Oct 30, 2016
Luisa Gómez Bravo
Good morning, everyone, and welcome to the Third Quarter 2016 Result Presentation of BBVA. I am Luisa Gómez Bravo, Global Head of Investor Relations, and here with me today are: Carlos Torres, Chief Executive Officer of the Group; and Jaime Sáenz de Tejada, our Chief Financial Officer.
Let me take the opportunity to remind you all that we have moved to a live Q&A this quarter. I am sure you all have received the calling numbers, but you may find them in the conference call tab in the webcast.
Although you already know this, please try to make the calls from the landlines and avoid using the speaker phone so that we can have - hear you as better as possible. For the sake of time, I would also like to please ask all of you to limit yourself to two questions per caller, so that we can attend as many participants as possible.
Of course, the IR team will remain available throughout the day to answer any pending questions. So I’ll hand over the call to Carlos.
Good morning, Carlos.
Carlos Torres Vila
Good morning, and thank you, Luisa. Good morning, everyone, and welcome to BBVA’s third quarter 2016 results presentation via webcast.
First of all, excuse my voice but I have a quite a cold this morning, so you might notice that along the presentation. Apart from that, we have had a very strong quarter as we had last quarter with €965 million attributable profit, which I think shows very well the strength of our business model and our portfolio which despite the environment, the low rates, the weakness in the markets, the uncertainties in various countries, the Brexit, Spanish political situation, the Turkey events, has shown that strength.
We continue to have positive trend in recurring revenue growing at 5.6% in constant euros versus the third quarter of last year with good cost controls. We have registered a one-off charge in the quarter of €94 million, which is a restructuring charge associated with our continued efforts in cost reduction and funded by net trading income.
The net trading income in the quarter is partly due to the sale of an additional 0.75% stake in CNCB and we sold that with €75 million capital gain. Risk indicators remain strong with reduction of NPLs of nearly €600 million versus June and low levels of provisioning and cost of risk of 0.9%.
Very good news also in capital, outstanding I would say capital generation in the quarter, 29 basis points, which means that we have achieved the 11% target that we have set for ourselves and clearly ahead of schedule on that count. We have a clear priority of optimizing our capital, clear focus on profitable growth, as I have insisted before, and I think that’s showing.
So overall, we have had €965 million, which represents 23.1% growth on current euros ex-corporate operations and 37.4% in constant euros versus a year-ago. Now beyond the good growth rates, I am particularly satisfied to see the effects of our focusing on two of the six strategic priorities; on capital and on efficiency, and I’ll talk more on that.
Looking at the underlying trends. Net interest income grows steadily at 5.5% and the quarter was also good in fees and commissions, growing at 6.1% and both items are of course very core to support our earnings.
Net trading income also was very significant with €577 million, which includes the €75 million I just alluded to on the CNCB disposal. But also we had some positive net trading income associated with markets and the ALCO portfolio.
That compares with a very low quarter a year ago, if you recall. Overall, very good total revenue growth at 12.7%.
Costs are growing however at 4.3%, so we have clear positive jaws this quarter and that reflects the cost controls. I mentioned three months ago that - and before as well, that efficiency is one of our strategic priorities and we are very committed to pushing that - pushing the entire organization to higher levels of efficiency.
And in fact, the €94 million restructuring charge in this quarter is yet another example of the initiatives that I will comment further along the presentation. Lower down the P&L, impairments are flat, behaving well, provisioning levels are lower, including the restructuring charges I just mentioned, so very solid and very good quarter results.
Breaking that down by geography illustrates well the value of our diversification and the strength of our portfolio with positive growth rates in the U.S. 2.3%; and Spain of 50%; Mexico maintaining strong double-digit growth; Turkey very impressive, 91.5%; and South America a decrease of 7.4%, that was due mostly to the impact of the non-deductible hyperinflation adjustment in Venezuela.
On the accumulated result for the nine months, €2,797 million, that’s a growth of 54.7% at current exchange rates and 98.1% at constant exchange rates. Ex-corporate operations, which you’ll recall were negative one year ago because we did the Garanti transaction, so if we strip that out, ex-corporate operations the growth rate in constant euros is 10.8%.
And as you can see, the trends in both revenues and costs are better than in prior quarters, in particular as it regards the evolution of costs and the strong pre-provision profit which reaches almost €8.9 billion and growing at nearly 7%. Below that impairments are also lower, asset provisions supporting the bottom line.
Moving onto the evolution of revenues. Net interest income of €4.3 billion, growing 3% quarter-on-quarter and 5.5% versus a year-ago, especially high growth in emerging markets.
We had a good quarter in fees, growing at 2.2% or 6.1% versus a year-ago in all areas except in Spain, and I will comment a bit more on that. But we had a good quarter in fees in the U.S.
and in South America, and of course this is another area of focus in the lower interest rate environment going forward. Net trading income, I commented it was strong at €590 million including the €75 million of CNCB and total revenue growth 12.7%, which is a slight decrease versus last quarter when we had the VISA divestment, if you recall.
So you can see that in the net trading income drop as well as in the gross income drop but very healthy 12.7% growth rate in revenues. Moving onto expenses.
I mentioned already this is one of the priorities, more so given the high pressure we have on the top line in some of the developed markets. So clearly costs are a management priority, and will continue to be.
As you can see on the slide, the costs have grown at a decreasing rate quarter-after-quarter as a result of the controls, the cost controls and the measures that we’re taking, and as a result, the operating jaws are closing. They are almost there crossing.
Costs growing at 7.4%. revenues at 7.1% for the Group.
Efficiency has improved in the year of 50 bps to 51.8%, remains below the peer group average which is well in excess of 65%. In September, we have completed the CatalunyaCaixa merger successfully and we plan to accelerate the integration, the cost synergies by one year.
In terms of the measures that we’re taking, the overall plan has several initiatives across different levers. The key ones would be around distribution model transformation, which is clearly related to the investments we’re making to transform our business model towards digital, and we’re already having specific measures that I will comment on.
Second important element is the operations model transformation; centralizing, digitizing, automating. There is huge potential here and we have defined a reference model and we’re implementing this by country.
Thirdly, the engineering models on the infrastructure and the software development, which is critical to enable our strategy. So we are adopting the new paradigms of Infrastructure-as-a-Service leveraging the cloud, as well as in the new way of developing software and DevOps.
And then there are others more associated with specific areas like in marketing or better use of our corporate premises and our organizational and workforce-related measures. And you can see in this slide a non-exhaustive illustration of some of the measures, for example, in Spain banking activity, we have already accomplished the integration of CatalunyaCaixa with a reduction of 436 branches, which have been closed already.
Additional 100 branches will be closed before the year end. We estimate 2,000 exits in Spain in the year in the banking activity.
We are working on the tellers’ optimization, reengineering of some of the back-offices and recoveries, SMEs. In the U.S., we had a significant streamlining of the CIB business.
In the corporate center, we’ve signed a few partnerships that you might have seen announced with the likes of Red Hat or Cisco or Amazon Web Services to incorporate some of those tools and improve our efficiency, and we will continue to implement further measures as we go on in the next few quarters and we will be sharing the results as we go. As a result of the revenues and cost trends, pre-provision profit reaches just above €3 billion, growing 23.3% versus a year-ago.
The drop of 6% in Spain is because of the weaker environment but it’s growing nicely in the U.S. 14%; in Mexico, 12%; Turkey, 81%; South America, 3%.
It’s a lower growth in South America because of the Colombia - the impact of the Colombian rate rise and also the Argentinean inflation, but very strong provision profit. And then asset quality continues to be good and the risk profile of the Group continues to show strength.
Impairments come down 2.3% or 6.3% in the quarter. Cost of risk is flat at very low levels, 0.9%.
NPLs are down by €2.1 billion, which leaves the NPL flat. Coverage is down from 74% to 72%.
That has a lot to do with just write-offs in Spain, but no change in the underlying coverage. So as you can see, we continue to perform better than our guidance in terms of cost of risk and that’s the case across most of our footprint.
On capital. Our capital ratio reached the 11% fully loaded at the end of September, which was the target for sometime next year, so clearly in advance.
Impressive 29 basis points capital generation. We’ve seen the contribution of earnings of 24 basis points, dividends detracting 8 basis points, so 16 basis points related to that organic part.
And then despite the fact that we had to see the downgrade of Turkey by Moody’s, which has had a negative impact of 15 basis points on our core capital ratio at the Group level. We have been able to grow 13%.
So compensate that and grow an additional 13%, so 28 basis points increase because of other elements. Part of that has to do with positive developments in the markets, to which we have some exposure in things like Telefónica stake or the CNCB stake, as well as the fixed income portfolios, sovereign and corporate.
But a significant part of those 28 basis points have to do with our efforts to allocate capital more efficiently and optimize how we do that. So focusing on growth that is profitable and really not deploying capital where that profitability is not there.
So that shows in a good evolution of risk-weighted assets, which has contributed significantly to the quarter evolution to the generation of capital in the quarter. Also, as in previous quarters, I would highlight the high quality of our capital.
We remain as one of the banks with the highest risk-weighted asset density and lower leverage. And I would remind you also that apart from reaching our targets, we have also filled the tier-1 and tier-2 buckets already.
Looking at other metrics that are also quite strategic. As in prior quarters, we have grown our digital customer base and our mobile customer base.
Digital customers are more than 17 million, growing 20% versus a year-ago. Mobile customers 11 million, growing 41% and with a penetration of 23%.
We continue with our efforts to drive digital sales also through digital channels, which is also one of our six priorities with constant monitoring and seeking for - looking for customer convenience and the best possible experience. As you can see, the percentage of all units that are sold digitally continues to grow every quarter and we are now between 15% and 25% of all sales, all unit sales are through digital channels over total sales, and that was only 10% or less, as you can see in 2015.
So not only does this represent more business, but it’s also a more efficient way to drive the business, and what’s more important with higher customer loyalty and satisfaction, which is another of our priorities to drive up our NPS. And we have continued to work on improving this aspect, the customer experience.
I’d highlight a few things this quarter. On one end on adapting our relationship model, a few examples, we’ve launched the Remote Manager model in Mexico that has been so successful in Spain.
We are also testing that in Turkey. We have in Turkey launched the mobile appointment system, so that you can take a branch appointment through the mobile phone.
In Argentina, OPINATOR to get customer feedback. Experiencia Única, which has had such tremendous positive impact in Mexico, we’ve exported that to Peru.
We’ve also continued to drive sales through digital channels, as I just mentioned, and launched new digital products and functionalities. Some examples are the instant payments in Spain mobile-to-mobile together with the rest of the industry, and it has been quite a great success in our particular case for sure; cross-selling of digital insurance in Mexico, the Signature Express product loan in the U.S.
We’ve had great success with BBVA Valora in Spain. So this is a great tool for clients and non-clients to help them make a decision when they are buying a home because this is a very easy tool that you can very quickly just find out the value of market - current market, going market value of any property in Spain.
And the results have been amazing. Even just after one month, more than half-a-million users have been using this tool and this has already led to a significant increase, for example, in mortgage applications, more than 40% increase in the mortgage applications, more than half of the applications are coming from this tool.
And what’s even more important is better funnel metrics of those applications. We also have good metrics in the PFM tools in Spain or in Mexico and other things in the U.S.
external account aggregations. In Peru, Cotizar, which is a pricing model for consumer and commercial loans, and a great use in Turkey of the mobile notifications in online banking.
Anyway I could go on, but let me move on to the area results. In Spain, banking activity had results of €317 million, a growth of 23.8% versus last year, a decline versus last quarter because of the VISA Europe disposal we had last quarter.
We have pressure on core revenues. Net interest income comes down 5% due to lower activity and lower ALCO contribution.
Fees and commissions are also down 9.5%, although our commissions here do not include those associated with insurance. If we were to include them here, as our competitors do, the drop would be 4.8%, not the 9.5%.
And for the nine months, accumulated versus last year, the drop would be 1.3%. This is because of the strong performance in the sales of insurance products in the network.
In Spain, control of costs continues, including the additional restructuring charge that has been registered. Good news on loan provisioning, and accumulated result of €936 million.
In activity, the leveraging continues. So the growth in commercial is not offsetting deleveraging in mortgages and in the public sector.
And then we have of course focus on profitable growth in Spain. Customer funds are also flat, but good trend in demand deposits growing 20%.
Key ratios. We have increased our spread by 8 bps as the cost of deposits has come down from 37 basis points to 30 basis points.
There might be still room to improve this as the Euribor has not been fully priced. Risk indicator is strong.
NPLs down by €112 million and the ratio drops to 5.9%. Cost of risk flat at a low 0.4%, and efficiency clearly it’s a management priority, we are working really hard on this and we will continue to do so.
As you can see, the cost growth has been coming down quarter-on-quarter, it’s at 6.6%, and that has basically to do with the CatalunyaCaixa integration, which accounts for almost all of that. And that integration we can say has been a complete success.
We expect €200 million cost synergies, which is a 6% of the current cost base and that will start to materialize by the end of this year and we’ve brought it forward by one year. And this implies, as you know, the closing of 436 branches in Catalunya and nearly 1,700 exits of the 2,000 that we estimate for the year in Spain.
Moving on to Real Estate. This quarter we continued to see positive market trends, demand increasing 13%, prices up 2%, housing permits are up 40%.
Positive evolution of all leading indicators. And we continue to reduce the negative impact of this activity in our P&L by 24%.
Our exposure is also down 13.7% and our goal is to keep reducing the negative impact. We expect that to continue overall in Spain.
Including both banking activity and real estate, the result for the quarter is €211 million, growing 50% versus a year-ago and for the nine months €621 million, growing almost 9%. Moving on to the U.S.
Quarterly results of €120 million, growing 2.3%. The drop versus last quarter is mostly related to the evolution of net trading income.
Recurring revenues, as you can see, have positive trend with net interest income growing as we see the repricing of the asset book on the back of the rise in the interest rates. And we had a good recovery in fees in the quarter supported by CIB business.
Costs are under control with 2% with a good evolution versus last quarter - versus the rate of growth that we had in prior quarters. Impairments also have a positive evolution.
We have the Shared National Credit review at Compass, was completed during the quarter and the impact was not material. And in the year, we are at €298 million attributable profit, down 24% due to the impairments we had in the oil and gas portfolio at the beginning of the year.
Regarding activity. Lending activity decreases.
It’s actually flat, as we focus on the more profitable segments in that search for profitability versus growth which is key to our strategy. We want to invest our capital to maximize our profitability.
Customer funds growing 1%, 1.2%, improving our mix to demand deposits. Key ratios in the U.S.
The customer spread has an upward trend. As I mentioned, the yields go up with the rise in interest rates.
And as you know, we have quite high sensitivity to interest rates hikes in the U.S. Risk indicators remained stable after the impacts we had in the first quarter, we are back to normal levels.
Cost of risk is better than expected at 0.4%, including that review by the Shared National Credit. And year-to-date, we are clearly better than guidance, which was 55 basis points.
And in the efficiency, this is what I was alluding to before, better trend in both revenues and in costs, which is improving the efficiency level. Clearly, it’s the worst efficiency we have within BBVA and we have some room to improve that but management is squarely focused on this, pushing down costs with the initiatives in CIB including the exits I referred to and there is further room but you can see that already the rates of growth are coming down.
In Turkey, despite the current environment in the country, the results for the third quarter are impressive, very good €141 million attributable profit growing 91%, and €464 million for the nine months, growing 46%. Comparison versus last quarter is affected by the VISA disposal in net trading income.
But core revenues are performing very well and net interest income growing 11% with good price management. And that would be even higher, if you recall, we have the reclassification of the costs over the swaps.
On a comparable basis, the growth of net interest income would be more like 22% in the quarter and 19% in the year. Fees are growing also at double-digit despite the regulatory pressure.
Even though they come down in the quarter because of the Turkish Airlines one-off we had in the second quarter. We don’t have net trading income in the quarter, but we’ve had a negative one last year, so that’s a positive in the comparison.
Cost control, positive jaws. Costs growing at 4% versus a year-ago, and this is including a €36 million, which is a one-off item associated with a change in the accounting for a brand at the consolidated level for BBVA.
So, very good evolution of costs and outstanding bottom line trend. In terms of activity, the loan growth slowing down to 8%, 7.4%, mainly explained by foreign currency lending, which is down, while loans in lira are growing still at 13% and we are gaining market share there with growth in the most profitable retail segments, so we’re seeing some deceleration but we are growing in the most profitable segments.
Key ratios in Turkey. The customer spread increases to 5.59% on the back of good price management and reduction in the cost of deposits due to the lower interest rates, which impact positively in Garanti’s case.
Risk indicators excellent; sound asset quality. Slight deceleration we have in the NPLs as some specific tickets are coming in in the corporate book, also some impact of the events of July and the aftermath of that.
But as you can see, the cost of risk is decreasing to 1.1% and it’s in line with our expectations, which we expect to close around those expectations for the year in line with last year. Efficiency, impressive cost evolution in the year with very open jaws and efficiency at 39.1%, which is a very good level - and that’s including, as I said, the €36 million extraordinary impact in the quarter.
Mexico. Another excellent quarter in Mexico, bottom line double-digit growth, good trends are maintained.
So we have €486 million net profits growing 13%, and on an accumulated basis €1.441 million, that’s a growth of 11%. So we have top line growing double digits and that goes through the entire P&L.
Core revenues - also fees are growing nicely, credit card consumer. And positive jaws, 10% versus 5.9% growth rates of revenues versus costs in the quarter.
Impairments are growing but in line with the activity growth rates, and as I say, the bottom line growing at more than 10% at constant euros. Maybe the biggest headwind here has been the FX.
The peso has depreciated significantly in the year almost 20%, so we have that impact in current euros that should be tampering down as the depreciation was significant after the summer of last year, so the comparison now for the last quarter shouldn’t be as dramatic. And no doubt, Bancomer continues to be the market leader in Mexico, the best ratios, profitability, ROE, ROA, NIMs, efficiency.
In terms of activity growth, still at high levels, double-digit despite the certain slowdown we’re seeing. We’re increasing 11% year-on-year supported by SME, by consumer and also by other commercial.
Even if the rate of growth of GDP might be slowing, what we have seen in the past few years is that Bancomer has been able to grow with GDP growth of 2%, 2.5%, has been able to grow double-digit, and that’s because of the under-penetrated system and the bankarization, progressive bankarization of an informal economy. Key ratios in Mexico.
Spreads remain high, interest rate hikes have not been translated much into the asset yield because of the competitive dynamics. Risk indicators are stable.
Cost of risk in line with our guidance of 350 basis points. We have an increase in the quarter due to the growth in the activity in SMEs and in consumer that I just mentioned.
And then excellent behavior in terms of efficiency, which is already a highest - one of the highest in the Group and it compares well with the system, 41% versus 56%. Positive jaws in all quarters this year, which is quite a contrast with what we had in 2015.
Finally in South America, we have had €179 million attributable profit. That’s a drop of 7% versus a year-ago with that impact of the hyperinflation in Venezuela that I mentioned.
Gross income is growing double-digit, but costs are growing very much as well, impacted by the Argentinean inflation. And we follow that income before taxes grows 5.9% quarter-on-quarter or 10.5% year-on-year.
Here we’ve also had, like in Mexico, the negative impact of the FX, which also in this case will be tampered as we move to the year-end, but all-in-all we’ll have an impact and we’ll probably be seeing a fall of around 15% in current euros for the entire ‘16 versus ‘15 results. In terms of activity.
Business activity is decelerating towards more sustainable levels, 9.5% in lending and 14% in consumer - in customer deposits, customer funds. Key ratios.
Customers spread - pressure on spreads in all countries, especially in Columbia because of the rising rates and the flattening curve, competition dynamics there as well and also in Chile with lower contribution of the UFs. Risk indicators, slight worsening, affected by the moderate macro growth, but very much in line with our expectations.
Good coverage, NPL ratio 2.8%; cost of risk in line, 1.2%, still in good levels. And good efficiency levels despite the inflationary economies, and the impact of depreciation that in this case since we have some dollar-denominated expenses has a negative impact.
So overall, concluding the presentation, we have what I think has been an excellent quarter. Solid revenue trends, increasing cost control efforts which will continue going forward very strongly, strong balance sheet, strong risk indicators heading the right way and capital levels ahead by almost a year.
I’m particularly satisfied, as I mentioned, with the good dynamics and the progress shown so far in our strategic priorities which I shared with all of you more than a year ago. The whole organization is aligned to deliver ambitiously in this regard on all six fronts.
As you have seen and I have explained, we’ve progressed very well in terms of developing product functionalities and adapting our distribution model to improve the customer experience, and that shows in our NPS. We have seen exponential growth in digital sales.
We have achieved our capital target to a large part because of our focus on optimizing capital and how we deploy it and the focus on profitability, which is priority number four. Cost control measures to gain efficiency which is number five.
So very happy with the results, lots of work going forward, but we are all very committed to succeed in the transformation journey and we will continue to focus on these priorities, on these six fronts. Particularly important in Spain, which remains a very challenging market because of the negative interest rate environment and the low lending volumes.
So reducing costs will be critical and ensuring the right use of our capital. It will be quite hard to grow our net interest income this year and fees and commissions will also remain under pressure this year.
So we will continue to focus on costs and more initiatives there. U.S.
should deliver better results than expected due to better cost of risk and the oil and gas exposure in Compass. Emerging markets will continue to be overall very supportive of growth, particularly in Mexico where Bancomer a clear leader.
And overall, the diversification will continue to give us, we believe, a competitive advantage, particularly amongst European banks since most of our footprint is in geographies where the macro perspectives are improving next year and rates are on the rise. And nothing more.
Thank you very much for your attention and we move on to the Q&A. Luisa?
Luisa Gómez Bravo
Thank you, Carlos. We are ready now to take the first question, please.
Operator
[Operator Instructions]. The first question comes from Carlos Cobo from Haitong Bank.
Please go ahead.
Carlos Cobo
Hi, good morning. Thank you very much for the presentation.
Just a couple of comments from my side. First one on the numbers and Spain’s net interest income down 2% in the quarter.
That seems to be following a 2% drop in loans, but at the same time, we’ve seen some margin expansion in terms of customer spread. So what are the dynamics do you have to stress here or what are the drivers here, and if you could elaborate on the outlook for 2017 and if you can share with us the maturities in the ALCO portfolio?
And the second one is a more general question on digitalization. You’ve shown a lot of initiatives in the presentation which are helpful for us to understand.
But in order to get more grip on your process and your achievements, what would you highlight as two, three key developments that is allowing you to improve business prospects? Where should we focus looking forward and how that’s going to be translated into better financial performance?
Thank you very much.
Luisa Gómez Bravo
Sorry, Carlos. The first question on NII, could you - we didn’t hear you quite well.
Was that regarding Spain or overall?
Carlos Cobo
Yes. So very quickly, the NII is down 2%.
It seems to be following the loan contraction in the quarter but within some customer spread expansion. So I’m just asking about what is this left that balances a equation there, what other negatives are there in the quarter.
Luisa Gómez Bravo
Okay, thank you.
Carlos Torres Vila
So Jaime, do you want to comment on that?
Jaime Sáenz de Tejada
Sure. Okay, yes, as Carlos says, NII was down in the quarter by 2.2% in Spain.
I think there is two factors here that went in the opposite direction. First of all, spreads.
Customer spreads were up by 8 basis points during the quarter. I think this is probably the best news in Spain.
Second, had to do with reduction in the customer funds. And one, and that’s probably the big positive in the quarter, thanks to increase in the loan yields.
In every single portfolio but the public sector book, front book spreads went up. That was true in a significant fashion in the mortgage portfolio.
This is a third quarter in a row in which this has happened. The same is true for SMEs that keep growing up.
And a slight increase in the CIB portfolio. The consumer portfolio also in the quarter behaved fairly well.
So clearly this is something that is a changing trend that we started to see in the fourth quarter of last year and it’s remaining very resilient. It is true that the room that we have to continue to improve funding cost is not as high as it was in the past, but I think that is something that should continue to help us in the quarters ahead.
In terms of volume, we knew after the very good second quarter that we had that certain transactions were one-offs that would not be recurrent. That was especially true in the public sector book and some large CIB tickets and those are precisely the areas where in the second quarter we saw more decreases.
The public sector book went down by around €1.5 billion. The same is true for the mortgage portfolio and a little bit less in the SME book.
So I think in general we can say that volumes will not grow during 2016. I think what we’ve been able to achieve until September is a good proxy of where we think we would end the year, but I do believe that the customer spread will continue to go up.
Also the NII in the quarter was affected - and that will be my last point - by the contribution from the ALCO portfolio. The ALCO went down in the quarter by €2.7 billion.
Year-on-year it’s down by €8 billion. So we had less contribution in this quarter around €16 million versus the second.
Carlos Torres Vila
Thank you, Jaime. On the second question regarding the main initiatives in digital.
It’s really mostly short-term about driving sales and making servicing more efficient and better for our customers, so that is both ensuring that our customers can do things on their own, so the do-it-yourself, the DIY, and we’re working hard in all countries to really DIY everything, which both increases efficiency, increases sales, as well as improves customer satisfaction. Another element of that short-term effort is to develop tools for our colleagues to be more efficient in serving customers as well.
A great example of that is the development of the STEP [ph] in Garanti Bank in Turkey, which is really taking the branch platform anywhere through any device that’s connected to the internet, so you can take your tablet and you can basically do everything you can do at the branch from the tablet. Longer term however where we see the impact of digital is beyond that.
It’s in really - adding value in a different way, leveraging data in the benefit of our customers and really helping both businesses and individuals make better decisions in their financial lives. That’s the route we’re working on.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Carlos Peixoto from BPI. Please go ahead.
Carlos Peixoto
Hello, good morning. So my question is actually on the evolution of capital and you already mentioned - already given some details on the evolution of fully loaded Core Tier-I capital, but I was wondering if you could give us the specific impacts from the mark-to-market available for sale portfolio, the FX impact, and most importantly, the component which relates with the measures that you mentioned to optimize capital allocation?
And within that same framework, is the reduction in risk-weighted assets in Spain associated to that or only to volumes, and also why are the risk-weighted assets at the corporate center moving up? Still on the capital side, I just wanted to ask whether you already have some indications on SREP requirements or what are your expectations regarding the SREP requirements for 2017?
Thank you.
Carlos Torres Vila
Thank you, Carlos. So, yes, I already provided some details, so the increase in 20 bps includes the negative impact of 15 basis points because of the downgrade in Turkey.
So if we then consider the 24 bps of earnings minus the 8 bps in dividends, we’re left with another 28 basis points for other effects. So a few things there.
One has to do with the market movements, which have been positive in the quarter. So Telefónica stake, CNCB and also the fixed income portfolios, as I was saying, which support us with 7 basis points.
And we have the risk-weighted asset evolution that you alluded to, that includes both the impact of our added focus on return, which is constant and really a critical priority for all business units and that has led us to grow in the most profitability segments and really let go of volumes, where really the return on the flow is not there. On the corporate center, there has been the increase associated mostly with the Telefónica stake.
And in terms of the SREP, as you know, we have not yet received the communication from the supervisor, but it will be coming and we had our dialogs with them and we don’t expect much surprise. We are clearly one of the banks with low-risk profile, and given the results of the stress test and the dialog so far, we don’t expect many changes.
Also the change in methodology in terms of breaking down the Pillar 2 in two components will be supportive of the distance to MDA which would be supportive of tier-I instruments, but I wouldn’t expect much surprise in that decision from that dialog. I don’t know, Jaime, if you wanted to add anything on the capital evolution?
Jaime Sáenz de Tejada
No, I don’t think so.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Mario Ropero from Fidentiis. Please go ahead.
Mario Ropero
Hello, good morning. Thank you taking my questions.
I have two questions again on NII in Spain and costs generally, all but mostly in Spain. On cost firstly, on the - out of the €94 million charge you booked, where did you book it?
Does this include the €53 million charge you mentioned also in Spain? Also in Spain, there is €125 million non-credit charge in the quarter.
Does this include additional restructuring charges? And then beyond this quarter, are we going to see more restructuring charges?
And related to this charges, are we going to see cost savings beyond the €200 million cost synergies from CatalunyaCaixa. Can you quantify the additional cost savings, please?
And then on NII, is simply to know, when do you expect basically NII to bottom in Spain?
Jaime Sáenz de Tejada
Okay. It’s not easy to understand the questions.
Okay, so I’ll try to do my best. I think you’ve asked regarding the €94 million charge off that we did this quarter.
As Carlos said during the call, we’ve taken advantage of the fact that we’ve had extraordinary gains in the CNCB stake to book these charge that had to do mainly with issues that are taking place at this very moment. The €94 million are booked; €53 million in Spain and the remainder €41 million at the corporate center level.
We do not expect significant additional charges in the fourth quarter. We might do some small adjustments, but the impact should not be significant.
And the payout of disinvestment we believe would be around two years, okay. So the savings associated will be roughly between €45 million and €50 million per annum.
Carlos Torres Vila
Yes, and just to make it clear, we would expect to continue to reduce costs going forward, absolutely, and we have many things going on and this is a continuous effort. And as I said in the call - in the presentation, if anywhere, this is where it’s most important that we become more efficient given the weakness of volumes and the pressures on NIM because of the low rates.
So digital will help us tremendously and all the things we’re doing will drive efficiency and further cost reduction will be in the €200 million of the CatalunyaCaixa.
Jaime Sáenz de Tejada
And regarding the second question, regarding NII, I think what we are expecting is as volumes will more or less remain as they have been, I think the year-to-date reduction I think is a good proxy of where we should end. The same is true for NII.
So that similar trend is what we are expecting for 2016. And as you know, we don’t give guidance beyond the year.
I want to take advantage of this question to also answer Carlos Cobo’s previous question that bit reminded that I have an answer, which is a maturity of the - the average maturity of the ALCO portfolio, which it is 3.5 years.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Jose Abad from Goldman Sachs. Please go ahead.
Jose Abad
Hello. Good morning and thank you, Carlos, from the presentation.
Three questions from my side. The first question is that very clear the key takeaway from today is your strong capital position, so should we expect any change in your dividend policy going forward, particularly in the cash payout ratio going forward?
Second question is regarding Real Estate in Spain. You are clearly best in class in terms of coverage of around 55% of your real estate exposure, which means that you have your assets marked at around 45%.
And given the virtual cycle in which we are with higher transactions and higher prices, what is your estimate of the expected loss of the real estate portfolio, depending on what the actual expected loss is actually below your coverage ratio. And in light of this, what’s your view regarding a potential for capital gains going forward?
And the last question is on Mexico. You mentioned that quite clearly before now we have seen some slowdown in activity lately, leading indicators are slowing down, NPLs going up a bit in certain segments, competitive environment high.
Could you elaborate a bit further on your vision in Mexico not just in terms of loan growth but also in terms of margins and cost of risk going forward? Thank you very much.
Carlos Torres Vila
Okay, let me take the first one on capital and then you take the others, Jaime. On capital, yes, we are in a good place undoubtedly as we have reached the 11% target we had set ourselves for next year.
Having said that, there is still uncertainties in the coming future - in the short-term coming future regarding some of the regulatory changes that are being talked about in Basel and we hope there would be a resolution there soon so the uncertainty doesn’t drag any longer. We are well positioned given our high risk-weights and the low usage of internal models versus our peers, and the fact that we are mostly a credit risk exposed institution.
Having said that, however there are elements there that could go in ways that have some material impact, although again we do believe that we are better placed than others. Also, we have the IFRS 9 and there is some uncertainty around how that will impact capital, if at all, or whether the additional provisions that might be required would be compensated with lower capital requirements.
And then we have of course the volatility or capital ratio which sometimes contributes with positive impact in the ratio and other times it goes the other way. So I think we ought to be prudent.
We are in a good place as we are looking for next year and for the year end, but we are not yet ready to change what we have guided in terms of our dividend policy and our capital objective. It continues to be 11% next year given where we think the requirements will be coming out of the SREP and the distances we want to have to those requirements on a fully-loaded basis.
And as we have guided, we have the intention of having two cash dividends, two scrip dividends and progressively reducing the scrips to move to a full cash dividend payout of 35% to 40%. Jaime, you want to take the real estate question and the Mexico?
Jaime Sáenz de Tejada
Sure. As you say, we are best in class in provisioning.
In coverage ratio, we are at around 58%, 59%. Losses versus last year are down by 24% in year-on-year, and that I think is a good proxy of how we view the negative contribution of real estate evolving going forward.
As you said, the underlying of the business - of the market in general is good in Spain in terms of units sold, so overall the market is selling 10% more units this year. Prices are up on average, 3%.
Building permits are up by over 40%. So clearly the underlying of the real estate sector in Spain is improving significantly.
We’re selling above our book value, okay. But as we’ve always said, although some potential write-backs could be expected those are mainly concentrated on the land portfolio but in order to achieve them, we need to build something on top.
So it will be a long-term proposition. What I think is important is that the negative marginal contribution of the real estate unit keeps going down.
The net exposure is down again in the quarter, and in the year, it’s already down by €1.5 billion more or less and it’s down to 11.1%. So clearly at very low levels.
As you say, Mexico - or turning now to Mexico. Mexico had a very low GDP growth rate in the first half of the year, below 1%.
So we are clearly expecting a much lower growth rate in the year from what it was a case at the beginning of the year. Regardless of that, Bancomer keeps operating around the guidance that we gave at the beginning of the year.
Loan growth is still 11% year-on-year. It’s true, it’s slightly lower than what we saw as of June but there were some one-off deals that affected that number.
I think overall in terms of spreads, we saw a very good not only quarter, spreads are up –customer spreads are up by 2 basis points and they are flat year-on-year, so clearly a very resilient customer spread at 10.7%. And the fact that we are experiencing a slight change in mix in which consumer loans and the commercial segment is increasing its weight in the overall asset mix means that slightly higher cost of risk should be expected, that is what is already happening as of the third quarter of the year.
But we will end the year below the guidance that we gave at the beginning of the year, which was €350 million. We don’t expect to reach it.
So overall, I think, although with a slower GDP growth rate than initially expected, Mexico continues to contribute at double-digit growth rates and we are very confident that those are sustainable rates going forward. The FX has clearly been the negative impact when we translate these growth rates into the consolidated balance sheet.
Although we’ve seen fairly good recovery of the peso in the last few weeks having a good correlation with, I guess, Clinton’s success in the next U.S. election, we do have some hedges in place to try to minimize both the capital impact of that exchange rate volatility and also the P&L impact.
In the case of the capital, we are hedged at 90%, so the sensitivity to depreciation of the peso is almost nil.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.
Alvaro Serrano
Hi. Just two quick questions.
One of them is a follow-up on the capital answer you gave. Not sure I understood what the capital build from here is going to be.
If you can give us some color there and also touch on - I remember there is a few regions where you are expecting sort of regulatory equivalence from the ECB. One was Turkey.
Is that still something you expect, and when could we expect this? And the second question is on Mexico again.
Obviously rates - the Central Bank has raised rates again in the quarter. What do you think - can you update us on the impact and when could that last rate increase impact margins, is it something for next quarter or next year, just give us a bit of flavor on the impact there?
Carlos Torres Vila
Yes, on capital, the build-up going forward is - I don’t think you can, by any means, extrapolate what we have seen this quarter. Capital efficiency and the proper allocation of that scare resource continues to be one of the six priorities and will continue to be forefront of our decision-making from planning and allocating capital all the way to executing the admission of operations and how we judge the new business, the flow.
So we make really sure that 100% of what we underwrite going forward does meet the right profitability criteria. So we will have that sustained push that that represent, and I think that’s very much embedded in all business units and it showed and it will continue to show.
Having said that, however this was quite an extraordinary quarter in terms of the capital build-up because of the market effects as well and the lower volume growth in Spain and in the U.S. In terms of the equivalence, it’s true we’re waiting for a few countries, the most advanced of which is Turkey because the EBA has already approved that and which is pending a decision from the European Union, which is more of a formal decision than a content decision and hopefully that will be coming in the first quarter of next year or something but we’ve been waiting for a few months already, so it’s hard to know.
The impact of that would be around 15 basis points of additional support to our capital ratio. And on Mexico, I think, Jamie, already commented, but maybe you want to add?
Jaime Sáenz de Tejada
Yes. The positive sensitivity we have to a 200 basis points increase, parallel increase in the curve is 2%.
I think that we’re not seeing that much positive impact as of now, but it is helping the customer spread. I think this is clearly one of the reasons why customer spread is behaving so well.
Don’t forget that 50% of our mortgage portfolio in general is fixed rate in Mexico.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Francisco Riquel from N+1 Equities. Please go ahead.
Francisco Riquel
Yes, hello. Thank you for taking my questions.
And a quick follow-up on capital and NII. On capital, if you can please quantify the weight of AFS gains in the capital ratios and in fully-loaded ratios?
And second, if you can also elaborate a bit more on your capital allocation measures because when I see the densities, risk-weightings in terms of assets or net loans, they have actually increased quarter-on-quarter, so I feel that you maybe growing risk-weighted assets less than I expected. So if you can comment here?
And then on the loan yields, if you can elaborate a bit more. In Spain, the loan yield is not trending down despite the lower Euribor rates as we have seen it for other peers, so if you can give more color here, if you have any lagging impact that should catch-up in coming quarters, you can comment more on front-book, back-book dynamics?
And also in Mexico, the loan yield despite the increase in rates and the mix, better mix, you also mentioned competition pressures, so you can elaborate a bit more here as well. Thank you.
Carlos Torres Vila
Okay. So on capital, the - let me comment on the allocation and the density and the growth of risk-weighted assets, etcetera, which is very much related to the second question in terms of loan yields.
So the exercise it’s really about the decision - as I was saying, the decision-making from planning all the way to the admitting sort of the admission of the risk that we’re focusing on profitability. That means that we absolutely have lower growth rates because we are giving up business that is not profitable on a risk- adjusted basis on return on capital.
And that has had an impact also in sustaining yields, which has supported our pricing policies in Spain. And I think we are different than other competitors here in that we are squarely focused on that return, giving up volume if the return is not there, given the environment and there is quite a lot of competitive pressure.
And I think that’s what explains the stability of our loan yield in Spain even in that environment. So, yes, we’re growing risk-weighted assets less than you might have expected.
A big part of the reason is that focus on return to make sure that we grow in the profitable segments. So it’s not so much that we’ve been tweaking models or doing other tricks.
On the AFS gains, you want to comment?
Jaime Sáenz de Tejada
They mainly have to do with increase in the CNCB and Telefónica stake. Telefónica went up by 7%, as you know, and CNCB by 8%.
Carlos Torres Vila
But I think the question is how much of a capital ratio…
Jaime Sáenz de Tejada
Between 7 basis points and 10 basis points, as you’ve pointed out.
Carlos Torres Vila
Well, that’s the increase, but I think the question is really on the stock of the capital ratio, how much is actually - isn’t that your question, Francisco?
Francisco Riquel
Yes, it is.
Jaime Sáenz de Tejada
You want the amount in millions that shareholding funds went…
Carlos Torres Vila
Okay.
Jaime Sáenz de Tejada
It’s €380 million.
Francisco Riquel
Okay. [indiscernible] the amount.
Thank you.
Carlos Torres Vila
Okay, we cannot hear very well. So let’s move on to the last question, the Mexico?
Jaime Sáenz de Tejada
I think I mainly answered the question in Mexico. We had a better mix, a more profitable mix.
We’ve increased our weighting by 1 percentage point of consumer loan, by another 1 percentage point of commercial loans. That’s a more profitable mix that is allowing us to maintain year-on-year.
The customer spread at around 10.7%, 2 basis points up versus the second quarter. So I think those are very good dynamics even if we have to realize that we do have increased competition, I think in general the strongest banks are behaving better than what they did in the past.
But as Carlos said before, we’re focusing on profitable growth in Mexico, and Mexico is behaving extremely well.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Andrea Unzueta from Credit Suisse. Please go ahead.
Andrea Unzueta
Hi, good morning. My first question is on Mexico.
Given that you are increasing your consumer and SME books, are you comfortable with the normalized 350 basis points cost of risk into 2017 or ‘18, or what would the normalized level of the new mix become? And then on capital - and I’m sorry, I’m going back to this.
But I was struggling to reconcile the numbers. If I look at your valuation adjustment, they actually are increasingly negative by €350 million and I understand the improvement in Telefónica would be within that number.
So if you could give us more clarity on what items of your valuation adjustments are not included on your core equity? Thank you.
Jaime Sáenz de Tejada
Okay, I do think that cost of risk in Mexico can be expected to be around 350 basis points during the next few years, if of course the GDP growth rate stays as the one that we’re expecting. Okay.
Now let’s answer the valuation adjustments. We had a positive contribution of the - in both the equity - the equity portfolios and the fixed income portfolios, okay.
So the AFS portfolios contributed by a little over €200 million and we had a negative FX impact of a little bit above €500 million. And that’s what justifies the decrease in valuation adjustments of €350 million in the quarter.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Daragh Quinn from KBW. Please go ahead.
Daragh Quinn
Hi, good morning. Thanks for the presentation and for taking live questions again.
Most of my questions have been answered but just one follow-up question on the U.S. As you highlighted in the presentation, a very high cost to income ratio and we just like to hear your views on whether you think it’s a revenue problem or a cost problem and what specific actions will you be taking to lower that cost to income ratio?
Thank you
Carlos Torres Vila
Thank you, Daragh. It is both actually.
I think we have and we’re working on driving revenue. I think digital - as I mentioned earlier, the efforts we’re doing in digital will support both driving additional sales and we have low productivity levels in our branch network in the U.S.
than we have in the rest of the Group very clearly. So the good news is that the percentage of digital sales is growing steadily in the U.S.
and we had great successes, like I commented on the Signature Express Loan product. And as we continue to extend the same capability to other product lines, we will be supporting productivity at the branch also with the adoption of tools like the STEP [ph] platform in Turkey and we’re working on the same for the U.S.
That will help to be more productive, leveraging technology. But then on the cost side as well.
And there, I think all six of the main levers that I described that apply to the Group apply very much to the U.S., the first being the distribution model, which needs to be rationalized like elsewhere as our customers go less to the branch and do things themselves on their screens. The operations model, so tons of opportunity there to automate and centralize and robotize.
And the engineering model in terms of moving to cloud-based infrastructure and new ways of developing software. We’ve built up quite a nice team in Dallas that is precisely doing that in terms of software development.
And then the other ones that I mentioned also in terms of the organization and workforce measures, the marketing and the corporate premises that we have also optimized the space and we have freed up some buildings that will also support the cost initiatives in the U.S. So quite a comprehensive program that will bring down our cost to income in a significant way going forward.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Rohith Chandra-Rajan from Barclays. Please go ahead.
Rohith Chandra-Rajan
Hi. Thank you.
Good morning. Just had a few points of clarification, please, mainly on capital, but a couple also on Spain interest income.
So just on the capital, particularly built in the quarter, the 28 basis points - I think you broke down into 8 basis points for market activity. And am I right - is my understanding correct that the other 20 basis points is mainly from lower business volumes as you prioritize high returning business?
And then secondly on capital progression, just to check my understanding that your expectation is that you will continue to build capital, and as well as moving towards a progressively more cash dividend. So that was on capital.
And finally just on Spain NII. Could you give us the current new business rates on deposits and also what the yield is on the ALCO book, please?
Carlos Torres Vila
So on capital, yes, the impacts of the lower risk-weighted assets is more like 13 basis points in the quarter of contribution because of that. So the rest of other effects have to do with the movements in the markets and the available for sale and there is other movements in terms of the minorities, the exchange rate and then smaller things that contribute.
So the math is not exactly like you said but approximately we have around 9 basis points in terms of market movements approximately. And then there is the rest of effects really that is hard to pinpoint one in particular.
And, yes, absolutely going forward, as I said, we are in a good place. We’re prudent in terms of changing our policies but we have already guided that we will progressively be reducing the scrip and moving to a full cash dividend going forward in the coming years.
And we will probably give more details as to what that looks like in our next results presentation. But yes, the cash dividend - the objective is to reach a cash dividend of 35% to 40% payout in the steady state.
Jaime Sáenz de Tejada
Okay. Regarding the yield of the ALCO portfolio is 2.5%.
And regarding the evolution of the 100% front-book, you can have in the annex. We’re currently giving time deposits out at 4 basis points, and as I said before, the overall deposit base including current accounts have decrease by 7 basis points in the quarter.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.
Ignacio Ulargui
Hi, good morning, gentlemen. Most of my questions has been answered, but just wanted to get a bit of color on what’s the interest rate sensitivity of the U.S.
business? Thanks.
Jaime Sáenz de Tejada
Okay. The sensitivity is 9.2% positive to an increase of 100 basis points in the curve, a flat increase in the curve as you know, that’s not necessarily happening, okay.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Sofie Peterzens from J.P. Morgan.
Please go ahead.
Sofie Peterzens
Yes, hi. Here is Sofie Peterzens from JP Morgan.
Just a clarification on the AFS gains. So end of the second quarter, you guided that you have €1.2 billion of AFS gains included in capital.
Did I understand correctly that you now have an addition €380 million in the AFS gain, i.e. taking your total AFS gains included in capital to around €1.6 billion, which would be around 40 basis points of capital?
And my second question is on Turkey. How do you view Turkey?
How should we think about your commitment to Turkey? Do you have any plans of increasing or reducing your presence in Turkey?
And lastly, the potential change to the CCAR rules in the U.S. Does it have any impact on BBVA, especially in the cost line?
Thank you.
Carlos Torres Vila
I’m not sure I understood the last one.
Sofie Peterzens
So basically the Fed Governor has said that banks with under 250 billion of assets in the U.S. might be excluded from the, call it, the CCAR in the U.S.
So I was just wondering BBVA would be in this case excluded, does it have any impact potentially on BBVA?
Carlos Torres Vila
Either way, it’s not really much of an issue for us given that we have had quite a strong review in that comprehensive capital assessment, and therefore either way we’re fine. In terms of Turkey, we have already indicated in the past we are very happy with our stake and Garanti is a critical part of our portfolio, very strategic.
The country has long-term potential because of the demographics. It’s going through some uncertainties because of the geopolitical events and the coup that took place in mid-July.
But we remain fully committed to that bank, which is really demonstrating very strong performance and we believe in the long-term potential. Right now we are also very happy with the 40% stake and we have no plans to change that in the near future given also how large Garanti is and the weight it already has in our allocation of capital at the Group-wide level.
In terms the weight of the AFS gains on the capital ratio, Jaime, if you can clarify?
Jaime Sáenz de Tejada
The number is - so, yes, it’s €1.9 billion, okay, is what the available for sale portfolios contribute to valuation at…
Carlos Torres Vila
Right, so basically Sofie’s interpretation was the right one if I understand correctly?
Jaime Sáenz de Tejada
Yes, it is.
Carlos Torres Vila
Yes.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Britta Schmidt from Autonomous Research. Please go ahead.
Britta Schmidt
Yes, hi there. Good morning.
I would like to recap on the trends in Spain real quick. So if I understand it correctly, both the flat lending yield as well as the RWA decline have to do with rolling off less profitable business.
Could you give us an indication what segment that regarded primarily and do you expect this to continue in the future? So should we expect that the lending yield will benefit from business rolling off but therefore business volumes being relatively muted, and does it mean that you expect to perhaps go a little bit less aggressive than some of your peers?
And the second one is just a clarification. Did you accrue any TLTRO income in [indiscernible] or did you expect to do it in the future, if you didn’t?
Luisa Gómez Bravo
Britta, I am afraid we have not understand…
Carlos Torres Vila
Okay. We couldn’t hear well, yes.
Jaime Sáenz de Tejada
I think you said that you wanted some more colors on volumes in Spain and TLTRO?
Britta Schmidt
Can you - maybe you can understand me better now. There was a lot of feedback on the line.
Luisa Gómez Bravo
It’s what - could you repeat the first question more slowly perhaps?
Britta Schmidt
My question was regarding the trends in Spain on RWAs as well as the lending yield. If I understand correctly, the flat lending yield, as well as the RWA decline, both have to do with the fact that less profitable business was abandoned.
Do you expect this trend to continue, and does it mean that you will grow less aggressive than peers? And the second question was whether Q3 included any TLTRO 2 income?
Jaime Sáenz de Tejada
Okay. On the second question, no TLTRO is included in the income, okay.
We are paying 0% for that and that is what is accounted on our P&L. Regarding volume growth in Spain, it’s true that our RWAs, as Carlos said before, are down in the quarter.
Those are because of two reasons. The first one is quarter-on-quarter loans went down, okay, and also we had some reductions in the weighting of certain products.
The main reduction took place, as I said before, in the mortgage portfolio. That is a trend that will probably continue into 2017.
We don’t expect that portfolio to increase until probably the end of 2017. We will continue to see reductions in the public sector book, although probably not as high next year as we have seen in 2016.
And now that we are expecting probably a better political situation, we do expect a recovery in the growth rate in the commercial and SME segments. We believe that the consumer book will continue to show very positive growth rates.
Luisa Gómez Bravo
Thank you. Next question, please?
Operator
The next question comes from Andrea Filtri from Mediobanca. Please go ahead.
Andrea Filtri
Yes, good morning. Most of my questions have already been answered.
I just wonder, how much capital free-up would you have today if implementation of regulatory equivalence would have been now in Turkey?
Carlos Torres Vila
Yes, I said already around 15 basis points.
Luisa Gómez Bravo
Thank you. I’m afraid we are running out of time, so we have time for one more question, please.
Operator
The next question comes from Benjie Creelan-Sandford from Jefferies. Please go ahead.
Benjie Creelan-Sandford
Yes, good morning, everyone. Just two quick questions from my side.
First of all, if we look at Mexico, the rate of cost growth has been continuing to slow in recent quarters. So I was just wondering whether you see scope for that rate of growth to slow further or if you think we’re reaching a floor.
And then secondly, in the U.S., margins obviously up quite strongly quarter-on-quarter in the U.S. I was wondering if you could just give a bit more detail in terms of the different drivers of that, and if we leave aside interest rate rises in the U.S.
whether you see any scope for further improvement in the underlying margin going forward. Thanks.
Jaime Sáenz de Tejada
Okay, we are expecting growth in Bancomer to remain more or less the same and we continue to expect double-digit growth rates going forward, as long as the Mexican GDP remains at around the 2% level, as I’ve answered before. As Carlos said during the call, we are focusing on profitable growth everywhere and I think that’s especially true in the U.S.
We had very strong core revenue growth quarter-on-quarter in the third quarter of this year both in NII and in fee and commission income, clearly not been affected by the reduction in the loan growth rate, and that is because both customer spreads and NIMs behaved very well once again. Customer spreads were up by 4 basis points in the quarter, 15 basis points year-on-year, and NIMs also were very positive.
I think on interest rate sensitivity, I already answered.
Luisa Gómez Bravo
Okay. Jaime, wants to take one more call, so please one last call.
Thank you.
Operator
The next question comes from Adrian Cighi from RBC. Please go ahead.
Adrian Cighi
Hi there. Thank you very much for taking my questions.
One quick clarification on capital and one on Turkey. On capital, earlier on the call, you mentioned the volatility of the capital is one of the key drivers for your caution.
Do you see the need for management to maintain a further safety buffer above and beyond the 11% target, and if so, what would you consider the additional buffer to be? And on Turkey, you’ve obviously increased spreads by 33 basis points in the quarter.
How do you see this developing in the coming quarters, and do you see scope for a further expansion? Thank you.
Carlos Torres Vila
So on capital, we do not foresee the need to have a further safety buffer. No, that’s - so we maintain the view that the 11% objective we set for ourselves is an adequate capital level.
We had an extraordinary quarter. We just don’t want to make a quick decision to change anything.
We just want to see how those uncertainties resolve, which we’re going to have some light soon I think at least on some of those and then we would be better ready to make some decisions. On Turkey, do you want to comment, Jaime?
Jaime Sáenz de Tejada
Yes, we had a very good quarter in terms of customer spreads. They went up by 33 basis points.
Clearly those are - growth rates are not sustainable going forward, although yesterday in Garanti’s results presentation, they were fairly positive about NIM evolution also beyond 2016 and into 2017.
Adrian Cighi
Perfect. Thank you.
Luisa Gómez Bravo
Thank you all. I think that we’ve spent time of the call.
If there are any pending questions, as you know, IR will be happy to take the questions after this presentation .So thank you, Jaime. Thank you, Carlos.
And thank you everybody for participating in this call.
Carlos Torres Vila
Thank you.