Banco Bilbao Vizcaya Argentaria Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 28, 2023

There are 15 speakers on the call.

Operator

Morning, and welcome, everyone, to BBVA's 2nd Quarter 2023 Results Presentation. As in previous quarters, I'm joined today by Onur Ghent, our CEO and Rafael Salinas, BBVA CFO. They will discuss quarterly figures, and then we will open the line to receive your questions. Thank you very much for your participation. And now I turn it over to Onur.

Speaker 1

Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining our Q2 2023 results audio webcast. Before going into the presentation, as you already know, yesterday, we have announced that Rafa, who's sitting next to me here, after more than 3 decades, 3 decades of a brilliant career at BBVA. He's going to be leaving his CFO position and executive responsibilities as of September 1.

Speaker 1

Rafa has been clearly one of the very important contributors to the success of BBVA. He will continue to be connected with the bank in nonexecutive responsibilities. But before we start, I want to extend my heartfelt congratulations to Rafa in his last results presentation, and I think that's a positive note, Rafa. Very good. In terms of the results, let me start with Slide number 3.

Speaker 1

On the left hand side of the slide, you can see our net attributable profit Reaching EUR 2,032,000,000. I would like to highlight that we are posting another record of quarterly results, passing for the first time the EUR 2,000,000,000 mark that is also 11% above the results of the same quarter of last year. These results bring our earnings per share up to €0.33 13% year over year growth, a higher growth rate than the one off net attributable profit due to the share buyback programs that we have been executing. The graph on the right hand side of the slide, it shows our capital ratio at 12.99 above our target range and well above our regulatory requirements. Page number 4, our tangible book value per share plus dividends.

Speaker 1

It continues the outstanding evolution of previous quarters with a 15% increase year over year and 2.3% growth in the quarter only. And regarding profitability, on the right hand side, We continue to improve our excellent profitability metrics, reaching in the first half of the year 16.9% in RoTE and 16.2% in ROE. These are being the highest figures of the last 10 years. We remain with these figures, we remain clearly one of the most Profitable European banks and we keep advancing on this every quarter. Moving to Slide 5 and focusing on the 2nd quarter results.

Speaker 1

This is the summarized P and L and you see the year over year comparisons here, especially the second column from the left in the table, what stands out is the impressive 38 point 8% year over year increase in gross income and 54.6% growth in operating income, which then obviously explained the net attributable profit growth of 30 5.3% in constant euros, excluding the non recurring impacts. In terms of the quarterly evolution, on the right most columns on the table, net attributable profit increased both in constant and current terms, 30.5% and 10%, respectively, versus the Q1 of this year, quarter over quarter evolution. Slide number 6, this is the first half, the 6 months, Again, comparing 2023 versus the same period of last year, once again, I would highlight positive gross income evolution, 35.2% growth in constant euros, led by the increase in NII, 39%, also great fee income performance, different from our competitors, growing 13%. All in, the strong gross income growth, coupled with positive jaws and also the solid underlying risk metrics, it leads to an outstanding recurrent net attributable profit of €3,900,000,000 and excluding nonrecurring impacts, this implies 35% growth in constant euros and 23% in current euros the 1st 6 months.

Speaker 1

Slide number 7, some light into the revenues breakdown and quarterly evolution. We very much like the trends here. We call them the chimeneas in Spanish. They are good trends, very good trends. And as you can see, net interest income Growing strongly 38% versus last year, 9.4% compared to last quarter.

Speaker 1

Solid activity growth Clearly, but also to a larger extent customer spread improvements. 2nd, the positive evolution of net fees and commissions, increasing 11% year on year and 7.9% versus last quarter, again payments, asset management, transactional businesses, all of them helping here in a major way. Net trading income is driven by the evolution in global markets and the FX hedges that we do. All in all, excellent growth in gross income, the one at the bottom on the right, 39% year over year growth and 15.6% quarter over quarter growth in gross income. Moving to Slide 8, let me focus a bit more on Spain and Mexico, also highlighting our conviction of continued revenue growth in the coming quarters in those two core geographies.

Speaker 1

On the left side of the slide, you can see the strong loan growth in the most profitable segments in both Spain and Mexico. In both Spain and Mexico, you see very healthy growth in the key portfolios that we have. Then on the second block from the left, you see the ongoing improvement in the customer spreads for both countries. In the case of Spain, it has increased during the last year to 312 now. And for Mexico, customer spreads, they continue to increase in a gradual but very consistent manner, reaching 1193 this last quarter.

Speaker 1

As a result, you can see the strong NII growth year over year in both countries. 2nd block from the right, you see that 51% growth year over year in Spain and 24% growth in Mexico in constant euros. Regarding the slight, Quarter over quarter NII decline in Mexico, I also saw some notes from some of you on this. It's a reflection of 2 things basically. It's a very deliberate But first, we are promoting off balance sheet customer funds as an alternative to time deposits, as such boosting fee income while containing the deposit costs.

Speaker 1

And second, as again, you can see in the appendix of our presentation as well, we do have a larger ALCO book in Mexico, locking in higher rates for longer in anticipation of a lower Rates scenario. So we have been doing this. As a result, this strategy, which we believe has brought a lot of value to us in the quarter and beyond, But this strategy implied higher wholesale funding costs in the quarter. But having said all of this, as you can see in the slide, sound underlying trends in core drivers for Mexico's NII activity and customer spread. And as a result, we expect to continue growing NII and our core revenues in the coming quarters in Mexico.

Speaker 1

Finally, on the right hand side of the slide, coupled also with the strong underlying trends in payments and as I just mentioned, net positive inflows to off balance sheet products in both countries, it is leading to higher asset management fees. And as a result, you can see the fee revenue growth quarter over quarter very healthy in both countries. Slide number 9, we continue showing positive jaws at the group level. Good performance of gross income obviously is helping 35.2%, as we mentioned, while the costs are growing 21.6%, mainly due to the impact of high inflation countries. On the right hand side of the slide, you can see our efficiency ratio, which shows an outstanding in our view, outstanding improvement to 42% from 46.7% of last year, and we clearly remain as one of the most efficient European banks out there.

Speaker 1

Slide 10. In this page, you can see that the set quality metrics, they are within guidance and they showed stability in the context of sound activity growth and higher interest rates, first on the left hand side of the page, our cost of risk, it decreases slightly to 104 basis points and remains in line with our expectations of cost of risk around 100 points in 2023. Our NPL ratio is at 3.4% on the right hand side, slightly higher quarter over quarter, while decreasing obviously versus the same period of last year. The coverage ratio on the same chart remains at 80%. Slide number 11, on capital.

Speaker 1

Our CET1 as of June remains at a very sound level and well above our SREP requirement and our own internal target. And turning to the waterfall in the page, the main impact of the quarter are, 1st, very obvious on the page, but 58 basis points on the results generation. 2nd, again, on the waterfall, I'm running from left to right. The dividend accrual and the AT1 coupon payments all in detracting 31 basis points. 3rd, 26 basis points due to RWA's growth, more than half of this, 14 basis points was in Mexico.

Speaker 1

All of this growth, as you can imagine, will result in even more capital generation in the coming quarters. And lastly, bucket of others of minus 15 basis points. This bucket is more negative than usual this quarter, mainly due to the exceptional Turkish lira devaluation. The direct impact from the Significant is 26% Quarterly depreciation of Turkish lira, as we have guided you last time, the direct impact was limited, 4 basis points. Why?

Speaker 1

Because we have done a significant hedging here before the elections. That strategy worked, and we did save capital as compared to an otherwise very low hedge scenario. However, these hedges, they come at a cost, and which in the last months has been particularly high and volatile in In Turkey, as you can imagine, the cost of the hedges plus the reversal of the mark to market gains of those hedges that we have booked in the Q1 has led in total to 13 basis points, rather idiosyncratic, I would call, quarterly impact in our CET1 ratio. Combined with the direct impact, the total 17 basis points total impact Due to Turkish lira devaluation basically. Having passed this significant devaluation, we now returned back to normal hedging levels in July.

Speaker 1

And as you can see beyond this, apart from this, the rest of the impacts of this bucket roughly offset each other. Finally, at the bottom of the page, as we announced this morning, you see our plan to do an extraordinary share buyback program of EUR 1,000,000,000 subject to regulatory approvals, obviously, in the last 2 years, in the form of dividends and share buybacks, we have already returned €8,200,000,000 to our shareholders. We have underscored our commitment many times in these calls and beyond, to profitable growth and attractive remuneration to our shareholders, again, many, many times before. In our view, this is yet again another representation of our delivery and of our consistency in delivering our messages as well. This program, as the name says, is an extraordinary distribution and is therefore not included in the scope of the ordinary distribution policy.

Speaker 1

And we will start the execution as soon as we receive the supervisory approvals. As you have seen in the previous pages, we are already at 17% RoTE Bank, 15% year over year growth in tangible book value per share. With such metrics, you can be sure that we will continue to Again, we discussed it many times before, but we believe that the most healthy way of growing the balance sheet is through growing our franchise of clients, customers. In the first half of twenty twenty three, another record, we have acquired 5,400,000 customers, doubling the client acquisition that we had 5 years ago. And even more impressive in this page is the share of those acquired through digital channels, which increased to 65% in the 1st 6 months.

Speaker 1

It was 11% in 2018. And we do think that this is the key difference versus most of our competitors out there. Slide number 13, our commitment to sustainability. We are accompanying our clients and supporting their sustainable transition. We have reached a new record quarters channeling EUR 19,000,000,000 in sustainable business, a total of EUR 169,000,000,000 since 2018.

Speaker 1

Therefore, we remain committed with our increased target of channeling cumulative €300,000,000,000 to sustainability by 2025. On the right side of the page, you can see the results of our effort to extend this business of sustainability to all of our customer segments. We are starting to see the results of our specialist teams, our expansion in the sustainable products catalog, and we are seeing the growth not only in a certain segment, but in all segments, especially in Enterprises and Retail segments, you see a very significant growth this quarter this quarter and this half of the year. Slide number 14, as I did last quarter, I would like to highlight this is an important page. I would like to highlight our positive impact on society.

Speaker 1

And it's our core business. With our primary We continue to help our clients achieve their life and financial goals. In the last year, we have increased our loan book by 8.4%. This implies it's a very high level number, but this implies, for example, that we have put some examples there. In the 1st 6 months of the year, we have helped more than 70,000 families buy their homes.

Speaker 1

We have financed the growth of more than 263,000 SMEs and self employed individuals and more than 70,000 larger corporates and through this promoting employment, promoting investment and promoting welfare in the society. Year to date, you also see on the right hand side of the page, we have also mobilized EUR 7,400,000,000 to finance inclusive growth, as we call it, initiatives, including social infrastructures, social mortgages or financing entrepreneurs. And finally, Slide number 15, Regarding our long term targets announced on the Investor Day, first good news to note here is that on all the metrics, we are well on track to realize them. 2nd, as mentioned in our previous quarterly call and as we are in the mid period of our 3 year strategic plan, we wanted to give you a better guidance on how we expect to fare at the end of the planning period with an upgrade of our expectations. So on the page, from left to right, from top to bottom.

Speaker 1

So from cost to income, a slight improvement is expected versus the original goal of 42%, as you see in the page. For ROTE, we believe that we will reach high teens as compared to our original goal of 14% in 2024. For tangible book value per share plus dividends, we expect to reach mid teens versus our original goal of 9% average annual growth between 2021 2024, target customers, we expect to be 40% to 50% above the original goal. And for sustainable business, where we have already improved our goal twice, we expect our performance to be aligned with the latest upgraded goal. Therefore, according to our current best estimate and in the absence of a very exceptional situation, the key message in this page is that we expect to comfortably beat all of our original goals.

Speaker 1

And now for the business update, I turn to Rafa. Rafa?

Speaker 2

Thank you, Onur, and good morning, everyone. As Onur anticipated, we are very pleased to share with you a very good set of results. We are delivering very solid operating trends across the board and excellent progress in the different goals of the business units. Our organic profitable growth strategy remains well on track in all the geographies with some momentum in those products and segments where we see the greatest value. Starting with Spain, Slide 17, we continue seeing very positive dynamics.

Speaker 2

In terms of activity, loan growth continues to be driven by sound dynamics in the most profitable segments, consumer and SMEs, where we are consistently gaining market share. In the mortgage portfolio, early repayments remain high, deleveraging Despite the sound new lending inflows. In terms of P and L, we are showing a very strong pre provision profit growth with core revenues as the main drivers of the P and L. NII growth step up in Q2 leverage on improving customer spread. The repricing of the loan portfolio continues while the deposits pass through in the retail segment is nonmaterial, keeping the cost of deposit well contained.

Speaker 2

As of today, we are not facing much pressure on deposit remuneration, which leads us to upgrade our NII guidance for 2023 to grow between 40% to 45%. Also, I would like to highlight the positive underlying dynamics on fees. Sound contribution from the Asset Management business, backed by strong net inflows and higher credit car fees. Efficiency ratio continues to improve to 41.8% as of June, given the highly positive jaws of the geography. And finally, on the asset quality side, underlying trends remain stable and within our expectation.

Speaker 2

Year to date cost of risk stand at 27 basis points with no major changes in the quarter. Overall, another very positive quarter for PVVA Spain increasing, I would say, normalizing history contribution to the group results. Slide 18, Mexico. The economy in Mexico is performing better than expected, showing a very strong employment momentum, supporting activity growth and asset quality metrics. The loan portfolios continued to show a very positive evolution in the quarter.

Speaker 2

Worth mentioning the 5% quarter on quarter growth in most profitable segments, consumer loans, credit cards and SME. On the P and L components, once again a very strong quarter in Mexico. Net attributable profit at record levers since the €1,300,000,000 mark with core revenue reaching plus 26% year on year growth. Solid trends on NII are maintained leverage on productivity growth above 11% year on year and the further improvement of customer spread. As you know, activity and effective pricing policies are the main drivers of the Mexico our Mexico NII.

Speaker 2

These trends make us much more confident about our NII guidance to grow at high teens, I will say even close to 20s in 2023. Outstanding fee growings above 20% year on year with some growth across the board, highlighting credit cards and payment fees and the increasing contribution from the Asset Management and Insurance Business. Efficiency ratio stand at very low levels of 30 percent 30.4% as of June, as revenues continue to grow well above the expenses. Finally, asset quality trends remain in line with expectations and with our portfolio growth strategy, cost of risk remained stable at 286 basis points. NPL ratio stand at a very low levels in the quarter of 2.5% and with a sound coverage ratio close to 130%.

Speaker 2

All in Mexico continues delivering extraordinary results quarter over quarter. Regarding Turkey, in Slide 19, after the election in May, we are seeing steps toward more Orthodox economic policies. Rates hiked by 900 basis points. We have seen some easing of regulatory measures in the banking sector and currency interventions has decreased. In anticipation of this change in policies, we have continued decreasing the duration gap of our total balance sheet in Turkish lira to only 2 months, 61 days.

Speaker 2

In the first half of the year, net income in Turkey reached EUR 525,000,000 that represents or implies a 10% decline in the quarter, negatively impacted by strong currency depreciation since March 23. Beyond the FX evolution and looking at the key operating trends in the quarter, we can see that the customer spreads in Turkey lira remain under pressure as regulation in place continue to stress deposit rates while maintaining caps on lending yields. In this context, guarantee is managing to offset the pressure on customer spread with a strong performance in fees, especially from payments and credit cards and also very strong net trading income. Asset quality continued to improve in the Q2 of 2023, thanks to strong recoveries in the commercial segment and still limited NPL entries in retail. As a result, the cost of risk in the first half of twenty twenty three stand at very low level of 23 basis points.

Speaker 2

And finally, South America. The region continues showing positive activity trends supported by growth geared towards retail portfolios. Positive trends in core revenues and the higher contribution from net trading income drive net income growth. This is partially offset by inflationary pressures on expenses and higher impairments. Nevertheless, efficiency continues to improve to 44.8%.

Speaker 2

Higher provisioning needs coming from the retail performance in all the Eurofins lead us to review our cost of risk guidance for the region to around 225 basis points in 23 from the previous guidance of EUR 200,000,000 All in, net profit in the region almost reached EUR 370,000,000 in the first half of the year. And now back to Onur who is going to highlight the main takeovers of the quarter.

Speaker 1

Thank you, Rafa. And we do have this commitment with you that 25 minutes or so, we will finish the presentation and go to Q and A. So this last page on the takeaways, we already have gone through them. So let me not go through them. The only message that I would give to you is that we are very, very pleased with the quarterly results, and we are on a very good path.

Speaker 1

That's our clear conviction. So maybe let's go to the Q and A, Patricia?

Operator

Yes, sure. Thank you, Onur. We are now ready to

Speaker 3

Yes. We have our first question from Masim From JB Capital, Mahesh, your line is now open.

Speaker 4

Is about net interest income in Spain. I was wondering when do you expect the customer spread to top out and what kind of customer spread should we think when their pricing is done for loans and deposits? The second question is on the loan book. Corporate loans and CIB growth has slowed. Actually, The loan book declined quarter on quarter.

Speaker 4

I was wondering if you see more competition there, less demand or simply this is seasonality? And then the last one is on capital. I was wondering if you could update us on the expectations for headwinds and tailwinds in the second half of the year. And the question is with the 70 basis points of excess left After the buyback, why haven't you done more? Thanks.

Speaker 1

Very good. Let me take them very quickly, Rafa. The spread the topping of the spread, It depends obviously on the beta. I mean, we did guide you in the previous calls that the beta would be around 20% to 25% by the end of this year. We do think that it's going to be better than that in terms of results.

Speaker 1

So the latest expectation that we have is going to be around 20 rather than 20 to 25. So the topping is obviously dependent on the deposit beta, and we don't see pressures there. As a result, We don't see the topping will happen at least until the Q1 of 2024. So we have another 6 to 9 months For the continued upgrading of the customer spread. Again, we did share this with you before, but 2 thirds of our mortgage book, It is repriced every 6 months and onethree every year.

Speaker 1

And when do you do the repricing? You take 2 months Before you rebore. So there's a 6 plus 2, 12 plus 2. So there's a 2 month delay in which price you took you take as well. Given that resetting that we have in our contracts, again, until 2024, we don't see the peaking happening.

Speaker 1

Corporate CIB, is it more competition or less demand? Very simple, less demand. Capital, given the fact that you have, you say, 70 basis points, Why haven't you done more? Max, we also discussed this before, but I would like to once again We say it every time, but there is no harm in saying it over and over again. We are committed to profitable growth, and we are committed to attractive distribution to our shareholders.

Speaker 1

That's what we have been saying for many quarters now. And we see this as a continuous process. We deliver, we then invest for more delivery with a very strict capital return perspective, so it has to be value creation focused, then we deliver again. Deliver, invest, deliver. In the process, reward your shareholders also very attractively.

Speaker 1

I mean, these are nice words, and I'm sure many other banks, many other companies say this, but forget our words. I do think that we are delivering. We are delivering. We are a 17% RoTE business. We did mention this to you before.

Speaker 1

Again, as we mentioned, 15% year over year growth in tangible book value per share. Every quarter, please look into the quarters before, Every quarter, we are consistently increasing our earnings per share. We now have doubled basically doubled our earnings per share in less than 5 years. Despite all this 17% RoTE business, we are still trading below book. We are still trading below book.

Speaker 1

We do think this is an amazing value creation opportunity for our shareholders. And we do see this as a continuous process. Rather than words, deliver, create value, share. And in that sense, we don't have a rush. It's a continuous process.

Speaker 1

We will continue to do this as long as these valuations are where they are, as long as we deliver those returns. And we also have guided you today regarding our rather long term perspective on our RoTE, you can be sure that we will continue to deliver and we will continue to Share it with our shareholders. So it's a continuous process. You also asked about maybe the future impacts and so on. We don't expect Any regulatory impacts this year, as we did mention in the Q1 call, we had 20 basis points in the Q1 capital number And that was the number for the year, so we don't expect anything extraordinary in the coming quarters.

Speaker 1

Obviously, we are In many multiple emerging economies, so the currency has some impact in certain cases. But on that one also, we did mention today that we have seen Some major devaluation in Turkey, only in the month of June or in the quarter, there was a 26% devaluation. So we don't expect major issues there as well also given the hedgings

Speaker 5

that we do.

Speaker 3

Thank you. Our next question is coming from Francisco Raquel from Alantra. Francisco, your line is now open.

Speaker 6

Yes. Thank you for taking my questions and congratulations to Rafa. My first question is on Mexico. NII customer Spread is up quarter on quarter. The loan book is still growing.

Speaker 6

There is a slight decline in net interest income. If you can Please explain the non customer NII impacts in this second quarter. You mentioned before it's ALCO and Wholesale Funding, how does it work? And in the context of the slight decline, if you think that the Q1 was the peak of the NII A cycle or you think that NII can grow sequentially in the coming quarters still? 2nd is on capital.

Speaker 6

The capital generation Has been limited in the 2nd quarter with the retained earnings offset with the growth in the risk weighted assets. So the question is why you are not generating capital organically with record earnings on the 17% RoTE? And separately, you are booking 17 basis points you mentioned related to the currency impact in the 2nd quarter, which is more like €600,000,000 you have also booked €600,000,000 of trading losses at the Corporate Center in the first half, Which I understand is related to currency hedging. So you can explain the hedging strategy, the total costs incurred Today and how do you see the trade off between the cost and of this strategy? Thank you.

Speaker 1

Perfect. Rafael, maybe for the second question, you can explain the general hedging policy that we have in both P and L and also capital To our colleagues. But let's start with the first question. Mexico NII, as you mentioned, slight decline in the quarter. We partially talked about it throughout the text, Francisco.

Speaker 1

But basically, 2 things happened in Mexico in the quarter, And you can see it in the numbers, in constant terms. So in Mexican peso terms, there was a EUR 3,000,000,000 move, EUR 3,000,000,000 worth of pesos moving from deposits to off balance sheet funds, mutual funds. And rather than start paying a lot to the time deposits and so on, as you can see in our numbers that our cost of funding is still relatively limited as compared to 11.25 percent Central Bank rate in Mexico. Rather than kind of tainting the whole portfolio, we have chosen that we would rather and they are typically private banking clients, high liquidity clients and so on. We have chosen that it's better also given the markets and so on to take some of that money to off balance sheet funds.

Speaker 1

That EUR 3,000,000,000 is the first component. The second component is, as you have also seen, you can see also in the appendix of our documentation, we have increased our ALCO book by €3,000,000,000 in Mexico, 3 plus 3. This implied more wholesale funding. The second component also maybe talk A little bit on that one. Why did we do that?

Speaker 1

Because we do think that we have to serve for the long term. Today we have bought we have increased our all co book for example with 4 to 5 years Mexican peso paper Trading at 9.5, 9.6 and so on. The cost of carry for that is 11.25. So we are basically rather than let me say Rather than giving our liquidity to the Central Bank at 11.25 and making a very good NII only for today, we said we are going to give it to 4 years, 5 years at 9.25%, 9.50%. Why?

Speaker 1

Because we do think that the rates are peaking, the official rates are peaking in Mexico, we are basically caring for the long term, mid to long term also in the process. To cut the long story short, this €6,000,000,000 implied higher wholesale funding costs. We funded it at 11% or so, Which then created the impact on NII. We have done a large part of this already in the Q2, but more importantly, looking forward, we don't think we have reached the peak yet in Mexico. So our expectation for the 3rd and the 4th quarter is that we will have higher NII as compared to the 2nd quarter, higher NII in both quarters going forward.

Speaker 1

In fact, our guidance to you, if you remember, for Mexico has been NII to grow at high teens for the years. We are now thinking that it's going to be close to 20%. So the 3rd and the 4th quarter will continue to go up. Then why are you not generating capital in the quarter, it's a detail. Again, we partially talked about it throughout the presentation, but it's important.

Speaker 1

So maybe I take a little bit time here and then I give it to Rafa for the general hedging policies that we have. As I mentioned, it was an exceptional it was an extraordinary quarter in the sense of Turkish lira devaluation. Turkish lira devalued 26% only in 1 quarter. So expecting this devaluation, elections and so on, starting at the latter part, at the end of the first quarter, we started hedging our excess capital, more than usual, more than the policy that we have. And again, that strategy worked.

Speaker 1

So despite the heavy devaluation, we only lost 4 basis points as a direct impact from this heavy devaluation. And we were guiding you, you remember, Every 10% devaluation, 1 basis points, this was the direct impact. But obviously, again, these hedges, they come with a cost. This increased hedging, it cost us 6 basis points as the cost of carry, 6. Plus, In the same period, interest rates in Turkey, as you know very well, they were very volatile.

Speaker 1

Given this, you have to mark to market constantly value these hedges in capital, constantly mark to market. At the end of the Q1, these hedges were very valuable and as such, we have booked 7 basis points of mark to market value gains in the Q1. As interest rates have normalized since then, in the Q2, that mark to market gain of 7 basis points, we reverted it. And basically, it's a wash. It's an exceptional positive capital gain in the Q1, which was reverted in the Q2, which was a wash.

Speaker 1

Based on these three components, 4, 6, 7, 4 the direct impact 6, the cost of carry 7, the reversal of the mark to market, that is the 17 basis points that we have been talking about. We still saved 12 basis points versus an alternative, no hate scenario. So it's great that we have done these hedges. But especially given also the flow of the impact from the Q1 to Q2, Q1 was more positive than the underlying numbers and the Q2 you have seen the 7 basis points mark to market reversal. But these are all details.

Speaker 1

Beyond all these details, especially in the case of Turkey, what matters is the forward perspective. Looking forward and having passed this significant devaluation, we normalized our hedging levels back to 60% of excess capital. Our sensitivity is now 3 basis points for a 10% devaluation, plus and now in the document you will always see this additional plus, we have 1 basis point monthly cost for the hedges independent of devaluation. So our going forward is 3 basis points for a 10% devaluation, plus 1 basis point monthly cost, and which we think, again, we'll hopefully make the 2nd quarter number quite exceptional. But our overall hedging policy on P and L and capital, Rafael, do you want to comment on this?

Speaker 2

I think we have shared many times, but very quickly, Francisco, I think you know that our hedging policies have some main objectives. It's just to manage the volatility of our P and L to FX movements and also to manage the volatility of our CET1 ratio due to FX movements. In the case on average, we tend to have 40% to 50% hedge on the P and L On the contribution of the different geographies in different currencies to the net attributable profit of the group. And then in the case of the hedging of the sensitivity of the CET1 ratio to the FX, we also hedged between 60% 70% of the excess capital in the different currencies that at the end of the day is the metric that generate that variability and sensitivity. As you can imagine, given the current performance of the different geographies and the contribution of different geographies, the key in the management of FX posture on the P and L is Mexico, when we have been clearly hedging those that The contribution of Mexico to the group, the only issue is just that when we have movements, either depreciation or appreciation, concentrating in a period of the year.

Speaker 2

In this case, we have seen a significant appreciation of the peso and peso of more than 11% in the first half of the year, we are going to have an asymmetry. The positive contribution or the incremental contribution in Mexico because of the precision of the currency is going to spread out throughout the year. Although on the hedging is a mark to market and therefore we have already impacted on the valuation of those hedges, the full appreciation of the peso in the first half of the year. So assuming that the Mexican peso from the rest of the year from now on behave in line of the forward curve of the Mexican peso, what we are going to have is not additional impacts on the hedging, but we will see on the contribution in the second and the third and the fourth quarter. On Mexico, a higher contribution in terms of the P and L.

Speaker 2

In the case of the sensitivity of the CET1 ratio to currencies, as you can imagine, the most relevant metrics is just Turkey. What we have seen in the Q2 of the year has been a very extreme scenario in terms of the depreciation of the currency in trucking, the 26% that Onur already mentioned. I think we did, I think, a great job hedging a significant position, more than 80% of our since excess capital in Turkey, for the Q2 of the year, the hedge work as Onur already mentioned, but clearly those hedge has been expensive in terms of the carry cost of those hedge clearly offset some of the positive contribution of the hedging. But as I said, on general terms, we will see we will continue hedging in terms of P and L 40%, 50% of the contribution in the different currencies to the group NIP. On the in terms of excess capital of that we have in the different currencies, we will continue hedging between 60% 70%.

Speaker 1

So I mean, our general policy, there is a range around this 40% to 50% of P and L expected P and L for the coming year and 60% to 70% of excess capital, we hedge it. That's the policy. And sometimes we go beyond, as we did in the Turkish case in the first half, But this is the general policy. One final thing. Given this flow of some of the impacts between the 1st and the second quarter, I would encourage you to also look into the first half in terms of the capital evolution.

Speaker 1

In the first half, because there's then it's a wash Within the quarters, there's a 19 basis points capital generation, 20 basis points, as I mentioned, regulatory impact in the Q1. So In total, 39 basis points of before regulatory impact, 39 basis points of organic capital generation, which is clearly better than what we have been guiding you before, which was we expect before regulatory impacts and before M and A inorganic moves, we expect SEK 1,500,000,000 excess capital generation every year. Obviously, quarters, 6 months, 1 year might change, but in our planning, the latest planning that we have for the next 3, 4 years, our own internal numbers tell us that Rather than that 1,500,000,000 we would expect again, the quarterly or the 6 month numbers might change depending on the currency and so on. But on average, for the next planning period of 3 to 4 years, we would expect in the base case EUR 2,300,000,000 excess capital generation. And to me that's the important number.

Operator

Thank you, Francisco. Next question please.

Speaker 3

Thank you. With our next question comes from Benjamin Thomas from RBC. Benjamin, your line is now open.

Speaker 7

Good morning, both. Thank you for taking my questions and good luck, Rafa, in whatever is your next endeavor. Firstly, you've upgraded your 2024 RoTE guidance 14% to high teens. Can I just invite you to comment on what high teens might mean? Looking at where you draw the line on Slide 15, it suggests 16% upwards, But perhaps it's reading into things a little bit too much.

Speaker 7

Perhaps you could give some idea of the shape after that point, whatever the answer is for Is there potential for further growth in RoTE after that juncture? And then secondly, on capital, you currently own something like 86 Exemptive guarantee, given the excess capital that you have, can you rule out in the short or medium term spending any of that excess capital On increasing your ownership in the entity, I know that management see untapped value in this geography, but investors tend to have a different view.

Speaker 1

Thank you. Let me start with the second one. 86% of guarantee, are you planning to increase your share? We are very comfortable with our With our existing share ownership, so we don't plan anything. Benjamin, do you want to comment on this one?

Speaker 1

Rafael, I'm having some second thoughts on you. This is your last, Should I be nice to you, not nice to you? Do you want to take the first question? The 14%, there is a range, it's not so clear. What does High teens mean you're planning for the coming year and a half?

Speaker 2

I think it's

Speaker 1

High teens is high teens.

Speaker 2

Clearly, I think the message is very clear. I think we are clearly going to outperform what was our goal. And we definitely want to guidance in that direction. And second, today, what we are projecting, what we are seeing is this high teen that we can talk, can be 2017, 2018, 2019. Clearly, clearly, we continue working to make sure that we do high teens as high as possible.

Speaker 2

So clearly, our projection are telling us now that we are going to be on the upper part of the teens range, clearly in the very upper part, but we will continue pushing the business units To get the

Speaker 1

best. I will add 2 things on this one. Number 1, the ranges that you see there, it might seem like it's arbitrarily drawn, it's not. So there is an intention behind those ranges. But why is it a range?

Speaker 1

Why aren't It's so precise and so on and typically we are precise. It's because of the fact that we are not providing guidance for 2024 today. We have a clear process with you. The 2024 guidance will be provided in the Q1 of next year. We have to see some of the uncertainties and so on.

Speaker 1

But our clear expectation at the moment is I'm looking into the reports of some of you, the analyst reports, they're expecting 14% Return on tangible equity for BBVA for next year, what we are telling you is that we clearly think We are going to be delivering again, we have to be cautious in these numbers and so on. That's why we have to give it to you in the Q1 next year. But we are clearly expecting to over perform some of your expectations. That's why we said clearly high teens.

Operator

Thank you, Benjamin. Next question, please.

Speaker 3

Thank you. Our next question comes from Sophie Peterson from JPMorgan. Sophie, your line is now open.

Speaker 8

Yes. Hi. Hi. Here is Citi from JPMorgan. Just kind of on Turkey, I know it's a very volatile Environment, but you had EUR 5,000,000 of recoveries in Turkey and So basically, new credit losses and also kind of the other income was quite largely positive, Mainly because the CPI linkers.

Speaker 8

But can you share how we should think about Turkey Going forward, given that NII also was down 45% almost quarter on quarter. So just any guidance on And just related to Turkey, I noticed your book value in Turkey fell to SEK 6,100,000,000 from SEK 7,800,000,000. I guess that clearly has to do with FX or have you kind of done any value adjustments to the book value? That would be the first question. My second question would be my usual question.

Speaker 8

How do you see cut off Any M and A opportunities, any inorganic growth opportunities considering that your capital position is very comfortable here? Thank

Speaker 1

you. Do you want to take the first one, Rafa, about the forecast for the rest of the year for Turkey?

Speaker 2

We I mean the guidance we maintain the guidance that we provide for Turkey that the contribution of Turkey is going to be in line with the contribution that we had in 2022. The reality is that it's very difficult to do our forecast in detail, so far this year, clearly, Turkey has been contributing in line with the full year of 2022, But it is also true that after depreciation of the currency and the trends on the currency is difficult to forecast and at the same time, the rules of the game, how the banks have performed and operate is changing continuously in a return to the orthodoxy, what is good, but I think it's too early. What we have done clearly is just to keep the bank as flexible as possible, minimizing and reducing the duration gap of the balance sheet is around 2 months now so that in this changing environment with the rates normalizing according to the inflation and also the currency depreciating in line with the inflation gap with the rest of the economies, clearly, we are just flexible quick enough to reprice the balance sheet as soon as possible. So we maintain our guidance, but clearly, the evolution of the country are going in the right direction.

Speaker 2

Regarding your question about the reduction in terms of book value in Turkey is mainly it's only driven by the FX effect.

Speaker 1

And the M and A question, any inorganic opportunity and so on, So we discussed it many times again before. We obviously look into opportunities in general, but our clear, clear focus at the moment is organic growth. We have to we have a 17% Rotabank. We have amazing opportunities in different countries that we are in, so we are focused on organic growth.

Operator

Thank you, Safi. Next question please.

Speaker 3

Thank you. Our next question comes from Alfaro Serrano from Morgan Stanley.

Speaker 9

Hi, good morning. I guess it's really a couple of follow-up questions On capital, on Mexico, you've very clearly explained the increase of the bond portfolio as you think about 2024 and 2025, I guess, and rate cut environment. The question is, can you are you intending to grow The bond portfolio even more and how much can you reduce the rate sensitive in Mexico, Maybe some flavor on what to expect next year as rates seem to be coming down, whether rate sensitivity is there. And then on capital, I'm sorry to do this, but in Q4, I think you referred to I don't want to hold you against your comments, because it's 6 months on. But I remember you did a Very passionate defensive, the 12% target.

Speaker 9

And I seem to remember that you're wanting to be at 12% by the end of the year. Your pro form a now is 12.60 something post the buyback. Is you still intending To be at 12% by year end? Or is that 12% we should think of as a medium term target that you'll go down to? Thank you.

Speaker 1

Very good. Thank you, Alvaro, for both questions. On Mexico, How much did we reduce the sensitivity by doing all these actions? You see it in the appendix. In the appendix of our presentations, you have all these figures.

Speaker 1

It was 3.4%, The 100 basis points increase in rates and it's a very symmetric relatively symmetric calculation, so it's the other way around also for minus 100 basis But 100 basis points, it was 3.4% in the previous quarter. And in this quarter, you would see in the appendix that it's now 2.5%. So when rates come down, we are going to be hurt much less as compared to before. And you are asking, are we going to continue on this? We have done a piece of this $2,500,000 by the way is dollar and so on.

Speaker 1

So the total is $2,500,000 And you also see in that page again, As I mentioned before, the cost of hedging in the footnote that we do also have 1 basis point of cost of hedges for the Mexican peso, in addition to this in addition to in the capital figure, you should see all these numbers there. They are the new updates to the appendix pages. But are we going to do more? Are we going to increase the outlook even more and so on? We are we have done a lot in the second quarter.

Speaker 1

A bit more can be done, but not to the extent of the second quarter. On capital, you're saying I was very passionate about 12%. I'm still very passionate about Well, I don't know, so you can hold me to my words every time. No, there is no problem. We are still underscoring our clear conviction that we don't like to operate with excess capital.

Speaker 1

11.5% to 12%. We told you that we are going to be at the upper end, the 12% is our reference, and we don't like to operate with excess capital. The 12%. Why is it 12? Look into look, please, look, please, please look into our requirements.

Speaker 1

As compared to our requirements, The 8.76, 8.75 was the previous quarter. It's 3.25 basis points buffer versus the requirement that the supervisor sets for us. Now everyone says, isn't it's 12% and where do you sit versus others and so on. Please compare the capital figures with the requirements. We do have a very diversified business model.

Speaker 1

We have over years, if you take a 5 year, 10 year, 15 years time frame, you would see that our Capital generation and our profits and our capital generation capacity has been very high and with very little fluctuation. As a result our requirement is low. That 3.25 basis points gap, if we are at 12 versus our requirement, is much better than the 2 70 basis points of the same calculation for other European banks. So 12% we do think is a very Fair number to operate our bank and we don't like to operate with excess capital. You are asking again, I guess, why 12 if you are 12.6 The 7 now pro form a, why don't you do more now?

Speaker 1

As I mentioned before, it's a continuous process. We are not in a rush. The consistency in doing this is very important. I will repeat myself, but I think it's important. We are a 17% Rotabank and we are trading below book.

Speaker 1

We will continue to do this. We will continue to do this. It's a continuous process, a consistent process until we see that we get somewhere close to our intrinsic value. But we are not in a rush. As such, we are doing €1,000,000,000 today, we might do more.

Speaker 1

Our planning period was 2021 to 2024 and our commitment, our previous discussions that we will be at that upper end of the range By 2024 still remains.

Operator

Thank you, Alvaro. Next question please.

Speaker 3

Thank you. We have our next Questions comes from Ignacio Onaki from BNP Paribas. Ignacio, your line is now open.

Speaker 10

Thanks very much for the presentation and for taking my questions and congratulations, Rafa. I just have two questions. 1 on Mexico, if I just look to your loan to deposit ratio, it stands around 100 Slightly above 100%. You keep on pushing for loan growth and gaining market share in Mexico, but you are losing a bit Market share in deposits, how comfortable are you with that? And how further we can go On the loan to deposit on the mix in deposits going forward.

Speaker 10

And the second question is on Turkey. So I wanted to have A bit of your thoughts, if you could help us to understand a bit on the impact that the potential changes that Central Bank is taking in terms of removing the caps Slowly and in the Turkish Lira spread, what could be the impact of that into Turkish Lira spread? And how long would it take to normalize the current customer spread in Tagrislina? Thank you.

Speaker 1

On the loan to deposits ratio, 99% for Mexico, as we just mentioned, we have done it on purpose. Our cost of deposits is 2.4% versus the industry average of 4.6%. So we have 220 basis points cost of funding advantage versus a typical average Mexican bank. The reason that we have done this off balance sheet is we thought for those customers as well, it was the right instrument for their investments. But if you like, we can start paying to time And we can get it back.

Speaker 1

So we have such an amazing franchise in Mexico. So the loan to deposit, 99% is not If you like, we can always improve on that figure, but we are far away from the risk limits also. So at the moment, what we thought is the best value creating opportunity, also the best strategy for our customers was the strategy that I mentioned to you. It's not coming out in the numbers, but I should also mention to you that we have gained market share in retail demand deposits In Mexico, retail demand deposits, which I think is much important than the broader Market shares and the numbers that you see in the deposits. Then on the potential changes in Turkey, let me just say Initially that we see the changes that we are seeing lately and there was an inflation outlook report and presentation by the Central Bank Governor yesterday, also outlining the Central Bank's plans going forward and so on, we see all these changes quite positive.

Speaker 1

As we mentioned to you many times, Turkey has a great potential, but there are some macro fragilities. We do think that the new administration, the new economic administration, they are confronting these challenges right upfront. And in that sense, It's a positive trajectory. But Turkey, all the time also, in the last 10 years, Turkey wants to prioritize growth, Investments, employment, which we like. But we have to do it in a gradual pace and you have to do it without solution in reestablishing market based economy.

Speaker 1

In that sense, all these regulations that Rafa talked about, which led to A very low net interest margin in the quarter. And it's very low, EUR 0.81 in the page that you T4TL, it was actually negative at the beginning of July. Our expectation is that it's going to come back up to positive in August, And it's going to continue to improve from thereon. But there are many macro fragilities. As you know, we have hyperinflationary accounting in Turkey.

Speaker 1

Yesterday, the Central Bank Governor has announced that the expectation for the year is 58% inflation. In the first half of the year, it was only 20%. So you should expect it's compounding, but still around 40% inflation in the second half. Some of that we'll be hurting the P and L to be fair, but we are all seeing very positive signals. We always said Turkey is a long But a very important, a big option for BBVA, and we are seeing the signals that option can be realized.

Speaker 1

So we have to continue with this process. But you're asking a specific number on the NII going forward. I can only tell you that the August numbers We'll be back to positive. Beyond that, it depends really, it depends on how fast that the Central Bank unwinds some of the regulations that are in place, especially around caps and so on. And going back again to what I was saying, In my view, independent of BBVA, independent of the banking system, they have to do it for the benefit of Turkey, Because Turkey has to go back to its path of a market based economy.

Speaker 1

In that sense, we are positive, but I cannot give you a precise figure, Ignacio. We have to see the next few months.

Operator

Thank you, Natso. Next question please.

Speaker 3

Thank you. We have our next question comes Carlos Peixoto from Casa Bank. Carlos, your line is now open.

Speaker 11

Yes. Hi. Yes. Hi. Good morning.

Speaker 11

So first of all, Arafa, Best of luck for future. Pleasure to have worked with you throughout these years. Now going to the questions. So sorry, just to going back on the capital access and the comments you made earlier regarding how comfortable 12% CET1 ratio and all of that. So first, shall we assume then that the average CET1 ratio embedded in the high teens royalty guidance for next year to be at around those levels.

Speaker 11

And secondly, so doing here some back of the envelopes. Right now, you are VVA would already have around €2,000,000,000 or over €2,000,000,000 in excess capital already adjusting for the share buyback announced. On top of that, we expect further capital generation throughout the coming quarters. So should we expect quite significant share buyback programs to be announced before The deadline of year end 2024. And then the second question would be actually on Spain NII.

Speaker 11

And here, Apologize if I missed some previous comments on that. But basically, in the previous quarter, you were guiding 30% rise in NII in Spain. Looking at the evolution in this quarter, It would this quarter would have to be the peak in terms of NII evolution in Spain for that to be the case. So I was wondering You still see 30% as a reasonable level or now you're more upbeat on the evolution of NII in Spain? Thank you very much.

Speaker 1

The second one, Rafael, if that's okay, you take it on the NII. I think we did upgrade the 30% today. But let's Rafael, why don't you take that one? Regarding the other question, the excess capital, are the numbers calculated assuming that we will be in the targeted ratio? The Yes to that one.

Speaker 1

Then you are saying EUR 2,500,000,000 you have EUR 2,500,000,000 excess capital. Does that mean that there will be more share buybacks in that range Until 2024, as I understand the question. Carlos, we just announced the share buyback today. Relatively speaking, we did the largest Ever share buyback relative to our size, the largest buyback program of Europe, dollars 8,200,000,000 buyback And dividends in the last 2 years, as I mentioned, let's go step by step. Let's do this $1,000,000,000 It requires an authorization.

Speaker 1

So most likely, we will execute this in the Q4 of this year and once again, it's a continuous process. We are committed to what we have been saying. In my view, there is more to come, but we have to do it step by step. You mentioned your Excel. I have my Excel as well.

Speaker 1

Once again, if I look into our earnings per share, the dividends per share, I really do think There is clearly much more room to go in the share buybacks and in the fact that there is a lot of value in the share at the moment. Regarding the NII, Rafael?

Speaker 2

As we already mentioned on the speech, we are upgrading our guidance on the NII in Spain to 40% to 45%. The main reason is just at the end of the day, what we have seen is just the increase in the cost of funding in Spain it's still probably lagging behind what was the initial expectation at the beginning of the year. So we have been upgrading our guidance on that respect. Today, we are expecting the NII to perform between 40% to 45% for the full year. This is a process in which we believe that the excess liquidity that we have seen in Spain is still putting pressure down on the cost of deposits.

Speaker 2

And that the reason was also we have been downgrading the EBITDA that we were expecting today, we are expecting for the year, EBITDA of 20 as Onur already mentioned at the beginning of the speech.

Operator

Thank you, Carlos. Next question please.

Speaker 3

Thank you. Our next question comes from Andrea Pietry from Mediobanca. Andre, your line is now open.

Speaker 12

Thank you. Two questions on NII and one on capital. On NII, ECB changed the Mandatory reserve remuneration yesterday, do you have any expectations of further harshening of the conditions going forward? And could you also elaborate just as you have done for Spain On the your projection of evolution of NII in Mexico, when do you expect the peak? And What do you expect?

Speaker 12

What are your assumptions there on the evolution of future rates, beta and ALCO contribution? And the second question on capital. What portion of your CET1 ratio is Affected by hyperinflation accounting. And could you guide us on the Basel IV impact? Thank you.

Speaker 1

Apo, maybe you take the actually, there are 3 questions, maybe the third one on the CET1 ratio and the piece of Argentina and Turkey within that. Andrea, on the first one, the NII, the further harshening of the conditions going forward, I mean, it's obviously dependent on Institutions and people beyond us, so we cannot judge yesterday's change in terms of not paying to the mandatory reserves, it will have an implication of €70,000,000 to €80,000,000 in 2024, full year September 20. But it was at some point, it was going to be happening, so that was kind of expected. To be fair, there is nothing else that we are expecting at the moment. But again, it's dependent on others, so you never know.

Speaker 1

Then when do we expect the peak in Mexico? Well, as I mentioned before, we do think that the 3rd quarter and the 4th quarter numbers will continue to increase. The peak In the NII, in the absolute number, it depends on many other things, but the growth rate in volumes is the key driver here, not the Pure spreads, spreads might be peaking, but the NII in my view will not be in the sense that you see the growth rate Our high return portfolios, I mean consumer book has grown 17%, credit cards has grown 22%, SMEs has grown 21% year over year in Mexico, year over year. And I'm looking into the Quarterly growth, so this is the year over year. In the quarterly growth, I see basically 5% growth quarterly, which is implying that the trend is still there.

Speaker 1

If these portfolios are growing 5% in the last quarter and if year to year growth is 20%, I do see that the volume growth is sound and is very robust. And I look into the new production, new production of loans in Mexico, that is also very, very positive. The new production quarter over quarter is 4% up Versus last quarter last year's Q2, 19% up, new loan production, Again, especially in high return businesses, so the volume growth in our view is going to continue to drive the NII. And why is this happening? And why is this happening?

Speaker 1

Without creating too much problems in cost of risk, because Mexico is growing. I do think that Mexico, we just upgraded our GDP growth forecast from 1.4 to 2.5, if I'm not mistaken. Latest number is 2.5%, but I don't know whether it was 1.4% or 1.6%. We have upgraded our numbers in such a way that we continue to see very high activity in the country. I mean, very few factoids, this near shoring topic is finally becoming real in Mexico.

Speaker 1

FTI, foreign direct investment is up 48% in the Q1 of this year. And that's mainly reinvestment of profits and so on, but we are seeing most of this happening in manufacturing. You might have seen this BBVA Research has published a near shoring report. In that, you also have some forward looking perspectives, the industrial complexes, especially in the north of the country, what is happening in the industrial are there new companies basically renting new spaces and so on. You see an amazing trend there.

Speaker 1

Very important, the May numbers came out. In the month of May, Mexico, after decades, has become the number one country exporter to U. S. A. Number 1.

Speaker 1

It passed Canada. It passed China. China has been the number one for many years. So in terms of the imports to U. S, what is the number one country for U.

Speaker 1

S? It's now Mexico. So there's so much happening in Mexico remittances. It was record last year 2022, 13% growth. In the 1st 5 months, another 10% growth.

Speaker 1

So we're going to have another record of remittances. It's going to be more than $60,000,000,000 65,000,000 Dollars of remittances. In that context, we do think that the volume growth is there to stay. We are gaining market share in all the key Folio is 81 basis points in SMEs. We have a wonderful bank in Mexico.

Speaker 1

So NII peak, you asked a simple question. I took some Opportunity to talk to you a little bit about Mexico, but we are very positive. We are very positive on Mexico. On the capital question, Rafa?

Speaker 2

I think the question was, I mean, how the CET1 is affected at the end of the day by the hyperinflation economies. At the end of the day, the only The most significant one clearly is Turkey given the weight of the group. But a way to measure can be your other comprehensive incomes amount on capital related to hyperinflation, and those are 15 basis points. So at the end of the day, the capital that we are generating because of hyperinflation counting on accumulated terms, at the end of the day, it's representing only 15 basis points of our CET1 ratio. And the second part of the question was about, I think, was what we are expecting on Basel IV.

Speaker 2

Today, our best estimates I mean, the expected impact of last F4 is very limited, less than 40 basis points in 2025.

Operator

Thank you, Andrea. Next question please.

Speaker 3

Thank you. Our next question comes from Carlos Corvo from Societe Generale. Carlos, your line is now open.

Speaker 5

Hi. Thank you very much for the presentation and just Wishing all the rest to Rafael. Three quick questions. One of them is basically following up on the growth in Mexico and thanks for So it's very detailed and granular color. But just as it's a bit of a challenge, year to date, Loans have grown in Mexico by 4.5% and your target was double digit.

Speaker 5

So could you double digit growth in the year? Could you elaborate on the dynamics during the year? Because what we heard from some peers is that higher rates are going to Impact the loan demand and expect this lower demand from lending in the second half. So just quickly, if you can touch on those Specific dynamics, it's very clear your views on the long term, but why growth is underperforming in your initial guidance, If I'm correct in reading those figures. 2nd, am I correct to understand that the growth The upgrade in RoTE is coming primarily from stronger NII in Spain or are there other drivers of your upgrade to the 2024 RoTE guidance.

Speaker 5

And lastly, it's more of a general question on valuation and everything. You said Stock is undervalued in your opinion. Some peers may say similar things. But at the same time, the only thing we hear from banks is that they want to do share buybacks Capital, why aren't you putting your extra capital at play if you think there's opportunities to buy cheap banks when you can Obtain returns above the cost of equity. So if there are no if banks are not putting the capital play there, is that The adoption value either or am I wrong?

Speaker 5

Why are you considering acquisitions?

Speaker 7

Thank you.

Speaker 1

I have to start with the last one. I mean, Carlos, if If you know some of those cheap banks, we should have an offline discussion on who they are and then we are looking into every single opportunity of capital deployment as a competition of Skars Resources Capital, which return is the best for our shareholders. That's how we look Obviously, there's a strategic perspective overlay on this. Obviously, we want to grow, but it has to make sense from a capital return perspective. And we don't see those opportunities as you are saying.

Speaker 1

As compared to that, the execution risk is basically 0 And we see a huge potential in our own share price. I'm not going to repeat myself, but we see that clear value in our share price. As a result, it's very normal that we consider this as the capital deployment opportunity. Regarding the growth, the first question that you asked, First of all, the numbers that you have seen there, the growth of 11.1% year over year for Mexico, broken down into Retail and Wholesale, Retail portfolio growth is 15.3% and Wholesale is 7%. A part of that 7%, the company segment, Empressas, the company segment is 7% because of the devaluation of dollar versus or the appreciation of Mexican peso, let me say it that way.

Speaker 1

There was 12% appreciation of Mexican peso in the year so far. And if you take out that impact out, that 7% becomes 11% in the company segment. But our core strength is in the retail portfolio. And that retail portfolio, there is no dollar lending there. In the retail portfolio, we see still very strong trends, very strong trends.

Speaker 1

I did mention to you, I mean, the quarter over quarter growth In Consumer is 4.4 percent. Credit cards, 5.6 percent. SMEs, 5.1 percent. This is only the quarter. If you annualize this, This is the last quarter.

Speaker 1

I mean, you do get to that 20% that I'm telling you about. So if there is some softness, It is in the Wholesale segment, and there is the impact of the currency that you have to be factoring here. The second question, did I miss the question? Rote?

Operator

In 2024 related to an improvement just on NII in Spain?

Speaker 1

It's basically NII improvement in revenue improvement in Mexico and Spain that drives the most of it, but Mexico as well.

Operator

Thank you, Carlos. Next question, please.

Speaker 1

Should we skip Next call, next question.

Speaker 3

Yes. We have our next question comes from Marta Romero from Citi. Marta, your line is now open.

Speaker 13

Thank you very much. I've got a few follow ups. The first one is the Mexico ALCO. What's the right way of looking at it from the outside? How do you measure your interest risk appetite?

Speaker 13

So should we look at it relative to your current I don't know if you can give us some guidance on what the end game for that ALCO should be in Mexico. The second question is fees in Spain. You've been very resilient seeing the performance of your peers. I mean, it's been a bit of a catastrophe. What explains that performance?

Speaker 13

Do you think that you still need to Update your prices and low and bring them down given that you're making a lot of money on your NII, so you're going to be your margins and fees are going to be lower or is it Just that you are gaining so many customers, can you explain a bit what's the reasons behind that outperformance? And the third one, I'm going to push my luck, but Given that you've given your RoTE target is pretty vague already and then it's complicated to calculate the how that Translating to euros because it's over excess capital and we need to put RWA into the equation and so on. Can we get Some sort of commitment from or no commitment, an indication of a bottom for that for earnings next year. Is it like EUR 7,000,000,000 a reasonable number or

Speaker 1

Thank you, Marta, for all the questions. The 9.5 Yield that we have on the ALCO book is the key driver for growing that ALCO book. But in Mexico, what is the NK you're asking? And you're asking about sensitivity, I mentioned it before. But in the previous quarter, we had a sensitivity to 100 basis points of 3.4 percent NAI sensitivity.

Speaker 1

Now Using all those ALCO strategies, we took it down to 2.5. 3.4 has become 2.5. And as I mentioned, we increased our ALCO book by €3,000,000,000 and we extended the duration also in the process for the whole to collect portfolio. We do think that we have done a big part of it. There might be a bit more that we can be doing in the Q3, but most of it is done.

Speaker 1

The second question, the fee income in Spain, we are really doing well. It's across the board. Asset Management, quarter over quarter number, you see in the document that 4% is the average growth in the fee income in the quarter over quarter for Spain. When you break it down, Asset Management quarter over quarter, up 4.7 percent. Credit cards, which we have been pushing.

Speaker 1

It's a relatively small business, but it's $77,000,000 fees in total cards and POS in Spain, it's up 19%. 19%. Insurance, we have an insurance venture with Allianz, you might know, 9%. So it's across the board. It's growing Very nicely.

Speaker 1

What is down? We were charging fees a bit last year. Year over year comparison is completely driven by that. Deposit fees are now gone. But in general, all the line items I'm looking into there in front of me now, they are doing really well.

Speaker 1

Dan RoTE imitation for bottom kind of an expectation for next year profit. And also you mentioned this sensitivity of the currencies and so on. I would encourage Marta, you and everyone else So not only looking to RoTE, but our guidance on tangible book value as well. Tangible book value incorporates everything. It's a beautiful metric.

Speaker 1

So you have everything included. And on that one, we are also basically saying rather than 9%, as you see in the document, we are upgrading our expectation there as well. So that should be the guidance of value creation. The expected profit for next year, don't do this to us. So we'll do it next in the Q1 of 2024.

Speaker 1

But maybe there is only one clue that I can give to you. As we are It's going to be better than 2023.

Operator

Thank you, Marta. Next question please.

Speaker 3

Thank you. We have our next questions from Britta Schmidt from Autonomous Research. Britta, your line is now open.

Speaker 8

Yes. Hi there. Thanks for taking my question. Just one on the fee income in Mexico. I mean, in line with the comments that you just gave on Steyn, maybe you can break down the drivers there and comment a little bit on the sustainability because that's been a line that's performing very well actually over the last couple of quarters.

Speaker 1

Rafael, do you want to take this one?

Speaker 2

I don't know if I caught the question.

Operator

Breakdown of fee income in Mexico.

Speaker 1

Fee income in Mexico, whether it's going to continue? The answer is yes.

Speaker 2

Good evening. Thank you, Onur.

Speaker 1

The The answer is yes, because it's based on Payment Systems and Payment Systems is going so well. So it's going to continue. We have to pick up some speed. Now we have 10 more minutes.

Operator

Yes. Next question, please. Thank you, Britta.

Speaker 3

Thank you. We have our next questions from Ignacio Sorenzo from UBS. Ignacio, your line is now open.

Speaker 14

Hi, good morning. Thank you for taking my questions. I've got 3 quick ones hopefully. First one is on the buyback authorization process by the ECB, Given it's kind of outside the normal channel basically in terms of timing in the year, we're sticking to the 3, 4 months approval Or is there anything different basically this time around? 2nd, I'm sorry if I'm not reading the numbers correctly, but in local currency, The NII in Turkey went up a little bit in the quarter considering the margin compression was quite significant, if you can elaborate on that.

Speaker 14

And then into next year, I mean, obviously, the cost of risk actually of most of the units is probably below In normalized levels, is it logical to expect a pickup of cost of risk in 2024 versus 2023 on a group basis? Thank you.

Speaker 1

On the first one, Ignacio, it's 4 months actually. So we submitted our request to ECB today. So the 4 month calendar starts, they can do any time within the 4 months, but that's the regular process. On the Turkish number, the current figures you see it on Page 19 of the presentation, it doesn't show that NII increase. So I didn't get the The Turkish NII?

Operator

Local figures.

Speaker 1

Local figures. Local figures NII It's impacted by CPIs. CPIs kick into the NII in the local figures, if you are looking into it. And the CPIs again delivered a good number. And the cost of swap has come down a bit.

Speaker 1

So it's beyond customers. It's more the wholesale topics that is impacting the local figures. Was there a third question?

Operator

No, it was and the guidance

Speaker 2

No, I think at the end of the day, we will see at the beginning of next year, but we are not I think we believe that performance of the portfolio is just clearly in line with what we were expecting and that the reason why we are maintaining our guidance in terms of cost of risk for this year.

Speaker 1

Ignacio, I think we do get also a lot of benefit from the fact that the countries that we are in are not highly leveraged Still, I mean, I repeat this over and over again, but in the case of Mexico, the banking debt over GDP, let's focus on that. The banking debt over GDP is still 38%, basically half of Brazil, 40% lower than Colombia and it's at the same level as Nicaragua. The leverage is important. Leverage is important. So we are growing our book, but still it's a very highly underpenetrated country.

Speaker 1

And in the case of Spain, You do know this, but household debt over GDP is now 35 percentage points lower as compared to 2010. Corporate debt over GDP, 50 percentage points. It used to be around 120 percent of GDP. Now it's 70% and lower than Europe for the first time. So the leverage the deleveraging that we have been seeing in Spain and the low leverage of Mexico, these two countries especially, it's a safeguard in my view of cost of risk going forward.

Operator

So thank you, Nacho. This was the last question. So thank you for all your questions and well, we leave it here. And just let me remind you that the entire team would be at your disposal to answer any further questions you might have. Thank you very much.

Operator

And Onur, I don't know if you want to close.

Speaker 1

No, I just want to thank everyone. And if you have not done your holidays,

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Earnings Conference Call
Banco Bilbao Vizcaya Argentaria Q2 2023
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