Jul 31, 2020
Operator
Good morning, everyone, and welcome to BBVA Second Quarter 2020 Results Presentation. I'm Gloria Couceiro, Head of Investor Relations.
And here with me today is Onur Genc, Chief Executive Officer of the Group and Jaime Saenz de Tejada, BBVA Group CFO. As in previous quarters, 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. And now, I will turn it over to Onur to start with the presentation.
Onur Genc
Thank you, Gloria. Good morning to everyone.
Welcome and thank you for joining us. I hope that you and your families and friends are all healthy and safe in this environment.
Let me also express my support to those affected by the pandemic and my deepest condolences to the relatives and friends of those who passed away. So let me start with slide number three, by updating you on BBVA’s response to this environment.
As mentioned in our previous quarterly results presentation, our three priorities to navigate this crisis remain the same. So, first and foremost, to protect the health and well being of our employees, our clients and the community, in general.
This has been our number one priority from the very beginning. We acted with anticipation before the official government measures were put in place, activating plans in order to have as many of our employees as possible working from home, 86,000 of them working from home at some point.
I really would like to also put focus on the fact that in this situation, our bank -- thanks to the technological investments that we have been doing in the many years to-date, our bank has been performing as usual, thanks to our people. And again, thanks to our technological capabilities.
Our second priority in this environment has been to continue to provide an essential service to the economies that you operate in. We are managing the branch network in a very dynamic way, based on data.
As of June, 87%, of our physical network is open, versus 69% as of March. So it has been improving day by day.
We have also leveraged, more than ever, our competitive advantage in the digital front. Our digital and mobile customers have reached their maximum ever, 60% and 56% respectively, penetration rates in this period.
So, our digital channels, something that we have been focusing on, again, significantly in the past few years, we think is paying off, all those investments. And the third priority has been to provide financial support to our long standing clients.
We believe, we, the banks, we had a powerful part of the solution to this crisis, continuing to finance the economy. So we have contributed with a full pack of measures, including especially deferrals.
As of today, 4 million transactions have been deferred, which represents in value 9% of the Group's total loan portfolio. We have been very prudent in our credit admission policies, but we also tried hard to stand next to our long standing healthy clients.
In the first half of the year, we have increased our total gross loans by €26 billion in constant euros. Additionally, we have provided new lines of credit and loans to our business clients through government facilities, the government support programs for a total of €20 billion.
Moving on to slide number four, as highlighted in the previous slides. Once again, I would like to remark that our leadership in digital has been a huge advantage in this context.
So on the left hand side of the page; you see that our relentless focus on technology and the effort BBVA has been putting over the last few years in building, what we call, end to end digital products and processes, are proving to be differential. So some examples on that side of the page.
The number of visits to BBVA app globally, it's increased by 20%, if you compare before and after the COVID-19 crisis periods. In addition to pure digital, our high value customers, they continue to interact with their relationship managers through our remote infrastructure embedded into our app.
Like in Spain, the number of visits to my conversation as we call it in the app. That functionality, the chat functionality directly with your RM, it increased by 68% in this period, on an apples-to-apples basis.
As a result, given also our differential capabilities to go beyond servicing and execute sales digitally, this quarter we have achieved a milestone of reaching 50% of total sales in terms of value. 50%, the tipping point that we have been looking to the pass that threshold.
In terms of units, digital sales now represent 66% of our total sales, which are again as compared to many other peers that they are looking into, these are uniquely differential figures. Second, on the right hand side of the page in this complex environment, despite all the complexities we continue to deliver on the digital tools and functionalities, maybe very quickly a few examples GloMo or Global Mobile app.
This is inspired from our Spanish app, as you will know, which is recognized by Forrester as the world's best mobile banking app. They are now extending it to several other countries.
More than 240 solutions and features of the app have been developed globally and they are now reusable globally. So any of those solutions can be plugged in plug and play in any of the countries that were operating in the future.
This is a clear example of how our globality allows us to optimize costs, share best practices and develop industry leading solutions. The second example is we developed a very specific SME specific app, again, a global one called hammer [ph], launched in Mexico, and it will be launched in other countries along the way along the same lines.
And similarly for large corporates, at the bottom of the page. You see that given the work from home chain in our clients, we are seeing huge traffic 29 times in the usage of technological infrastructures we have built such as digital signature.
Moving to financial results, slide number five. I would like to emphasize that in this complex unprecedented environments, we continue to deliver a strong pre-provision profit, which increased 0.7% in current euros 17.6% in constant euros versus the same quarter of last year, in our view, a very, very strong reading on this one.
From a pure bottom line perspective. In the second graph from the left, you can see the reported net attributable profit is EUR636 million due to higher impairments.
As I will explain later, we continue to do we continue to do some extraordinary additional coverage related provisioning. Nevertheless, given the even heavier upfront provisioning we have done in the first quarter.
It is important to highlight that net attributable profit for this quarter, it's more than doubled like 118% increase versus the first quarter of this year. The third graph from the left it shows the very strong capital generation, one of our best quarters ever 38 fifths increase in the CET one ratio.
So we now stand at 1122 at the end of June 2020, being very close to the upper part of our target range that we shared with you in the first quarter presentation. Finally, on the right hand side of the page, you see that it's important again to note, one of our core metrics to look into is the tangible book value per share.
Despite the fact that the currencies are being significantly affected, we continued to grow our tangible book value per share plus dividends. It's very, very important in my view.
Going to page number six, slide number six. So if there are a few messages that come out from the results that we will be explaining in detail later to you.
First, again, resiliency in pre-provision, profit increasing 17.6% in constant euro versus the same quarter last year. Second, very strong cost control and efficiency, we will share the detailed numbers with you in a second.
But in our view, an excellent management of our costs, decreasing 4.9% in constant euro versus to the second quarter of 2019. And as you know, we have significant inflation in some of our geographies, despite that high inflation in those geographies minus 4.9 blended for the whole operation.
Third, significantly improvement in our cost of risk. It's now 151 bps versus 257 bps in the first quarter.
So we will again talk about more about this in the coming slides, but cost of risk which is one of the core topics that we're putting significant management attention to continuously evolve within our expectations, within our expectations. And fourth, once again, I think it is one of the great news of the quarter, strong evolution in capital metrics, fully-loaded CET1, increasing significantly by 38 bps versus last quarter, standing now at 1,122.
Moving to Slide number 7, I would like to highlight the positive evolution of the net interest income in the challenging environment increasing 2% in constant euros. Together with impressive evolution on net trading income, it offsets the negative evolution of fee income, leading to a strong increase in gross income of 6.1% in constant euros.
This evolution coupled with the good performance and expenses that I mentioned explains the 17.6% increase in operating income. As I explained previously, the bottom line has been negatively affected by the increase in impairments and provisioning versus the same quarter last year.
All in all though, net attributable profit for the quarter is €636 million, 40%, 40.5%, year-on-year decrease in constant euros. Moving to Slide number 8.
If you turn Slide number 8, you can see the evolution in the first half of this year, so year-to-date versus the same period last year. Again, very positive evolution in net interest income, gross income expenses and operating income.
Our operating income in the first half, it has increased by 19.2% in constant euros, again very strong reading even in normal times. First quarter COVID-19 front-loaded provisions of €1.4 billion together with additional COVID provisions that we are booking in the second quarter of around €0.6 billion.
They lead to a negative impact on the bottom line, but we wanted to be, as we mentioned in the first quarter, very prudent in our provisioning in the first quarter and in the second quarter, we have taken these additional extraordinary provisioning. Net attributable profit for the first half of the year is €928 million, 57.8% decrease year-over-year.
If we exclude the non-cash, the BBVA, USA goodwill impairments that we have recorded in the first quarter of this year. If we include that impairment, it's minus 2.1 billion the impairment.
The final reported net attributable profit for the half of the year is €1.157 billion. Moving to Slide number 9 to shed more light into the revenues breakdown.
And it's also a quarterly evolution, you see here the quarterly evolution. It's important to note that the 2% growth in net interest income has been achieved.
Again, despite the lower interest rate environments in practically all of our markets. The performance of net fees and commissions with a decrease of 9.5%.
This is very negatively affected by lower economic activity, especially in card payments, the payment business is a good part of that number. We are seeing clear pickup in that figure in the last months, but still it has affected the quarterly figure.
Retail loan production related decrease in insurance related fees under the fees and commissions. And there's this new regulation on fees in Turkey, capping certain commissions, which also affected that figure.
Excellent performance in our view on net trading income, fourfold increase versus a year ago, positively affected by the portfolio sales, driven by the volatility in the sovereign yields and also very positive results on global markets. All in all, again, robust revenue growth of 6.1% versus the second quarter of 2019, here, let me note that the second quarter is because you see the quarterly evolution on the stage, second quarters as seasonally affected by the annual deposit insurance payments that we do to single resolution fund.
So there's some seasonality in the second quarters. Moving to slide number 10, I did mention it, but I think it is important we put a lot of attention to this, a lot of attention to this.
The good performance of expenses, it continues to drop quarter-on-quarter and year-over-year. If you compare the year-on-year evolution, expenses dropped significantly by 4.9%.
We also maintain positive operating jaws with our core revenues, increasing by 3.2%, in the first half, when the expenses are decreasing by 1.5%. Again, the blended inflation rates in our footprint is 4.7%, in that context, these day decreases in the costs, it clearly highlights our, discipline on the on the topic.
And finally on the right hand side of the page, as a result of all of this, you can see an outstanding efficiency ratio of 45.8%, in the first half of the year, keeps improving 389bps versus 2019. A figure again, that is significantly better than our European peer group.
Slide number 11, loan loss provisions for the quarter €1,665 million. As I mentioned, a bit of this is extraordinary provisioning, due to COVID.
In the impairments line, there is also some piece under the provisions line, but in the impairments line, we have 576 million related to this additional provisioning. Still high, it's still a significant number, but significantly improving versus the first quarter, whereas all of you know that we have front loaded significantly, in the first quarter.
More specifically, the €576 million of COVID-19 related provisions, it includes a few things. It includes the additional provisioning driven by IFRS 9 macro scenarios updates, additional management adjustments, related to some idiosyncratic factors, in order to include the expected COVID-19 impact on specific names or certain sectors, in certain countries, not factored in the macro adjustment.
So as already explained in the first quarter, we frontloaded the expected full impact of COVID-19 for 2020, according to macro estimates that we had, back in April. As of July, we have updated these macro scenarios.
And I will share with them with you in a second. And the forecasts have been reviewed downwards, in some countries, leading us to include some additional provisions, which is -- which are the numbers that you're seeing here, again, still significant, but much lower than in the previous quarter.
Excluding the COVID-19 related provisions, as you can see in the top left chart, the underlying impairments, they would have remained almost in line with our previous quarters, except for the second quarter of 2019, which included some provision release one-offs. So it was a particularly positive quarter that that's one 2019 second quarter.
But in general, it's in line, MPL and coverage ratios remain almost stable, versus last quarter, 3.7% and 85%, respectively, which again show that we don't see deterioration in the underlying risk parameters yet. So all in all, we see a significant improvement on the cost of risk in the quarter, decreasing significantly to 151bps quarterly annualized versus 257bps in the first quarter of the year, again, good evolution in our view within our expectations, completely within our expectations so far.
Moving to page number 12, I did talk to you about this macro and this additional macro-related provisioning. Let me update you on GDP growth estimates to form the base -- which forms the basis of this quarter's additional provisioning.
As in April, the updated economic forecasts, they continue to project an incomplete V. We call it an incomplete V-shaped recovery.
However, in general, a deeper construction in 2020, especially in some countries, so heterogeneous impact across regions. That said, uncertainty remains high.
So, we continue to show as you see in this page, some ranges. 2020, again, downward adjustments in Spain, in Mexico of around three percentage points in the point estimates, and more moderate revision in the U.S.
with 0.3 -- minus 0.0 percentage points revision and the forecasts in Turkey they have been kept unchanged in the case of Turkey. Not depicted in the chart, but as announced by BBVA Research, we also do expect a deeper construction in South America, especially in Peru.
So, the Peru chart is not here, but Peru is also seeing some negative downgrade in terms of contraction in 2020. So, we took these scenarios in general towards the midrange and smooth them out the quarterly spikes as recommended by ECD and we have redone our provisioning on these forecasts.
So, the impact and the results, this is on page -- slide number 13, the breakdown of the impairments and cost of risk by country differentiating the COVID-19 related impairments and the returns underlying impairments. As mentioned the €1.7 billion of total impairments, €0.6 billion correspond to extraordinary provisioning due to COVID.
Out of the €0.6 billion extraordinary provisioning, Mexico and Peru got affected more significantly than others with a worse evolution versus several expectations as mentioned in the previous slide, but I would again highlight the fact that we continue to be -- as we have done in the first quarter, we continue to be prudent in these expectations and estimations. Additionally, in Spain, we have included some specific adjustments related to those sectors that are affected in this crisis, especially tourism and leisure.
Similarly, in the U.S., we are taking some specific provisions in the retail book consumer auto loans given the evolution of the pandemic. And in the case of Turkey, we have incorporated the impact of the depreciation on the stock of the provision for foreign currency loans that we have in the country.
And on the right hand side of the page, we see the year-to-date cost of risk. Year-to-date total impairments imply an annualized cost of risk of 204 bps as it is negatively impacted, especially by the provision front loading that we have been doing in the first quarter and now in the second quarter.
As mentioned, the quarter-only annualized cost of risk has been 151 bps. It's very important to highlight that excluding the COVID-19 impairments, underlying cost of risk continues to be within the traditional ranges 113 bps the underlying cost of risk, which is again in alignment with the previous quarters.
As we guided in the previous quarters, for 2020 full year cost of risk, our best estimate acknowledging the uncertainties still -- because there's still uncertainty clearly out there, we still expect this range of 150 to 180 bps. So, considering the fact that our year-to-date cost of risk is 204 bps, we are expecting in the second half of the year to be much below than what we have booked in the first half of the year.
If you go to slide number 14, before I hand it over to Jaime, this is the capital page. Very strong reading, one of our best quarters ever.
I would like to break down the 38 bps CET1 one capital accumulation of the quarters. If you can follow within the waterfall at the top, first our results generation that contributes 17 bps.
Second, the decrease in RWAs in constant euros adding six bps to the ratio, from the 6 bps to 5 bps comes from CRR supporting factors especially on SMEs and infrastructure, but excluding this, RWAs added only 1 bps to the ratio. That was good growth in the portfolios in this quarter, as you would see in terms of figures so big growth in sterling credit, but growth was supported by State Guaranteed Loan programs and it helped and there was some improvement also in market risk.
Third on the page in the waterfall, you see the positive markets slated impacts. This quarter adding 14 bps, mainly due to the mark-to-market of our fixed income portfolio and last in the others buckets, we include the release of 3 bps related to prudent valuation adjustment following EC decisions.
All in all, our CET1 stands at 11.22 as of June, 263 bps above minimum requirements 263 bps above minimum requirements it is important to also highlight that we practically achieved our year end guidance that has been close to the upper part of our CET1 target range, our target change as you all know is 225 to 275, and currently, we stand at 263. On the stage, it's once again worth mentioning the high quality of our capital ratio, it's real capacity to also absorb losses.
We are best-in-class in terms of the leverage ratio, standing at 6.1%. And also, considering the reasons executed and announced 81 in Tier 2 transactions.
We have fully endowed our 81 in Tier 2 updated requirements after P2R hearing. This allowed us to optimize our capital base, and our distance to MDA – distance to MDA is now standing at a very comfortable position of 304 bps.
Now, I turn it over to Jaime for the business area, Jaime?
Jaime Saenz de Tejada
Thank you very much, Onur, and good morning, everybody. Let me begin with Spain.
As Onur said there is taxation for 2020 have been revised downwards, with BBVA Research expecting a GDP contraction of between minus 10 and minus 15, due mainly to a longer and more intense lockdown than initially expected. On the other hand, 2021 expectations have been revised upwards BBVA Research now expecting you to be to grow between 3% and 9%.
In terms of activity, loans have increased by 2.7% year-to-date and better than expected, driven by the strong growth across commercial segments and very small businesses, supported by government programs. That more than offsets the negative impact of the lockdown in retail portfolios.
For 2020, we now expect total loans to increases slightly versus the slight decrease before. In the first half BBVA Spain delivered an outstanding pre-provision profit, up by almost 20% versus last year.
And that's despite the challenging environment. Thanks to card revenues growing by 3.6% year-on-year in the half, driven by strong growth in fees up almost 7.5%, thanks to higher fees in CIB and asset management.
NII grew by 1.7%, mainly due to lower wholesale funding costs and higher contribution from the global markets and the ALCO portfolio. For 2020, we now expect NII to increase slightly in line with activity versus a slight decrease we have before, higher NTI, up almost 80%, mainly driven by ALCO portfolio sales.
And then we also have a remarkable decrease in operating expenses down over 6%, and exceeding expectations. For 2020 for the whole year, we expect expenses to decrease by more than 5%.
And we could even – we could even beat this – this half of evolution. This strong performance of operating income has allowed us to absorb the increasing loan loss provisions versus last year.
Explained first of all by the base effect that Onur commented, in the first half of last year, we included 185 million of provision releases from a mortgage portfolio sale. And also the significant front loading of COVID related provisions were done in Q1 plus the 64 million of additional provisions we've done in Q2, mainly related to sectors most affected by the crisis such as leisure and transportation.
Having said so, cost of risk improved significantly from 154 basis points in Q1 to 100 basis points a year today and in line with expectations. For 2020, we now expect cost the risk to be significantly below first half levels.
As you can see, a good set of numbers and clearly above expectations. Let's now turn to the U.S.
GDP expectations for the U.S. in 2020 and currently in the range of between minus 4% and minus 7%.
We've had recovery of between plus two and plus five in '21. While this sample is expected to have a more negative growth rate this year, its dynamism will allow the region to catch up with the U.S.
recovery in 2021. Loan growth is up almost 13% year on year, driven by the commercial segments supported by the draw down in credit lines in Q1 and the 3 billion granted under the paycheck protection programming in Q2.
For 2020, we expect long growth in the mid single digit range. As for the P&L, the contribution of the U.S.
has clearly improved this quarter, and we've generated 126 million euros of net attributable profit versus the 100 million loss in Q1. Thanks to our resilient pre provision, profit and lower impairments.
Looking at the have numbers and comparing to last year, we have a 9% decline in NII, mainly related to the lower interest rates levels. However, we've seen NII growing by almost 6.5% versus the previous quarter, due to a higher contribution from the securities portfolio and the loan origination fees received from the PPPs.
I will also like to highlight the lower funding costs due to a better deposit mix with demand deposits representing now 84% of the total and a great price management with the cost of deposits down by 39 basis points in the quarter. For 2020, we expect the reduction of cost of deposits to continue and NII to decrease at low single digit improving on first half trends.
We've also face and increasing impairments here today, mainly explained by the front loading of COVID provisions in Q1. In fact, [Indiscernible] 56% versus the first quarter and cost of race decrease quarter on quarter as guidance from 260 basis points in Q1 to 180 a year today.
For 2020, we expect now cost of risk to be significantly below the first half. These two headwinds are partially offset by a very good performance, both in expenses and NTI.
Expenses are down by 2.5% versus last year. For 2020, we expect the expenses to decrease in line with the first half.
NTI increased by over 80% versus last year, supported by sales in the securities portfolio as well as better results in the global market division. All in all, good performance of the U.S.
franchise despite lower rates and a challenging environment. Let's now move to Mexico.
In Mexico, TL loans increased by 9.5% year-on-year, or 6% if we exclude the FX impact, mainly driven also by corporate clients drawing down lines, especially during Q1 and mortgage is growing in Q2 due to pent up demand. Operating Income in the half has remained more or less flat in constant euros versus last year, and showing its resiliency supported by an outstanding, net trading income and OpEx growing below inflation.
NTI is at over 85% and driven by good results in global markets and the insurance business. Expenses growing by 2.6% and below inflation, thanks to lower personnel expenses after the variable remuneration adjustments, which allowed us to maintain our best-in-class cost of income ratio off 33.8% in half.
For 2020 expenses should perform better than initially expected and growing below inflation. NII is down by 1.5% versus last year impacted by lower customer spread, both in Mexican pesos and U.S.
dollars explained by the strong reduction in rates by Banxico, 325 basis points versus June last year. And the mix effect as loan growth had been biased to commercial segments, up 14% year-on-year, which have lower yields.
One of the fact as deferrals in credit cards and SMEs do not accrue interest during the grace period. They tend to be four months and they started in April.
These had a one-off effect that’s 107 million of NII in Q2 that’s also worth to take into account. For 2020, we expect NII to remain flat versus last year.
The resilient pre-provision profit has allowed us to absorb the increasing impairments. Cost of risk improves slightly from 530 basis points in Q1 to 495 basis points year-to-date as impairments decreased by 5.1% quarter-on-quarter.
Going forward and considering that uncertainty still remains, we think that the 2020 cost of risk will be in line or slightly below the first half figure. Let's now focus on Turkey.
We have practically unchanged our GDP expectation for 2020 and 2021 Guarantee BBVA delivered a significant growth in TL loans up over 30% year-on-year, mainly driven by the commercial segment and supported by the credit guarantee fund in Q2. Foreign currency declines by almost 6% year-on-year.
For the whole 2020, we expect TL to grow around 25% and have a small reduction in foreign currency loans. Moving to the P&L.
Pre-provision profits in the half grew by 45% versus last year in constant terms, supported by the strong revenue generation, and continued focus on efficiency. NII was up 28% mainly explained by activity and a significant improvement in TL customers spreads due to the lower deposit costs, and that is despite the lower contribution from the CPI-linked portfolio.
For 2020, we expect NII to grow in the high-teens range in constant euros. We also had a very good performance of NTI, thanks to FX results, gains from security sales and the global market salary contribution.
Expenses grew 6.6%. That's significantly below inflation, which was almost 12%, bringing the efficiency ratio down to an historic level of 28.7%.
These pre-provision profit enable us to absorb the provisions related to COVID. Given the front loading efforts done in Q1 impairments have significantly declined in the second quarter, down 37% versus Q1.
As a result, cumulative cost of risk has declined from 380 basis points to 271 in half. For 2020, we expect cost of risk to be significantly below first half levels.
All-in-all robust set of results that continue to prove guarantees BBVA’s earnings resiliency with a net attributable profit increasing by 6.3% year-on-year in constant terms. And let's close with South America.
In Colombia and Peru BBVA research has significantly downgraded GDP growth expectations for 2020 to a range of between minus 5.5 and minus 10 for Colombia, and minus 12 and minus 18 for Peru, followed by an incomplete V-shaped recovery for 2021. In Argentina, the debt renegotiations that are currently taken place seem to be moving in the right direction.
Now some color on the main countries. In Colombia, NII grows at a high single-digit versus last year in constant terms supported by activity growth 12% year-on-year.
Cost of risk, improving quarter-on-quarter from 401 basis points to 337 basis points in the half after the significant promoting of provisions in Q1. These together with good performance in NTI and expenses explained the ‘improvement’ in net attributable profit.
Peru’s second quarter, net attributable profit only 3 million is impacted by provision related impairments and provisions as the GDP estimates deteriorated further. The NII decrease is explained by lower loan deal.
And finally, Argentina with a net attributable profit of €39 million in Q2 and showing a significant improvement versus the previous quarter due to low inflation adjustments and provision releases in the securities portfolio. And now back to Onur.
Onur Genc
Very good. So to close the whole session with the final remarks conclude first, reiterate the resiliency of our operating income, successful crisis management in our view, differential digital capabilities, they're coming up to be very clear messages of this quarter.
Our focus on cost control and efficiency improvement is clearly being seen in the figures in our view. Third, significant improvement in our risk indicators that allows the provision from floating in the first quarter, and we have done some more, but in retail line we have our expectation that we have been guiding you in the first quarter.
And lastly is a solid capitals generation in the quarters already achieving our year end targets much earlier than what we forecasted. So with this, I conclude the presentation.
Gloria, back to you for the Q&A.
Gloria Couceiro
Thank you, Onur. We are now ready to move into the live Q&A session.
So first question, please.
Operator
[Operator Instructions] The first question today comes from Francisco Requel [ph] from Atlanta. Francisco, please go ahead.
Unidentified Analyst
Good morning. Thank you very much for the presentation.
I will start with Mexico. Two questions here.
First on the on the asset quality, I mean, do you currently -- I seen the presentation a 25 -- 40% of household loans are currently under payment holidays. If you can give us some color of portfolios, how many of the claims have been furlough?
Or have areas in the past, if you have ever managed such a high level of moratoria? And the 5% cost of risk that you are guiding for the full year is close to that historical peak, but why do you think that this tiny say no wash in?
And they got Mexicans on the top line in volumes. I see that you are still – but I wonder, if you are still willing to meet then the strong loan demand, given the lack of state support, or if you are planning to adopt more prudent risk taking criteria?
And then on the outlook for the NIA, so you are considering that they moratoria -- four month moratoria will not be rollover just in that plugins are already prepare to pay the loans again. I will say if you can explain a bit more on the dynamics and volumes and margins?
Thank you.
Onur Genc
Okay. Thank you, Francisco.
So asset quality, 34% are payments holidays. It is high.
Yes, but it is also inline with some other countries that you might see in the appendix of the presentation, you would see the details of the different portfolios by countries. And this is relatively mid range or some of the other countries that you would be seeing.
It's what is demanded in the market. But what I will be seeing in that payment holidays?
Most of those deferrals are payment holidays. They will be due in July -- late July, which is these weeks -- this week, and also mostly in August.
So we will see, but the first signals that we are getting is not bad at all. So the first signals we are seeing some customers are already closing their loans or paying their installments in the consumer loans and mortgages and so on.
The thing that I would like to highlight regarding Mexico is first of all, close to half of the deferred portfolio is mortgage -- close to -- in retail, close to half is mortgage. So there's a clear collateral value that we should be taking into account here.
So we are guiding in the asset cost of risk number for Mexico to be flat to slight decrease that what we had been seeing in the first half. In every other country, we are seeing a significant decline in the second half or cost of risk.
In the case of Mexico, in our forecasting, in our thinking, we think it's going to be slight decrease, but not much given the situation of the country. What is different in Mexico?
First of all, the pandemics still continues in terms of the new cases and so on. And the second, the government support is not as high as in other countries, as a result, we would see some impact, but we are all be taking them into account in our figures.
The first signals that we are seeing is positive, but we have to go through this August timeframe to really see how it will be panning out. We have segmented all of the portfolios.
We are proactive reaching those customers. That's where we are getting the signals.
We are proactively reaching every single portfolio, depending on the risk level. And we are seeing some positive signals, but we have to go through the month of August.
On the top line volumes, given the lack of state support, Francisco you're asking, are we still willing to lend. We are willing to lend to anybody whom we think is credible and healthy.
And we have -- as you all know, we have the best franchise in Mexico in terms of customers, franchise, in terms of talents, in terms of systems and so on. You would have seen that in the second quarter of this year, we are actually gaining market share on things like deposits.
We have gained 120 bps market share in deposits. So there's some flight to quality happening in Mexico as well.
Given that, so, we will see and it will be prudent, but we will continue to lend. In the -- again, in the appendix of this presentation, you will see the evolution of new production for retail products, like mortgages and for consumer loans.
What you'll see is mortgages basically completely recovered that V-shape, you can see it in that chart, at the appendix. But in consumer, we are still not at the levels of February or January and so on.
One of the reasons for that is, especially on those products, we are being prudent. So we will see some volumes.
But, we will continue to be prudent at least in the coming months. Regarding NII, outlook for NII, what is the expectation?
First of all, if you look into the simplified P&L of ALCO, you will see that in net interest income in the second course, we have registered a minus 7.3% decline. That decline should not be extrapolated to the second half of the year, should not be.
Why, that minus 7.3% is affected by multiple things. But first of all, the rates in the market, Francisco, cut 225 bps since the beginning of the year.
And that is affecting obviously the lending yields and the impact on the deposit costs. So the way to recover those rate declines comes a bit late.
So, it's a lag delay and you are seeing it in the second quarter, but you will see it even more in the coming quarters in terms of cost of funding. So that lag in responding to the lower rates or Banxico, will help in the second half second.
Second, in the second quarter, some of the impacts of the payment deferrals, some of them were without interest, and that should not be extrapolated again. So we will recover from that as of August.
Given those factors, we are guiding for Mexico in terms of NII, flat to slight decrease rather than this minus 7% that you're seeing on the table.
Gloria Couceiro
Thank you, Francisco. Next question, please.
Operator
The next question comes from Carlos Cobo, Societe Generale. Carlos, please go ahead.
Carlos Cobo
Hi. Thank you very much for the presentation.
A couple of questions for me. One is on the site assets.
We have a couple of different approach to these, well, lower quality assets perhaps over the last couple of years from peers. And I would like to ask you about, your total exposure to DTAs.
It’s true that tax loss carryforwards are slow, but what do you think about the quality of other time difference on grantee DTAs. And if you have gone any updated absorption test on those DTAs and is any chance of seeing impairments here, like to see your views.
And secondly, if you could update us on your CET1 target for the end of the year, capital progress has been better than expected. And now, you're close to the high end of the range, as you said.
So, are you raising the target or capital formation in the second half? That’s great.
Thank you.
Onur Genc
On EPAs. Jaime ?
Jaime Saenz de Tejada
Okay. Okay, so first of all we have guaranteed EPAs of €9.4 billion.
Those are guaranteed by the state. They do not expire and they do not depend on future results.
As you know, we pay a fee for them every quarter. That's roughly 17 million of fees net of taxes, which are recorded on the on the corporate center, income tax line.
And then we have 4.8 billion of non-guaranteed EPAs that are currently deducting 67 basis points in CET1. For these we need to do projections and we do update our projections as you can imagine every single quarter.
We did we did a major change at the end of 2019, in which we increase the years, in which we evaluate the DTH, we used to use only a 10 year P&L forecast and we increase it to 15 after realizing the peers were all along those lines. And we feel that we will be generating in years ahead, even after the lower income expected, especially in the next couple of years in Spain, enough taxable revenue in order to recover these non-guarantees EPA.
So, we do not expect unless things change significantly, we do not expect any impairments on these EPA numbers.
Onur Genc
And Carlos on the CET1, we are very likely that it would be above our target range by the end of year. As you all know, there are some corporate transactions that were announced some time ago, Paraguay and also Allianz, the partnership on insurance.
They will be adding, when they are completed, they are not sure that they will be completed by the end of the year. But when they are 13 bps, there are some pending regulatory impacts that we will be benefiting from, especially on the software treatments, our expectation would be 12 bps, 13 bps on that one.
Also considering those additional impacts, we would be very highly likely we would be above our target range at the end of the year. So what then we are not planning to raise our 225 to 275 goal that we said actually a quarter ago.
According to ECB recommendation, as you all know, our Board of Directors, we committed that we would not be making any dividend payments for the year 2020 until the uncertainties caused by COVID-19 disappear and in any case, we would not do any dividend distribution before the end of 2020 fiscal year. So, we stick with that, but going forward starting from 2021 once the COVID uncertainties dissipate and the existing supervisory recommendation is eliminated, our clear intention obviously is to give that back to the shareholders.
So, we will resume our dividend payments. And as we have mentioned before the COVID crisis, we would also explore other shareholder remuneration methods, like share buybacks.
So, we will go back to our lever but we are not planning to raise our target. No.
Gloria Couceiro
Thank you – thank you, Carlos. Next question, please.
Operator
The next question comes from Alvaro Serrano of Morgan Stanley. Alvaro, please go ahead.
Alvaro Serrano
Thanks for taking my questions. Good morning, everyone.
Can you hear me, okay?
Gloria Couceiro
Yes. Alvaro, we can hear you well.
Alvaro Serrano
Yeah. Thanks.
I have follow-up on Mexico and then on cost. On Mexico, I think Jaime outlined that the impacts from the payment holidays was €107 million in the quarter.
I just was wondering around the NII recovery in the second half that you've pointed to, how much visibility you've got on that, is that €107 million. I mean, you said that August was the biggest rollover, how quickly that's going to come back.
And how sure are you that most of that's going to come back? And related to that is on the loan production.
I mean, it's recovered from the lows, but it's still -- you were pointing out the recovery is slower in Mexico and loan production still looks like 40%, 50% lower in consumer up until June. So I was wondering what visibility you have, how confident you are in that NII recovery and anything you can point it out, point us out on in terms of volumes?
And the other question was on cost, more generically, I mean your cost performance was obviously very impressive, 7% better than consensus in the quarter. So impressive that it kind of -- I mean, how are you doing it from a qualitative point of view, and I know you've given the guidance by division, I don't have time to do all the numbers yet, but conceptually, what are you addressing in the cost and how sustainable that is going forward?
Is Q2, the right run rate, is there extraordinary from COVID. And more thinking about sort of long-term trend and next year's trend, I know you don't give guidance, but conceptually, what is their extraordinary in the quarter and what is sustainable?
Thank you.
Onur Genc
Thank you, Alvaro. On the Mexico question the €107 million, the impact on the NII from the payment holidays, it will disappear as Jaime mentioned, as of August, so that $107 was basically for the quarters, most of it is done.
So for the second half, you would see very little of that one. So you can take that one out in terms of extrapolation for the second half.
In terms of the loans and the volumes and so on, our guidance would be mid single-digit growth, driven mostly by wholesale portfolios. As you said, we see some softness in retail production, and as I mentioned, it is partially deliberate.
We just want to be cautious. These are times to be prudent and that's what we are doing.
But overall, we still see single, mid single-digit growth mainly by wholesale, because we are the largest bank in Mexico. We are seeing from very credible, big wholesale clients some demand.
So that will be there. So mid single-digit is the expectation for the broader volumes for the whole portfolio.
And as I mentioned for the NII, flat to slight decrease in overall NII, that's why I was saying that the second quarter should not be extrapolated at all in terms of the percentage. On the retail, you also ask about the curve.
Again, it's in the appendix, you would see that basic mortgage is back to where it was. So mortgage in April was 70, now 100, consumer in terms of Index 200 of pre-COVID.
It in terms of consumer, it was around 30% in April, and now it's back up to 60%. And again, it's partially deliberate on our side.
That 60% even in July, we are seeing some gradual, gradual pickup, but we should not be rushing into it. We should not be rushing into it.
We are managing the value of the franchise and we are not going to rush into it until we see that the situation stabilizes a bit more and so on. One of the things about Mexico that you should all be aware is Mexico, again, the signals on the delinquency side, on the cost of risk side is quite good and we deep dive into it, because as I mentioned, there are some negative factors out there.
The government support programs is not there. So you would expect the negative impact of that on cost of risk.
But some – there are some other factors, I mean, the remittance flow from U.S. to Mexico in this time period in May, and in July, and as you might know, we have a company in the U.S., who is like 30% of that flow, remittance flow from U.S.
to Mexico, so we can see it from our business very clearly. We peaked in May, and then again in June, so, there is a lot of remittance flow coming from U.S.
to Mexico. So, some of those factors are kicking-in.
We see an accumulation of deposits actually in the balance sheet. If you look into the deposit buildup in Mexico, for different customer segments, retail, SMEs, commercial, you're seeing deposits going up, because people are not spending either.
So those are other factors that is balancing some of the negativeness, hence giving us some positive signals on the cost of risk. But we have to be prudent in this time period.
So we are not going to be pushing the retail production in a major way unless we see it's justified from a value perspective. On costs – sorry, I took the – first one on the costs.
So what are we doing? We are doing a lot.
I mean, it has been one of the short-term priorities that we put on the table. There was – there was a list of four, one of the four was costs.
We have done a very detailed bottom-up exercise with every single business unit, all the countries and also every single business units in the holding. And then, we have gone line by line on where we are because we said, this is a tough year.
We have to recover some of this from costs. We came up with detailed plans and we are delivering on the plans.
Should we expect a similar positivity for the second half of the year? The answer is clearly yes, because we are seeing already in the – in the months in July and also we are seeing it in the plans.
Jaime Saenz de Tejada
I got a – once you add up all the guidance that I provided in terms of expenses, you will be able to see that what Onur has just said, it's up. I think it's very relevant that we are expecting a better second half of the year in pre-provision profit overall for the group versus the first half, particularly supported by better performance in both Mexico and Latin America, which as Onur has said, the areas that have been more effective in Q2.
Gloria Couceiro
Thank you. Thank you, Alvaro for the questions.
Next question, please.
Operator
The next question comes from Marta Romero of Bank of America. Marta, please go ahead.
Marta Romero
Good morning. Thank you very much for taking my questions.
I've got three quick ones. The first one on dividends, your message is very clear nothing until we get more clarity on the effects of that pandemic, when the time comes to redefine your dividend policy, I was wondering whether you may consider bringing the script dividend back or you're happy to leave that script in the past?
The second question is a follow-up on the outlook for Mexico's top line. Your fees in local currency are 17% below last year, how fast and to what level do you expect the fee line to recover?
How much is volume driven? How much is lower prices?
Do you see political pressure to keep prices low given what's going on? And the third one, sorry – quick, quick one, looking at your coverage ratios by stages.
Stage one loans show coverage of 66 basis points. For years your cost of risk has been around 100 basis points.
Shouldn't you have at least 100 basis points coverage for stage one loans or am I taking the wrong approach here? Thank you.
Onur Genc
Okay. Thanks, Marta for all the three questions.
On dividend is -- let's do it very short and sweet. Is script going to come back?
The answer is clearly no. We announced this some years ago.
We said we are going to be consistent, predictable on our dividend policy. It's cash.
And the percentages are clear. So we'll continue with that approach.
On Mexico. I didn't get the thing, but you were asking about the fee income, I think the minus 17%.
The fee income, as you know, there are three things that drives that. Number one, the payment systems, in the case of Mexico is more important than even other geographies.
So the card, credit card business, the merchant acquiring business, so the overall payment business. That's the key reason why the decline has been there, minus 17%.
And on that one, what I can tell you is that it goes back to the economic activity. What I can share with you is if you look into the spending that we are seeing on our cards, and plus on our merchant acquiring terminals in Mexico, the spending in the country on -- in the week of 12th of April, with an index of 100, 100 is last year same week spending.
On the 12th of April, the number was 68. And in July, early July, that same number is 96.
So there is a clear pickup in spending and in economic activity, which will drive a good part of the fees and commissions. The second most important relevant thing in the fees and commissions is insurance.
A good part of the insurance fee income is driven by retail loan production. So if you produce in retail, you will recover some part of that as well.
Again, you have in the appendix the curve of how that has been changing. As I mentioned, some gradual pick up better than the bottom that we see in April.
So there will be some recovery on that one as well. Once again, the 17% -- minus 17% that you see in fee income in Mexico is going to be much better in our view.
Obviously, obviously, if there are no more lockdowns or major confinements that we see in the country, that is not going to be, that should not be extrapolated to the second half. The last question.
So you're saying our cost of risk is in general on a typically 100 bps. Our coverage for Stage 1 is 66, so shouldn't it be close to 100?
I think it should be look at a different perspective, because we will always have Stage 2 and Stage 3s. So you cannot just look into Stage 1, it should be the blended all the three.
The blended all the three would give you the cost of risk. And the probability of Stage 1 moving to Stage 2 and Stage 3 is what defines coverage.
In the case of Mexico, you see it in the charts, our coverage ratio is 165%. We are covering much more than what we have in the NPL.
Why? Because the likelihood of going from the Stage 1 to Stage 2 and 3 is much higher and the collateral, the loan different -- the loss given default is much, much worse.
In the case of Spain, the same coverage ratio is 65. Why because the portfolio is most mortgage and you will get the coverage from the collateral or the mortgage.
So, you have to look into multiple dimensions. And in my view, you have to look into the blended loan portfolio to be able to come up with the proper coverage.
Jaime Saenz de Tejada
Yes, I think this is really important in the yearly cost of risk, what you describe as underline, we include provisions not only for the Stage 1 portfolio, but also for the Stage 2 and 3s, as Onur has said.
Marta Romero
Very good.
Gloria Couceiro
Thank you. Thank you, Marta for your questions.
Next question please.
Operator
The next question comes from Ignacio Ulargui from Exane BNP. Ignacio, please go ahead.
Ignacio Ulargui
Hi. Hi, good morning.
Thanks for taking my questions. I just have two questions.
One, if you could give us some detail on the performance of those payment holidays that have expired in Mexico and in South America. I mean, I see that in Mexico, there's €1.1 billion of moratoria have expired so far.
How this has performed? Whether clients have been paying or not, to get a bit of a sense of how we could expect those.
And the second thing is, on the NII guidance that you've given in Mexico, I assume this in local terms. Thanks.
Gloria Couceiro
Ignacio, yes, NII guidance is in local terms.
Onur Genc
Yeah, it's always -- the old guidance is always in constant, to be able to make them comparable. On the first one, on the deferrals, Ignacio, it's -- again, most of it is expiring, actually, this week.
We are watching it actually daily, and most of its expiring, it is actually in August. But the pieces that we have seen is, what we call, return to payment ratio, which is the key KPI that we are seeing, is actually improving every single week and month.
Why? Because the deferral period actually changes depending on how late the loan was when we deferred it.
So when we deferred loans, in April, the ones that were even late at the time, let's assume there was a loan 30 days late, we only give three months to that one. If the loan was 60 days late, we only gave two months deferral to that customer, if you know what I mean.
So depending on the initial starting point of deferral, we changed the deferral period. So the ones that are expiring that we are seeing now, is actually the ones that were already late and the funds that first expired were the most problematic ones.
So we started in early June with a very small portfolio of deferral returns payments ratio of around 20%. And in the last weeks, we are seeing 60%, 70% in certain portfolios, the consumer portfolio, and even the ones that are expiring now, were already late when they were deferred.
So when the real deferrals come and expire, which is again this week, and in August, our expectation is that number is going to go even higher. These numbers, as I did mention, are better than what we were expecting.
But we have to see, especially, this week and August, to be able to better judge on this, but the first signals are quite, quite positive.
Gloria Couceiro
Thank you, Ignacio. Next question?
Operator
The next question comes from Adrian Cighi of Credit Suisse. Adrian, please go ahead.
Adrian Cighi
Hi, there. Adrian Cighi from Credit Suisse.
Thank you for taking my questions. Three quick follow ups, please.
On the cost of risk, you reiterate the guidance for this year. Do you see some of the elevated costs of risk potentially shifting into the next year, given the moratorium in a number of geographies?
Or do you expect a sharper decline towards more normalized into next year? On capital, very briefly, you've mentioned the corporate transactions in the software intangibles, do you see any other sort of potential headwinds or other impacts from TRIM or other regulatory sort of developments?
And then thirdly, just follow up on costs. You've mentioned quite a quite a number of, sort of, cost measures have been taken.
Looking at bottom up this quarter or this year, do you expect some of these to be temporary, i.e. coming back in 2021?
Or should we consider these as a sort of more permanent cost reduction? Thank you.
Onur Genc
On cost of risk, do we expect this to trickle down to the next year, obviously. But in retail, which is the key portfolio here, on retail and SME book, most of the deferrals you will see it again in the appendix would be expiring in the next three months, especially in August.
So given that the trickling down to 2021 would be much or less in retail, we will see most of it. And it's all factored in the 150bps and 180bps expectation.
For corporate wholesale portfolio, there might be some trickling down, but there might be some trickling down even 2022 and so on. So, on those ones we will see.
We will see in 2021. On the headwinds, the TRIM, on the TRIM, as you all know, they are delayed to 2021.
We already updated you in the last quarterly presentation. But on the TRIM impact, especially on the low default portfolios, which is the last remaining TRIM that we have.
We would be having 10bps, but again in 2021. So from this year, they're taken out and some others another 5bps that you might be expecting in 2021.
Jaime Saenz de Tejada
Yeah, from the BBVA guidelines, some on PD, LGD will probably have an additional 5 basis points hit, but also delay for 2021. So we don't expect any supervisory nor regulatory hits in the second half of 2020.
And on the other hand, we will have the tailwinds coming from the treatment of software.
Adrian Cighi
Yeah.
Onur Genc
We will probably add to 12 to 30 basis points of capital in the second half of this year.
Adrian Cighi
Yes. On the cost, how temporary sales would we expect some structural reduction out of it?
Yes, you should expect some structural reduction out of it as well. Roughly one-third of the decrease in terms of the programs that you put on the table, which led to this reduction, roughly one-third of that is variable compensation related.
So that variable compensation is a decision for this year. So for next year, we'll see.
So that might be the temporary component or the most temporary component out of it. The rest, we are trying to make sure that most of it is structural.
In the case of, for example, hiring and FTE numbers, you would again see it in the holding. I mean, we are close to 15% to 20% decline in the holding costs, because we are being very attentive, again on variable compensation, but also on hiring.
Until the end of June we didn't hire anyone to anywhere. Since the end of June for networks, for client service, for sales, we are selectively open the hiring.
For Corporate Services as we call them, we are not hiring. So that all of that is structural, you will keep that FTE advantage, in the coming years as well.
Gloria Couceiro
Thank you, Adrian. Next question, please.
Operator
The next question comes from Sofie Peterzen of JP Morgan. Sophie, please go ahead.
Sofie Peterzen
Yeah. Hi it's Sofie Peterzen from JP Morgan.
I was so wondering if you can go just tell me about your NPL uplift when I look at your NPL as they grew as you can see in this quarter or for many quarters increased from 3.6% to 3.7%. So, my question would be at what point do, you expect NPL to beat.
And last simple question would be on growth. I wondered if you can clear that, as you see you can see that additional price to be unlocked and premiums have gone up.
It is something that, we potentially should expect? And my last question would be just on NPL outlook.
I know you mentioned [Technical Difficulty] Thank you.
Onur Genc
Well, Sofie, we didn't want to interrupt you, but your line was completely broken. So we couldn't get to your questions.
We only got pieces of it. So maybe let's try if not, please dial back again with a different line, so we can get the full answer, so we don't miss you out.
But the first one was on the NPLs as far as I understood, on NPLs, the outlook on NPLs. You have seen a slight pickup in the second quarter in the NPL, mainly because of wholesale client, actually one single client in Turkey, so we don't see any increase in the NPLs at all.
Again, because of the deferrals, and because of the government support programs that we have in place, if you are deferring people don't go to, again in the installment loans, they don't go above 90 days, because they are paused on their payments. That's why we are now -- we are not seeing any negativity on the NPLs.
We will see, depending on the August results, some pick up maybe in the third quarter, but we are not seeing, again, at the moment those trends. There is one important thing here though, we did those deferrals, but obviously all of those deferrals were done at the request of the client, and in some cases, we were proactive, in certain cases, the client was proactive in getting that deferral.
We could have been facing a situation where the clients could have said, forget the deferral, I'm not going to pay, I don't have the money, I'm unemployed, I closed my business, I'm not going to be doing any of those payments. And that didn't happen, which is a great signal in terms of willingness to pay from -- on behalf of our country.
So the deferral is not giving us the true picture on the NPL yet, so maybe we will see some more NPLs in the second half of the year. But if we manage those deferral programs proactively and in a client specific way, we do feel in terms of cost of risk and the NPLs, we would not see major, major hikes.
The goodwill. Is it more to come, Jaime?
Jaime Saenz de Tejada
I think we have a very small goodwill, actually, we only have €2.7 billion of goodwill as you know, because we required detail in Q1, €1.8 billion of these comes from the U.S. where we did a significant impairment in Q1 of this year, but also Q4 of last year.
And since we did it in April, things have recovered quite significantly in the U.S. in Q2, even more than what we were expecting when we did impairment.
So we are quite confident that no additional impairments will need to be done in the short-term.
Gloria Couceiro
Thank you, Sofie. Next question please.
Operator
The next question comes from Daragh Quinn of KBW. Daragh, please go ahead.
Daragh Quinn
Hi, good morning and thanks for the presentation. Question on Spain, on the corporate loan growth, what does your eyes look for demand there once the ICO loans are fully dispersed?
And then a second question, just on -- you're seeing how the business has performed during a lockdown? Is this changing your view on the speed or ability to reduce the physical distribution branch network?
Do you think the recent comments or changes in approach maybe from the ECB, coupled with the ongoing conditions, foods accelerator only to re-evaluation of consolidation opportunities in Spanish markets? Thanks.
Onur Genc
Well, on the on the Spain loan growth, we do expect growth. Overall, the BBVA research actually estimates in terms of total loan growth to be single digit at the lower end of the single digit, but we do expect that to be the case for the industry and we will be aligned and if not betters.
Again, most of the growth as you have seen is driven by the wholesale segments mainly because the ICO continues by the way until the end of September. As you all know, we have done much better than competitors in ICO.
Our original share was 11.1%, if I'm not mistaken, given the performance that we had using those lines, we are now getting more than our fair share more than 16%. So we have done really well on ICO and we will continue to do that in the third quarter.
Because as I said, given that performance, we are granted additional lines more than others, and that will be running until the end of September. So the third quarter you will see some ICO health growth.
Overall for the year, we will see clear growth in wholesale, in mortgages, some deleveraging, in consumer, some deleveraging. As you know, consumer has been growing very significantly in the past three years.
But this year, given the production being low, especially in the second quarter, we will see some deleveraging on consumer as well. So retail segments, negative probably and wholesale segments robust positive that's the expectation on the volumes in Spain.
Speedo velocity of physical, closure of physical and so on. As we said many times before we are -- we were one of the first in my view, we were the pioneers in saying that digital is going to be a competitive advantage for the banking industry.
We have invested so much in it, and we are getting the benefit out of it. In that dialogue in that speech that people are giving many years ago, we were also saying that it doesn't mean that people will disappear.
But it does mean that probably physical spaces would be not needed, that's the trend. That trend would be accelerated somehow, the people will still be there because we still need to provide advice on financial products to our customers, but the branches will become less relevant probably and in that sense, the acceleration will be there.
So we have closed, we are planning to close 160 branches this year in Spain, some acceleration or that pace might be expected for the coming years. The third one was consolidation in Spain.
We said many times before, we always look into it. Our pure focus is organic growth.
We have a game to play. In all the markets that we are seeing, we are gaining market share, thanks to digital, thanks to our people.
That's our focus and if opportunities arise, which we always analyze, we will look into them as well.
Gloria Couceiro
Thank you, Daragh. Next question please
Operator
. The next question comes from Andrea Filtri of Mediobanca.
Andrea, please go ahead.
Andrea Filtri
Yes, thank you for taking my questions. Two questions one on capital and one on cost of risk.
On capital, just understanding better in a dynamic way. How much risk weighted asset inflation do you envisage from breaking migration and when you think it will start to emerge?
And at what point would you be prepared to grow your CP1 targets or to go above your target to appease the market about the headline numbers? And of cost of risk, what is the main factor which could imply further material coverage charges in your view?
Thank you.
Onur Genc
Okay. On rating migration, we are already seen some impacts from rating migration -- but actually very minor in Q2 with numbers.
That impact will probably be a little bit stronger in the second half, but probably more towards 2021 as some of the more notorious mature. By itself, the fact that two-thirds of our RWAs are being calculated using standard models means that rating migration has less of an impact.
So, it's mainly the large corporate sector -- the large corporate segment meaning mainly CIB, plus the sovereign portfolios, the ones that will be more affected by ratings. Having said so, in the case of sovereign portfolios, everything that as you know, everything that you sell local currency base and in geographies that are Basel-compliant are zero risk weighted and will not be affected either by those rating migrations.
So, that is something that we will start to see as our quarters go by. It will be under the RWA column and, of course, as you can imagine, is factoring in all the guidance that that we provide.
Jaime Saenz de Tejada
On the capital topic, I would like to add one thing. Our distance to MDA and as you know, it's calculated on the phased-in basis is 304 bps.
Our requirements is, I think, among the large banks is the lowest in Europe. And I hate to say this, but those factors somehow are not seen too much in the reports that I see and read.
If you look into the distance to MDA, 304 bps, it is one of the most -- one of the healthiest distance MDAs that you can find. So, would we change our target?
We don't think so. I mean, 225 to 275, I think it's a very safe target.
But obviously, it will be decided on dialogues with many other stakeholders. Regarding the cost of risk, what is the main factor that might triggers further COVID-related provisioning?
If I pick one thing, lockdowns. If there's one number, lock -- one word lockdowns.
We have seen it in different countries, independent of the country changes a little bit from one country to another. But every week of additional lockdown triggers 0.5 to 1% decline in GDP every week.
So, if there are strict lockdowns coming back in in certain countries depending on the sensitivity of 0.5% to 1%, we will see impact. And we will see impact on fee income, we will see impact on especially on cost of risk.
As it stands, given still the spikes in many countries, I believe as a society we are somehow learning to live with it. That's why you are seeing this credit card spendings in every country going above 100 index now in many countries, because the COVID is still there, but we are finding your way.
But if you go back to strict lockdowns, that will impact the numbers.
Gloria Couceiro
Thank you. Thank you, Andrea.
Next question, please.
Operator
The next question comes from Britta Schmidt of Autonomous Research. Britta, please go ahead.
Britta Schmidt
Yes. Hi, there.
I've got three quick questions, please. The first one is to follow-up on M&A.
Those who comment also hold for other geographies, for example, the U.S. The second one is on the U.S.
Could you detail how much PPP fees were net interest income? And what sort of delta we should expect there for the coming quarter?
And then lastly, could you give us an idea as to what inflation has been included in the Turkish CPI expectations for the year? Thank you.
Onur Genc
On the first one I take and then the rest maybe Jaime. On the M&A that comment is valid for every geography, not true for any geography.
We will always look into it if there is value creation for our stakeholders. On the rest, PPP.
Jaime Saenz de Tejada
I think we haven't provided that number. But we have provided that we disburse the 3 billion of PPP loans during Q2 and the fees standard.
So you can more or less calculate the average. And then on…
Onur Genc
It's around €100 million, but not all of it is registered in the second quarter.
Jaime Saenz de Tejada
Yes. All right.
We've actually we've registered roughly €70 million in Q2. Sure.
Okay. And then on inflation, we started the year accruing 8.5% in the first quarter.
In the second quarter, it went down to 7.5%. So the average of the first half is actually 7.8%.
Our current expectations for year end inflation is 10%, which probably means and that the year-on-year comparison of these impact on NII is minus 75%. And – sorry, €75 million affecting first half numbers, which clearly means that the second half is going to be much better, not only than the first half of 2020, but also much better than the second half of 2019.
Gloria Couceiro
Thank you, Britta. Next question, please.
Operator
The next question comes from Stefan Nedialkov of Citigroup. Stefan, please go ahead.
Stefan Nedialkov
Thank you. Hi guys.
Good morning. It’s Stefan from Citi.
A couple of questions in mind. First, on the cost of risk, the 150 to 180 guidance.
Last quarter you told us that the upper end corresponds to a second wave. So just wanted to prove that a little bit further.
Have you changed your second wave estimate? And in a way is the reiteration of the 150 to 180 basically, because you just feel more comfortable that there's not going to be a second wave and hence your second wave estimate increase on the upper end of that range?
The second question is on Mexico. You have been saying in the past that really NII is much more driven by threats than rates.
When you look at the new production, how much scope there is for repricing on the new loans? And if you can just give us some more color on the percent of floating loans versus fixed loans?
Also on Mexico in terms of the cost of risk, you basically seems to be guiding to 500 basis points for the full year. Some more color would be very welcome in terms of things like how many of your payroll back – consumer loan customers are employed by the stage, percentage guaranteed by agencies.
And in terms of ratings, do expect defaults to happen at the B level and below? Or are we talking more like BBBs and below, any color around that would be greatly appreciated?
Thank you.
Onur Genc
Jamie, take the first one.
Jaime Saenz de Tejada
Sure. Cost of risk -- customer's guidance at the end of last quarter was to between 150 and 180.
And we gave us -- that wide range, because of the uncertainty on the environment. But we didn't specifically said that at the higher end of that range was because of a potential second round at all.
It's simply because it was complicated to – we didn’t have sufficient info on the specialty, how the shape of their recovery was going to look down the line. I think we have more info today on how that shape is looking in the countries that entered the crisis before.
And we are starting to see these V-shape recovery in Turkey, in Spain, in the U S maybe not so -- maybe not in every single country, in every single product, sorry, but overall that's clearly the message which, gives us a lot of confidence, even more than once we had at the end of Q1 that we will be within that, 150, 180 range at the end of the year.
Onur Genc
And once again Stefan on this one -- the thing that matters to us is again the lockdown, if there are strict lockdowns or not. So this second wave has become a fluid motion in my view.
So if you have strict lockdowns coming out in October, November, it might affect the number otherwise we are in certain cases, we are in the second wave in certain geographies or we are in extended first wave, whatever you call them. So you should look into the strict lockdown.
Regarding Mexico, the numbers are already there. So all the retail loans are practically fixed in the corporate portfolio, only a certain segment or the large segment is variables.
On the 500 bips. There's so much question on this one.
So you tempted me into it. I will give you a bit more details on Mexico and the deferrals and also the percentages that we see.
First of the all, in terms of the -- in the retail portfolio, retail and SME portfolio, because the rest is one-on-one client management and we are, we are doing really well on that portfolio, but on retail and the SME, what you should know it's around, the total stock of deferrals is like €8.5 billion. 47% of that is again, mortgages.
And the very high percentage or those mortgages are less than 60% LTV, but 47% is mortgages. Consumer loans, 24% of the deferrals is consumer loans.
And roughly two-thirds of that is to our customers who have payrolls with us, so relatively well contained, two-thirds of that 24%. The rest 14.5%, 15% is credit cards and there's, you know, the ticket size of a credit card loan is much lower than the – than a typical instalment loan.
And then another 14% is small business. Given the fact that 47% is mortgages and a good collateralization on that portfolio, we feel confident on mortgages, on consumer, given the fact that two-thirds are payroll, we feel relatively comfortable on that portfolio.
Credit cards, given the fact that the average ticket size is much smaller than other portfolios around 1000, if I'm not mistaken, we feel comfortable on that portfolio as well. And small business, that's the portfolio that I'm a bit worried about, but that's around 14% of the total deferrals as I mentioned.
I'll give you one more number before again, there were so many questions on this one. Consumer loans, as I did mention in one of the previous questions, the ones that expired, the first versus the ones that were the most problematic because we delayed depending on how late the customers were when we did the deferral.
So we have seen in terms of returning to normal, we have seen the ones who expired in April, very small percentage, but in April, there were also some expiration that we have seen a 14% return back to normal. The ones who expired in May, 15%, the ones who expired in June, 19%., the ones who expired in July, which are still late, which were late when we deferred them, we see 68% return back to normal.
So we are seeing a clear and weekly -- week by week, a clear trend of improvement and the August portfolio, very hypothesis that it will be even better. So all of this again are giving us clear signals that it's going to be definitely within that range that you mentioned, excluding the probability of that are strict lockdowns.
I hope it helps, Stefan.
Gloria Couceiro
Thank you. Thank you, Stefan.
We are running out of time. So clearly we have time for the very last question.
Next question, please.
Operator
So today's last question comes from Carlos Peixoto of CaixaBank. Carlos, please go ahead.
Carlos Peixoto
Hi, good morning. Thanks for taking my call.
Carlos Peixoto from CaixaBank BPI. My question would actually be on the on fees just a one in particularly in Spain, basically in the release information that was some coming back from corporate transactions in the quarter.
I was wondering how much this could be seen as a one off effect in the polling that what type of expectation do you have for fees for the full year? Thank you very much.
Jaime Saenz de Tejada
Okay. For net fees and commission, we expected is a slight decrease in 2020 versus 2019 and mainly due to the lower asset management fees and to the lower activity that that we've had due to the lockdown.
When people go down, transactional activity tends to go down and those are the fees that are more affected and also the reduction in low production on the retail side that also tends to generate a significant amount of fees also conditions these, these, these guidance. Overall CIB has, has delivered.
They're way above budget in Spain and overall in the group and is allowing us to offset part of the negative impact, so, as Onur has previously said, as long as we don't have another lockdown, we should expect a better second half of the year overall.
Gloria Couceiro
Okay, so thank you, Carlos. And thank you very much to all of you for participating in this call.
Let me remind you that of course, the entire IR team will remain available to answer any questions you may have. Onur, do you want to close?
Onur Genc
No, I'm just -- I just want to extend my sympathy and empathy to all of you who are on the other side of the call. It's very tough to understand the numbers, very tough these days.
But in our case, we have tried really hard to be as transparent as possible for you to be able to have a perspective on how the business and the numbers are evolving. The IR team -- we have a wonderful IR team, so please don't hesitate to reach out to them.
If you need any more details, but broader message is a message of positivity, I would say. Thank you, so much for all joining in.
Jaime Saenz de Tejada
And have a wonderful summer.
Onur Genc
Have a wonderful summer. Exactly.
Thanks so much. Bye-bye.