Apr 29, 2019
Gloria Couceiro
Good afternoon, everyone, and welcome to BBVA First Quarter 2019 Results Presentation. I'm Gloria Couceiro, Head of Investor Relations.
And here with me today is Onur Genç, Chief Executive Officer of the Group, and Jaime Sáenz de Tejada, BBVA Group CFO. As in previous quarter, Onur will begin with the presentation of group's results and then Jaime will review the business areas.
We will move straight to the live Q&A session after that. As always, let me remind you that we would appreciate all the participants to try to make the calls from the landlines and avoid using the speakerphone.
And now I will turn it over to Onur to start with the presentation.
Onur Genç
Thank you, Gloria. Good afternoon to everyone and welcome to the presentation of BBVA's 2019 first quarter results.
As Gloria mentioned, I would comment on the group's evolution and Jaime will focus on the separate business areas. So, starting with slide number 3.
We have started the year with net attributable profit of €1.164 billion. This represents a 9.8% decline versus the first quarter of last year given the sale of BBVA Chile in July 2018 though.
If we exclude BBVA Chile recurrent operations, the decline would have been 7.7%. With respect to the previous quarter though namely the fourth quarter 2018, the net attributable profit, it grew at 16.2%.
Two other key messages to highlight on this slide, as we have started a few quarters ago, first in the middle of the page, you see that we maintain our clear focus on creating value for our shareholders. In the quarter that's why we have this metric in this documentation and that's why we have it in our management scorecards.
In the quarter, we increased our tangible book value per share plus dividends by 4%. And this increase this quarter is the highest since the second quarter of 2014.
The evolution on a year-over-year basis is also very strong, very impressive with a double-digit growth rate of 11% as you see on the page. On the right-hand side of the page, as you see, what we also would like to highlight is our capital position.
Despite recognizing the full negative impact of 11 bps due to IFRS 16 in this quarter, our capital position inched up slightly by one bps towards our goal of 11.50% to 12%, so net-net 12 bps increase in capital position in the first quarter 2019. Moving on to slide number 4 and to be more specific on the quarter.
On slide number 4, we would like to highlight the evolution of some of our core performance metrics. So the year-over-year variations, starting from this page, they will exclude BBVA Chile.
As you all know, as I said, we sold our Chilean operations, the banking operations, in July 2018. So there were recurrent operations in the first quarter and the second quarter of 2018 in the numbers.
So if you exclude that to be able to have a more apples-to-apples comparison, there are a few messages coming out very clearly. The first message: Number one, we would like to highlight the strong, very strong actually growth in core revenues.
Net interest income plus fees, they have grown by 8% in constant euros year-over-year. Second: Number two, the good performance on the top part of the P&L on the core revenue side coupled with our continued focus on efficiency has led us to show a double-digit growth on operating income, double-digit growth in operating income by 10.2%.
And this helped us reduce the cost to income ratio by 118 bps to 48.1%. This C&I ratio, cost to income ratio, it represents the lowest quarterly cost to income ratio since the third quarter of 2012.
Number three on the page, the risk indicators they continue to be sound with a good trend in the NPL ratio reduction. NPL ratio now stands at 3.94 dropping 53 bps versus first quarter last year.
And another positive message, an increase of 110 bps in our coverage ratio and our coverage ratio now stands at 74%. Although, we have seen some pickup in our cost of risk versus the same period last year and then same period last year was an exceptionally low cost of risk quarter, it remains better than our expectations.
And for 2019, we expect cost of risk to remain around this number at the aggregated level. Number four on the same page, on slide number 4, the resilient capital position.
I mentioned it also in the first opening page, our capital position CET1 fully-loaded stands at 11.35%. It's an increase of 1 bps in the quarter absorbing the full 11 bps negative impact from IFRS 16.
Number five on the page, again, as partially mentioned on the opening page, we remained focused on creating value for our shareholders. In terms of profitability and return metrics, BBVA is a leader in the European banking industry.
And our return on tangible equity remains very strong at 11.9%. A very strong number to note also, again, this quarter, is a tangible book value per share plus dividends.
It grew 11% versus March 2018. And again, as mentioned, the best value creation quarter since the second quarter of 2014.
Finally, on this page number six, listed in the page, the trend in digital sales and digitalization of our customers. It is once again in our view a very strong digital sales.
It has risen to 57% of the total units sold in the year digital customers. It's up by 17% now at 28.4 million customers.
Similarly the number of mobile customers reached 24.4 million with a yearly growth rate of 25% and a 45% penetration, closer to our 50% target for the end of the year. Looking at the summarized P&L on slide number 5.
You can clearly identify the positive evolution on the core business drivers. If you're looking to the right hand column, the most right hand column, the net interest income is up 9.5%, gross income is up 7% and operating income is up as I mentioned 10.2%.
On this slide though you also see some line items negatively affecting the bottom line. Two things -- two numbers to note, the provisions the first one.
Regarding the increase in provisions, it's again worth to note that first quarter 2018, last year first quarter was one of our exceptionally low provision quarters. As compared to that very low base in this quarter, given the slowing global growth and its implications on the macro fundamentals of our footprint countries, we have registered some negative IFRS nine macro-prudential adjustment impact.
And to be specific versus last year first quarter, there is an additional €130 million of macro-related provisioning. And also on provisioning line item, we should also mention U.S.A.
Again, there is a macro-prudential adjustment in U.S.A. which is affecting the numbers, but there is also some higher provisioning in the commercial and unsecured consumer lending portfolios.
But in terms of expectations, cost of risk in the U.S. this quarter shouldn't be extrapolated for the rest of the year.
And then the second one to note on this page in terms of factors affecting the bottom line, underlying net trading income was negatively impacted by the muted markets activity in the first quarter this year in comparison with the same period last year. You don't see it in the numbers but as we will discuss it in the next page, there is a one-off impact if we exclude those that one-off impact.
It was a relatively soft quarter in terms of net trading income. Going to slide number 6.
To talk more about this as you can see on page -- slide number 6, page number 6, net interest income growing nearly double-digit at 9.5% versus a year ago. The comparison with the fourth quarter 2018 excluding the contribution of CPI linkers in Turkey, which you all know has an inherent seasonality, is also positive with an increase of 2.2% even as compared to the last quarter of 2018.
Positive evolution on the right hand side at the top, positive evolution in net fees and commissions, 2.6%, versus the same quarter last year. Net trading income in the quarter is growing actually 13.5% but as I just mentioned this figure is impacted by the Prisma stake sale in Argentina which is €107 million at the revenue line.
If you exclude the Prisma proceeds, the underlying NTI, as I mentioned, was relatively soft given the market conditions as you have seen in the announcements of other banks as well. So given the muted global markets activity, it was a relatively soft NTI quarter.
But all in all, total revenues, they are up 7% versus the first quarter of last year. Slide number 7, page number 7.
This is the page that I like the most. One more quarter we continue to show positive operating jaws.
It is once again very satisfying to see that our expenses are growing 3.7%, well below the growth rate in core revenues, which was 8%. And this has been happening for so many quarters now.
And the increase in costs obviously is as compared to the very high inflation in some of our countries and our footprint is very favorable. In the middle of the page, we showed a very strong evolution at double-digit growth of the operating income, which we discussed before.
And finally on the right part of the slide, the efficiency ratio keeps improving, year-to-date improvement is 118 bps. So our new cost-to-income ratio stands at 48.1%.
If you go to slide number 8, talking about risk, moving on to asset quality, sound risk indicators. As we mentioned, this quarter we have seen impairments growing at 31% versus the first quarter of 2018.
But as I said before, it's driven mostly by the low base of the first quarter 2018 and due to broader macro-related provisioning and some higher impairments in the U.S. But on the other side if we compare this quarter's impairments with the previous one, we see a 24% decrease.
On the other risk metrics, NPLs were significantly reduced by €1.8 billion versus last year. And the NPL ratio decreases by 53 bps to 3.9%.
And again, as I mentioned, the coverage ratio increases 110 bps year-over-year to 74%. Moving on to slide number 9.
One of our clear bright spots in the quarter regarding year-to-date capital evolution CET1 fully-loaded ratio, it has increased by 1 bp to 11.35%. It is once again important to highlight that in the first quarter this year we have fully absorbed the IFRS 16 impact which was again 11 bps on the capital ratio.
This implies, again, if you combine the two robust capital generation in the quarter of 12 bps. All in all, our CET1 ratio stands well above the regulatory requirement of 9.26% and additionally we still maintain our guidance that we will be within our capital target range of 11.50% to 12% by the end of this year.
I also would like to highlight at the bottom of this page the quality of our capital. You can see that we continue to lead the ranking in our European peer group in terms of the leverage ratio, which stands at 6.4% versus an average of 5% for our peers.
And regarding the AT1 and T2 buckets, which have been actively managed during the quarter, you might have seen some of our issuances both buckets remain completely endowed both on a phased-in and also on a fully-loaded basis. Slide number 10: To conclude this section on the financials and the numbers, I would like to reconfirm our focus on shareholder value.
Our tangible book value per share increased by 11% year-over-year including dividends and we, again, remain at the forefront group of the European banking industry in terms of profitability. Our return on tangible equity standing at 11.9% versus the average European peer group number of 7.7%, which is again a very favorable comparison.
Moving on to digital transformation, we would like to highlight some tangible metrics around value creation here. We also believe that will ensure the sustainability of our positive results going forward.
So how does digital transformation help our numbers in terms of some tangible value metrics? First, on growth: On the top right hand side of the page -- top left hand side of the page you see the growth numbers.
As you can see active client base has increased 4.6 million customers, 8% number in the past two years. We believe it's now the right time to boost activity and grow our customer base further leveraging also our digital levers.
Second on engagement and transactionality again at the top end side of the page, digital tools they help us engage with our clients better and faster. I mean we put here the Peru example.
In Peru our digital engagement tools they help us improve our interface with the clients to better identify their needs. I mean they tailored the product offer based on these needs.
This obviously then results in higher cross-sell and you see it in the numbers there. So number of clients with more than one product it has been multiplied by 2.4 times, three months after on-boarding through a new digital engagement process that we put in place in Peru.
Then network productivity, on the left right, very important driver. We want to optimize our branch network and we want to devote more time in our branches to advise and sales.
And with the help of digitized processes and tools, as you can see on the graph the products sold per branch per month in the United States it has increased by 42% as compared to two years ago. And finally efficiency, we maintain our commitment to improve efficiency.
Reducing transaction cost is another good example of how digitalization is helping us to create value. Transactions are migrating to digital channels.
I mean, like mobile, online, ATM and those channels now account 61% of our overall transactions. And in this context, we have reduced the cost of a transaction by 31% in two years, as a result of the channel mix of the transactions, as well as the measures that we have taken to increase the efficiency of our platforms.
If you move to slide number 12, and again as we have commented in the last quarters underpinning the growth in digital business is the continued digitization of our customer base. Digital customers they are up 17% and they now represent 53% of our customers.
In the middle of the slide, you can see the same perspective with our mobile customer's mobile channel. And our mobile customers it grew almost by 5 million up by 25% reaching a 45% penetration.
This accelerated adoption is also expected to reach the tipping point of the 50% that we committed in the last quarterly presentation and we are on our way to reach that goal by the end of the year. And finally on the graph, at the right answer to the page you can see the continued outstanding trend in digital sales.
Finally on page number 13, before I hand it over to Jaime. On digital transformation, we would like to highlight – how different we are from competitors in pushing through this transformation.
And one way to exemplify that, there are many other methods, but it's the availability of our products and services in digital channels. So, this is a Spain example.
In Spain, recent market report done by an independent firm it shows how BBVA's availability of products services and advise features is leading the market. I mean, 83% of the futures that are available in traditional channels they are also available digitally for BBVA customers and the closest competitor to us is 65%.
And it takes a while – proven by experience it takes a while to close that gap and this gives us a differentiating edge as we serve our customers through our digital channels. Having said all of this, let me now turn it over to Jaime for an overview of the business areas.
So the floor is yours Jamie?
Jaime Sáenz de Tejada
Thank you very much, Onur, and good evening, everyone. Beginning with Spain, let me start by explaining the evolution of the NII down minus 4.9% on a year-on-year basis.
On the one hand, the commercial activity with clients showed a positive performance in the quarter. We had a good start of the year in loan growth of 1.8% year-on-year, together with a slight improvement in the customer spread.
The loan mix is improving. It's more profitable and it's also being supported by higher arrival rates.
But on the other hand, the positive evolution of the commercial activities more than offset by a lower contribution from the ALCO portfolios the IFRS 16 impact and the cost of excess liquidity we hold in the ECB. In this sense and given ECB's more dovish tone in its last meeting, we now expect a lower for longer interest rate environment.
And as a result, NII might decrease slightly around 1%, 2% in 2019. In any case, the Q1 decrease should not be extrapolated.
The main drivers of the P&L in Spain continue to be the reduction in operating expenses and the low cost of risk. Cost continued to go down minus 3.5% on a year-on-year basis with efficiency improving to 54.4% as of March that is 1.5% better than in December.
Then we also had a better-than-expected evolution of impairments, down to 38% versus Q1 2018 drove cost of risk to 18 basis points in Q1. As a result of this very good number, we now think that the 2019 cost of risk could be around 20 basis points, improving on our previous guidance of mid-20s.
Let's move now to the U.S. Top line growth continues in line with our expectations.
NII increases at high-single-digits 8% versus last year, mainly supported by loan growth especially in the consumer portfolio growing at 22%. And the improvement in customer spread by 10 basis points in the quarter.
Operating jaws are widening as OpEx remained nearly flat versus last year and gross revenues are up by over 6% driven by NII and net trading income. All this makes operating income grow by over 15% year-on-year.
In terms of asset quality and as Onur has already mentioned, the cost of risk reached 106 basis points in Q1 due to three reasons a negative IFRS nine macro impact, higher provisions for large tickets in the commercial portfolio, and write-offs in the consumer segment where we – where the bad debt performance was focused on a specific segments and channels. And as you can imagine, we've already adjusted underwriting and standards.
It is also worth mentioning as Onur also said that impairments in Q1 of last year were extremely low, due to provision releases and positive IFRS 9 and macro impact. Regarding cost of risk expectations for the full year Q1 numbers should not be extrapolated, but now we believe that the cost of risk at the end of the year would be around 80 or 90 basis points below Q1 levels as we expect consumer write-offs to decrease in the second half of the year.
Let's now turn to Mexico. Mexico continues to deliver very strong results with net attributable profit increasing by over 10% in current euros versus last year supported by NII and the good evolution of impairments.
NII is up around 8% in constant euros, supported mainly by activity. Loans are up by 8.6% versus last year, showing a well-balanced growth between wholesale and retail portfolios.
Probably worth highlighting, the sound growth in consumer loans, up 12% and mortgages up 8.5%, where we've gained market share in both products in the last quarter. Mexico, again, delivers positive operating Jaws with core revenues up by 6.6% and cost up by 4.8% on a year-on-year basis.
The cost evolution is affected by a larger contribution to the BBVA foundation in Mexico. Excluding this, OpEx would have grown by 3.8%.
While asset quality indicators improve, the NPL ratio stands at 2%, coverage increases five percentage points, to 159%. And cost of risk stays at 293 basis points, in line with our guidance for the year of around 300 basis points.
This solid results continue to reflect BBVA's leadership position in Mexico, both in terms of market share and profitability. Let's focus now on Turkey.
Garanti had a strongest start of the year, with better than expected performance. Compared to the last quarter, net attributable profit increased by 55%, mainly due to lower provisioning needs and to a lesser extent a strong fee growth and lower expenses.
Loan loss provisions decreased by 63% versus Q4, becoming the main P&L driver in the quarter, due to mainly a significant lower provisioning needs in the foreign currency book and a limited IFRS 9 macro impact. As a result cost of risk is down to 182 basis points, better-than-expected and significantly below last year.
If the trend continues like this, we think we could beat our 2019 cost-of-risk guidance, which is below 300 basis points. Regarding NII, the quarterly decline 26% is fully explained by the lower CPI linkers contribution.
Very high in Q4, as inflation, you all remember, picked at 25%. Excluding these, NII is up by 41%, mainly due to the significant reduction in TL funding cost and the TL loan portfolio growing by over 7% in the quarter.
Regarding the year-on-year comparison, core revenues show a very strong performance, with NII up 20%, thanks to the higher CPI linkers contribution versus last year. Remember that we started accruing an 8% inflation level and also to the increase in TL loans, while fees are up by 26%.
However, these positive numbers have been offset by the increase in impairments, all this versus the first quarter of 2018. And let me finalize with South America.
Let me provide some color on the evolution of the three main countries in the region. Starting with Colombia.
Operating income increased by 8% versus last year in constant euros, mainly supported by net trading income and flat expenses. The decrease at the net attributable profit level is explained by the increase in impairments related to a single large ticket, now fully written off.
Peru enjoyed a very good the first quarter, with the bottom line up by 15% year-on-year. NII continues to be the main P&L driver, growing also at 15% on a year-on-year basis and above activity, thanks to lower funding cost.
The loan book is up by 6.5%, thanks to dynamic retail market and improving growth in commercial. Argentina reported a net attributable profit of €60 million this quarter and that's versus minus €23 million last year in constant euros.
Q1 results include hyperinflation impact of minus €49 million, that is fully offset by the €50 million positive results coming from the Prisma sale, also at net attributable level. NII is once again the main P&L driver in the country, driven by the contribution from the high yielding bond portfolio.
And now, back on to Onur for some final remarks.
Onur Genç
Thank you, Jaime. So final remarks are, I would like to reiterate the very strong core business fundamentals, with operating income growing at double-digit and the good news, driven by recurring income and efficiency improvements.
The second message I would like to highlight is that, we show sound risk indicators and resilient capital position, absorbing the full impact of IFRS 16. Third we continue creating value for our shareholders and we are one of the clear leaders of the European banking industry in terms of profitability.
And finally, as the page also says, as we experience it every single day, digital transformation is positively impacting our business and ensures sustainability of our future results, as evidenced in levers like growth, customer growth, transactional, productivity and also efficiency. So thank you very much for listening.
Now, I give the floor to Gloria for the Q&A. Gloria?
Gloria Couceiro
Thank you, Onur. So we're now ready to move into the live Q&A session.
So first question, please?
Operator
Our first question today comes from Alvaro Serrano, calling from Morgan Stanley. Alvaro, your line is open.
Alvaro Serrano
Good afternoon. Thank you for taking my questions.
Two quick questions. Spain, on the NII in Spain, you very clearly explained what happened in Q1 and obviously the guidance.
But just -- I want to press a bit more on why do you think the NII is going to improve over the next few quarters, given your minus 1% to minus 2% NII growth? Is it can you explain a bit more on what's going to improve and what gave you confidence and what should we take into account in terms of modeling for the next few quarters?
And the second question is on Turkey. Also you've shown confidence that the provisions will be better than probably expected at the beginning of the year.
But the currency keeps on sliding which you flagged in the past that's the main uncertainty when it comes to provisions. Can you maybe give us a bit more color on that confidence and what do you think the currency impact so far could be or some kind of sensitivity?
Onur Genç
Thank you, Alvaro. Great questions both.
The first one Spain. So, what will change to improve the trend is the question.
As we mentioned, there are three drivers of the decline. Because if you look into the Spain page, the activity and also the customer yields they actually have improved versus last year.
So, there were three other factors that created the decline in the NII. And those three were as partially explained by Jaime first of all the IFRS 16 impact which is there to stay but then the second and the third we see better prospects in the next quarters.
And those second and the third impacts or the factors were the ALCO portfolio and the excess liquidity that we had in the Spain balance sheet. The ALCO portfolio because as you might remember we partially talked about it in the fourth quarter results there was a big maturity of the ALCO book assets at the end of the last year, in the fourth quarter 2018.
And that ALCO portfolio we started replenishing them with yielding assets and it takes a while. And then we were also watching the excess liquidity situation a similar perspective there.
The excess liquidity we were looking into TLTRO situation and everything else. So, coupled all of that, we are seeing improvement on those two areas.
ALCO portfolio and the excess liquidity will not yield as negative impact on our NII in Spain and that's the key change looking into the next few quarters. Regarding Turkey, you're right, we said in the past that the key sensitivity here is to the currency.
But what we have seen and what we have budgeted for the first quarter, we see a positive dynamic there and we're looking to every single client on a client-by-client basis. So far, it's turning out to be better than what we expected.
It doesn't mean that the currency is not affecting or the currency is not the key driver. Currency is still a very important driver of the NPLs going forward and the cost of risk going forward.
But so far I think what we're commenting is so far we've seen relative to our expectations a positive picture. And we expect -- given that we expect our guidance of less than 300 to hold.
But again currency is going to be a critical driver.
Alvaro Serrano
Thank you very much.
Gloria Couceiro
Thank you. Thank you, Alvaro, for your questions.
Next question, please.
Operator
Our next question today comes from Carlos Peixoto. Carlos, please go ahead.
Carlos from CaixaBank, your line is open. Please go ahead.
Carlos Peixoto
Hello, are you listening to me? I'm getting through now, okay.
Sorry. So, thank you for holding my question and also for holding a reservation in the afternoon which I think is quite useful.
First question would be regarding a bit on how do you see the potential -- the new TLTROs from the ECB in what role could that play in the management of your ALCO portfolio? And overall how do you expect to manage the overall exposure to the ECB against this backdrop?
Second question would be on capital. Basically the IFRS 16 impact was a bit smaller than expected which was a good news.
We now have another pending regulatory impact which will be coming from the Trim I believe. Do you expect it to be able to -- entirely throughout this year?
And you maintained the 25 basis points guidance that you have mentioned in the past. Are there any other impacts such as the changes and risk ratings on foreclosed -- sorry on real estates exposures, real estate lending that we should take into consideration?
And finally just -- sorry for putting a third question which is a quick one. What's the current size or evolution of the foreclosed assets portfolio in Spain in the quarter?
Thank you.
Gloria Couceiro
Carlos, do you mind to repeat your last question please?
Carlos Peixoto
The last question was the evolution of the foreclosed real estate portfolio in Spain?
Gloria Couceiro
Okay, thank you.
Onur Genç
Why don't you start with the first one? Do you want to take the first one TLTRO Jaime?
Jaime Sáenz de Tejada
Yes sure. As you know we have $23.7 billion possession with TLTRO-2 that matures June next year.
Our best case as of today and that's why we're accumulating so much liquidity is to bake down at maturity. We will wait until final details are provided to see whether or not it makes sense to do anything with TLTRO-3.
Onur Genç
Okay. So, on the capital question Carlos just to restate what I said in the fourth quarter quarterly presentation, we expect for 2019 regulatory impacts to be in the range of 30 to 40 bps.
And this was including IFRS 16 plus the Trims that we expect to be concluded in 2019. As you know, the Trim exercise is running from 2017 to 2019.
Some of that will be concluded at the end of 2019 and some of that impact will probably be realized in 2020 especially the low delinquency portfolios. But our guidance that in 2019, we will see a total regulatory impact of 30 to 40 bps, it still remains.
And this includes the IFRS 16 of 11 bps which we have already realized. And it includes the Trim exercises that will be completed and concluded in 2019, like the credit risk in Spain, like the market risk exercise that we have just completed and everything else.
So the 30 to 40 guidance still remains for this year for 2019 as we have mentioned before. On the foreclosed assets, I have the numbers in front of me, but do you want to take it Jamie?
Jaime Sáenz de Tejada
Sure. They remain stable during the quarter at €1.9 billion.
And we actually closed another portion of the Marina transaction with Divarian during the month of April. So during the month of April, we've actually transferred an additional €500 million.
We expect to transfer the full amount pending an additional €200 million during the next quarters.
Gloria Couceiro
Thank you, Carlos. Next question, please.
Operator
Our next question comes from Andrea Filtri calling from Mediobanca. Andrea, please go ahead.
Andrea Filtri
Thank you very much for taking my question. One question on the U.S.
regarding your consumer strategy, if – from the negative surprise of the quarter of the surging cost of risk, what have you learned? And if this is implying any changes to your strategy in the U.S.?
And secondly on capital, the approval of CRD 5 allowing for the exclusion of certain IT intangibles from deductions and the SME support factor, I wonder if you could share with us if this could be – had an element of relevance for you, I guess on the positive side going forward and how much? And just a follow-up on what was just said before regarding the regulatory headwinds.
If I understood correctly, the 30 to 40 basis points just regards the 2019 impact and therefore on the low default portfolio you could have some additional impacts in 2020?
Onur Genç
Very good. Andrea, thank you for the questions.
Let me start with the U.S. So what did you learn and are we changing the strategy and so on.
Of course, we learn. We learn every single day.
So in the U.S. as we probably mentioned before and I partially mentioned it in the last quarterly presentation as well our approach in the U.S.
has been to grow the customer base. And consumer strategy was developed to achieve that.
At the end of the day, what we realized was when we were acquiring customers what we call from the open market they are completely new customers to BBVA. So it's not like lending to our existing customers, which we know and which we do very well.
Given our customer base in the U.S. we went out to the open market to underwrite and acquire completely new customers.
And that requires a learning curve. That requires refinement of the underwriting engines over time with the data that we have with real underwriting and the loans that we give out.
So given that we have learned, we have adjusted at a very, very micro and granular level of segmentation. We know where to go and where not to go.
So we have done that adjustment in the second half of last year 2018. So we are seeing some very good vintages from that new originations.
What we have realized in the first part of this year – in the first quarter of this year is some implications from the first batch of underwritings that we have done. So it's an ongoing learning process basically.
But you also asked does this have any implications on the U.S. strategy.
U.S. strategy is very clear.
We believe we have a clear goal of growing organically using our digital capabilities and our digital assets. This doesn't mean that we always look into inorganic opportunities as well, but our focus is clearly on organic and that's going to continue to – continue to be helping us and serving us in the coming quarters.
On the intangibles do you want to take it Jamie?
Jaime Sáenz de Tejada
Yeah. Sure.
On the intangibles, the current deduction that we have on capital, because of intangibles is 43 basis points. How much we will potentially benefit from the change in CRD V is still not known, because as you know we will only be able to not to deduct the subord that is not affected in resolution or insolvency or in liquidation.
And further guidelines from the EBA need to be developed. So I think it's still too soon to provide a final number.
On the case of the SME factor also together with the potential additional benefit from investment in infrastructure, I think it's also still too soon to quantify the impact, but it's true that it could potentially be positive.
Onur Genç
On the last question about the 30 to 40 bps and you asked whether this was 2019. Yes, it was.
I mean, our guidance was the 2019 total regulatory impact. This can obviously change and so, but we still stick to that guidance the 30 and 40.
It included IFRS 16. It included the Trim impact in 2019.
It included other regulatory impacts, which is we continue to have OCs and so on. So all bundled was 30 to 40.
You asked whether this includes the low delinquency portfolio. It wasn't, because we don't expect the low delinquency Trims to be concluded and finalized in 2019.
We will see what comes out of them in 2020.
Gloria Couceiro
Thank you. Thank you, Andrea, for the questions.
Next question, please.
Operator
Our next question today comes from Marta Romero calling from Bank of America Merrill Lynch. Marta, your line is now open.
Marta Romero
Thank you very much for the evening presentation. I have a couple of questions.
The first one is a follow-up on NII in Spain the ALCO portfolio. You've got €23 billion seems low from the size of your balance sheet in Spain.
How do you -- how are you thinking about it? Where do you -- where are you aiming at building in the ALCO portfolio in Spain?
And the second one is on Turkey. The public banks are raising equity, this is going to add pressure to volumes, the margins.
How you seen -- how comfortable do you feel about the capital position currently at the moment? And if you could share the sensitivity to movement of currency to NPLs, so what would happen to your NPL ratio if the currency depreciates by every 10%?
And where do you -- where do we need to see the currency going for Garanti to need more capital? Thank you.
Onur Genç
Good. Why don't you take the first one, Jaime?
Jaime Sáenz de Tejada
Sure. Okay.
As you mentioned Marta, the size of the ALCO portfolio went down significantly in the fourth quarter of last year. We had significant maturities of around €6 billion.
Half of that was Spain's sovereign risk and the other half Italian sovereign risk as we shared in the previous call. We've increased slightly just slightly the position this first quarter.
We are planning to increase a little bit more the size of the portfolio, but we are waiting to -- for slightly higher levels before we do that. As Onur mentioned before, we are trying to reduce also the negative cost of carry of the high-quality liquid portfolio that we have prepared in order to pay down the TLTRO in June next year.
We've increased the size of that so as to reduce the 40 basis points negative carry and we reduced significantly the size of the deposits in the ECB that reached €27 billion at the end of last year and now are close to around €15 billion. So that's what I would say.
Onur Genç
Very good. Marta on the Turkish situation question, let's start with the capital one.
And as you all know, I mean, all the numbers are public, because all the banks are publicly traded. Garanti has one of the highest capital ratios now in Turkey.
I mean, if you look into our latest March -- end of March numbers, we have a total capital ratio of 15.5 and our CET1 ratio stands at 13.3. And this obviously, again is a competitive differentiation for us, because when you look into the other figures, other bank figures, we stand above them.
You asked about the sensitivity of this to the depreciation. Our estimate is every 10% devaluation in TL to dollar, every 10% deducts 55 bps from these ratios.
And we believe we can manage that. So, on the pressure on the margins, we also touched upon the pressure on margins regarding Turkey.
As you have seen in the presentation Jaime went through it very quickly, but we have seen a pickup in the spread in TL and the foreign currency is also increasing in terms of customer spread. On the TL, it obviously depends on the level of interest rates.
So, we might see some stabilization or maybe some decline in it depending on the latest interest rate situation in the country. But again, we budgeted and planned for this very clearly.
Gloria Couceiro
Thank you, Marta. Next question, please.
Operator
Our next question today comes from Francisco Riquel calling from Alantra. Francisco, please go ahead.
Francisco Riquel
Yes. Hello.
And first question about Spain. And you are guiding down NII slightly I wonder, if you can mitigate it somehow across the P&L other -- with other P&L lines.
So if you can please update, how do you see fees evolving on the cost base, which is falling again this year? That could be helpful And then I would also like to follow-up on the cost of risk in the U.S.
You can please elaborate it a bit more. IFRS 9 macro impact you mentioned.
So can you explain the assumptions because the macro is holding up well at this point in the U.S. cycle?
The write-offs in the consumer loan, I mean, this has been the main driver of NII growth to-date in the U.S. You plan to change the risk appetite the growth outlook in the U.S.
because this segment is still growing by 22% year-on-year. So can you give us what do, I mean, 80 bps, 90 bps cost of risk at this point in the cycle is -- in the late cycle in the U.S.
is high. So do you think it's -- what could be the through the cycle cost of risk in the U.S.
given that -- what you have shown us in the first quarter?
Onur Genç
Thank you, Francisco. On the first question, some guidance on Spain going forward.
As you mentioned, we -- as we said -- as Jaime said NII, we expect it to decrease slightly 1% to 2% this year. Again better than the first quarter trends as we also mentioned due to the reasons for the first question.
So NII to decrease 1% to 2%. But on net fees and commissions our guidance is low single-digit growth.
On expenses, we continue to maintain our guidance of slightly down. On asset quality, and Jamie also mentioned it, our original guidance was around 20s and now we are -- mid-20s now we are revising it down to around 20s, which is a better figure.
And you also have seen it in the numbers in the first quarter. Our actual cost of risk came out to be better than what we expected in the first quarter in Spain.
That's the positive that we will generate to reach our still bottom line goals and expectations. Regarding U.S., I might missed -- I might have missed the first part of it, but you are asking IFRS 9 macro impact, given the cycle and given things are fine.
Why is there an impact? We have reduced you might have seen it, we have reduced.
Obviously, these numbers are driven by the original expectations versus the revised expectations. So we have revised our growth in the U.S.
slightly down in the first quarter. So this is a reflection of that.
So there was a negative impact coming from the revised down expectations in the macro growth. And also IFRS 9 is not only just macro, it's other metrics like real estate prices.
We see some softness in real estate prices as well. All of that bundled has created a decrease in our perspective, a negativity in our perspective, hence it was reflected into the provisional figures.
Then you talked about 80 to 90 bps and so on and you talked about the 22% growth in consumer. As you would see in the coming quarters that growth has been tamed down a bit based on again the things that I've said.
We continue to learn and adjust. It's all about macro segmentation.
It's about underwriting to a new customer base. So we have adjusted, so the growth rate in consumer might be a bit toned down going forward, but still we see huge margins there and we will continue to do it in a gradual fashion.
But 80 to 90 bps in this context, you are saying it's too high. Well 80 to 90 bps in this context depends on the portfolio.
As you see our portfolio is shifting towards a credit -- a retail -- higher retail-heavy environment. I mean the commercial and corporate is still going to be the core, but our growth in retail is higher than the other portfolios.
And obviously, that has an implication on the cost of risk. But as you can imagine, if you go and pick up any other competitor out there, the customer yields for those loans and the returns that we generate from those loans in consumer lending is much better than the wholesale portfolios.
So we will manage it very well. We will continue to gradually grow.
And the cost of risk implication might be a bit negative, but the return implication and the profit implication will be positive.
Gloria Couceiro
Thank you, Francisco. Next question, please.
Operator
Our next question comes from Britta Schmidt calling from Autonomous Research. Britta, please go ahead.
Britta Schmidt
I have got two questions please. Coming back to the U.S.
business, am I right in understanding that you're referring to underwriting issues with the personal express loans in the U.S. And coming back to the question of what loan growth could be, could you give any guidance what the 22% could be down towards?
And Andrea has asked about this as well, are there any learnings from this that you can draw also on your Spanish business given that giving out consumer loans to non-customers is on the raise, especially within the digital lending area. And the second question will be on Turkey.
There is a bit of a mismatch emerging in terms of FX deposits growing, but FX lending declining. Can you comment a little bit on the funding cost outlook given the dollarization in the economy and also comment a bit on the Turkish lira funding outlook?
Onur Genç
Okay. On the first one Britta you asked about the U.S.
business. I mean our guidance still stands for the overall loan book.
We expect mid single-digit loan growth in the U.S. this year mid single digit.
And there will be a higher growth in consumer. But you asked about the precise guidance, we cannot give that to you, because it's an ongoing calibration, ongoing dynamic management of the portfolio.
So on that one I'll reiterate our overall guidance of mid single-digit for the overall loan portfolio. On the Turkish case, do you want to take it Jamie?
Jaime Sáenz de Tejada
Yes. As you've mentioned, the Turkish lira portfolio is up by 7% in the quarter, the same rate on a year-on-year basis.
We remain -- we maintain guidance. We expect the year to end at around 5% growth in the Turkish lira portfolio.
It's true that the economy, especially deposits have been dollarizing over the last couple of months in Turkey. So loan-to-deposit ratio in dollars has decreased significantly, but it is happening in Turkish lira.
This has created additional pressures in the Turkish lira funding over the last couple of weeks. So the level, the trend, the very positive trends of cost of funding that we've experienced in liras over the first part of the year will probably decrease slightly as the second quarter evolves.
On the other hand, the FX spreads continue to improve. They continue to improve significantly.
That was also the case this first quarter they were up by over 60 basis points and we expect that to sustain as the year goes by.
Gloria Couceiro
Thank you, Britta. Next question please.
Operator
Our next question comes from Mario Ropero from Fidentiis. Mario, please go ahead.
Mario Ropero
Hi, good afternoon. My first question in on the coverage in Spain, it is 58%, which looks very high relative to the sector.
So I wonder if you can give some color on the level of this going forward? And if you see should remain this high, don't you think that this is a competitive disadvantage versus peers regarding loan growth?
And then the second question is also about Spain. Profitability trading income remained very high I would say.
So to understand the sustainability of this line could you please tell us what is -- what are the unrealized gains in the European ALCO book? Thank you.
Jaime Sáenz de Tejada
Okay. On the first question, yes as you said, the coverage level increased in Spain this quarter to 58%.
We don't believe this is a competitive disadvantage. We think this is a competitive advantage.
So we are quite comfortable with our coverage level. I think we've always been very prudent provisioning-wise and we maintain that policy.
The second question is around, if I understood correctly, the capital -- the unrealized capital gains on the ALCO portfolio?
Mario Ropero
Trading income for…
Jaime Saenz de Tejada
Trading income for Spain. Okay.
The trading income went down versus the first quarter of last year in Spain. Two reasons.
Lower ALCO sales and then a slower beginning in the global markets area. We do expect additional ALCO capital gains in the year, but they will probably be lower than the ones that we had last year, even if unrealized capital gains in the ALCO portfolio have increased quite significantly over the quarter, taking into account the very low premium that Spain has reached during this latter part of the quarter.
Gloria Couceiro
Thank you, Mario. Next question, please.
Operator
Our next question comes from Ignacio Ulargui calling from Deutsche Bank. Ignacio, please go ahead.
Ignacio Ulargui
Hi. Yes.
Hi. Good afternoon.
Just have two questions for you guys. One is, if you could update a bit on the trends that you see for NII in Mexico in terms of competitive landscape?
And then, to just move things, maybe you have commented that, but I joined a bit later in the presentation. Whether you could give some color on what is it under the €123 million of other provisions in Spain?
So whether the €8 million of other income and expenses in the quarter is sustainable? Thanks.
Or is that at the current level which should go on a normalized level going forward?
Onur Genç
I will take the Mexico one. Jaime, why don't you take the second one?
On the Mexico one, our guidance remains NII, we see it growing at high single digit in line with activity. We see the clear signals of that in the first quarter as well.
We expect high single-digit loan growth for the year as well. So, robust -- as before, robust net interest income growth in Mexico.
On Spain, I think it was about provisions in Spain?
Jaime Saenz de Tejada
Yes. If I understood correctly, I think, it was on other provisions in Spain, right?
Onur Genç
Ignacio?
Jaime Saenz de Tejada
Ignacio?
Ignacio Ulargui
Yes.
Jaime Saenz de Tejada
Okay. I'll answer that question, because it's not -- it was not clear there in the call.
The other provision line is down versus Q4 of last year. The main impact that we had this first quarter in this line mainly has to do with restructuring charges.
We've increased restructuring charges related to the closure of branches. A good portion of the expected closures have been front-loaded to this first quarter and we've had to recognize some cost there.
And also, it had to do with some early retirement charges. If you compare the number to the first quarter of last year, the number is higher, because we had releases in Q1 2018 having to do with especially the real estate portfolio, both in some contingent liabilities and also on the update of the appraisal values of some foreclosed assets.
And I also think that you asked a third question regarding how sustainable the minus 3.5% year-on-year rating expenses is? Well, we don't believe it is sustainable going forward.
That's why we are guiding for a slight expense decrease in 2019, although, as you can imagine, we will try -- we will strive to perform as best as we can.
Onur Genç
Nothing changes from the current guidance that we have given regarding the costs in Spain. We still see a clear decline in costs, but not as large as last year, which was 3.6%.
Gloria Couceiro
Thank you, Ignacio. Next question, please.
Operator
The next question today comes from Stefan Nedialkov from Citigroup. Stefan, please go ahead.
Stefan Nedialkov
Hi, guys. Good evening/good afternoon.
A couple of questions on my side. Sorry, to come back on the U.S.
consumer topic, but it's something that you basically got involved in relatively recently. It looked like you wanted to make a showcase out of the U.S., how quickly you can increase operating leverage, et cetera, or at least that's how it came across?
In order for us to understand things a little bit better as analysts, could you just help us with, for example, return metrics of some sort? What was your hurdle rate of return or return on risk-weighted assets?
Or, for example, what was the cost of risk you are expecting through this cycle on that new book of business and what did it come out to be in the past few quarters? Some color around that would be extremely helpful.
My second question is on Mexico. I see that fees grew 1% year-on-year in the quarter.
Is this part of the new normal in terms of fee growth that we've been witnessing, the political noise around for the past couple of months? Or is this just a one-off and we should be -- we should probably be seeing something bigger than the 1%?
Some color around that would be great. And thirdly, if I may, there have been some press articles on you potentially reorganizing your insurance agreements in various parts of the world.
If you can share your strategy, vis-à-vis, insurance overall and specifically in Europe and also South America? Thank you.
Onur Genç
Very quickly, I'll do the all three of them, because we need to save time. There are five other colleagues who want to ask questions.
Very quickly, Stefan, thanks for the questions. Consumer topic.
I can very clearly, very clearly tell you that with the expectation and still the plan and we believe we can execute on that plan, is to have clearly double-digit return on regulatory capital on the consumer book in the U.S. and very healthy double-digit return on regulatory capital.
Does this come with high cost of risk? It does come with high cost of risk.
Does it come with a very high return on capital? It does come with a high risk -- very high return on capital.
So, we will continue to watch it. If it continues as we planned, we will push ahead because we manage our business on return on regulatory capital through the cycle.
If return on capital through the cycle is a good one, which in this case is a good one, we will continue to invest, but we have to do it in a very balanced way which is the way that we are doing it. On the Mexican case 1% it's a bit lower than what we have been -- what we are expecting in the next coming quarters.
So, we should expect some pick up in that number. On the third insurance business, yes, there were press rumors around this.
We don't comment on press rumors. As you know, insurance is a product that we love as a bank.
Our customers have a clear affinity towards their product. We will always keep it in our product portfolio.
In terms of production of that product, we will look into opportunities. We'll look into different alternatives.
Stefan Nedialkov
All right. Thank you.
Gloria Couceiro
Thank you, Stefan. Next question, please.
Operator
The next question today comes from Javier Echanove calling from Santander. Javier, your line is open.
Javier Echanove
Yeah, so, thanks very much for taking the questions. I wanted to go back to the commissions in Mexico.
We were expecting some resolution of the negotiations with the government and the banking sector on these. But things appear to have stalled.
I don't know if you could comment on that and give us an idea of where we are right now. Sorry that was my question.
Everything else was answered. Thanks very much.
Onur Genç
Okay. Very quickly again on that one.
Commissions -- the fee proposal as we call it, it has been -- there has been a new fee proposal as you all know in the past few months on the table. A revised version of the original fee proposal that was put in place back in October/November timeframe.
And that new fee proposal is, as far as we understand, it's sitting on one side and then -- but then there is a clear guidance from President López Obrador on the fact that in the next three years, there will not be any new legislation on these type of topics on the financial topics and so on. So, we don't know.
There is some uncertainty around this. We don't know what will come out of it.
But as mentioned previously multiple times whatever is good for Mexico, is good for BBVA. We are long-term investors in Mexico.
We have been there for long. We will be there for long.
So, whatever is good for Mexico -- and if the fee proposal supports the key objectives of the country, we are 100% supporting it as well.
Gloria Couceiro
Thank you, Javier. Next question, please.
Operator
The next question comes from Benjie Creelan-Sandford calling from Jefferies. Benjie, please go ahead.
Benjie Creelan-Sandford
Yeah. Hi.
Good afternoon, everyone. Most of my questions have been answered.
Just two quick ones. First of all, on the U.S.
and apologies if I missed it. But I just wanted to check whether you had updated the NII growth target in 2019 for the U.S.
business? And then the second question is just a broader strategic one.
Just when you think about the footprint of the Group and capital allocation going forward and whether you are thinking about organic or inorganic growth. Do you consider the mix of capital between developed markets and emerging markets an important factor?
And is that a constraining factor in terms of how you would want the Group to grow going forward in terms of that balance?
Onur Genç
Very good. On the first one updated NII guidance for the U.S., right away, we expect high single digit growth in the NII, high single-digit growth.
That was our guidance. We stick with that guidance.
On the capital allocation regarding the footprint, obviously, there are macro and we look into again through the cycle mid to long-term view on the countries, but our capital allocation framework is a very clear one. We do it at the micro level, which means every single dollar of capital that we deploy in any country has to go through a capital planning process, which means it has to be above a certain threshold of return on regulatory capital.
It has to be above a certain threshold of return on economic capital. On those two metrics, if the relationship with the client justifies that capital deployment, we support that deployment.
And we believe on top of the macro which is very important -- on top of the macro, this micro capital planning approach is the right one to go. Because there might be really great clients and opportunities in countries that we're in and the macro should not be shadowing the opportunity at the client level.
Again, you should put the macro view on top. But on top of that macro view that micro planning is very critical to us and that's how we deploy capital.
Two more questions and we have to close I know, but let's take the two, Carlos.
Gloria Couceiro
Yes. Next question, please.
Operator
The next question is from Ignacio Cerezo calling from UBS. Ignacio, your line is now open.
Ignacio Cerezo
Yeah. Hi and good evening everybody and thanks for presentation.
Sorry to come back to the U.S. consumer book.
If you can give us some color in terms of how quickly those vintages have gone bad basically. And the second one is on Turkey.
You can share with us actually why you feel comfortable if you show profit in Turkey considering that the music around the economy and the currency in the last couple of months has deteriorated. I'm basically wondering if it was -- having been more conservative actually to keep some of those profits, especially on the loan loss provisioning side.
Thank you.
Onur Genç
Okay. On the first one how quickly those vintages go bad?
I mean, these are typically 50 -- you're asking very specific than. Let me go very specific.
They are typically 52-month loans on average maturity and some of them are prepaid, weighted average lifetime is around 2.1 years, because they -- the maturity after closures is around 44 months and then the weighted average lifetime is around 2.1 years. And we see the vintages in six months.
That's why what I said in the beginning of this call that we have adjusted looking into the vintages in the second half of 2018. We are seeing some implications of that in the first quarter this year, but we had done the adjustments.
On Turkey, I didn't get the full question, but you were asking, whether we should be more conservative on Turkey no?
Jaime Sáenz de Tejada
Yeah, provisioning wise. Well Ignacio, the profits are still there.
They're still in Turkey. So if we don't need to make additional provisions, but the profits are still there are still in Turkey, I think they still qualify as being conservative.
Gloria Couceiro
Thank you. Next question please?
Operator
Our final question today comes from Carlos Cobo calling from Societe Generale. Carlos, please go ahead.
Carlos Cobo
Yes, good afternoon. Thank you very much for the afternoon presentation.
Couple of questions. I read something around the European Union approving the regulatory equivalence in Argentina.
And I wanted to know if you are expecting any sort of positive capital impact out of that? And the second one, if you could add some more color on the type of ALCO portfolio you're building up because at current rates levels a conservative portfolio with very short-term maturities is not very profitable.
And I wonder what type of maturities are you adding what yields and if you're comfortable with the risk reward of the new portfolio? And whether it makes sense or it would be more conservative to add a shorter term portfolio to improve the liquidity metrics, but not adding such a market risk to the portfolio?
Onur Genç
Very good questions Carlos. On the first one, yes.
European authorities have recognized the equivalence of Argentina. It will be reflected in the second quarter's numbers.
We expect five bps impact from that equivalents, five obviously positive impact. On the ALCO portfolio, Jamie?
Jaime Sáenz de Tejada
Yes. The increase in the ALCO portfolio Carlos was €400 million in the quarter.
Okay? So we agree with you that at current levels, it doesn't make too much sense to increase the size.
And that's exactly what I said when I answered a previous question. So what -- we're doing exactly what you're recommending which is trying to build a high-quality liquid asset portfolio very short-term in nature, less than two years, so has to reduce more or less by half in the minus 40 basis points cost of carry.
We agree with you that at these levels it doesn't make sense. The current ALCO portfolio in Spain is €22.9 billion and a little bit more than half is accounted in the former health maturity situation.
So it will not affect in case there is volatility in the market our capital numbers. We still hold as I said quite significant amounts of unrealized capital gains to act as a buffer and the average is at five years sorry.
Gloria Couceiro
So we need to end here as we have the press conference in a few minutes. So thank you very much for participating in this call.
And let me remind you that the entire IR team will remain available to answer any questions that you may have. Thank you very much.
Onur Genç
Thank you to all of you.