Apr 30, 2014
Executives
Ángel Cano Fernández - President, Chief Operating Officer, Director, Member of Executive Committee and Member of Global Asset Allocation Committee Luisa Gomez Bravo Jaime Sáenz de Tejada - Head of Strategy and Finance
Ángel Cano Fernández
Good morning, everyone. Welcome to this presentation of the first quarter 2014 results for BBVA.
We're going to change things a bit, and instead of letting the investor relations people introduce me, I'm going to introduce our strategy and finance team with us today: first of all, the new CFO, Jaime Sáenz de Tejada; and also the new Director of Investor Relations, Luisa Gomez Bravo. You'll be seeing Luisa later on because she's going to be dealing with all the questions that will be coming in.
I also want to take advantage of the fact that I was starting today's presentation by making special mention of Manolo González Cid and Tomás Blasco for all their help over the last few years, especially Manolo, who's worked so hard as CFO, having to deal with me and worked very closely with me through these very complex, difficult years of financial crisis we've had. So without further ado, I'll move on to the presentation of earnings as such, but first of all, I wanted to highlight that you're going to find an after-tax profit before corporate transactions, thinking that, this quarter, as you'll be seeing, we haven't got any capital gains from corporate transactions, whereas a year ago, we were seeing capital gains from the sale of the pension business in Mexico and part of the insurance business in Spain, which we had to record to the first quarter of last year.
So this quarter, we don't have anything like that, no capital gains from any corporate transactions. So as I was saying, this after-tax profit, which is net income, has been growing at about 19%, and that's after absorbing the impact of the exchange rate which has been pretty significant, as you'll see in the presentation, this first quarter.
In constant terms, the growth has been excellent, with this income growing over 70%. There are 3 main drivers, positive performance of all the income lines in constant terms: the net interest income and fee gross income, operating income, excellent cost control.
As you know, all of last year, each quarter, we saw a gradual improvement in the cost profile against the previous year. This first quarter, the costs are now growing below income and revenues.
And it's mainly in the developing countries -- developed countries that you see the costs going down 2.5%, in places like Spain, as we'll see later. We're seeing that they're falling off at near 8%.
And then the third driver, which is also very important, is something that we've been waiting for, for a long time, which is what's happening to the cost of risks. The risk premium has to do a lot with the additions to NPLs.
So this year, it's fallen 18 basis points against last year. And we're definitely seeing the tendency that we were expecting to see and that we were expecting to continue throughout the rest of the year.
We can now move on, as we always do, to that wheel [ph] with the keys -- the key highlights. So we have to start talking about our earnings as such.
Already from the first quarter, we're seeing the new cycle of growing revenues. I said that our profit is growing at 19%, 19.7%, being driven forward by those 3 factors: income, costs and the risk premium, as I said; improvement in the risk indicators, as I said, as well.
We're confirming the positive performance of these indicators. In general, we're seeing this in a lot of different countries and now in Spain as well.
And we are able to confirm that Spain is definitely seeing better cost of risk. There's a drop of gross additions to NPAs compared against the first quarter of last year.
It was the lowest interest we've had, 25% down there. These falls, again, in Spain are even greater, close to 35% drop in Spain, and a drop in the risk premium as well of 18 basis points.
And that's what makes it possible to start to see the NPL dropping in absolute terms. In core capital, we're still actively managing our capital ratios.
We've launched 2 issues: one Tier I; and the other, Tier II, each of EUR 1.5 billion. The idea is to go on shoring up our capital ratios.
At the end of the quarter, our capital ratio, under the requirements, the legal requirements with phased-in CRD is now 10.8%. And as we'll see later, there's a requirement under Basel III fully loaded which would give us a 9.9% ratio.
And as for our leverage, that's at about 6%. Looking at our financial structure.
We've got lower costs, taking advantage of windows on the markets this quarter with an issue of EUR 1 billion for senior 5-year bonds. The main thing to take home is the improvement of 177 basis points in the cost of this issue compared to the issue we made just 1 year ago.
I was saying that our main income lines are impacted and will continue to be impacted throughout the year by the exchange rate, maybe not so much as the impact that we usually see at the beginning of the year. In the first quarter of 2014, we saw that when we had to book the entire impact of the exchange rates performance of the previous year.
So there won't be such big impacts throughout the rest of the quarters and the year. But to understand what's happening to the different income lines, in constant terms, we can see the net interest income and fee income is growing 6.7%.
And if we look at the tendencies in most countries, as we'll see later, this line is showing positive growth over the different quarters. And that's including Spain now, as we'll see later.
Including net trading income, gross income is growing at 5%. And maybe at the end of this quarter, we're seeing a certain rebalancing between the contribution coming from the developed economies and the emerging economies.
Earlier on, I said that costs was one of the drivers for better performance this quarter. And that's no surprise for us because it's the outcome of all the plans for cost saving and management that we've been launching last year.
We talked about cost growing at 4% in constant terms and already growing below revenues and a good balance between the developed and emerging economies. In the developed countries, we're seeing falls of 2.4% this quarter with the better evolution of income and costs, with income growing and costs going down.
That's the best you could possibly get. And in the emerging economies, there too costs are growing below income, so that's good news in both of these environments.
And with these, operating income is growing 6% year-on-year. And here, this is something we talked about last quarter, this quarter, we are seeing that the returns, the net -- sorry, the operating income over average total assets is growing much better than our peers', more than 2x more than the rest of our peer group in Europe.
I was saying that the third driver, that we were -- and though it was something we were expecting, was what's happening with provisions. It's not so much loan loss provisions.
It's the real estate provisions, really, but both of them are helping us along. We're seeing that the new endowments to the provisions are going down, which means that our profits are going up at over 70% in constant terms.
And after absorbing the impact of the exchange rate for the quarter, we are growing at about 19%. Looking at the risk indicators.
Earlier on, I said that there was a drop of net additions of 25% quarter-on-quarter. This means that we've got a positive performance in the balance of NPAs both for the group as a whole.
For real estate, as you can see, we've got a drop from the peak in September of EUR 1.1 billion; and also excluding real estate, where we see an improvement of EUR 400 million from the peak in September last year. And what does that mean?
Well, we've got stabilization of net additions and our coverage ratio and a significant improvement in the cost of risks that we will be seeing throughout the rest of the year as well. In capital, 10.8% core capital under the phased-in, 9.9% under fully loaded Basel III.
And 5.8% is our leverage ratio. We should also talk about the stress tests that we've recently gone through in the U.S.A.
We came out well in both the quantitative and the qualitative tests, which is what we think are most important in term too [ph] of EUR 1.5 billion in the quarter of Tier I and Tier II capital, which means that we are able to face this year with very comfortable capital buffers as we go through the stress tests that we're going to be undergoing in the next few months, whose results will be published at the end of the year. So to sum up.
Our profit, after minorities, is EUR 624 million; with that EUR 744 million before corporate transactions, which is growing 19%. And most important is the positive trend that we're observing in most of the countries where we operate, and in our global P&L as well over the different quarters.
Our focus of attention throughout the year will be the exchange rate impact on most of the different lines with significant differences between constant and absolute figures. Costs are going to be very important as well in helping us to grow our profit.
And we're seeing more and more visibility in the P&L for our group as a whole. Okay, we can now move on to the different business areas.
And as usual, we'll start with the developed world. And we're looking at banking activity in Spain.
And what we're seeing here is a fall in lending of 8.4%. If we look at longer series, we'll see how this fall is slowing down.
And I would even go so -- as far as saying that the stock at the beginning of this quarter has grown just over 1% in comparison with the stock at the close of 2013. Customer funds are going fine, as I said.
And the financial structure in this balance shows positive performance. If we look at the net interest income and fees, this falls by 9.5%.
And then this is the plus fees, one -- the positive thing is that we have 3 quarters where we've grown the net interest income quarter-on-quarter, if we compare it with the last quarter of last year. And the final piece of information is that we shouldn't forget the impact of the fact that the floor clause has gone from the mortgages on the net interest income.
This is as of the 9th of May last year. And without this effect, the net interest income, instead of falling, would have increased by 1%.
If we add in the financial operations, then gross income increases by 5%. And it's true that, this quarter, we've used low interest income in order to manage our portfolios, and that's why we've reached this 5.5% additional growth at the gross income level.
Spain is the best area -- has shown the best performance in costs because of all the plans that we've launched in recent quarters here. It's almost 8% fall in costs, which enables us to show over EUR 1 billion in net -- in operating income in the quarter, which is a 17% growth.
Another positive figure that has helped this performance of the net interest income in recent income, especially between 1T [ph] and 4T [ph], we've increased the customer spread by 21 basis points, supported on the material reduction in the cost of deposits here in Spain. So the risk indicators now.
As you can see, the NPAs have stabled after gross entries. If we -- even if we compare this with one of the best quarters of last year, it's still falling, as I said before, of around -- at around 35% (sic) [25%].
The risk premium in Spain has fallen 31 basis points in comparison with the average of last year. And the NPAs and coverage rates are stable for the third consecutive quarters, which gives us an income statement in Spain of EUR 386 million that give to the group, plus good performance by -- on each of the different lines.
And it's not just the year-on-year performance of these margins, but if we look at 3T [ph], 4T [ph] and Q1 of this year, we can see the trend, and it's excellent. So we will see that the contribution from Spain will get back to normal and will approach the current contribution that we're seeing of the operating income in the group as a whole.
Okay, real estate business in Spain now, just one slide on this which has summarized the main magnitudes here. We're talking about a net exposure of around of EUR 14 billion.
This has fallen from the peak by 21%. The NPA ratio has also fallen.
There's been a reduction in this quarter, 127 basis points, in the NPA. And with regard to the business activity, the sales that we've made are close to 5,000 units in the quarter, and this is approximately 27% more than last year.
Sales prices are very close to the net book value. And what we're seeing on average in Spain is a gradual stabilization of the falls in prices.
We're starting to see some regions where prices are starting to pick up and other regions where there's still a slight slip in prices. So what we're seeing here is a clear recovery in demand, but this is not uniform throughout the country, I repeat, but on average, there is clear positive performance.
Because of the updates and the appraisals that we do for each period for results, this will have an impact on provisions in the unit. And this has led us to present this EUR 231 million in negative earnings, which means that altogether as a whole, just adding the results from the banking activity, this quarter shows a positive -- shows positive earnings.
The United States now. This is the first of many quarters that I can remember in which all the margins are starting to grow.
There are 2 drivers here. On the one hand, we have the positive performance of business activity both on the lending side, except for the customer funds because of the high liquidity levels we have, but the business here is starting to perform positive.
And this is showing through in the different margins. It's true that we continue to see slowing-down reductions in the customer spreads because of the lower pricing of our assets, but this has meant that the main margins are growing.
The net interest income plus commissions is growing by 6%. And what's important to see here is the behavior of last quarter so that we can see the trend that is picking up.
The gross income has grown by nearly 7% and the operating income, as with the revenues have outgrown cost, is growing by over 10%. If we look at the risk indicators.
These merely confirm the trends that we've seen in recent quarters. The NPA ratio is now 1%, which is clearly the lowest of all the regions.
The coverage ratio continues to grow. We're talking about 160%.
And the risk premium is around 0.2% and 0.3% over recent quarters. And this gives us an income statement in the United States of over EUR 100 million, which is growing just over 16% and with positive performance from each of the margins in the income statement.
So we will increasingly see how this performance will approach the growth in business. So I think we can look forward to better growth as we move through the year.
Moving on now to the emerging world. And as always, I will start with the rest of Europe and Asia.
Here, we have Portugal; the rest of CIB, both in Asia and Europe, in the different offices that we have in Europe where we don't have any retail presence. And of course, this also includes our main asset, the main business, which comes with our 25% investment in Garanti.
What we're seeing in Garanti in the first quarter of this year is lending that is growing at a very positive rate, very similar and somewhat better than the United States but at lower rates than we've seen in recent quarters. We're talking around closer to 20% than 25% that we saw last year, after a third and fourth quarter in which the cost of funding had an enormous impact on customer spreads, and we saw a clear step between the second and the third quarter.
In the first quarter of 2014, this is higher than the third and fourth quarters of last year. And the second important point is that the customer spreads is now above T3 [ph] and T4 [ph] of last year, but we are comparing this with the first quarter, which was the best of last year's basically with regard to customer spreads, but T2 [ph] was also good.
So I think we will see that the negative figures in the margins will stop picking up as we move through the year. Despite the political instability we've seen in Turkey in the first part of this year and at the end of 2013, the macro prospects are good.
We're talking about an economy that has a potential growth in its economy of around 5% and with an enormous -- about 2/3 of the population is under 35, which gives it enormous potential. And we have the most profitable and the best-managed bank in the country -- in a country where there's a long way to go with regard to banking the unbanked.
So from the point of view of opportunities, Turkey is -- clearly has enormous potential for us. If we look at the Eurasia income statement and including all the other business, plus Turkey that I've mentioned, these contribute approximately the same to earning as the United States, EUR 105 million.
The margins, as I said, are impacted by the difficult comparative of the T1 [ph] of 2014 with the best quarter of 2013 but, as I think we'll see, that all of this stabling off in the group's earnings as we move forward. So moving on now to Mexico.
Mexico continues to be just as dynamic as we saw at the close of last year, with double-digit growth both on the lending side and in customer funds. And this is filtering through quite quickly to the different lines in the income statement.
We're seeing the net interest income plus fees growing by over 14%. And within this line, as we will see when we look at the full income statement, we have the net interest income which is growing by over 17%, which is clearly higher than the banking activity, but what's also important to understand, that this all includes not just the retail and the corporate banking but also the markets and the ALCO, which behave better in net interest income and less in the net trading income.
So what we need to do is to look at the gross income altogether, which is growing by over 10%, which is very similar to what we're seeing in the growth in business. The operating income has grown by over 12% and from [ph] the gross revenues, and this is due to good cost management.
And we're keeping the growth in revenues, which is -- continues to outperform the cost. There's no novelties in the risk income, the improvement in the cover ratio and the NPA ratio for the franchise in Mexico, which takes us to our Mexican contribution to our bottom line at EUR 453 million, growing at around 15%, with very positive performance, as we can see in the slide, right from the net interest income right the way down to the operating income.
And finally, South America. Once again, in South America, we can see enormous diversification within the region, as we've said on other occasions -- sorry, I just choked on that.
The volatility from Venezuela, although Venezuela is going fine in constant terms but it's highly volatile with regard to exchange rates, but in general business activity throughout South America, it's growing at an average of around 25%. And if we include Venezuela, and you can see this information in the quarterly brochure, we're talking closer to 20%.
But once again, this filters down quite quickly to the main margins, the net interest fees, gross income and operating -- we're seeing the excellent performance in the activity, the spread management and even the cost management which also growing here less than the revenues. So this enables us to see this performance in the margins over and over again.
The risk indicators. Once again, there's no news.
There's no change in the trends. They're stable both in NPA and the coverage ratio and also the risk premium, which depending on the quarter will -- varies between 1.3% and 1.5%, which takes us to a contribution to the group of EUR 244 million, which is 16% increase year-on-year.
And as we can see, the performance on all quarters is good. And once again, okay, just to give you an image: If we take out the volatility of Venezuela, we're seeing very positive growth which are closer than -- to 20% or -- than 25% or 30%, but earnings are growing year-on-year by over 12%.
And this has clearly shows us the positive effect, on the one hand, of the complete diversification of the group but particularly within this group, within South America, which generates a stability in the income statement. So those are the income statements.
So maybe as a quick summary. Net income, x corporate activities, has grown by close to 19%, also after absorbing the exchange rate effect because, otherwise, it would have grown by over 70%.
There are no capital gains from corporate operations this quarter, which makes it difficult to compare this quarter with the previous year. The main drivers for all of this: first of all, the main margins, this positive quarterly trend and positive growth quarter-on-quarter; and the positive earnings and results that we're seeing from controlling our cost management; and also the confirmation of the risk indicators, the risk premium on one hand, and the NPAs with sharp falls in gross entries to NPAs, basically in Spain, where this is even greater.
So I will now hand over to Luisa Gomez Bravo, who will run the Q&A session.
Luisa Gomez Bravo
Thank you, Ángel. And good morning, everybody.
What we'll do is to move straight on to the Q&A session. And as we've done previously, in order to optimize the time we have, we'll put these together into different groups.
So any questions that can't be answered here will be answered by our investor relation teams today. So we'll start with the currency block.
We have several questions here: David Vaamonde from MainFirst, Antonio Ramirez, Rohith Chandra from Barclays, from Deutsche Bank and Mario Ropero from Fidentiis. We have 4 questions here.
The first one, could we give a bit more color about the impact of currency from Argentina? The effect of cover -- of hedging in these countries.
The third issue is, what's our general hedging policy? And the fourth question is, how do we consider the situation in the coming quarters?
Ángel Cano Fernández
Well, Jaime, you can break the ice and talk about Venezuela and Argentina, mainly when we're talking about currency issues.
Jaime Sáenz de Tejada
Well, the impact we've got from the exchange rate over the quarter between the average rate from the first quarter of 2014 and the closing rate at the end of 2013 in Venezuela in attributable profit was EUR 44 million. The impact of hedging in that country was 24.
So we've been able to neutralize about 1/3 of the impact on our P&L. The negative impact on the attributable profit, again, in Argentina was EUR 7 million.
And in this case, the positive impact of hedging has been 7 -- 16, sorry. So the hedging in Argentina was higher than what we had in Venezuela.
The impact in terms of capital in both countries was practically 0. The impact of the devaluation is offset by the risk-weighted assets, and so the total impact on capital was neutral.
Our hedging policy in general, as we've often said to the market, seeks to cover about 30% to 50% of the expected profit for the year. The final level of hedging will depend obviously on the cost, the exchange rate that we're talking about at each time.
And looking at the capital ratios, we're trying there to minimize the impact of volatility on our core capital. So what we usually do is to hedge about 50% of the capital investment that we have in our subsidiaries, and then the rest is offset by the performance of our risk-weighted assets.
So from now on, what are we thinking about doing in both countries? Well, the contribution of Venezuela to the year-end profit should fall by about, well, 1/3, maybe a bit more, against the previous year, in 2013.
And in Argentina, maybe it will be about 20%, approximately, lower than what it was last year.
Ángel Cano Fernández
Well, in the presentation, I already said that the tendency isn't going to be the same everywhere or the same over the different quarters. It's mathematical, really.
Every time we go from 1 year to another year, we start from 0 with our average exchange rate, but when the exchange rate, as happened in 2013, has been moving with the depreciation of currencies, that means in 1 single quarter, we have to book this mathematical calculation in one go. So the rest of the quarters, unless there's a really negative performance such as what happened in the second half of the year last year, we'll see that the tendency is much more stable because it stabled -- as it will stable out over the next few quarters.
Well, Jaime said that, of course, Venezuela is a case apart, but that -- there, we have to see what might happen to the currency over the year. But we usually say that with the hedging we have against the consolidated books in ALCO are sometimes done on corporate level or sometimes done at local level if there aren't deep-enough markets, which is the case in Venezuela and Argentina where the markets aren't very deep.
Luisa Gomez Bravo
And in Venezuela, Francisco Riquel from N+1 and also from Deutsche Bank and Nomura and from San and Credit Suisse, we have questions. Are we going to change the exchange rate from Sicad 1 to Sicad 2 in Venezuela over the next few months?
Jaime Sáenz de Tejada
No. Based on the information that we currently have, as you know, Sicad 1 is the exchange rate used in Venezuela for international investments.
So this is the one that we consider to be the appropriate one to apply both to the profits that we make in the year and also to all the retained profits and the capital. The average exchange rate for Sicad 1 is VEF 11.30 compared with 6 2 6 3 [ph] that we had last year.
The Sicad 2 is not accessible for foreigners or for local banks. We are only intermediaries in this system.
Ángel Cano Fernández
What's more, Jaime, what we're doing is to apply the main book entries and the increases that we're being told by the auditors and the supervisors because they're the ones who tell us the exchange rate that we have to use. And what we do is the Sicad 1, which is stabilized at VEF 11.3 that you've just said.
Luisa Gomez Bravo
So we'll now move on to the block on digital banking. Raoul Leonard from Deutsche Bank has asked 3 questions.
The first one is, we've just announced a change in our organic program, and what changes can we expect from this? And the second question is, could we give an update on our digital strategy?
And the third question is, do we expect to see further transactions in the future in digital banking?
Ángel Cano Fernández
Okay, well, first of all, when we analyze what's been happening in industries that wanted to transform themselves over the last few years, there are 2 things that you can see. Some create factories alongside their traditional business, in which case the results that we've seen and that you know is that they don't manage to really transform their conventional business.
Everybody, I think, understands the lack of efficiency in traditional banking. We know how complex transactions are.
The processes are long, workflows are long. It's quite complex to give the right service to customers.
So with the new digital organization, the idea is to have a global focus reducing our number of people, so we have top people but not so many but with more people with their feet on the ground close to customers. We're combining the traditional business development in the different countries with this digital factory which is global, so we'll have much more efficient distribution models, which will be much more productive.
Some of you might say this isn't exactly digital, but for us, what we mean by digital is that the business will be done as efficiently and productively as possible so that the customer will benefit not just in terms of the customers that come in through digital touch points but those that use the traditional ones too, because the transformation will mean that everything can be done from one place locally and there will be a digital offering which will include both digital products and the traditional products. So it's much more simple for customers, so they have a better experience and a seamless experience whatever touch point they use.
And that's what we are aiming at. What does it mean?
It means that we're especially focusing on Spain where the business is more advanced so we offer more functions and more products; and the U.S.A., which par excellence is the most digitalized country. Although actually, in terms of the way they do banking, it's got one of the most obsolete banking systems in the world.
So there's a lot of upside to digitalization there. So we're focusing on those 2 countries, maybe in Mexico and South America.
What we have to do is to create something more similar to what they've done in other industries having a digital factory. Some are coming in a little bit later because of the customers' needs, they are different, and they expect a different kind of service.
It's the U.S. and in Spain then where we're expecting to make this real leap forward in terms of quality.
Additional information for you: In order to move through this process of rapid digital transformation, you have to have sufficient infrastructure in order to make sure that everybody can make most efficient use of all the different channels. And we started in 2007 when we took the decision and we've been implementing our policy gradually over years.
And now we've got a technology platform with the right architecture for Spain and for the U.S.A. And parallel to that, we've been working very hard, above all, in Mexico and -- but also in other South American countries.
But we've got the architecture and we've got the platform, so what's the next thing we have to do? We have to add on the different channels so that people will have the same touch points in all the different countries in order to access that platform.
With this architecture, we integrate information. We have an architecture that means that -- and consultants have said that this is the case.
We really are modular in the way we do business, which means we can export modules from one -- from our platform to all the different countries in order to transform these countries' organizations much quickly -- more quickly in order to incorporate all the new channels. So we'll have a seamless experience for our customers and the easy exporting of the modules that we've already got within the architecture that we've already deployed in the group.
And so now we'll be able to develop digital businesses such as Simple, as we saw in the first quarter. The Simple business is not so much a business that is going to generate short-term profits.
Rather, it's good for us because it gives us best practices in developing products and processes and workflows in order to give better service to our customers. Simple has been around for 1.5 years, but it's already got more than 100,000 customers in 2013.
It's managed or administered over $1.7 billion in transactions. It hasn't done any marketing in all that time, but it's generated its business by word-of-mouth because customers have brought in other customers.
So what we want to do is to pass on these best practices to the rest of the group, starting with the United States, of course. We are on the lookout all the time to see potential digital investments out there, but our main objective is to speed up the transformation process as we move from conventional to digital banking.
That doesn't mean that we, in 5 years, again have 0 banking branch offices. We will have branches but a more -- with a more productive branch network which will work much more efficiently.
So we will see how all of this rolls out over the next few quarters, in our future presentations.
Luisa Gomez Bravo
So let's move on to capital, liquidity and ALCO. Starting off with capital, Raoul Leonard asks 3 questions.
He's from Deutsche Bank. Can we give information on what's happening to risk-weighted assets and capital?
In terms of dividend policy, how many scrip dividends can we expect to have in 2014? And what kind of mix will there be between scrip and cash in 2015?
Apart from that, Mario Ropero from Fidentiis asks about capital too: What is the outlook for the fully loaded ratio by the end of 2014?
Ángel Cano Fernández
Do you want to start on capital?
Jaime Sáenz de Tejada
Fine. First of all, I'm going to talk in terms of phased-in.
Basel III in -- has fallen 3 basis points in the quarter to 10.78%. The positive contribution from the earnings x dividends offsets the impact of the risk-weighted assets, x the impact of currencies.
The exchange rates impact has been 0. It's been totally offset, as I said before, with the core -- with risk-weighted assets.
In terms of fully loaded, which -- it's fallen by 9 basis points to 9.9%, and in this case, this has been helped by the capital gains from our available-for-sale portfolio. With regard to our dividend policy this year, we've already said that our intention is to move towards cash dividends that will represent about 35% or 40% payout.
So what we're trying to do is to gradually eliminate the scrip dividends, but the mix between scrip and cash for this year is something that has not been defined. And obviously, this will depend on the performance we see from the income statement, although our intention would be 2 cash and 2 scrip dividend issues.
With regard to fully loaded, at the end of this year, 2014, our objective for fully loaded is 10%. And our intention is to maintain this objective of 10% in years to come as well, okay?
So that's for the end of 2014.
Luisa Gomez Bravo
With regard to ALCO and liquidity, Antonio Ramirez from KBW, Britta Schmidt from Autonomous and from Mediobanca ask 3 questions. The first is, can you give the details about the debt portfolio in the case of Spain, the average term and the average yield?
And can you explain the performance in comparison with 2013 in the last quarter, and finally the contribution of trading and the sale of bonds here in Spain to the income statement?
Jaime Sáenz de Tejada
Let's see if I can remember all the questions, let's see. First of all, with respect to the portfolio, it's been pretty stable over the last few quarters.
It is true that, in the first quarter of the year, we've seen a slight rise. We're talking about EUR 33 billion.
That's about EUR 2 billion up on what it was at the end of last year. The terms are 3.5, that's the average duration.
It has gone up a little bit as a consequence of the fall in the rates that we're seeing, above all, on sovereign debt here in Spain, which is about 90-something percent of our total exposure here. The contribution of net trading income here on this portfolio was pretty relevant this quarter, over EUR 200 million, and that comes together with magnificent performance of our markets area this first quarter.
I don't know, have I missed anything out? Well, EUR 231 million was the contribution of the ALCO portfolio.
Ángel Cano Fernández
And I could also say that there's been a big fall in spreads on all the portfolios, which has enabled us to bring forward some of the profits that we have for the rest of the year so that we can control in advance what's going to be happening throughout the rest of the year in terms of what we're doing from ALCO. And we can give more details to people during the day from investor relations.
Luisa Gomez Bravo
Regulatory issues: We've got questions here from Credit Suisse about capital, but I think you've already answered them with what you've said here. And then the regulatory issues: Barclays, Autonomous and Santander have questions.
What's our opinion about the different stress test scenarios in the European Central Bank? How do we think that might have an impact on BBVA with respect to our future profits?
Ángel Cano Fernández
We're really not surprised initially. There are tougher scenarios than we saw with Oliver Wyman in the last year.
On this occasion, what we've seen is how they've factored in the stress supported by the economies, particularly Spain, and this deterioration of 6.1%, which is quite a lot more than in the case of Oliver Wyman, but we're seeing that this year is more stressful than last year. We've also seen a reasonable balance at the different geographic areas.
Maybe the -- we get a reasonably limited impact depending on which area we're talking about. The impact in the U.S.
is lower than in Spain, and the impact on Mexico is very similar to the United States and lower even than Spain. In other areas where we operate in Latin America, for instance, in Chile and Peru, there's practically no -- there will be practically no impact in the next 3 years.
So from our point of view and after preliminary studies and as I said in the presentation, our comfortable capital position means that we can face the impacts from these this year very comfortably. And I think it's going to be a stringent year.
It will give us credibility in the financial system in Europe in general. And I think we're well in line with what's happening in last years not just with regard to economic growth but also the performance we're going to see in real estate prices.
The countries that haven't burst their bubbles over the last 3 years, this year, they will. And the countries that have had -- have been harder hit, such as Spain and Italy, the effect will be far more limited.
So in the case of BBVA, our comfortable capital position; the diversification of our footprint outside of Spain, the United States, Colombia, Peru will enable us to face the coming year very comfortably; maybe Turkey, which is another area which has been hit fairly hard, but we only have a 25% share there, which means that the impact will be very limited on our earnings this year.
Luisa Gomez Bravo
Okay, we'll now move on to the different business units, starting with South America. Ignacio Cerezo from Credit Suisse and Britta Schmidt from Autonomous ask, what can we expect in terms of profits from South America for 2014?
Ángel Cano Fernández
Well, South America, in principle, is showing growth which is going up progressively in all of our franchises, except for Venezuela. And even Argentina is going to show quite stable performance over the next few quarters, as far as we can see.
So of the 7 countries, 6 are going to show tendentially [ph] positive performance. As Jaime said, in Venezuela, what we expect to see is a reduction of its contribution to the bottom line for the group and to the region.
Although, for us, we won't be expecting bad news from there because it means that we're below 5% in terms of what the contribution of Venezuela to the group is, in a region where volatility is greater. So more stability and predictability of the earnings from this region, except for Venezuela where the contribution will be lower and will lower over the years.
At the end of the year, we might expect it to be slightly below -- or down 150 million, 160 million, and that's related to the impact of the exchange rate but depending on whether it's Sicad 1 or Sicad 2 over the year. And so what we want is to have -- is the stability that we will get from the rest of the region, the positive, dynamic growth of business volumes in all the different countries where we're gaining market share both in lending and borrowing and also customer spreads are improving.
Luisa Gomez Bravo
And regarding Venezuela, we've got several questions. And going from more general to more specific, on our book position, Sabadell asks if it makes sense for us to go on being present in a country that has such big macro problems.
Ángel Cano Fernández
This is a franchise that's possibly the best thing in the country, and this franchise is highly dynamic in its business activities. The financial structure, if we bear in mind the situation, it's enviable with regard to the liquidity ratio, which is around 55% in loan-to-deposits.
If we look at it from the point of view of business, it -- there's enormous improvement in the customer experience and the services we're providing to customers. So for now, we certainly have no plans to move out of the country.
I would repeat, the team, the bank is fantastic and it wouldn't make sense to leave the country at the moment. We have booked our stake in line with the appraisal that's been made by the business in Venezuela and looking forward, as I said, where you can see volatility but this is volatility in a well-managed business.
Capital -- as Jaime said, without affecting the group's capital ratios because of the effect of the risk-weighted assets in Venezuela. So the best thing here is to wait and see because we could see some down growth -- some deterioration in the economy before we see it picking up again.
We will continue to wait and see, and on the way, in the meantime, we will work within this franchise as we do throughout the rest of the group.
Luisa Gomez Bravo
More specifically in Venezuela, issues of the book value, Mario Ropero from Fidentiis asks if we can expect any write-off in the book value of our investments in Venezuela. And maybe we can give them an update on the book value the -- in Venezuela.
And Raoul Leonard from Deutsche Bank asks if we can give him an update on the hyperinflation and how we treat this from an accounting point of view. Do we make any correction in our balance in the first quarter of 2014?
Jaime Sáenz de Tejada
Well, of course, there are adjustments made for inflation. It's required by accounting regulations everywhere where inflation is very high.
In the specific case of Venezuela, inflation this quarter was about 10%, and that's slightly higher than what we had in the first quarter of last year, when it was about 7-point-something. Consequently, the negative entry that was booked was higher than what we had last year.
In this case, it was EUR 81 million. The book value?
Ángel Cano Fernández
It was 36 last year, yes.
Jaime Sáenz de Tejada
And EUR 81 million, well, I was right about EUR 81 million, wasn't I? Yes.
And then with respect to the book value of the -- no, not the Telefónica stake, the Venezuela one, EUR 1.1 billion, approximately. Obviously, that's factoring in the negative entry because of the impact of the exchange rate, which in the year was slightly over EUR 500 million; and then after that, write-offs, impairments and such rate.
Well, we think, as Ángel said, the value of our franchise is intact, and consequently, we don't feel any need to do anything over and above what we are already doing, always being compliant with the accounting regulations.
Luisa Gomez Bravo
Okay then, let's move on to Mexico. There are quite a lot of questions about Mexico.
Let's put them in order. From MainFirst and from Citi and Deutsche Bank and Nomura, Mediobanca and Barclays, we've got questions basically about how we see the performance of the Mexican economy.
It would seem to be weaker than expected at the moment, and if this continues, what kind of expectations do we have for growth in our loan book and in our profit this year for Mexico? And what do we think about the net interest income with respect to the growth in the loan book and, above all, in SME and corporate lending?
And what do we think will happen in the net interest income going forward, will it stabilize?
Ángel Cano Fernández
The first quarter in Mexico, I think we're going to see slower growth than we were expecting at the end of last quarter. BBVA Research, for 2014 as a whole, had growth of 3.4%, which is true that this is below the expectations of the Mexican government, which is 3.9%, almost 4%.
So we think that, in the next few weeks or months, there's going to be a correction made to that estimates and it's going to be downgraded to about 3%. We'll have to see what happens.
What we're seeing in the first quarter, we need to look at the investment plans, especially in structure -- infrastructure in this public sector, as we saw last year, after taking on the 7 structural reforms. These had to be transposed to decree-specific regulations.
And this is the process that we're going to see in the first part of this year and this is where we are at the moment. So maybe what we're seeing is to transfer parts of the growth that we thought we would see now further forward into 2015.
We don't think that the -- if we put together 2014 and 2015, that we're going to have the same sum, but it's going to come later. And in 2014, we're still seeing growth of around 3%.
And I repeat, all of this is very -- it's too early really to say. We'll have to see the numbers that come out in the next few weeks and months with regard to the main macro magnitude in Mexico.
So what are we seeing in the business activity? As I said in the presentation, we're seeing no major change in our business.
We think we will continue to grow throughout the year at around 10%, between 10% and 11% for the rest of the year. And the margins will probably be in line with this 10% rather than the 20 -- than the 17% that we saw.
But it's also true that the market activities in the ALCO area is more positive than expected. By the end of the year, I think we'll probably see a growth in profit that will be double digit that we saw in the first quarter.
I'm not sure whether it will be 10%, 14%, but it's going to be around there for the year as a whole. So sound contribution from Mexico with no surprises that I can see for the next few quarters.
So I think the question is whether it's going to take longer or less time, but either way, it's going to be positive.
Luisa Gomez Bravo
And more specifically, Antonio Ramirez from KBW asks, why are fees so weak in Mexico? And we also have questions about provisions in Mexico.
Andrea Filtri from Mediobanca asks for our general outlook for provisions for 2014. And more specifically, from Citi, we have a question about quarter-on-quarter behavior of provisions.
And is this due to SME and corporate lending in the quarter?
Ángel Cano Fernández
Let's have a look at our fee income then. There is no change of tendency.
We budgeted a lower growth in fee income than in net interest income, which is going to make the biggest contribution during the year. But we can perhaps give you more specific data through our investor relation teams in the rest of the day.
As for provisions, well, here, we're doing better than budget for the year as a whole, we think, depending on the kind of portfolio we're talking about. The contribution of cards and consumer lending is greater than elsewhere, and that means that it's -- if it's stable over the different quarters, we'll have risk premiums of between 3.3%, 3.2%, 3.5%.
But we're not expecting any kind of big change over and above what I've already said. Well, there might be some one-off changes, one decimal point up or down, over 1 quarter to the next, but for the first quarter of 2014, we've seen a performance of 20 million better than budget.
So there's no surprise there. The risk indicators were shown in the presentation.
When we bring forward the most relevant impacts that we could get from real estate from last year, the NPAs have been going down and the balances of NPAs as well as the net additions have been going down. And the better customer spread means that the risk premium is higher and the risk-adjusted yield is better than in other countries.
So in Mexico, things are in line with what we're expecting. The different income lines are related to our business volumes and our cost of risk at the risk premium is what we said it was in the presentation.
As for fee income?
Jaime Sáenz de Tejada
There, there's nothing relevant apart from the fact that the first and fourth quarter of last year, we saw excellent performance in investment banking fee income. Our expectations this year is that we'll probably grow fee income in line with inflation over the rest of the year.
Luisa Gomez Bravo
Okay, finally, with Mexico. From Deutsche Bank, we asked a question, which says that the tax rate's gone up 24% in the quarter.
So the question is what kind of guidance can we give on the tax rate in Mexico over the year as a whole?
Ángel Cano Fernández
[Spanish] First of all, for the group as a whole, the taxes that we're paying, the tax rate has increased by 2% or 3%. It's true that if you think of the group going forward over time, we always expect normal tax rate of between 24.5%, 25%, 27%, 28%, depending on the quarter.
But also, it depends on the contribution from America in comparison with Spain, where tax rates are higher. From Mexico, specifically, we have no important information that will have an impact on the tax rates there.
What I would say on average throughout the year, we're going to -- is things aren't going to change. And for the group as a whole, I think what we can expect, a tax rate of between 25%, 26%, 27% for the year as a whole.
What we will see is higher tax rates than last year, but in areas such as Colombia. The positive tax effects that we've reaped there because we've bought savings there, so we don't -- we have no more positive tax ones, so we're facing the normal tax rate.
And this is one of the reasons why we'll see a slight slip up in tax rates in 24 (sic) [2014] for the group as a whole.
Luisa Gomez Bravo
Fine. So let's move on to questions about earnings here in Spain, starting with all the questions dealing with lending, margins, customer spreads.
Citi -- Rohith Chandra from Barclays, Andres Williams from Mediobanca, Carlos Peixoto from BPI, asked the following questions about lending here in Spain. Can we give more information about which segments are going to increase in lending, and can we also give an update on our views on the flow of new lending, especially mortgages?
And do we expect to grow in lending in 2014? What impacts on lending spreads are we going to see for the year?
And moreover, if we can give a bit of some guidance about the quarterly performance of net interest income here in Spain. Will this be leveraged by the cost of deposits or lending?
And also, can we talk a little bit about the impact of the second quarter on the net interest income because we're selling sovereign debt in the first quarter?
Ángel Cano Fernández
I think that we have the advantage that Jaime has just left Spain or this area of Spain, so he must have all these figures very top of mind. So share your knowledge.
Jaime Sáenz de Tejada
Okay, I'll put on my other hat, shall I? Well, we -- I've always said that Spain is a highly indebted economy.
So looking forward, we will have to deleverage. We've still got a level of private borrowing of about 137%, and that's a big overhang.
It should -- cutting back this overhang should be made compatible with the new projects and giving people access to credit. And that's the position we've always maintained in BBVA.
Regarding the specific performance this quarter, we've seen a rise of about 1.5%, mainly because of growth that we've seen in corporate and institutional lending. There, we've seen pretty positive performance throughout the first quarter.
That's not the case in SMEs where we see a slower fall, but nonetheless, a fall. And in the front book, new business in some segments, this has been growing quite significantly since last summer.
And in the first quarter, we've seen that growth speeding up with growth in consumer lending, new business of about 25%, 28%; and in mortgage new business, again 25% growth; and amongst the self-employed, about 10% rise in new business. So front book is definitely suggesting very positive performance as we look forward as domestic demand begins to recover here in Spain.
As for customer spread and what's happening to prices for both lending and customer projects, we've seen a 4 basis point rise in lending. So that continues the good trend we had from fourth quarter, where we also saw a rise of about 3 basis points, the yield on lending compared to the third quarter.
It's true that we're seeing greater pressure on spreads with the new business that we're bringing in, so that's higher than the -- for the stock as a whole. So we can expect to have a positive dynamic going forward.
Although it will be slower than it has been, although the drops that we're seeing in the sovereign risk premium knocks on into everything that's to do with public sector. There's much more supply for corporates, and the spreads on the front book are higher.
And that is also happening now with individuals, the loans that we make to individuals. The main positive surprise we've had this quarter where the figure was above our target for the whole year was what's happened to the price of customer funds.
We have been, in March, giving about below 1%, and that's meant that we've been able to bring forward 3 months the target achievement. And both impacts have improved our customer spreads in the quarter by 21 basis points.
I think that, obviously, the lower price of deposits is not sustainable, if we look forward. But nonetheless, there's still quite a bit of upside for improvement in terms of the prices of the maturing deposits as they mature on our back book.
So our feeling is that this profile of the very positive growth in the net interest income that we've been seeing from the third quarter of last year, will continue over the next few quarters. So what we're talking about is about net interest income similar to what we had last year for the year end.
As Ángel said, because of the impact of the floor clauses, that's about EUR 150 million. And without that impact, the net interest income in Spain would have gone up by about 1.5%.
And we have to digest that additional EUR 75 million from the floor clauses over the next few quarters.
Ángel Cano Fernández
And then the impact of selling debt on the net interest income in the second quarter.
Jaime Sáenz de Tejada
It's true that we have got some capital gains from the first quarter with that net trading income that we talked about when answering a previous question. We've also recomposed the portfolio.
So we're expecting a more or less stable contribution from this portfolio over the year. The yield is going down slightly, but our back book is maturing bit by bit.
And part of the yield change is offset by the lower cost of funding this portfolio. So for 2014, I'd say as a whole, the contribution will be stable to the net interest income.
Ángel Cano Fernández
Earlier on, you said when you were talking about net interest income over the year in Spain, that we're including the contribution of ALCO interest rate on the euro portfolio contribution. So with respect to this question, the expectation for the year end is that there will be flat performance or slightly positive improvement against the previous year.
And that includes what's happening with that portfolio. So there's really nothing relevant even from the ALCO.
So we expect growth to increase over the year of the net interest income. So by the end of the year, we'll be around 0, between minus 1 and plus 1 over the year as a whole.
Luisa Gomez Bravo
And then more specifically, although I think you have covered this slightly. From Fidentiis, from N+1 and from Barclays, we have questions about the cost of the front and back book of term deposits in Spain.
From Citi, we have a question about the upside or the downside on depos. And from Citi, we have a question about lending to SMEs over the first quarter of 2014.
Then finally, ending up with Spain, from Fidentiis, in line with what we've said, we have a question about what we expect ROE to be over the next few quarters in Spain?
Jaime Sáenz de Tejada
Okay. Once again, if I forget any of them, you can remind me about them.
The back book for depos is 1.7%. That's depos plus promissory notes is 1.7%.
And the front book, as we say, it is around 0.9%. The total cost of deposits is about 1.4% approximately.
So going forward, there's still some upside there. We've improved the cost of deposits by 17 basis points this quarter.
And going forward, I think there'll be less upside. But obviously, this will depend on many different factors.
Of course, what the competition does, what our peers do, but less than 1%, I think we can start to find some sort of resistance. We'll have to test the market, I suppose.
Moving on then to investments in SMEs and corporates. This is something that's lending to them.
This is still not growing in our estimates. The 8% fall that we've seen in recent quarters, what we're going to do is to try and converge and flatten it out for this year.
This is probably quite an ambitious objective, but that's certainly what we're trying to do. And then in the final question, I -- the last one...
Ángel Cano Fernández
What can we expect for Spain? I would say it'll be stable, but I don't think 2014 is going to be a normal year.
But I think we should be, the ROE should be just over the cost of capital. It should be around 10%.
And we may find an ROE of around 12% once things start to get back to normal. This is to be closer to 2015 and even more so in 2016, especially bringing the risk premium back to normal levels.
Luisa Gomez Bravo
The risk premium, as we've got very little time left, I'll try to put the questions together in groups. KBW and HSBC asked about the gross entries to NPAs and the recovery in Spain and how we compare this with Q4 and maybe we can start with that.
But maybe you can give us some information about this issue, and what we expect in the coming quarters in gross entries to NPA and recoveries in Spain. Santander and BPI asked if we can tell us about our expectations for NPAs in Spain, when is this going to reach a peak and when are we going to see the refinancing cured?
And at any time in 2014, or 2015, 2016, are we going to see a recovery in provisions? And finally, with regard to risks in Spain, Autonomous, Fidentiis, Mediobanca and JB Capital Markets all ask questions asking for guidance with regard to the risk premiums in Spain for 2014 and 2015.
Are we going to maintain that for 2015?
Jaime Sáenz de Tejada
Once again, if I forget anything, please tell me. Maybe I'll start by answering the first question.
We maintain the guidance, our guidance for banking assets plus developed 1% for 2014. This is converting to below 1% for 2015.
The performance for the quarter falls within this guidance. The risk premium was 1.11%.
So without any changes there really. And what are the underpinnings of this significant improvement in the risk premium, which had gone over 1.5% last year.
Well basically, it comes from the reduction of the gross additions to NPLs that Ángel was talking about before here in the Spanish banking system. But more important still is that we also have to include the real estate performance.
Compared to the last quarter last year, the net additions in real estate, down 40%, and that's about half of what we had in the first quarter of 2013. Recoveries?
There, we're seeing excellent performance with reperforming loans. So it's pretty well on budget.
It's very important here to be aware that a very big percentage of all these nonperforming assets have to do with, what we call, subjective nonperforming assets that actually are up-to-date in payment. More than 40% of the NPA balance is up-to-date in payment, and that's relevant especially so when we're talking about mortgages.
There the figures would be about 47% up-to-date in payment. So in a very natural way, very naturally without any haste, we can expect to see a certain reduction in the total balance of NPAs as a consequence of the cures that have been set in place.
Ángel Cano Fernández
So we have to wait until the end of the year really to see the outcome of the cures. That will be more noticeable towards the end of the year than at the beginning.
Jaime Sáenz de Tejada
Yes. As for some time now, we've been saying that the NPA ratio performance will prevent -- would depend a lot on the denominator as well.
And you know what the expectations are. But we don't know if -- exactly what will happen.
But in the first quarter, the denominator has done well apart from the NPA ratio as a whole -- sorry, the NPA volume as a whole, which has given us that slight drop in the NPA ratio on our banking business and the 3 basis points on the real estate assets. Yes, for the quarter, individual's down 1.5.
That's the general figure, about 1.5. But in SMEs, maybe it's more stable.
This is more 1 plus 1. It's more nominal, you could say.
And then SMEs is really impacted by real estate, which is where things are going down most. But we can expect the balance of NPAs to flatten out and if the plans that are scheduled in the different countries are rolled out, a lot of them are up-to-date in payment.
So by the end of the year, we'll see more significant falls in the NPA balance. And over the next few quarters, we can expect this to continue.
Luisa Gomez Bravo
And talking about real estate. I have some questions about the area as a whole from Santander and from Autonomous.
We have questions about the news on the creation of an internal bad bank, what impact would we expect this to have on the management of these kinds of assets and the workout strategies that we have underway. From Autonomous, we have a question.
Are we thinking of selling off packages of assets at the current market prices? And finally, from Macquarie, we have a question about the sales of real estate in both units and million euros.
Ángel Cano Fernández
You want me to take the first question? So the first question, a few weeks ago, when we made the changes in incentives basically for the digital -- we did made an additional change apart from Jaime's job, the person who replaced Jaime -- and this is the fourth movement, which is to concentrate the problematic assets in their corporate area.
And this included real estate assets. We're not setting up a bad bank.
What we're doing is to concentrate the attention, the focus, the management of all these assets in a single unit. So real estate, what we're trying to do is to harness the synergies of managing assets of this kind this way because in the next question, if we're talking about blocks of assets, this can affect real estate assets.
But the kind of -- it can also affect the kind of credit that would go to SMEs. Once we've concentrated all of this in a single unit, then I'm sure we'll be far more productive and more responsive in order to get assets of this kind off our books.
When we're talking about real estate with the negative contributions made to the group this year, we're seeing this right from the first quarter of this year, that this negative component is going to be smaller and smaller so their performance is going to improve. They're going to be efficient, productive and profit based.
Jaime before mentioned that we're moving forward slowly but surely. And I'm sure there's going to be high business turnover to reduce these balances as much as possible.
But obviously, we're certainly not going to destroy any value, so we're not going to take any decisions quickly just to -- based on the balance sheet rather than on return on reinvestment. We have to be very careful when we're reducing our exposure, for instance, at a real estate.
As I said in the presentation from -- since 2011, we've reduced our exposure by 21%. We've got a fantastic team, they're working really, really well.
And going forward, we're going to maintain our current business volumes. And occasionally, we will see some blocks taken off our balances without destroying value for BBVA.
Jaime Sáenz de Tejada
As Ángel has said, the second question that was asked, the wholesale strategy to reduce our real estate risks is always there in the back of our mind. It will depend on the moment if we can maximize the value.
What we're going to do is -- when we can, is going to be through the retail structure. We're selling very close to the net book value, so it's not having any major impact on the balance sheet.
The total sales has been about 5,000 units this quarter. This includes the units that were sold within our books, which is just over 3,000.
And the units that we sell through promoters, those have been 1,900, almost 2,000. These 5,000 units about, it's about 25% more than we sold in the first quarter of 2013.
With regard to the amount, I think it's been very much more at 61% higher than we could sell in the first quarter of last year because there's been a whole series of assets that could be considered as one-off ones, especially here in Madrid, which has pushed the price up.
Luisa Gomez Bravo
Okay. That puts an end to real estate, so we can move on to Eurasia.
We have some questions here dealing with the balance and the earnings from Garanti and some strategic questions. So maybe we could start with a question from Deutsche Bank with do we have any updates on potential shocks, i.e., risks, lending risks or assets moving forward?
I'm not sure whether this refer to the stress test, but do we have any update on potential impacts in the area of asset quality moving forward? Sabadell, we have a question from Sabadell.
Are we considering any impairments in our Garanti stake? JB Capital Markets and Mediobanca asked a double question.
One concerning about the trends in earnings in Garanti and another is a strategic question concerning our stake in Garanti in 2014. Can we expect an increase in our stake, and can you give us an update on our purchase option?
Ángel Cano Fernández
With respect to the first question first, with what you said, we have our risks people, who are always tracking what's going on with very close contact with the people in Turkey. There is no unexpectable surprises around the corner.
We know what the risks are. They're pretty stable in the case of Garanti, in general as well, excellent performance compared to our peers there.
But the system as a whole isn't doing badly in terms of credit risk. So we don't see any indicators when we look at net additions, for example, to NPAs or anything that might suggest that our NPA ratio would go up or that our risks were going up for the year as a whole in Garanti.
But anyway, as I said before, the first quarter for Turkey has been a quarter where we've outperformed our expectations, taking into account the guidance given by the CEO of Garanti to the market. Now given the numbers from the first quarter, we can say we're doing better than expected for the year as a whole.
However, it is rather early to be sure of consolidating the improvement against budget or against the guidance. So we just really have to wait and see for another couple of quarters.
We've got -- with the results of the local elections, we can expect markets to relax more, recognizing prices, more stability in the exchange rates. The exchange rate with the most tension was in third and fourth quarter of 2012 -- 2013.
But with the local elections in Turkey, things should stabilize more in Turkey as a whole at macro level. We're not expecting to see any negative impacts on the basis of information we currently have over the next few quarters.
So that should be added to the fact that we don't have any information that leaves us to think that we should have to book any impairment in any way. I mean if it does, obviously, we will always follow the accounting standards.
But we don't foresee that happening. In strategic terms, how are we going to increase our stake there?
Well, you know what the windows are, March 2016, when we can exercise the option. And in the presentation, I said that our commitment to Turkey continues to be as deep as it always has been.
Maybe with respect to the last quarter last year, we can talk about more stability in the final weeks. That's also related to the outcome of the elections, we'll go on analyzing our strategy there to decide what the best timing is to increase our stake.
We're not in a hurry. In the short term, we're not going to feel under pressure to make a decision either way with more stability, above all political stability looking forward because in the macro economy, you've heard the data from Turkey.
We see that there is a high potential for growth and the demographic pyramid is very positive for the economy looking forward. The banking industry is doing well, more and more consolidation.
There's no new information I can give you because I think you're very well informed about what's happening there anyway. So obviously, we have to be prudent and wait and see.
But we feel that at the moment, it's all quite clear. In other words, because we've talked about the fact that August is going to be a key moment in Turkey because that's when they'll be holding their presidential elections.
Then we'll get additional information which will help us in our decision-making.
Luisa Gomez Bravo
We've now come to the final question, which has to do with the United States. From Fidentiis, we have a question about net interest income in the U.S.A.
in 2014 year-on-year.
Ángel Cano Fernández
[Spanish]
Luisa Gomez Bravo
The net interest income, what we're expecting for 2014?
Ángel Cano Fernández
In the presentation, I gave you some clues to all of this. If you looked, the lending was growing by over 14%, but the net interest income is closer to 5s.
It's true that last year, we saw how business volumes were around 10%, 11%, 12%, this gradual growth without wrecking the balanced diversification that we're creating within the U.S. portfolio.
If you remember, 5 years ago, CRE was an enormous weight in lending in the United States. And this has been offset and rebalanced.
And we now have a totally normal balance, and we've even grown that sector for the first quarter with positive growth now. And this growth will gradually pick up throughout the year.
It will not -- in 2014, we're not going to see the source of -- lending was not going to grow as much. I think we'll see that in 2015.
So in 2014, we'll increasingly see smaller falls in the customer spreads, particularly the yield from new loans that are being granted, which is still below the price of the stock. But I will repeat, with the slowdown in the fall in the customer spreads, which will enable us to increase the margins and our business volumes, it's going to be between 5% and 10% in growth in the course of the year.
And this will filter down to the operating income because although the amortization of the technological platforms will show growth in costs, these will grow far less than earnings. So we will see greater growth in the operating income throughout the year.
But this is the first quarter and in the coming quarters where I'm sure we're going to see a consolidation of our expectations before we see the material increase maybe in 2015. Maybe in the second half of 2015, I think we'll see this increase in interest rates that we think will happen.
And this will have a positive effect in our American business because of the positioning of our balance.
Luisa Gomez Bravo
Thank you very much, Ángel and Jaime. With this final question, we will close the presentation of the results for the first quarter.
Any questions that have -- we haven't been able to answer in this session plus the questions that come in from now on, we will answer in the course of the day. They will be answered by Investor Relations team.
Thank you very much.
Ángel Cano Fernández
I'd like to thank everybody, and I'll see you next quarter with good news and better news. Thank you very much.