio of cost to core income of 48% is very healthy and assures the sustainability of our business model. In terms of the impairment charges, as we see here, there is a decrease of around 36% in consolidated terms, 41% in Portugal, coming both from impairments in credit and real estate valuation.
This is provoked also by the very healthy development in the Portuguese economy, also, it's important to say, by some normal anticipation that we have due to the IFRS 9, because the IFRS 9 is based on expected loss and not on incurred loss. As we commented before, the IFRS 9 had an impact in terms of 30 basis points in terms of capital in the transition. Of course, if we anticipate some of the impairments, the ongoing impairments are also smaller now. The international operations still grow in terms of total impairment, I would say from EUR 20.5 million to EUR 22 million. A part of it, I would say, is explained by the IAS 29 impact in Angola due to the hyperinflation verified there. In terms of delinquency, what we see is that the NPEs reduced by around EUR 2 billion in the last 12 months.
Since December, around EUR 500 million. This reduction has been very important. As you see, it has mostly occurred in Portugal due to reasons that are easy to understand. Our ratios, albeit still high, show a very positive trend. Our NPL 90-day ratio reduces by more than 150 basis points from 10% to 8.5%. The NPE ratio, the more traditional, reduces more than 250 basis points and including securities and off-balance sheet, we are already at 10%. Liquidity. A very healthy development in terms of customer funds. As you see here on page 19, they are growing around 5.7% and in a very balanced way with 5.4% in Portugal and 6.5% in terms of international operations. I have to say, this is basically linked to the growth of our franchise in the affluent segment, in the retail market.
It's not wholesale, it's not deposits of large corporates, which is a very positive sign in terms of the strength of the franchise and value creation. The loans to customers, as you see, when compared with the first quarter of last year, still coming down. However, when compared with the end of the year, this is already the second quarter in which they go slightly up. The NPEs in Portugal, as you see, reduced by EUR 2 billion in the last 12 months, but the performing assets went up still by EUR 600 million. This makes us able to show you a very healthy, I would say, net loans to deposits ratio, which is also an opportunity in terms of both growth of credit and growth of investment products.
The ECB funding quite stable at a very low level when compared to our balance sheet, and a very high stock of eligible assets of around EUR 14 billion. Of course, very comfortable liquidity ratios, both the NSFR and the liquidity coverage ratio. In terms of capital, our fully loaded ratio from March 2017 to March 2018 grows around 60 basis points, which compares with the requirement of 8.8%. This has several impacts. One very important positive impact is, of course, the net income, the accumulated net income generation. There was also in the period the impact of the IFRS 9 that I commented, 30 to 35 basis points. There are a couple of other issues that we then may explain later on. The leverage ratio, also very healthy, mainly when compared with other geographies, as I say. Our RWA density going slightly up.
However, we have to stress that this is linked to some revision of models that charged more the expected loss, or if you want, that benefited the expected loss at the expense of the RWAs. In general, one compensates more or less the other, so they are balanced in terms of the final impact. Nevertheless, this shows a very comfortable, I would say, ratio in terms of RWA density. I will now pass it to Rui that will elaborate a little bit in more detail the Portuguese evolution and the evolution of the international operations.
Okay. Starting with Portugal, net income of EUR 45 million and an important increase from last year. This increase was mainly driven by lower impairment and provisions. NII on page 27, the decrease of 1% versus last year has some positive and negative elements that are worth mentioning. Starting on the positive side, still the effect of the CoCo repayment that we had last year so it has a positive effect of EUR 6 million. Still the positive effect of the decrease of the cost of time deposits, although here less than what we were seeing in the previous years. This is very much linked with our focus on customer acquisition. On the negative side, again, still lower average volumes. We are comparing first quarter of last year with first of this year, so still a negative effect of EUR 6 million here.
As well, a lower positive effect from the recovery of interest. This is obviously very much linked with the application of the IFRS 9. In the past, as you recall, more or less, we were having a positive effect here of around EUR 6 million and this disappear now. This overall effect is zero, but when we compare one to the other, it has this negative effect. Obviously, as it was already mentioning, this lower NII from this effect is repercuss as well in lower cost of risk, so should be relatively neutral for the P&L. As well, we saw a lower contribution from the securities portfolio. Last year was EUR 7 million, the positive contribution, and now is EUR 5 million, but when we compare one to the other is minus EUR 2 million.
When we look quarter on quarter, on top of some of these reasons that we already explained, on top of that, obviously, you recall the full year impact of the TLTRO in December last year. When we compare the fourth quarter with this quarter, this impact is negative in EUR 12 million. Obviously, as usual, the first quarter of this year, comparing with the fourth quarter, it has some days less. The two days less represents more or less EUR 4 million less on the NII. On top of that, some of the reasons that applies for the year-on-year applies on the quarter-on-quarter as well. Now, looking to spreads on page 28. The spread on the time deposits on the back book is still negative on minus 59 basis points, but still is an improvement of around 11 basis points from last year.
Regarding the front book, the negative spread is 12 basis points below the one of the back book. Still a way to go and to improve here. Regarding loans, the average spread decreased from 278 to 263, so a decrease of 18 basis points. This, as we already mentioned several times, is very much linked as well with the successful execution on the NPE reduction plan, especially the unlikely-to-pay loans that obviously affect at the end the average spread here. NIM is still stable at 1.8%. Moving to fees now. They were up 4.5%, both on the market related commissions and banking commissions as well. Regarding other income, as already explained as well, there was some one-off negative effects this year that we didn't have last year, and as well, some less around EUR 2 million trading versus the previous year. On costs, relatively stable.
Number of employees and number of branches still going down. On page 31 on the NPEs, the decrease of EUR 2 billion year-over-year through a combination of EUR 902 million of net exits, 471 write-offs, and 666 sales. This from March 2017 to March 2018. Regarding quarter-over-quarter, the performance was again very positive with a decrease of around EUR 500 million, mainly through net entries and sales as well. Cost of risk in Portugal is for the first time, for some time already below 100 basis points. In terms of coverage by provisions at 46% versus 39% last year. If we include the 2% of the expected loss gap that is, as you know, already deducted from capital, we move with a coverage to 48%. Then including both financial and the real estate collaterals, then the coverage is at 105%.
In terms of foreclosed assets, a decrease of 4.5% from last year, in spite of a large amount of entries that obviously is part of as well the NPE reduction execution as you know. We increased sales this year and we continue to register important profits here. Regarding restructuring funds, the amount of EUR 1 billion represents a decrease of 6.6% versus last year and from the EUR 2 billion of the original credit exposure. Regarding volumes, customer funds up by 5.4%. In terms of loans, the decrease of 3.6% is obviously due to a combination that is a benign one over 25% decrease on the NPE and an increase in the performing book. In terms of the international operations, a stable contribution to the consolidated P&L at EUR 41 million.
If we exclude the negative effect of the application of the IAS 29 for Angola and excluding as well the FX, the contribution would have an increase of 8% from previous year. Moving now to Poland. The net income of EUR 37 million represents an increase of 10%, mainly due to the increase of both NII and commissions. On page 38, net interest income up. This was mainly due to a higher contribution from loans, both volumes but as well an improvement on the loan spread. In terms of commission, the 3.8% up is due to higher commissions on investment products and insurance as well. Costs increase 5% and the cost to income is relatively stable at 50%. In terms of credit quality, indicators are relatively stable here, NPL ratio at 2.7% and with an increased coverage to 137%.
Cost of risk at 44 basis points below the 51 basis points of last year very much related to lower retail loans cost of risk. Moving now to volumes. Customer funds up by 7.6% with an important increase in demand deposits of 16% and loans up by 3%. This again in a combination of a decrease on the FX mortgage of around 16% and an increase of 13% for all the other loans, so excluding the FX mortgage. Moving now to Mozambique. Net income up by 19% with a return on equity of 26%. The income grew 3.6% above the increase and almost stable operating costs. NII went up by 8.6% mainly due, as you can see to higher NIM and this was mainly due an important contribution from the securities portfolio, both volumes and yields as well.
In terms of commissions down slightly with less contribution from loans and the other income with some less FX results. Operating costs relatively stable and the cost to income at 36%. In terms of credit quality you recall last year that we noticed an increase on the NPLs during the first half of 2017 but then we are noticing an improving trend since then and since the peak that we saw at EUR 162 million in June 2017, now we are already at EUR 130. Cost of risk is at 270 basis points and with a coverage of 66%, obviously well above 100% when we include collaterals. Regarding volumes, the deposits relatively stable and loans decreasing 19%. This is due to the early repayment of some customers and is very much related, of course, with the high interest rates in the country.
This is a movement that we explained already for the closing of the previous year. Okay. In summary, as you know we have been commenting to you in the last quarters how we are performing vis-à-vis a plan that was elaborated around two years ago. What we see is that in terms of these several metrics, we are overachieving in some of them. Of course, we are recalibrating, so to say, our performance based on the evolution of the market. In terms of the Common Equity Tier 1 fully implemented we have a target ratio of around 11%. We are comfortably above this ratio with around 11.8%. To be clear also, we are elaborating a new strategic plan that we will be presenting to the market in around mid of the year.
Based on this, probably our target will be reviewed upwards in this direction. The loan to deposit and in general the liquidity situation is much better than we were envisaging in the beginning of the plan due to several factors among which our strong growth in terms of customer franchise and in terms of deposit franchise. Cost to income is evolving with the typical volatility of ratio that is influenced also by trading gains. I would say that we are more or less aligned with our year-end objectives. The cost to core income, which is a better indication of our intrinsic franchise strength, is evolving very well and already comfortably below the 50% that was our target. The cost of risk
The ROE and the NPE reduction, and by the way, also the coverage also have to be seen together in conjunction. As you know, we had committed to decrease from 2016 to 2018, EUR 3 billion. We have already reduced EUR 3.5 billion and effectively our intention until the end of the year is to reduce at least EUR 1 billion more, which means that we will be overachieving significantly this target, achieving a reduction of EUR 4.5 billion instead of EUR 3 billion. This comes, of course, at a cost, but we think that the trade-off makes sense, and this cost is influencing our cost of risk slightly. What we see is that we are with a cost of risk of 85 basis points, and probably we will be slightly above the 75 basis points that we had envisaged two years ago.
Of course, this also has an impact in terms of ROE. All in all, I would say minor adjustments so to say to the metrics of the plan with the objective of creating even more shareholder value due to the sensitiveness of the NP reduction issues. Thank you very much. I will pass it now to Nuno, who will say the final words.
Basically, finally, Mark, just to make a summary of what is my understanding of the performance of the quarter. Basically as you could see, and you can see there are two issues that we are pointing out to manage. One is the net interest margin in Portugal. Reasons are clear. It's the IFRS 9, is the customer acquisition, is the lower securities portfolio. We are managing it and I think it's very important to increase our business volumes and our customer base. We're discipline and that we will do in the future in order to have a wider position in the market with the normalization of the Portuguese situation where we are clearly positive on it.
Second, as it was mentioned, the results from Angola because we had this quarter for the first time a zero impact, no positive impact because the local profit was offset by the hyperinflation accounting treatment. These are the two issues that we have to follow a little bit more, and we will do it. What went clearly on the good side, on the upper side, I would say to almost all the other issues. NPE last EUR 2 billion, year-on-year coverage from 40%-48%. Impairment still high but lower and we don't see why this trend should not be consistent with what we expected. Customer net acquisition and business volumes I think are reasonably good. Poland, we have a sound business growth and a sound position there. Mozambique, we maintain the good position, but protecting the profitability as it was mentioned, costs controlled.
I would say the attention to a couple of aspects, generally, I think it was a reasonable evolution, a good evolution on the quarter that we would like to maintain. Now we are open to questions.
Ladies and gentlemen, if you wish to ask a question at this time, please press *1 on your telephone keypad. Please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. First question comes from Sofie Peterzéns of JP Morgan. Please go ahead.
Yeah. Hi, here is Sofie Peterzéns from J.P. Morgan. Yesterday there were some articles in Bloomberg around BCP starting to pay dividends already on 2018 earnings. How should we think about the payout going forward? Do you have any preference between ordinary dividend, special dividends, buybacks? That would be my first question. My second question is around your net interest income. How should we think about net interest income growth, going forward in 2018 and also looking into 2019? Thank you.
As you know the dividend decision is a decision of the shareholders, of the general shareholders meeting. What we as board members do is to do a suggestion in terms of what dividend policy should be followed and what trade-offs should be done. As we are seeing right now, as we approach a level of around 11%-12% of CET1, with, I would say, a low single-digit growth in terms of risk-weighted assets. It goes without saying that we are generating organic capital, what makes sense is that we distribute this capital to shareholders. Based on the information that we have today, of course, this is something that we have to adjust, we think that by the end of this year, with the net income of this year, we should be in a position to start to distribute dividends.
Of course, this will be a decision of the shareholders. This also depends on other opportunities and the trade-offs between what is the capital ratio in which the bank wants to operate. We will present to the market in the middle of the year a new strategic plan that, of course, will do the trade-off between the capital ratio and the dividend policy. If you ask my personal opinion, I think that a bank such as ours should have a ratio of Common Equity 1 between 11%-12%, and the remaining capital, over time, should be distributed to shareholders. In terms of NII. I'm sorry, in terms of ordinary or extraordinary dividends, we are not in a position still to distribute extraordinary dividends because our capital generation is starting. It's healthy, it's not extraordinary, I would say.
I would link extraordinary dividends to extraordinary capital generations. In any case, our suggestion will probably be to do what we have to do based on the ordinary dividend distribution. In terms of NII, the evolution of NII and so on. IFRS 9 introduced some complexity in terms of the modeling of the NII, because as you may know, for clients that are in stage 3, even if they are in stage 3 in a non-default status, in an unlikely-to-pay status, what we have is that the margin accrues, but in a pro rata of the coverage. I.e., if a certain client has a coverage of 40%, even if he or she pays the loan, the margin accrues only at a level of 60%.
This, of course, creates some distortions and makes even the margin a little bit more conservative at the expense of less impairment losses. I would say this is an impact in terms of margin that is then immunized at the P&L level. It is a reclassification, if you want, between margin and impairments. As this is the first year that this is occurring, our expectation is to have a quite stable margin this year. As Rui commented, in the first quarter, this impact of the recovery of interest that occurred last year based on previous accounting definitions compared with this year represented, if you want, a negative deviation of around EUR 5 million. That was a negative deviation or negative evolution that then was compensated in impairments. We see no reason why this negative deviation should not continue going forward.
This would mean that in terms of margin, we are expecting, we are still seeing exactly what will happen based on these factors. We are expecting stable/low single-digit growth, and that's it, basically. If we did a pro forma, it would be growing healthily.
Thanks.
Thank you.
We will now take our next question from Carlos Peixoto of CaixaBank BPI. Please go ahead.
Hi, good afternoon. My first question would actually be on, or actually both of them would actually be on the provisioning side. The first one would be on cost of risk. Well, you already hinted at, well, with the recovery effect now being in the cost of risk line. This should benefit a bit the provisions. On the other hand, it is true that NPE reduction at least this quarter was much, much higher than what would be a pro forma for the EUR 1 billion target that you have for the full year. Basically, what I wanted to understand here is how do you see cost of risk for the full year? Whether you maintain the 75 basis points cost of risk, or whether you believe that it could end up being a bit higher as you deliver more on the NPE reduction front.
The other question would be on other provisions. If I recall correctly, in previous conference calls, you have hinted that other provisions for the full year would be somewhere between EUR 150 million-EUR 200 million. This quarter, the figure was well below the run rate for that level. I was wondering if you maintain that guidance or whether you believe that maybe a level closer to EUR 100 million or EUR 120 million could be a more reasonable one. Thank you.
Okay. In terms of the provisioning, as I have commented over the cycle, our models, I would say for the stage 1 and stage 2 portfolios would point to a cost of risk between 30 and 40 basis points. The amount that we do above 30 and 40 basis points is basically an additional cost that we incur to deliver faster, so to say, on the NPE reduction or to increase the coverage. Of course, when we decrease the NPEs at a higher rate, there is an additional cost in terms of the cost of risk, because at the margin it is costly and the more we reduce it, as it has a marginal increase in cost, the more it costs. Of course, if we over-deliver on the NPE reduction by reducing by EUR 4.5 billion instead of EUR 3 billion reduction, this will continue to have a cost.
I would expect for the full year to have a cost of risk more aligned with the first quarter and slightly above the target that we had in 2018, the original 2018 target. This would be, I would say, my best estimate based on current information because we will over-deliver on the NPE reduction. It is a minor adjustment, as you see, for the big amount that we are overachieving in terms of NPE. On the other hand, in terms of other provisions, I would say here the news are good. A part of these other provisions are linked to the evolution of the real estate prices. As you know, the real estate market in Portugal is behaving well. In our last sales, we even had some capital gains.
I would expect also the other provisions to be more aligned with the level of this first quarter in the next quarters than with what we were seeing in a more prudent way last year. Okay. I would say that a level between EUR 30 million and EUR 40 million per quarter probably is more adequate today than a level of around between EUR 40 million and EUR 50 million, I would say. Of course, it is particularly difficult to predict. The trading gains and the other provision lines are the two most difficult lines to predict because they depend a lot on the market.
Thank you. I will now move to our next question from José Martins of JB Capital Markets. Please go ahead.
Hi there. Hope everyone's well. I have a couple of questions. One, on the growth in the loan book, on the performing loan book, 2% in the first quarter year-on-year. Do you expect this trend to accelerate towards the end of the year? We are already in May. I am sure you have seen the first quarter now, a little bit of the second quarter. It would be hugely helpful if you could guide us on the strength of the growth in the loan book. The second question is on page 31, on your slide on page 31. The split of the NPE buildup was achieved unusually, not by one third, one third, one third, but a lot by recoveries or negative net entries and a lot less by write-offs. Do you expect this trend to continue towards this end of the year?
Is this more aggressive NPE reduction, can it be achieved without write-offs? Thank you.
Starting with the last question, the more granular you are in the forecast because of the intrinsic uncertainty in any forecast, the more difficult it is, as we all know. Today, I would say for the full year, I would still maintain the level of one third, one third, one third. Of course, it depends because just to give you an idea, the sales and the write-offs are very fungible. Because at the end of the day, if you sell it at a price that is a discount price, it is almost equal to a write-off. It depends a lot on the possibilities of selling. This year, this quarter, we had a good possibility of selling. The price for us appears okay. I would say it was an extraordinary sale, if you want, that allowed the reduction of NPEs of EUR 162 billion.
The total value was, of course, much higher than that. I would maintain for the full year, something closer to one third, one third, one third than the trend that we had this year. In terms of the loan book, a good indication, I would say, it's also difficult to know in executive terms, but a good indication is that we have as target in Portugal to compensate, I would say, the NPE reduction with the growth of the healthy book. We are envisaging a decrease of the NPEs of around EUR 1 billion. We would expect, of course, I would say a further EUR 1 billion, EUR 1.5 billion in the full year. We would expect the growth of the credit of EUR 1.5 billion in the full year. Of course, these are targets that are instrumental, so we will not originate credit to achieve a target.
Everything depends on us being able to originate credit that really adds value for everybody and that is intrinsically healthy. Overall, I think it's a good guidance.
Excellent. If I could follow up on that, do you expect this, well, it's now official that there's going to be some changes in the management team, and you've announced already on this call that you're going to tell us a little bit about the business plan for the next years. Should we expect this business plan to come before the summer, after the summer, or are you still unsure on how you can when you can disclose your new plan?
Yes. As you know, the new board will be elected in the last day of this month, on the 30th of May.
Right.
Strategy is of the competence of the full board. It's not of the competence of the ExCo. We look forward to working with this full board, and it depends a lot on the interaction between the, I would say, the ExCo and this full board, and how fast it goes. I would say if it were not summer, I would expect us to have completed the work by July. Considering that it is summer and July is not a good month to present anything, it's very hard for me to say whether it will be before August or immediately after August. Probably it won't be in August that we will be presenting this, I can assure you. It's very difficult for me to say whether it will be immediately before August or immediately after August.
I don't want to condition the new board, because it's not my function to condition the new board.
Thank you.
We will now move to our next question from José Abad of Goldman Sachs. Please go ahead. It seems that he stepped away. We're now going to move to our next question from Mário Roberto of Gidentis. Please go ahead.
Hello, good afternoon. My first question is, if you can tell us whether for the next asset quality plan, if you are taking the 5% NPL ratio that the EBA mentioned a couple of months ago, I think, as a reference for a potential target in the future. If so, could you share with us your views about the potential time horizon that would be reasonable in order to reach such target? My second question is on spreads of the loan book in Portugal. You mentioned pressure due to falling NPEs. Could you please elaborate on this a little bit more, and also tell us about what you expect in terms of outlook for this year? Thank you.
Okay. In terms of the 5%, as you correctly comment, the 5% is not a benchmark. The EBA very clearly states in the letter that 5% should not be considered the benchmark. For those of you that have not read it, I strongly recommend you to read it. The 5% is only a threshold that tells who has to present an NPE reduction plan and who doesn't have to present an NPE reduction plan. It is not the guidance, it is not a benchmark. It is what it is. Our main objective is to protect shareholder value, to continue in a trend of reducing NPEs because we think that there is an optimal speed in terms of NPE reduction. This optimal speed, to a certain extent, depends on the prices of the sales and on the positive and negative effects of having high NPEs.
We don't feel any, if you want, any urgency in terms of getting to the 5%. What I can tell you is the following. When we present the plan, one of the key elements of the plan, because there are trade-offs to be done, will be the ROE, the earnings. Also, of course, what is the level of NPEs that we expect to achieve by 2021, in the next three years. This is certainly that we will have to discuss. I don't want to condition the board on this issue. What I can comment to you is that our current performance in terms of being able to reduce NPEs at a very controlled cost and without sacrificing too much of shareholder value are good indicators of our future performance. This will be the trend.
The exact intensity of the trend will depend on a board decision. What I can comment to you is that in terms of order of magnitude, in terms of the direction of what we are doing, this will continue. Okay? In terms of the spreads of the loan book, there are several elements in terms of the loan book. Of course, as the situation in Portugal normalizes, our wholesale funding costs come down. Of course, because when we issue and so on, that come down. Also, the clients also benefit from this normalization of the situation in Portugal. It is only normal that spreads, to some extent, come down and contract mainly in the corporate sector as the country improves. This on one hand. On the other hand, what we see is that the NPEs have two parts.
They have the unlikely to pay and the defaulter part, so to say. In the unlikely to pay, in some of these clients, as we reduce the NPEs, some of these clients go elsewhere. Of course, typically, these clients are clients that pay higher spreads. These are the riskier clients. As we reduce the NPE, there is an element of reduction of the portfolio of the higher-risk customers that are also higher rewards. This is also an element. There is a third element here also that I would not consider it contractual spreads, but I would consider it the impact on the margin, so to say. As I commented, with the IFRS 9. For clients that are in stage 3, so that are effectively NPEs, even if you receive the full interest, you only accrue the interest in the proportion of one minus the coverage.
Effectively, even if you have a client that is paying interest, that is fully up to date, but for whatever reason, because you fear that a part of the capital will not be received, I don't know, you have a coverage of 40%, you only recognize 60% of the interest. Of course, this is a change in accounting rules. This is not a change in the contractual spread, but it is a change in terms of what contributes to the margin vis-a-vis of what contributes to the impairment. I would expect this asset margin to contract somewhat as it has been doing. I would also expect still for us to have some scope of improvement in terms of the deposit cost as we are doing. The guidance that we are giving here for Portugal is a stable/slightly increasing margin for this year.
Okay. Thank you. Helpful.
Thank you. We will now move to our next question from Noemi Peruch of Mediobanca. Please go ahead.
Good afternoon. I have three questions, if I may. The first one is on capital. Could you please walk us through all the positive moving parts of the quarterly change in common equity ratio, except from the retained earnings? The second one is on GOVI. In 2018, 30% of your government bond will expire. Could you please disclose the unrealized gains or losses and the yield specifically related to this portfolio? The third one is on tax rate. Could you please give us a guidance for 2018? Thank you very much.
Okay, in terms of capital, I'm sorry, there was here an issue of sound. I was not able totally to hear your questions very clearly. If I miss something, please repeat it. In terms of capital, there are here a couple of issues now. There were here two negative effects, I would say. One was the IFRS 9 between the 30 and 35 basis points as anticipated, as we always told since last year. This was a negative effect. Then there was a negative effect also of an issue that the ECB asked for all the banks, as far as we know, in the Eurozone to harmonize the treatment between the irrevocable commitments for the Deposit Guarantee Funds and for the Resolution Funds. In some countries, they were deducted from capital. In other countries, the part that was not realized was not deducted from capital.
This also had a negative impact of around 30 basis points. All in all, both of them around 60 basis points negative. There was a positive impact of around 20 basis points. That was important also. There were other two positive impacts of less magnitude, but together they were responsible for 20-30 basis points. That was the participations part. We have a participation in an insurance joint venture where we distribute insurance products that distributed dividends. By distributed dividends, the deduction of the participations became lower. This had an impact between 10 and 15 basis points. By selling also some of the loans and by the normal evolution in Portugal, there was an additional gain, I would say, besides the impact of IFRS 9 of the expected loss reduction on top of the models also.
This is also responsible for 10-15 basis points. All in all, when you see there are a lot of moving parts here, but I would say that the sustainable part, the recurrent part is the earnings part. The other ones are more one-offs as you may see. In terms of our government debt portfolio, we see our government debt much more as a way to manage interest rate risk in our balance sheets to protect our demand deposits than anything else, than to take positions in credit. In our specific situation, our government debt portfolio, net of the coverages that we have to it, and the part of the coverage that we have were coverages in credit risk, so an important part of the credit risk is covered, is slightly positive. But I will not elaborate too much on it.
I would say for the purposes of capital, I would say is not very material. Okay?
Thank you. We will now move to our next question from Gabor Kemeny of Autonomous Research. Please go ahead.
Hi. It's Gabor from Autonomous. Just a couple of follow-ups from me. On the NII point, would it be possible to quantify the impact of the NII derived from the unlikely to pay loans, roughly? The other question on the sovereign bond portfolio, I realized that you increased your longer-term treasury holdings also quite significantly in the first quarter. Can you talk a bit about this? It looks like you kind of locked in a little bit low interest rates, and reduced your potential exposure to interest rate hikes when interest rates are pretty low.
In terms of the NII, I think we already gave more information than most of the banks give, I think it is not advisable to go further into detail because the reality is not that predictable. It is very difficult for me to tell you exactly which clients that are unlikely to pay will prepay, at which spreads. I think it is not, I would say, worthwhile even to do this exercise. It's a very minacious exercise, at the end of the day, what we know is that the reality will be different from any type of projection. I would not elaborate further in terms of NII. I think the guidance that we gave was already probably more than most of the financial institutions will give.
Not only that, I think going beyond that will give a sense of certainty where the reality is not that certain. It will be almost a little bit misleading if we are going this way. In terms of the sovereign bond portfolio, as I commented, we manage the sovereign bond portfolio in the context of ALM management. When we think that it makes sense because of interest rate risk to increase, so to say, the exposure to interest rates or to hedge for a longer term our demand deposits. We have an important stock, as you know, of demand deposits that are fixed rate at zero. These demand deposits, in behavioral terms, they are very long term. Effectively, if we wanted to hedge them economically, probably the securities that we would need to buy would be securities with more than eight, nine, 10 years maturity.
We don't do this because then we may have issues in terms of the treatment in terms of genuine hedge and so on. Economically, they are very long-term fixed rate liabilities. I think the way we have to see it is when do we want, how do we want to open a position where we have a very long-term fixed rate liability? When do we want to shorten it? How much do we want to shorten it, how much do we want to increase it? When we are, I would say, a little bit more certain that interest rates will go up, we tend to shorten the position and reduce the amounts. When we are less certain, we do it the other way, so to say.
In this specific case, as you see, more recently, we are probably a little bit less certain due to the recent evolutions in Europe that the interest rates in Europe will increase very fast. This explains some of the movements in terms of the ALM portfolio. Of course, this is dynamic and this is something that we manage as probably many asset managers and many other banks manage their ALM portfolio. I would like to stress that the non-speculative position would be to have very long-term bonds and not the short-term bonds. In the short-term bonds, we are effectively opening our economic value to increases in interest rates. Still, we remain with a very positive exposure to interest rate movements, and our NII impact of 100 basis points increase is slightly below EUR 100 million. It was slightly above, now it's slightly below. Okay?
Okay, thank you. Just a small clarification on the asset quality guidance. You are now saying EUR 1.5 billion of NP reductions are possible in 2018, and you would expect the P&L provisioning to trend around the first quarter levels? Is this correct?
Yes. I would say it's, of course, as I want to stress again, it's very difficult to be totally precise about the forecast. Of course, I have to tell this with the normal caveats and disclaimers of anybody that is speaking about the future. I would say our best estimate right now in terms of NPE reduction for the full year would be EUR 1.5 billion for the full year, i.e., another EUR 1 billion in the next quarters. This will come at the expense of having a cost of risk more aligned with the cost of risk of the first quarter than the one that was our initial objective.
Very clear. Thank you.
We will now take our next question from José Abad of Goldman Sachs. Please go ahead.
I'm sorry, we are not able to hear anything. If you can speak up or closer to the mic. José Abad, Goldman Sachs.
Yes.
Please go ahead.
Yes. Hello, good afternoon. I got disconnected. Apologies if someone asked this while I was disconnected. My first question is, what we saw is that actually the aggregate of NPEs and real estate assets was flat QOQ, was around EUR 8.9 billion. You mentioned that you are planning now to reduce your NPEs by another EUR 1 billion, EUR 1.5 billion for the full year. Could you give us some color about how the aggregate of NPEs and real estate assets is going to evolve over the year? Should we expect actually an increase of around north of EUR 1 billion also in foreclosed assets? What should we expect there? We've seen a massive increase in the EUR 400 million more or less actually in real estate assets in the quarter. I was wondering if you could explain what is actually behind that.
Is it actually lower sales? Is it actually higher ability or willingness actually to repossess collateral versus the past? What is actually underlying this peak equity in real estate assets? The last thing is, if you could actually elaborate a bit, give us some color on trends, macro from a top-down level, maybe in Mozambique, given that we have no peers to follow the activity in the country. Thank you very much.
Okay. First, of course, as you know, in terms of recovery, defaulted collateralized loans are sold typically at a very high discount because there is the additional risk of the process of the repossession, so to say, which in countries in Portugal, is charged an additional risk. The typical process is not a sale, is the acquisition of the collateral, and then the sale of the collateral. What we have been able to do is to reduce strongly the NPEs, and at the same time, broadly maintaining the foreclosed assets. The foreclosed have not increased, as you may see on page 33. Effectively, they have even slightly decreased. Which is very important because this means that the real estate assets that come from the NPEs have a symmetrical impact of other real estate assets that are being sold.
I would say that going forward, I would expect this trend to continue.
Miguel, only one comment here. Real estate assets increased QOQ. They decreased marginally year-on-year, they increased QOQ.
Yes. I'm speaking on a year-on-year. quarter-over-quarter, they have increased marginally, but not that much. I would here comment that the real estate assets, in principle, our objective is to maintain their stock with a slight decrease this year due to this very strong reduction of the NPEs. So in total, I would expect the sum of the NPEs plus the real estate assets to reduce to EUR 1.5 billion or even slightly more. Okay? So this is what we are doing right now. In terms Huh? I'm just here checking here the values in quarter-on-quarter, the foreclosed assets, I don't know exactly. The foreclosed real estate assets, that I have here is even that they have decreased somewhat, I will then take it outside from here. Rui?
So on December 17, it was actually 1,778. Now it's 1,757, so it was a decrease as well.
We can then take these out and see. The idea that we have here is that in Portugal, the amount of real estate assets have been broadly stable, and we have been able to sell an important amount of properties. As you see here on page 33, almost 1,000 properties sold, so 919, with a sales value also of EUR 96 million, which is around 15% more than the amount that we sold last year. So this is in terms of real estate assets. In terms of the composition of the NPEs and the general environment in Portugal and so on, I would say that in general, in Portugal right now, in terms of real estate and so on, there are tailwinds. So we see a genuine feel-good factor, in terms of the apartments in the large cities and so on.
Once we have them ready for sale, we sell them. Sometimes there is a process until which they are ready for sale. So things sometimes take time, and we have sometimes to do some minor adjustments in terms of the apartments to get the keys. Things take time. There is a process, and most of it in terms of the apartments that are ready for sale, they are in general, the market is good in terms of real estate. In terms of, I would say, pieces of real estate that are not that commoditized, you have to find the right buyer. In general, we feel-- you see the amount of the pieces of real estate that we have been seeing. So in general, it is a positive evolution in Portugal. Of Mozambique. The inflation came down very material, as you may know.
The exchange rate is stable, which are two very important indicators of the stabilization of the country. We are intrinsically optimistic in terms of the long-term prospects of the country. As it's normal in the developing countries, there are cycles, there are adjustments and so on. Going forward, the economy may decelerate somewhat in the next two or three years for it to adjust. After that, we see that with the wealth of the country in terms of minerals, or in terms of gas projects and so on, we remain intrinsically optimistic on the country. Having said that, we are prudent in terms of our credit growth in the country. As you know, we have a very contained balance sheet. We have, I would say, quite healthy business model.
We intend to remain an important player in the market, being able to benefit from the growth of the country once it starts to grow again its two-digit numbers, which we expect to occur within three to four years.
Thank you very much.
Okay.
We'll now take our next question from Manj Dhillon, Sanford of Jefferies. Please go ahead.
Yes, good afternoon. Just a quick question from me, just on the IFRS 9 first-time adoption. I know you've guided that the capital impact was 30 to 35 basis points, but can you perhaps just split out or tell us what the euro amount was in terms of impact on provisions and shareholders' equity in the quarter? I guess I'm just trying to understand what the netting impact with the expected loss deduction in capital has been. Thank you.
Okay. In principle, so to say, the variation in terms of accounting equity based on the increase in provisions or the variation in terms of provisions, if you want, was around EUR 250 million. This variation of provisions was compensated partly with a variation in terms of expected loss gap. This is a positive impact because of around EUR 110 million. There are second-order effects because this then changes also. I'm sorry. There is a variation also in terms of DTAs linked to these provisions, a positive impact of around EUR 120 million in terms of DTAs. Okay. I'm sorry. This EUR 120 million in terms of DTAs reduced both the equity and the own funds. These are the big impacts.
All in all, I would say that the euro impact before taxes was broadly EUR 250 million negative plus EUR 100 million, around EUR 150 million broadly. My numbers.