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Edited Transcript of BBVA.MC earnings conference call or presentation 31-Oct-19 8:30am GMT

Q3 2019 Banco Bilbao Vizcaya Argentaria SA Earnings Call

Madrid Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Bilbao Vizcaya Argentaria SA earnings conference call or presentation Thursday, October 31, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gloria Couceiro Justo

Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR

* Jaime Saenz de Tejada Pulido

Banco Bilbao Vizcaya Argentaria, S.A. - CFO

* Onur Genç

Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director

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Conference Call Participants

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* Alvaro Serrano Saenz de Tejada

Morgan Stanley, Research Division - Lead Analyst

* Andrea Filtri

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Andrea Unzueta

Crédit Suisse AG, Research Division - VP

* Benjamin Toms

RBC Capital Markets, Research Division - Analyst

* Britta Schmidt

Autonomous Research LLP - Non-Designated Member

* Carlos Cobo Catena

Societe Generale Cross Asset Research - Equity Analyst

* Carlos Peixoto

Banco Português de Investimento, S.A., Research Division - Analyst

* Fernando Gil de Santivañes d´Ornellas

Barclays Bank PLC, Research Division - Research Analyst

* Ignacio Cerezo Olmos

UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst

* José Maria Abad Hernandez

Goldman Sachs Group Inc., Research Division - Executive Director

* Marta Sánchez Romero

BofA Merrill Lynch, Research Division - Director and Analyst

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst

* Ya-Lan Liu

Ahorro Corporacion Financiera, S.V, S.A., Research Division - Analyst

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Presentation

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Gloria Couceiro Justo, Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR [1]

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Good morning, everyone, and welcome to the BBVA Third Quarter 2019 Results Presentation. I'm Gloria Couceiro, Head of Investor Relations. And here with me today is Onur Genç, Chief Executive Officer of the group; and Jaime Sáenz de Tejada, BBVA Group CFO.

As in previous quarters, Onur will begin with a presentation of group's results and then Jaime will review the business areas. We will move astride to the live Q&A session after that. And now I will turn it over to Onur to start with the presentation.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [2]

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Thank you, Gloria. Good morning to everyone, and welcome to BBVA's Third Quarter 2019 Results Audio Webcast. So let's jump into it, starting on Slide #3. Once again, we are reporting an excellent quarter in our view in terms of results, in terms of value creation and capital generation. So on this page, our net attributable profit, on the left-hand side of the page, in the third quarter, is EUR 1.225 billion. At a constant perimeter, which is basically excluding the recurrent operations and the capital gains from the sale of BBVA Chile in the third quarter of 2018, our net attributable profit grows 6.1% year-over-year.

There are 2 other very key and important messages on this page. In the middle of the page, you can see that we continue to deliver outstanding value for our shareholders. The year-on-year evolution of our tangible book value per share plus dividends is in our view, very extraordinary. I mean, growing 14.2% year-over-year. The annualized year-to-date growth, if you take the 9 months and annualize it, that same percentage is actually 16%, which is even better.

And then on the right-hand side of the page, I need to highlight once again that our strong capacity to generate capital is obvious in these numbers. In this regard, our fully loaded CET1 ratio has increased 22 bps in the year. And as you know, this is happening even after absorbing 24 bps due to regulatory impacts, namely TRIM and IFRS 16 in the first half of 2019. It's also worth to mention that we are already within our capital target range of 11.5% to 12%.

Moving on to Slide #4, and to be more specific on the quarter, let's highlight some of the key metrics and the evolution of some of our core performance metrics. For comparison purposes, the year-over-year variations in this page and beyond exclude BBVA Chile recurrent operations in 2018 and the capital gain, obviously, from that sale. So if you -- at that constant perimeter, the main highlights of the quarter are: so number one, we would like to highlight that our core revenue growth is very robust, with net interest income growing 3.2% in constant euros. And as you know, despite a challenging macro environment and the low rate environment in some of our core countries. We are also showing strong fee income generation, growing 6.4% year-over-year in constant euros.

Number two, on the page. The good performance at the top part of the P&L is coupled with our constant focus on efficiency is resulting in an excellent operating income evolution. Operating income is growing close to double digits. 9.6% to be more precise. Our cost-to-income ratio continues to show a very positive trend, with a reduction of 75 bps in the year. Now it stands at 48.7%, and the trend of positive operating jaw creating positive operating leverage, it continues in this quarter as well.

Number three, on the page. Risk indicators continue to be sound, good trend in NPL ratio reduction, it's now at 3.90%, dropping 23 bps versus 1 year ago, an improvement of 257 bps in the coverage ratio also to 75%, and our cost of risk remains stable in the year, standing at 1.01% year-to-date, accumulated terms, completely in line with our expectations.

Number four, I already mentioned it, but our solid capital position, fully loaded CET1 stands at 11.56%, 4 bps increase in the quarter and 20 bps increase in the year.

Next, we remain focused on creating value for our shareholders. In terms of profitability and return metrics, BBVA continues to be at the forefront of the European banking industry. Return on tangible equity remains very strong at 12.2%. And as mentioned in the previous page, tangible book value per share plus dividends a key metric that we look into all quarters, grew exceptionally well at 14.2%, as I mentioned, versus September 2018. And finally, we are progressing ahead of expectations, I would say, in digital transformation, doing very well in digital transformation, a key lever for our results this year and beyond. So digital sales increased to 59% of the total units sold in the year versus -- it was 33%, 2 years ago. And 56% of our customer base interacts with the bank now through digital channels. Similarly, 49.7% of our customers interact actively through our mobile app, almost reaching the 50% target we have established for ourselves for the end of the year. So we're going to arrive at that goal much earlier than the end of the year.

Slide #5. If I move to Slide #5, summarized P&L of the third quarter, you can identify the positive evolution on the core business drivers. I mentioned some of them already, but net interest income is up 3.2%. Fees and commissions, up 6.4%. Net trading income is up 76.1%, mainly impacted by global markets, very strong global markets results and some portfolio sales. And all these result in gross income being up 5.9%. Again, cost control, excellent cost control. Operating expenses growing only 2.2%, leading to nearly 10% growth in operating income at constant euros.

Some of the soft spots that I would like to highlight, though, other income and expenses, negatively impacted by the higher hyperinflation adjustment on this line item due to Argentina and some lower insurance activity in Mexico. And then the impairments, on the impairment line, you might be looking into the increase, but it's mainly due to a worsening macro environment in most countries and mostly due to base effect because in 2018, we had some significant provision releases last year in Spain and in the U.S.

Moving on to the year-to-date numbers, Slide #6, the top line shows, again, very similar trends, strong evolution versus the same period in 2018. Gross income is up 5.5% and operating income is up 7.9% at constant euro terms. And looking at the bottom line, we are nearly flat versus the same period last year, driven by the impairments and the provisions and other gains line. But regarding the impairments line, the 16.2% increase in that line item is all within the expectations and as you might all remember, within the previous guidance that we have all given to you in the previous quarters. And regarding the provisions line, please note that in the first 9 months of 2018, we recorded some capital gains from divestments, mainly real estate-related divestments in Mexico and in Turkey. And there were some provisional releases from the real estate business again in Spain. So as compared to that low base -- it's mainly a base effect as compared to that low base, in 2019, we have had some higher contingency risks, so leading to this negative year-over-year comparison. But again, as you can see from the page, very positive core operating performance.

Slide #7. Let's talk about revenues, the top line. As I mentioned, net interest income growing despite the challenging macro environment and as you all know, despite the lower interest rates in developed markets, we have grown our net interest income by 3.2% versus a year ago. And this is -- this growth is emerging also despite the lower CPI linkers contribution in Turkey. We have registered EUR 113 million less in the CPI linkers versus the third quarter of 2018. And again, despite the low interest rates, despite lower contribution for CIP (sic) [CPI] linkers, 3.2% in net interest income growth.

On the top right, you see the net fees and commissions, up 6.4% as I mentioned, versus the same quarter last year. This is the highest figure in the last 10 years and -- 10 quarters, sorry, in the last 10 quarters at constant euro terms. So the performance in the net fees and commissions is making us particularly happy. Net trading income increasing 76.1% versus a year ago, positively impacted by portfolio sales. Global markets, obviously, is also performing much better, as I mentioned before compared to the third quarter of 2018. All in all, total revenues, the gross income is up 5.9% versus the third quarter of 2018.

Moving on to Slide #8, operating income growth and efficiency. Again, we continue to show our positive operating jaws. Our expenses are growing 3.2%, well below the growth rate in core revenues of 6.3%. These are 9-month numbers and well below the blended inflation in our footprint. Our blended inflation in our footprint is 6% again, versus the cost growth that we are realizing. So we are on the positive territory here.

In the middle of the page, we show the strong evolution of operating income, high single digits. This is year-to-date growth of 7.9%. Finally, on the right-hand side of the slide, you see the efficiency ratio improvement, showing a 75 bps decrease to 48.7%. A figure, again, as you see on the page, significantly better than the European peer group. And if you calculate cost-to-income at the core revenue level at the denominator, the improvement is actually even better at 90 bps.

So I have often reiterated our commitment to improve efficiency in the context of the transformation that we have been pursuing. But once again, I believe this page is a clear display of our track record, of our focus on this topic of the management discipline that we are putting onto this area.

Slide #9, the risk indicators, we continue to see some risk indicators. This quarter, we saw impairments growing at 17.6%. But as I said before, it's mainly due to the base effect in the U.S. and Spain and it's macro-related provisioning because, as you know, in many countries, we have reduced our macro growth forecast throughout the year, especially in Mexico, and as a result, we have seen some impact here. But quarter-over-quarter increase also shows some change, but it's mainly because of the lower base in Spain. As you know, in Spain in the second quarter, there was a sale of a mortgage portfolio and the quarter-over-quarter increase, also partially driven by Turkey because in the second quarter, we had very low wholesale requirements in Turkey.

On other risk metrics, NPLs were reduced by EUR 600 million versus last year, mainly due to portfolio sales in Spain. Cost of risk is now at 101 bps year-to-date, an increase of 10 bps versus last quarter. But as I mentioned, and as we have discussed with you before in the previous quarterly calls, it's completely in line with our expectations. The NPL ratio decrease is 23 bps in the quarter, and it stands now at 3.9%, and the coverage ratio is at 75%, an improvement of 257 bps on the coverage.

Slide #10, the capital position regarding the quarterly capital evolution, and as previously said, CET1 has increased 4 bps in the quarter. Again, these numbers underscore our strong organic capital generation capacity. And I would like to highlight that the 4 bps comes in the context of some negative market-related impacts included in the others bucket, coming mainly from the U.S. dollar appreciation in the quarter, which has created a minus 4 bps impact on the CET1 plus the increase in the RWAs in Argentina. As you know, there was a sovereign rating downgrade in Argentina that resulted in another minus 4 bps impact in the quarter. Despite those 2, despite the U.S. dollar appreciation creating a minus 4 bps impact, Argentina sovereign creating another minus 4 bps, we still have improved our capital position by plus 4 bps again, thanks to our organic capital generation capacity.

All in all, our CET1 ratio today stands at 11.56%, well above the regulatory requirement of 9.26% and continues to be within our target range of 11.5% to 12%. I also would like to point out, it's very important to us, the high-quality of our capital ratio as you can see on the bottom of the page, we continue to lead the ranking in our European peer group in terms of the leverage ratio, which stands at 6.9% today on a fully loaded basis. And regarding AT1 and Tier 2 buckets, we maintain both our buckets fulfilled in both fully loaded and also phased in basis.

And the last page on the financial side is page number -- Slide #11, shareholder value creation. Mentioned it already, tangible book value per share, including dividends, growing 14%, and the more important message on this page is the continuous evolution of upward trend that you see on this page, every quarter, every quarter, tangible book value per share is going up consistently and nicely as you see on the page. And also in terms of profitability, I mentioned about return on tangible equity, 12.2%. Obviously, this is one of the highest, we are at the forefront of European banking industry in terms of profitability and return on tangible equity.

Moving on to Slide #12. As we have commented in the last quarters, underpinning the growth in the digital business is the continued digitization of our customer base, no? And as you can see on the left-hand side of the page, we continue to show positive evolution here. In our digital customers, they're up by 17% versus September 2018 and now it represents 56% penetration of our active customers. In the center of the slide, you see the mobile penetration and the mobile customers. We grew our mobile customers by more than 5 million in 1 year, it's up 26%, and now it's at the penetration level of 49.7%, again, very close to the 50% goal that we have. And finally, we are very happy, again, once again, that our app in Spain, was once again awarded as the Best Banking App in the World by Forrester in 2019 for the third consecutive year. And as you know, the second best in the world is Garanti BBVA in Turkey.

Slide #13, I would like to highlight the impact of our transformation because we talk about transformation, okay, but how do we extract more value from digitization. And here, you see some clear highlights of that process. Digital sales, I believe we can further foster growth by leveraging our digital capabilities and given the digitization that we just talked about, you see here that our digital sales now represent 58.9% in number of units sold and 44.8% in terms of the value of the sales done through digital. Very strong numbers. And secondly, we are constantly trying to improve the customers' experience, together with that sales goal. In this context, I mean, one good example of growth and customer experience playing together is this digital end-to-end onboarding for SMEs. We launched this in Spain recently, allowing SME clients, SME potential customers to open a fully operative account through digital means. And BBVA is the first bank in Spain to provide this capability, digital onboarding capability for SMEs and targeting 650,000 potential new clients. And thanks to our global capabilities, we have done this platform in such a way that we can take this platform to other countries through our global platform.

And finally, on Slide #14, end-to-end view on how digitization -- digitalization is helping us to propel our numbers. And in order to understand the impact of transformation holistically, I gave you in the last quarterly presentation, an example on Spain and now I'm putting the Mexico case on the table. And you can see very strong numbers on multiple dimensions and you can see the clear evidence of how digital is helping us to push our numbers. So on growth, on the left-hand side of the page, we are bringing millions of new clients to the bank in Mexico with the help of digital sales. So our total sales increased by 14% in value, and it's mainly fueled by our digital end-to-end sales capabilities. And as you can see, our digital end-to-end sales has gone up by 131% in 2 years. And then we gain new clients through these capabilities.

Second, on engagement at the middle of the page, creating a world-class digital experience. It helps us to lead the NPS customer satisfaction in Mexico. Among our peer group, we are by far #1 for the last 2 years. And our digital clients in Mexico, they are showing an attrition rate which is 54% better than non-digital ones. And on the right-hand side of the page, on efficiency, obviously, transformation is also positively impacting our network efficiency. I would like to highlight here that the sales growth that I just mentioned, despite all that sales growth happening, we only increased our brand sales force by 1%, 1%. Additionally, and as a result of our transformation, our clients are moving to lower-cost channels for the cash related transactions. You see on the page that the transactions is managed by tellers decreased by 13%, while at the same time, the use of ATMs, a much more efficient channel increased by 20%.

And so I'm finishing this section. I now turn it over to Jaime for an overview of the business areas. But overall, a very good quarter. So Jaime, on the countries.

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [3]

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Thank you, Onur, and good morning, everybody. Let me begin with Spain. The economy remains strong and even if GDP is slowing down, it is still expected to grow by 1.9% this year and 1.6% in 2020, maintaining a gap of nearly 1 full percentage point above the growth rate in the eurozone.

Net attributable profit in the first 9 months of the year decreased by 2.5%, that's EUR 27 million, mainly explained by a significant reduction in NTI, down by EUR 202 million and the increase in other provisions, up EUR 63 million as 2018 included significant provision releases in the real estate business as Onur has already mentioned. Both negative impacts are partially offset by lower impairments, thanks to the sale of a mortgage portfolio in Q2 that released EUR 185 million in provisions.

The main P&L highlights are, first of all, NII in the first 9 months of the year, it decreases by 1.9% year-on-year, in line with our 2019 guidance of 1% to 2% decrease. The positive evolution of the commercial activity and the customer spread was more than offset by the lower contribution from the ALCO portfolio and the EUR 32 million impact coming from IFRS 16. We had a good -- we had a strong growth in fees in Q2, up over 5% versus last year, supported by both CIB asset management and retail banking fees. We confirm our guidance that fees will go up in the low-single-digit level in 2019. Costs continue to go down 3% year-on-year -- sorry, thanks to our transformation efforts. Cost of risk stands at a solid 23 basis points, excluding the provision release from the mortgage portfolio sale we did in Q2, with coverage and the NPL ratio further improving this quarter. The quarter-on-quarter increase in cost of risk is fully explained by the extraordinary real estate write-offs in the quarter as the underlying trend remains stable. We remain committed to our 20 basis points cost of risk guidance by year-end. That is excluding the provision release mentioned before.

Let's now turn to the U.S. macroeconomic prospects for the sample region continue to be solid. In fact, our research department has recently revised upwards the GDP growth rate expected for the region to 3.4% in 2019 and 2.8% in 2020, outperforming once again the U.S. average. Operating income is up by 15% versus September of last year in constant euros, driven by NII, up by 2% versus last year, supported by a slight increase in loan growth, a more profitable loan mix and a higher customer spread still benefited by the rate increases in the second half of 2018. Having said this, and given the LIBOR decline well above expectations in the last few quarters and our high NII sensitivity to interest rates that we now expect NII to be flat this year versus 2018.

Trading income continues to behave well due to some portfolio sales, higher valuation of equity stakes and higher global market results. We sustained positive operating jaws as expenses remained flat year-on-year, while gross income is growing above 5%. Growth in the operating income line is offset by higher impairments. Remember that provisions in the first half of last year were affected by some releases. Having said this, impairments are trending down quarter-on-quarter since the beginning of 2019, in line with our expectations. Cost of risk is also trending down, while coverage levels are also improving every quarter. Cost of risk stands at 87 basis points year-to-date and already within our 80, 90 basis points guidance for the year.

Let's now move to Mexico. The macro scenario in Mexico has proven to be more challenging than expected at the beginning of the year, with BBVA Research now forecasting a 0.2% GDP growth rate in 2019. For 2020, we expect the economy to recover to levels around 1.3%. Despite this, BBVA Mexico continues to show its earnings resiliency, with net attributable profit growing by 7% in current euros as of September. Last year, numbers included capital gains from the sale of 2 real estate assets. Otherwise, net attributable profit would have grown by 9.4% in current or 4.2% in constant. NII continues to be the main P&L driver in Mexico, increasing by 6.5% in constant euros, growing in line with activity as average balances are up by 6.6%. The decrease in the customer spread is mostly offset by higher contributions from the securities portfolio. We maintain our expectations of NII growing at a high single-digit level in 2019.

Regarding activity, loan growth continues to be driven by retail portfolios, up by 8.5% year-on-year supported by both mortgages and consumer loans, where we continue to gain market share. In the commercial segment, growth remains subdued, up only 2.1% year-on-year due to the lower public and private investment in the country. Net trading income increases by 15%, favored by some portfolio sales and strong global markets activity with clients. Positive jaws are maintained in line with guidance, with core revenue growing 5.4% year-on-year versus OpEx at 4.8% . OpEx would be growing by 4.2%, if we exclude the increase in the contribution to the BBVA Foundation in Mexico. Impairments increased by 11% in the year and above activity, due to a negative macro impact in 2019, actually it was positive in 2018 and growth being biased to retail portfolios. All in all, cost of risk remains at 298 basis points, in line with our guidance for the year of around 300 basis points and as you know, at the lowest levels of the last decade.

These results reflect, once again, BBVA's Mexico leadership position, both in terms of market share and profitability, proving its resilience in lower GDP growth scenarios.

Let's now focus in Turkey. Macro data is improving with GDP showing already 2 quarters with positive quarter-on-quarter growth and inflation falling significantly to 9.3%. BBVA Research expects GDP growth of around 0.3% this year and around 3%, in 2020. In the first 9 months of the year, numbers continue to prove Garanti BBA's earnings strength in a challenging environment, with operating income increasing by 1.5% in constant terms. This has been possible, thanks to our robust core revenue growth and our focus on efficiency. NII is up by 6% year-on-year, explained by higher customer spreads, especially in the foreign currency portfolio, up 76 basis points and lower wholesale funding costs more than offsetting the lower contribution from the TL loan book, both because of loan activity and customer spreads.

Considering the year-to-date evolution, and the Central Bank rate cuts since July amounting to 10%, we now think that we will beat our previous guidance, of NII excluding CPI linkers because it will increase in 2019 versus 2018. Fees continue to increase by over 22%, with very good performance across the board. Expenses grow significantly below the 12-month inflation, improving the efficiency ratio by 61 basis points versus the first half of the year to 34.8%. Growth in the operating income line is offset by the increase in loan provisions, up 16% versus last year. The quarter-on-quarter increase in cost of risk was expected and is due to our higher provisioning needs in the commercial portfolio, being consistent with our guidance. The year-to-date cost of risk stands at 199 basis points in September, still below our year-end guidance of around 250 basis points. We now expect to end the year below this figure. Other provisions have also increased, explained by provisions related to contingent's liabilities and a base effect as last year numbers had a positive result from the sale of a real estate asset.

And finally, South America. Colombia and Peru will continue to show a solid GDP growth rate around 3%, both for 2019 and '20 and we will wait until the new government announces new policy measures to update Argentina's macro. Colombia's net attributable profit grows by over 18% in the first 9 months of the year in constant terms. Thanks to NII, up almost 5% versus last year on the back of higher activity. Positive jaws with expenses growing below inflation and also lower impairments, thanks to a positive IFRS 9 calibration impact. Peru's net attributable profit also grows strongly by almost 18%, driven by NII increasing over 11% and growing above activity, thanks to lower wholesale funding cost. This has allowed the franchise to generate positive jaws offsetting the increase in provisions, explained by some provision releases in 2018.

And finally, Argentina. It had a positive contribution in the first 9 months of the year of EUR 117 million, and that was thanks to the sale of -- partly, thanks to the sale of our stake in Prisma in the first quarter of the year and a higher NII, driven by the contribution from the securities portfolio. That has been able to more than offset the impact from the inflation adjustment, the depreciation of the currency and the increasing cost of risk related to the macro and sovereign rating downgrade.

And now, back to Onur for some final remarks.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [4]

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Yes, I would like to restate once again that the very strong core business fundamentals, operating income growing nearly at double-digit, 9.7% growth in operating income, a continuous improvement in efficiency, where we keep maintaining our best-in-class position versus competitors. Sound risk indicators, very positive evolution in the year, thanks to our diversified footprint. Capital position, our capital position is even stronger today, we reached the target range for the CET1 full-loaded ratio much earlier than expected and we keep maintaining it at those levels, and we continue to improve. We continue delivering on outstanding shareholder value creation and double digit profitability. We are at the forefront of our European peer group. And finally, we continue ahead of the curve in digital transformation, positively impacting key business drivers such as growth, customer experience and efficiency.

All in all, I would say we had an excellent results, we had excellent results in the third quarter, driven by our unique and diversified footprint and business model.

With this, I conclude the presentation. Thank you very much for listening. Now I yield the floor back to Gloria.

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Gloria Couceiro Justo, Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR [5]

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Thank you, Onur. We are now ready to move into the live Q&A session. So first question, please.

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Questions and Answers

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Operator [1]

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Our first question today comes from Alvaro Serrano of Morgan Stanley.

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Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [2]

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My first question is on Spain and the NII. I know you've reiterated the guidance for this year and then give guidance beyond this year, but a question on general trends. In your ability to sustain, if I think about sequentially from here on, the NII, obviously, lower rates will feed through. Volume growth, doesn't appear too strong anywhere in Spain. But you also got levers like charging for large deposits, et cetera, et cetera. So could you give some commentary around do you think you're able to sustain this current level of NII going forward despite the headwinds into next year? Or given your management levers that you may or may not apply, do you think this is a good run rate? Or some color around that, given the different trends that I've touched on.

And the second question is on capital. If you can give us an update on the different sort of -- it's been discussed, the disposal of the consumer business in Chile, the joint venture insurance, the [Casia Norte] development. Maybe you can give us an update of where we are, apart from organic if there's any more levers that we should look forward to? Or give us a sense of how much -- how material those things could be.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [3]

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Thank you for both questions, Alvaro. So very quickly, on Spain and net interest income as we've said, we don't provide guidance for the upcoming years. We had the guidance of minus 1% to minus 2% for 2019. We have 1 more quarter to go, and we still stick with our original guidance for 2019.

For 2020, as you said, as I said, we don't provide guidance yet. The only thing I would say is, obviously, there are headwinds and tailwinds. And we'll try to use our management capacity to try to balance them all as much as possible. You mentioned some negative topics, obviously, but there are also some positive things, no? Obviously, the TLTRO 3 conditions, the 2 tier deposit system, it will help the Spain business unit in 2020. And as you can see here, I mean, when we were starting the year, the cost of deposits, it was 8 bps. And over time, we have taken them down to 5 bps. And that 3 bps is -- it's very valuable to achieve that decline. So we are doing the things that we can to be able to manage the headwinds, and we will discuss more specific guidance in the next quarterly call.

Regarding capital, you mentioned topics that are mainly inorganic and M&A-related and on those topics, obviously, it depends whether we execute those deals or not, and we are for value creation. If we don't see any value creation, we don't close those deals. So -- but -- so I would not comment on them because they might not happen. The only thing I would say is our organic capital generation capacity, I hope you see it from the numbers, it's very robust. I mean, 22 bps in the year despite the fact that we have weathered 24 bps from regulatory topics and still growing 22 bps. It does point out to our organic generation -- organic capital generation capacity. So I'm very happy with what we have been doing organically, and we will continue to create organic capital.

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Operator [4]

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Our next question today comes from Sofie Peterzens of JP Morgan.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [5]

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Here is Sofie from JP Morgan. So I'd like to continue on the capital topic. This quarter, I can't see that you take any TRIM impact. But could you just remind us what regulatory capital headwinds you expect going forward? How much additional TRIM impact you expect, anything from Basel IV impact that you can give us? And if you expect to see any impact on any pension adjustments in the coming quarters. That will be my first question.

And my second question would be on M&A, both in Spain and outside of Spain. Could you just elaborate a little bit how you kind of look at the opportunities like to grow inside Spain. How do you view kind of organic versus inorganic growth. And if you're looking potentially at inorganic growth, what are the kind of key things that you're looking for?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [6]

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Okay. So on capital, we have provided guidance at the beginning of the year that these regulatory impacts would be in the range of around 30s. Basically, it was the IFRS 16, 11 bps and TRIM, 20 bps. As you might remember, in the second quarter, we said we are prudentially taking 13 bps from TRIM into the capital numbers already. So 13 bps, 3 bps from the market risk and 10 bps from the mortgage portfolio, basically. And at the time that we said for the mortgage portfolio, our expectation -- we haven't received a final letter, but our expectation was going to be another 10 bps to be realized. We don't know the exact timing of when we will receive the letter. But we still expect that the 10 additional bps will come either this year or next year.

As you all know, the TRIM schedule is such that all the field work will be completed by the end of 2019, and then the impact might come either 2019 and 2020. So we are at the end of that cycle. So basically, the TRIM exercises is close to be complete. The only remaining one is the low default portfolios and we expect the impact of that to come in 2020, but it's very tough to judge at the moment because we haven't received any guidance yet. So we are done with the TRIM, except the additional 10 bps that will come from mortgage, whenever we receive the letter and then the low default portfolios. The rest of the Trim exercise has been, as you know, completed already.

And given the fact that we -- our usage of internal models is quite low, the impact on trends on BBVA has been, as compared to our peer group basically, has been relatively low. To cut the long story short, we have registered 13 bps in the second quarter, we have registered 11 bps in the first quarter, the total being 24 bps. On the ones that we know -- which is the mortgage, we expect another 10 bps to come either in the fourth quarter or in 2020.

And you asked other topics that might be affecting us and so on. Obviously, the Q1 would be Basel IV and obviously, it's not going to come in the very near future, but it will come January '22 or beyond. And at that time frame, what I can tell you is again, given our RWA density, the key lever in Basel IV is obviously the key impact is going to come from the output floor. And given our RWA density and our balance sheet, we don't expect to be affected from output floor. So we would expect that our -- the impact, again, coming from 2022 and beyond, the impact that could be coming on our way from Basel IV would be much less than competitors.

Regarding M&A, the same discussion that we have every quarter but I would repeat what we believe in, which is M&A. We only do it when we think there's a strategic and financial fit. We only do it when we feel we can create value from those opportunities. So we are -- we obviously analyze the opportunities and so on. But our focus, our clear focus is on growing organically. And I hope you see it again from the numbers today. We are growing our top line, 3% in the third quarter, net interest income, 6% growth in fee income. I mean, the gross income is growing 5 -- plus 5%, the operating income growing 10% in the context of no inorganic opportunities. We have a lot of opportunities organically, and that's our focus.

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Operator [7]

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Our next question today comes from José Abad of Goldman Sachs.

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José Maria Abad Hernandez, Goldman Sachs Group Inc., Research Division - Executive Director [8]

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I have 2 questions on Spain. The first one is that, as Jaime pointed out earlier, the most recent high-frequency indicators point to economic slowdown, which seems to be particularly driven by weaker household consumption. So with that in mind, should we expect an increase in the cost of risk next year beyond the 20 bps guidance for this one? And related to this, I saw in the -- that you're growing actually the back book of consumer lending at 15% -- north of actually 15% year-on-year. Could you please tell us at which rate did you grow the front book of consumer lending in Q3? And maybe provide some color about your expectations going forward about originations.

On a separate question, which is on fixed rate mortgages. Could you please comment on the competitive dynamics as well as on your strategy in this particular segment.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [9]

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Thank you José. Maybe -- do you want to take the first one, Jaime, on Spain? You commented on it already, so why don't you follow from there?

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [10]

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Yes, you were asking about the impact on cost of risk of the potential slowdown, as you know, José, we don't provide guidance beyond 2020 -- 2019. But as I've said already, we still think that we will end the year within the guidance that we have provided at the beginning of the year. So without the impact from the sale of the mortgage portfolio that we did in Q2, we're expecting cost of risk guidance of around 20 basis points at the end of this year.

On how the back book is behaving, on the spreads on the back book, especially on the consumer side, and the reality is that back book spreads are -- deals are behaving quite well. We're not seeing any pressure on deals. They are improving in mortgages, in consumer loans, in various small businesses. Even in corporates. Only the public sector portfolio and the midsized company book is reducing the deals slightly. The consumer portfolio is behaving quite well. The year-on-year rates are slowing down a little bit versus the second quarter of last year -- of this year. As of June, we were growing at a yearly level of 18%. We're down to slightly over 15%. So it's true that the year-on-year levels are slowing down. Cost of risk is not having an increase, any relevant increase in this portfolio and behaving quite well.

On the fixed rate question on mortgages and how things are changing, it's true that the front book fixed rates and fixed rate product is down slightly versus the second quarter, roughly 15 basis points, and that is due to the lower rate levels that we've had in Spain over these last 3 months. The mix of -- of fixed-rate mortgages in Spain has slightly increased this quarter to slightly over 60% versus an average of 50% that we've had in the first half of the year.

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Operator [11]

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Our next question comes from Andrea Unzueta of Crédit Suisse .

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Andrea Unzueta, Crédit Suisse AG, Research Division - VP [12]

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Both of my questions are on Mexico actually. You mentioned that NII was supported by a higher contribution from the ALCO portfolio. Could you give us a bit of color on how big that contribution is? How big the ALCO portfolio is? What's the yield and the duration?

And the second question is on the NPLs, the NPL ratio has increased by 40 basis points in the last 2 quarters, and it was very stable during 2018. So I was wondering if you could explain a bit how asset quality is progressing.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [13]

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Andrea, thank you for both questions. The first topic is around the growth in the net interest income and the ALCO portfolio. As you can see, the core of the growth is driven by the volume growth and while maintaining more or less maintaining the margins. If you look into the growth in our volumes, year-over-year growth in our loan book in Mexico is 5.4%, 5.4%. If you look into our year-over-year growth in net interest income it's around 4%. So most of the growth is actually coming from in the net interest income book. Net interest income coming from volumes. We are growing our business in Mexico. Some contribution from ALCO, but not a major contribution.

On the NPLs, as you can see, the cost of risk is actually very stable in Mexico and the NPL has gone up. The reason for the NPL increase is the fact that it's a definition change. We have moved from 3 past due installments to 90 days past due to harmonize our definition of NPLs all around the globe. And as a result, some portfolio, which was there and in most cases, which we already provisioned for, has moved into NPL. So it's a definition change. The key metric that you should look into, obviously, is the cost of risk and cost of risk is 298 bps. Again, if you remember, if you take the average over the past 10 years, our cost of risk was 340 bps. Last year, we had 300 -- around 300 bps cost of risk, and it was the best year ever. And so far, this year, we are doing even better than that. So this cost of risk is actually making us extremely happy.

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [14]

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Just to point out that 2/3 of the increase in NPLs is coming from that...

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [15]

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Definition change.

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [16]

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The criteria change that Onur has mentioned.

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Operator [17]

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Our next question today comes from Ben Toms of RBC.

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Benjamin Toms, RBC Capital Markets, Research Division - Analyst [18]

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Just one for me, please. I'm not quite sure that I heard correctly, but I think you adjusted your cost of risk guidance in Turkey for Q4 or for the full year down. Did you say that you expect it to come in lower than the 250 bps you've given before? If so, how much lower than the 250 bps, please?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [19]

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Go, go. Jaime, why don't you go? We have a good answer to this one. Anyone can pick it up. So take it.

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [20]

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Well, I did say -- I did said that the guidance will be improved. It will be below 250 bps, I haven't said anything different. Sure that we started the year with a cost of risk expectation of 300 basis points, midyear we reduce it to 250 bps. And now we're expecting that number to be below that. Let's leave it there.

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Operator [21]

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Our next question today comes from Carlos Cobo of Societe Generale.

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [22]

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A quick question, a follow-up on consumer credit. Sorry, it's a bit long, I'll take some -- the idea is if you are -- we have been reading some headlines that you are targeting nonexisting clients of the bank in Spain, but considering that the credit repository in Spain is only negative of default, it's difficult to gather those data on clients and to price it properly. So I was wondering how are you planning to do it? What's the growth target for this type of business? And if you are doing the same in Mexico, actually, because that's why you are gaining market share, growing with non-banking clients of the group. Lastly, do you feel there could be -- I mean, do you think it's the right phase of the cycle to do that approach of a higher risk client outside the bank and there could be a mispricing that is happening in the U.S.? Or I mean, how do you calibrate this risk?

Second, on capital, if you could explain the -- in Slide 10, the others impact, which is negative by 5 basis points, you explained that a part of that is Argentina and the U.S. currency impact. But what is the balancing positive to make it that round up to minus 5%, please?

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [23]

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Carlos, could you please repeat the last question, please, on Argentina?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [24]

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No, no, the minus 5 bps.

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [25]

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Yes, the final minus 5 bps, sorry.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [26]

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The other is on the capital.

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [27]

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Yes Jaime, sorry. It is just -- if you could split that minus 5 basis point other capital impact, we know 2 negatives, minus 4, Argentina; minus 4, FX in the U.S. or dollar. What is the balancing positive?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [28]

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So the first one, on the -- Carlos, thank you for both questions, very good questions. On the consumer. First of all, the growth that we are seeing in Spain and in Mexico. And for -- as a matter of fact, in other countries at the moment is only our existing customers, existing customers, no? Because we have not started the other program yet. So in the context of for example, the Spanish growth, the 15% growth that you see on the stock. That 15% growth is driven by our existing customers and 89% of the origination that we do, 89% of the origination that we do, is coming from what we call preapproved loans to our customers that we know very well. And in most cases, that have their salaries, with payrolls with our bank. So it's a known customer to us. We have seen their behavior for many years. We have the clear safeguard of the payroll account being with us and so on.

So -- and we don't see -- so at the moment, we don't see any concern whatsoever on that book at all. On the contrary, I mean, we look into these things with a very simple principle. We call it through the cycle, through the cycle, return on capital. So if we have a portfolio, a book-to-build up to go for, we look into whether through the cycle, we can make decent returns out of that book. In the case of consumer loans in Spain, for example, our current -- the yield on the loan is around 7%, 7%. Okay? Obviously, the risk cost is much higher but when you incorporate the risk cost, when you look into the capital that you deploy for that book, the return is justifying such a strategy. And I'm saying through the cycle with an underlying version because we don't look into the current risk, we simulate and we look into what the risk cost would be through the cycle. And if that analysis gives us very decent returns, that's a book that we would like to grow. And that's what we are doing.

So at the moment, we don't have a concern whatsoever. And then I can assure you that the return on capital for that book is basically encouraging us to grow the book. But you did ask another question. You said -- and by the way, the same situation is in Mexico. In Mexico, at the moment, the whole growth is coming from our existing customers. But you asked another question, so it might be the case today, but you are saying that you want to grow also for nonexistent clients or, we call it, non customers, open market, that is also true. But in all -- in those cases, in the future, as we start to grow that book, and we will obviously try to do it gradually, only gradually. We will leverage and you ask of our strategies. We will leverage again the data. In the case of Spain, for example, we will leverage PSD deal 2. We will see what the client data is in other institutions. So if a client -- a non client, an open market customer wants to buy a loan in Spain from us, a consumer loan, we would ask through PSD deal 2 the information about that customer so that we can underwrite comfortably that customer base. And in the case of Spain, again, that open market strategy will be built on salary accounts as well. So if you want to get that loan, we would like you to also take your nominal, your payroll to our bank as well. And the similar strategy is in Mexico. So we would look into it with a through the cycle profitability lens. And we will have enough data to be able to underwrite these customers and then do it gradually, so that we can manage our profitability overall.

Is this the right time to do it given the cycle as you say, it goes back to the strategy that I mentioned. We look into this through the cycle. So we put stress to the cost of risk in such a way to see whether through the cycle profitability is going to be there. On the 5 bps, why don't you jump in, Jaime?

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [29]

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On the 5 bps, in others, we do not have the Argentinian impact that we talked previously about. Here, we have the impact mainly from the FX, which was minus 6 basis points in which the U.S. represents 4 basis points. In this column, we also represent the mark-to-market of the held to collect and sale portfolios, that is up by 1 basis point in the quarter. That's minus 1 bps coming from the equity portfolios and plus 2 bps from the fixed income book. The impact of Argentina, it's in the RWA column. And this minus 4 basis points impact is due to the sovereign rating downgrade that increases foreign currency exposure to 150% versus [150%], the sovereign exposure in foreign currency, together with also increase in weighting for some Argentinian corporates.

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Operator [30]

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Our next question today comes from Andrea Filtri of Mediobanca .

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Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [31]

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A question on your capital target, is your 11.5% to 12% CET1 target, a good pre and post Basel IV? And could you please give us the contributions from the different ALCO portfolios by geography in the Q3 results. Finally, can you remind us the U.S. unit's sensitivity to interest rates?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [32]

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Andrea, thank you for the questions. I'll take one and three. Jaime, maybe you talk about ALCO portfolio. On the first one, the capital target, 11.50% to 12% is pre or post Basel IV. After Basel IV, we might need to really -- I mean, this target is a dynamic target. People look into it after the implementation of Basel IV and then we might revise it. We will look into it. It's at the moment -- for today, I mean, for pre Basel IV basically. And if you remember what we said last time is we would expect to be within this range in 2019 towards the lower end of the range, which we already are. And at the end of 2020, we will try to be at the upper end of this range, upper end of this range. And we're still with that strategy. And those 2 years, our goal is -- those 2 years are pre Basel IV, obviously.

Then the second question was on the contribution of ALCO portfolio?

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [33]

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Yes, we never provide the contribution of the ALCO portfolios to the different P&Ls, but we do provide in the annex a lot of detail on how they behave and size of the different portfolios. The mix between held to collect and sell and -- held to collect. And the largest, also additional information on the largest portfolio, which is in the euro book.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [34]

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And on the NII sensitivity, the third question, we provide this to plus/minus 100 bps, step function parallel movement in the curve. So with minus 100 bps parallel movement, the net interest income of the euro balance sheet is going to be minus 7% impact, minus 7%. If you remember in the last quarterly call, this number was around minus 8% to minus 9%, but we have taken it down because of the TLTRO and also the tiering system. In the U.S.A., it's between, again, 100 bps downward adjustment to the curves. Step function, minus 8% to minus 9% impact on net interest income. In Mexico, minus 2% to minus 3%. In South America, is a blended geography, minus 2% to minus 3%, close to minus 2%. And in Turkey, basically, there is very limited sensitivity.

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Operator [35]

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Our next question today comes from Ignacio Cerezo of UBS.

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [36]

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First question is on capital, if you can give us the size of that low default portfolio, you're expecting to get some news flow next year? And which of the geographies this is concentrated on? And the second one, I think I've seen in Mexico a pickup of the cost of deposits. So considering the direction of interest rates, I was wondering what is behind it.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [37]

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Ignacio, on the first one, the size of the low default portfolio, if you're asking for the total amount that we are looking into, I don't have the exact number at the moment. But it's the FI book and it's the corporate book, basically, corporate book. And you can very easily deduct it out from the numbers that we are providing in the presentation as well. But those are the 2 books that we are looking into.

On the cost of deposit in Mexico, I couldn't get the full question. You were asking why it has gone up?

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [38]

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Yes, I mean, your cost of deposits going up 16 basis points in the quarter when rates are going down. So wondering why.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [39]

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Yes. So the cost of deposits have gone up a bit because we wanted to fund more of our balance sheet through deposits. So it's completely normal. And given the curve now in Mexico so as you know, the Banco Mexico has started the easening curve. So the curves are coming down. As a result, that growth is going to be stabilized. And in the next quarters, you will see that curve to come down actually. It was mainly because of the market situation and the fact that our appetite of -- we wanted to fund our growth through deposits.

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [40]

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Yes, it hasn't had any -- actually, any impact on NII, because these are new deposits, this new -- this funding needs -- used to be funded through the ALCO portfolio through short-term funding that has been canceled and now we're using deposits with clients, especially corporates and SMEs, to fund our needs.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [41]

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That's why you see it -- will see the 4% growth in net interest income in Mexico.

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Operator [42]

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Our next question today comes from Fernando Gil of Barclays.

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Fernando Gil de Santivañes d´Ornellas, Barclays Bank PLC, Research Division - Research Analyst [43]

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Just a question on for the NII. I think you guided for higher NII for 2020 versus 2019. So just wanted to check. And have the contribution from the CPI linkers if possible.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [44]

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I think we had trouble in hearing, but I think, it was for Turkey, because the meaning...

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Gloria Couceiro Justo, Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR [45]

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Yes. Fernando, I think you were asking about the contribution of the CPI linkers...

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Fernando Gil de Santivañes d´Ornellas, Barclays Bank PLC, Research Division - Research Analyst [46]

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About the NII in Turkey for next year? And contribution on the CPI linkers. I think I heard that you were guiding to higher NII in 2020 versus '19, but I just want to check.

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [47]

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No, we don't provide guidance for 2020.

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [48]

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It was more -- Fernando, it was for 2019, we originally guided in 2019 that the NII, excluding CPI to be flat and we are now revising that guidance to upwards. And we are saying that the NII, excluding CPI, will grow in 2019 rather than staying flat. That was the comment that was made by Jaime previously, yes.

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Fernando Gil de Santivañes d´Ornellas, Barclays Bank PLC, Research Division - Research Analyst [49]

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And again, the contribution from the CPI linkers?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [50]

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Fernando, again, sorry, we cannot hear you very well. So can you say it again?

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Fernando Gil de Santivañes d´Ornellas, Barclays Bank PLC, Research Division - Research Analyst [51]

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CPI linkers' contribution to NII?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [52]

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It's going to be lower in the third and fourth quarter because the inflation expectations has come down. And as I mentioned, versus last year, CPI linkers has contributed EUR 133 million less this year than last. So the contribution would be less from CPI, obviously, because the inflation is going to be much lower.

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Gloria Couceiro Justo, Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR [53]

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In the third quarter, the contribution was EUR 100 million.

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Operator [54]

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Our next question today comes from Carlos Peixoto of Caixabank.

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Carlos Peixoto, Banco Português de Investimento, S.A., Research Division - Analyst [55]

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Carlos Peixoto here from Caixabank. Just a couple of questions. First one would actually be on litigation, on the litigation themes. I mean, recently or this week we've seen Spanish courts or the Spanish Supreme Court ruling on overdraft commissions. I was wondering if you could give us some color on how much those type of provisions represent for -- sorry, those type of commissions represent for BBVA? And whether you think that there is a risk of similar lawsuits. I know that this one was involving a different bank but I was just wondering whether there could be some cross readings here for BBVA.

Secondly, just to get a bit of a feeling, so you're seeing NII in Spain declining by 1% to 2% for the full year, if I understood correctly. How do you perceive in terms of volume growth, not only for this year but also in mainly for next year, do you think that we're now at closer to a turning of the cycle on that front? Or as the macroeconomic cycle seems to be slowing down over recent times, we shouldn't actually be expecting much of volume growth over the coming quarters?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [56]

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Perfect. So on the first one, Carlos, thanks for the questions on the litigation. As you said, this is a case of another bank on overdraft fees. It was -- it came out on October 29. The ruling was on a specific overdraft clause fee. It does not say that every overdraft fee is void by definition and so on. So based on what we have seen, the ruling does not affect BBVA. According to Bank of Spain, the overdraft fee must relate to the expenses linked to the recovery processes. And we think BBVA fulfills this requirement. So it was a very, very specific case, and we don't expect any material impact to come out of it for BBVA.

For growth, obviously, we maintain our guidance that we have said originally, which is the flat loan growth for the year. So it's a bit -- slightly -- year-over-year, it's minus 0.8% this quarter. But we maintain our guidance because the fourth quarter typically is a quarter of good loan production. So we maintain our guidance of 2019 staying flat.

For next year, again, we don't provide guidance for next year. But the volumes will probably be -- we will be a bit on the positive side because in the context of the mortgage deleveraging coming down a bit, we would see probably some positive dynamics coming from mortgages. And if we can maintain the growth in the other portfolios, I wouldn't expect radically negative situation at all. I mean, we will probably be in that range that we have provided for 2019.

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Operator [57]

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Our next question today comes from Britta Schmidt of Autonomous Research.

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [58]

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Two quick questions, please. One, in Mexico, 5% loan growth year-on-year in the quarter, there's 1% loan growth we saw and we saw a steep decline in retail volumes as well. I think previously, you've given a message of high single-digit loan growth Mexico. Do you think that in Q4, you can pick up? And can you give us a little bit of insight whether this lower growth is demand-driven or whether you are more cautious on pricing in certain segments?

And then secondly, on the NPLs, in terms of change in definition, I think I might have missed something there. Is that something you did this quarter? Is it something that where you can point us to different regions being more impacted? And is it something that's also going to change the run rate of NPL inflows going forward?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [59]

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Perfect. Britta, thank you for both questions. The first one, on the growth in Mexico, as you say, 5.4% is year-over-year as of September. We think that we will still achieve that high single-digit growth at the end of the year because, as I said in general, the fourth quarter is typically a good season for new production. So we will -- we maintain our guidance basically. The answer to your question is, we maintain our guidance of high single-digit growth.

In terms of the NPL definition, as I said, the change was -- it's a methodological thing. But you count installments and if you are 3 installments short delinquency, then originally that was the NPL definition. Now that we moved that from installments, number of installments to number of days, and that basically creates a one-off effect. That's the reason why the NPL has gone up, but it has nothing to do with the quality of the portfolio, with the cost of risk and so on. We did this one step change once, and then we will continue as is. So there is nothing to be concerned about.

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Operator [60]

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Our next question is from Marta Romero of Bank of America.

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Marta Sánchez Romero, BofA Merrill Lynch, Research Division - Director and Analyst [61]

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The first question is on the U.S. I'm trying to understand your commitment to allocating capital there. The annual loan growth is slowing down fast to just about 1% compared to 3% last year -- in Q2, sorry. Is this a reflection of the environment? Or is it you putting the foot on the brake? With rates not going up in the foreseeable future, do you think you will be able to make your cost of equity in that market? Are you open to selling or merging your bank with another player in order to extract cost synergies?

The second question is on capital on EBA guidelines and ECB calendar provisions. Do you expect any negative impact next year from calendar provisions on your capital and in 2021 from defaulted exposures? And if there is a headwind based on the exposure you have today, do you feel like you need to step up the disposal of NPLs? And do you think your coverage levels in Spain are adequate for that?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [62]

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The second one, Jaime, why don't you take it up on the NPL definitions? I give all the good ones to you because it's supposed -- they're supposed to store it there as well. But on the first one, the -- on the U.S., as you said, we have -- the growth has come down -- came down and come down a bit. But in terms of the overall strategy, if you're asking -- because you're asking merging, consolidating and so on, as I mentioned, we don't -- we analyze opportunities all the time but our focus is very clear. Our focus is organic growth. And that's what we are trying to do in the U.S.A. As I mentioned many times before, we are in the sweet spot of the U.S. market. We are in geographies, we are in states that has been growing much higher than the rest of the U.S. and these are very large markets that we feel we can create value. Texas, by itself is $1.8 trillion economy. We are the fourth largest bank in Texas. And we have an amazing growth opportunity in Texas. So we would like to explore that organic growth opportunity as much as we can. And we feel, given also our digital capabilities, that we can create a differentiation in those markets that we are in. If you are in a very good market and if you believe you can leverage things that others cannot do like digital that we have been putting so much focus on in the past few years, then there is a value creation opportunity, and we want to explore that value creation opportunity.

In terms of the growth, though, it has come down. You're saying 1%. So because the market has not grown up -- has not grown as much lately either. And as I said in the last quarterly calls, we have to be careful in terms of cost of risk. And as you have seen, we committed in the last quarterly calls, that our cost of risk would be in the 80 to 90 bps range, which is where it is now. So given that cost of risk and return, again, through the cycle return calculations, we are picking our bets and picking the portfolios that we want to grow in, and that's what's still giving us a 1.4% growth year-over-year. Basically, in short, we are committed to the U.S. market. We believe we have an organic growth story to have in the U.S. and we will go after that one.

On the NPLs.

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [63]

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On the second question, I don't particularly expect the EBA guidelines to have a significant impact on us. As you know, they mainly affect the PD's and LGD's estimations for advanced models and we only use IRB models for 1/3 of our credit RWA. So it shouldn't be relevant. And then, as you know, the ECB, the SSM when coming to the bank and doing TRIM, on-site inspections, et cetera, they already use these EBA guidelines in the review on how we calculate RWA.

So I think we think the impact's already provided, this impact will be there. We're still working on the potential impacts on the new definition of default, and that is something that we're going to need the whole 2020 to have an idea. I don't think this would particularly change the way we manage our NPLs. I think we've been quite proactive in reducing the NPLs, especially in Europe over the last few years. And it shouldn't significantly affect our strategy.

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Gloria Couceiro Justo, Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR [64]

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I think there's one last question.

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Operator [65]

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Of course, our final question today comes from Ya-Lan Liu of ACF.

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Ya-Lan Liu, Ahorro Corporacion Financiera, S.V, S.A., Research Division - Analyst [66]

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Just 2 very quick questions. One on the ECB tiering and TLTRO 3,what are your plans? And how much of the savings you can -- cost savings from these 2 new ECB measures? And then second, goodwill, I mean, when is your impairment test due on your goodwill? And how comfortable are you on the resilience of your assumptions used to calculate your goodwill, particularly in the U.S. and Turkey, please?

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Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [67]

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I'll give the second one to you again, Jaime. On the first one, ECB and TLTRO 3, are we planning to use it? The answer is yes. The TLTRO 3 with the new and revised guidelines, we want to leverage our allotment capacity and also for the tiering system as well. The total combined effect of this is going to be EUR 75 million in net interest income in 2020. On the goodwill impairments?

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Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [68]

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We have to analyze valuations every single quarter. This is an ongoing exercise and as of now, we feel confident, of course, with the valuations that we have in place, and we will continue to review and update this number every single quarter. It will clearly depend on the expectations of both franchises for the next few years and also in general, the valuation that banks in those geographies also have.

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Gloria Couceiro Justo, Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR [69]

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Okay. Thank you. Thank you, Ya-Lan, and thank you very much to all of you for participating in this call. And let me of course remind you that the entire IR team will remain available to answer any questions you may have. So thank you very much, and have a great day.