U.S. Markets closed

Edited Transcript of BBVA.MC earnings conference call or presentation 31-Jul-19 7:30am GMT

Q2 2019 Banco Bilbao Vizcaya Argentaria SA Earnings Call

Madrid Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Bilbao Vizcaya Argentaria SA earnings conference call or presentation Wednesday, July 31, 2019 at 7:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* 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, LLC, 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

* Daragh Joseph Quinn

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Fernando Gil de Santivañes d´Ornellas

Barclays Bank PLC, Research Division - Research Analyst

* Francisco Riquel

Alantra Equities Sociedad de Valores, S.A., Research Division - Head of Research

* 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

* Mario Ropero

Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst

* Marta Sánchez Romero

BofA Merrill Lynch, Research Division - Director and Analyst

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst

* Stefan Rosenov Nedialkov

Citigroup Inc, Research Division - Director

* Ya-Lan Liu

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

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, everyone, and welcome to the BBVA Second 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 the presentation of group's results and then Jaime will review the business areas. We will move straight to the live Q&A session after that. (Operator Instructions) And now, I will turn it over to Onur to start with the presentation.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Gloria. Good morning to everyone, and welcome to BBVA's Second Quarter '19 Results Audio Webcast. As Gloria mentioned, I'm going to talk about the group, the group's evolution and Jaime will focus on the respective business areas.

So let's jump into it, Page #3. Starting with Slide #3, we are reporting a very good second quarter in terms of results, value creation and capital generation. This is the same page that you have been seeing in the past few quarters, and very good progress on all the key metrics that we see on this page. So our net attributable profit on the left-hand side of the page in the second quarter is EUR 1.278 billion.

This represents an increase of 2.6% versus the second quarter of last year, but as you all know, given the sale of BBVA Chile in July 2018. If we exclude BBVA Chile recurrent operations from the base, from the second quarter of 2018, the true comparable apple-to-apple increase is 5.7%. And comparing to the previous quarter, the first quarter of the year, net attributable profit grew at the strong rate of 9.8%.

There are 2 other very important key messages on this page -- on the -- in the middle of the page, you see that we continue to deliver outstanding value for our shareholders. In the first half of the year, we have increased our tangible book value per share plus dividends by 6.9%. We haven't seen this level since 2014, basically, so very strong.

The evolution on a year-over-year basis is also worth to mention, with a double-digit growth rate of 12.6% versus June 2018. And second, on the right-hand side of the page, what you see, we would like to highlight on the right-hand side is, despite absorbing 24 bps from 2 regulatory impacts, IFRS 16 and Trim-related regulatory impacts, our capital position increased 18 bps versus December 2018. And we already stand within our target range. As you all know, we have communicated a target range of 11.50% to 12%, and earlier than expected. You were expecting to be in that range by the end of the year, but earlier than expected, we are now within our capital target range.

Slide #4, the key highlights of the quarter. We would like to highlight the excellent evolution again on some of our core performance metrics. As in the first quarter, the year-over-year variations exclude BBVA Chile recurrent operations, just to be comparable. In this slide and also in the consecutive slides. So in the rest of the presentation, we wanted to make it more comparable. With that footnote, the main highlights of the quarter are, first, number one, we would like to highlight the robust growth in core revenues, so net interest income plus fees growing 8.7% year-over-year in constant euros as always. And net interest income growing even at double digit, 10.4% at constant euro terms, again. Second, the good performance at the top part of the P&L, coupled with our constant focus on efficiency. It helped us show a reduction in the cost-to-income ratio of more than 40 bps. Now our cost-to-income ratio stands at 49%, continuing the trend of positive operating jaws, which we care about a lot, as you all know.

Risk indicators. Number three, risk indicators were one of the bright spots of this quarter. Excellent trend in the year with NPL ratio down 57 bps versus 1 year ago, and our NPL ratio now stands at 3.84%, and then improvement of 330 bps in the coverage ratio. So the coverage ratio now stands at 75%. And also we have seen an improvement in our year-to-date cost of risk, which now stands at 0.91%, 91 bps in year-to-date accumulated terms, again, much better than our expectations.

Number four, capital, I partially mentioned it, but our strong capital position is obviously in the numbers, 11.52%, increasing 17 bps in the quarter. And in this quarter, we absorbed 13 bps from Trim-related impacts. So again, as I mentioned in the first -- in Slide #3, we have already achieved our target earlier than expected. Number 5, we continue creating value for our shareholders in terms of profitability and return metrics. BBVA is at the forefront of the European banking industry. Return on tangible equity, which is a number that we care about a lot, it remains strong at 12.4%. Another outstanding figure on this page, obviously is the tangible book value per share plus dividends, as I mentioned in the previous page, it grew 12.6% versus June 2018. And finally, we are progressing ahead of the expectations in digital transformation. Digital sales increased to 58% of the total units sold in the year. I remind you, this number was 30% 2 years ago. And digital customers, they are up by 17% to 29.7 million customers. Similarly, the number of mobile customers, it reached 26.1 million. It's a yearly growth rate of 25%, and this represents a 48% penetration. As I mentioned in the previous quarters, our goal is get to 50% by the end of this year, and we are well on track to get to that goal as well.

Slide #5. This is about the second quarter profit and loss, simplified P&L statement. You can identify the positive evolution on the core business drivers on this page. As mentioned, net interest income is up 10.4%, gross income is up 5.1% and operating income is up 6.1% at constant euro terms.

Also, as I mentioned, very positive news regarding impairments with an improved figure in the second quarter versus the first one. The soft spots of the quarter, again, it's -- they are obviously on the page, but there are 3 soft spots that we would like to highlight. The first one is NTI. The NTI contribution was lower, given the market situation due to the muted markets activity basically and lower portfolio sales that we did in the second quarter. Other income and expenses, negatively impacted by the hyperinflation adjustments of Argentina, it was higher inflation adjustment for Argentina in this quarter plus this line includes a higher contribution than last year through the single Resolution Fund in Spain. And also, the last -- I would take the soft spot as the provisions line here, provisions and other gains and losses line. Note that in the second quarter '18, we recorded in this line some capital gains from the sale of a building in Mexico. So the base was -- is not fully comparable, but as compared to that base in this quarter, we have had higher early retirement costs in Spain and higher continuous risks we potentially encountered in Turkey. So leading to a negative year-over-year comparison. But again, in our view in this page, the highlight is the core income, core operating income and core business drivers which are showing very positive signals.

Slide #6. This is the half year numbers, again, in a summarized P&L format. The top line, similarly, shows a very strong evolution versus the 6 month '18. Gross income is up 6% and operating income is up 8.2% at constant euro terms. Looking at the bottom line, though, I mean, again, we improved a lot in terms of year-over-year comparisons in the second quarter, but this is the half year numbers. We remained flat versus 6 month '18, driven mainly by the impairments line. As you can see, the impairments line has grown 15.7% versus the 6 month '18. Multiple things, but due to the negative impact of the macro update, higher provisioning in the commercial and unsecured consumer lending portfolios in U.S.A. in the first quarter, as you would see in a few pages now. There's a very meaningful improvement in those numbers in the U.S. in the second quarter. And the low base of the U.S. actually in the 6 months of '18, because we did some -- there were some provision releases in that period in the U.S., mostly due to Hurricane Harvey releases, and there was a positive macro impact. So that was basically the key changes versus the base. And also, in Turkey, as you know, we have had higher requirements in retail portfolios in the first half of this year. So impairments line was the key difference. But on the core top line drivers, as you can see, we are again registering a very robust growth.

Slide #7, we talked about the revenue, maybe a bit more details on the revenue. As I mentioned, net interest income growing double digit 10.4% versus a year ago. This year's trend is very positive comparing to first -- the first quarter. So second quarter is doing much better at 4% growth. Very important to note that -- and you will see when Jaime talks about the countries, but most geographies are performing very well on this line item in this critical dimension of our business. So we welcome this opportunity, this development.

Positive evolution in net fees and commissions, as you can see, 3% versus the same quarter last year and 4.2% increase versus the first quarter of this year. This is, by the way, the highest figure in the last 10 quarters at constant euro terms. So very well on the net fees and commissions.

Net trading income, as I mentioned, is down 58%, highly impacted by the muted Global Markets activity and lower portfolio sales, as I mentioned, that we did in the second quarter. All in all, total revenues are up 5.1% versus the second quarter of last year. 1.9% down versus the first quarter, but as I mentioned in the second quarters of every year or this year in the second quarter, we registered our annual single Resolution Fund. So comparison between the first quarter and the second quarter is not apples-to-apples. But overall, 5.1% growth in gross income.

Moving on to Slide #8. One more quarter, we continue to show positive operating jaws. It is once again very satisfying to see our expenses growing at 3.9%, well below the growth rate in core revenues, which is 8.3%, as you see on the left-hand side of the page. And it is doing this for so many quarters now and it is despite the high inflation in some countries of our footprint. In the middle of the page, we show the strong evolution at high single-digit growth, 8.2% growth in the operating income. And on the right-hand side of the slide, as you can see, the efficiency ratio keeps improving, showing a 41 bp decrease to now standing at 49% overall cost-to-income ratio. Significantly better than European peer group. And if we calculate cost to income at the core revenue level without the NTI, the improvement is actually more than 70 bps.

I mean -- I keep reiterating this every quarterly call, our commitment to improve efficiency is clearly top-notch in the context of our transformation. We are highly prioritizing this topic, and I believe our track record shows how high it stands as a priority for us as the management in the group.

Moving on to page number -- Slide #9, asset quality and risk indicators. Really good news, as I said here on this slide, in impairments line, we see an improved figure versus the first quarter of this year. So the provision -- impairments line 25.6% down versus the previous quarter, and it's flat versus the second quarter of last year. So the quarter-over-quarter decline improvement is driven by Spain, thanks for the sale this past June 21 of another mortgage portfolio of EUR 1.2 billion of gross book value. But beyond Spain lies Turkey, due to lower requirements in Turkey, especially on the wholesale side by the U.S., driven by the lower requirements in the U.S. as compared to the first quarter.

On other risk metrics, NPLs were significantly reduced by EUR 2.6 billion on the top right versus last year, EUR 2.6 billion reduction versus last year and EUR 0.6 billion reduction versus the first quarter of this year. Cost of risk at the bottom, keeps improving versus the first quarter, stands now at 91 bps year-to-date, an increase of 9 bps versus last year, and at 77 bps actually on a quarterly annualized basis for the quarter. It was 77 bps, a very strong figure, declining 27 bps compared to the previous quarter.

The NPL ratio keeps decreasing this quarter, so 57 bps reduction to 3.8%, and coverage ratio again, improving 330 bp improvement to 75%. So overall, we maintain an excellent risk profile and better than our expectations.

Capital. Slide #10, regarding the quarterly capital evolution, the CET1 fully loaded ratio, as you can see, it has increased 17 bps, even after absorbing the 13 bps of Trim-related impacts in the quarter. The good evolution was helped by the grant of regulatory equivalence in Argentina, as you can see on the waterfall chart. And the good performance Held To Collect and Sell portfolios. But beyond that and overall, these numbers underscore, once again, our really strong organic capital generation capacity.

I would also like to highlight the quality of our capital on the bottom left side of the slide. It's -- we think it's an important metric to look into. You can continue -- you can see that we continue to lead the ranking of our European peer group in terms of the leverage ratio, which stands at 6.6% versus the European peer average of 4.9%.

Regarding the AT1 and the Tier 2 buckets, we are already covered and completely end out. And lastly at BBVA, I would like to mention this topic that we keep strengthening our capital position through green, social and sustainable bonds. Last June, we successfully issued our second EUR 1 billion senior non-preferred green bond. This perfectly illustrates BBVA's vision and strategy towards a more responsible way of doing business, as you can imagine. As our success depends -- and this is a genuine belief culturally shared across the organization, our success depends ultimately on the prosperity of the communities that we serve and the society in general. So you will hear us talk more about this going forward, but in short, we believe business should up its gain, addressing the main challenges the society has, both environmental and social, and we intend to be one of the leading actors here.

Moving on to Slide 11, outstanding delivery on shareholder value creation, again we keep delivering on this. As you can see, I repeated it, so I'm not going to spend too much time on this, 12.6% yearly increase in tangible book value per share. And the return on tangible equity, we are at the forefront of the European banking industry, and 12.4% return on tangible equity.

Slide #12. We -- as we have commented in the last quarters, underpinning the growth in the digital business is the continued digitization of our customer base. So on the left-hand side of the page, you see the evolution of digital customers, up 17% versus June 2018. It represents a 54% penetration of our customers. And same with a different angle, mobile customers, the penetration of mobile customers. Mobile customers grew more than 5 million in 1 year, up 25% and now we had a 48% customer penetration. We had a goal of 50%. We are very close to it, we believe we will achieve it by the end of the year. And finally, on the right-hand side of the page, as a consequence of the strong base of digital and mobile clients. Digital sales continues to grow. Now 58% in terms of number of units and 44% in terms of value. In our view, very, very strong numbers.

Moving now to Slide #13. I would like to highlight the impact of our transformation on our business drivers. This is important because we talk a lot about digital transformation. We believe we can create a competitive advantage through our investments in digital and through owning this topic. And in every quarterly call I would like to highlight you a few things, which does -- a few things we do highlight the reasons on why we think this is a competitive advantage. So first, the impact of digital transformation on growth. On the left-hand side of the page, I believe we can further foster growth by leveraging our digital capabilities. We have been doing well in serving our own customers through digital, but now we can use our digital advantage to acquire to grow our customer base to acquire new customers. One example of that is Uber. I mean the partnership that we launched in Mexico. So Uber has partnered with BBVA to launch its first financial product outside the U.S. And this is also BBVA's first product created through our open-banking capabilities and the API-based infrastructure, we have been building all around the world. So this is an important partnership that we pay attention to.

Second, the customer engagement and advice. You can see on the right-hand side of the page, technology and data will be key to deliver advice-based value proposition at scale and increase our customer loyalty. One good example of this is this new feature in the BBVA Spain app, which is set up your account, and this is beyond alerts. It helps you, it aims to help customers manage their everyday finances, automating certain tasks, creating a self-functioning bank for the customer through simple settings. And these initiatives -- it helps us to be in the daily cash flow of our clients and to help them better -- make better financial decisions. So very important development. It keeps adding on. And then finally, I would like to give you an example, our end-to-end, a holistic assessment of how digital is helping us in delivering better numbers. The numbers are up, obviously, at the surface but there are many things that are being done underneath. So our transformation in Spain, I think it is a good example of that. I mean we have started our transformation open growth to generate growth in our customer base to improve engagement, to improve efficiency, and we are seeing clear results there. So on growth, bringing new clients to the bank. Even in a very mature -- highly mature and bank rise market like Spain, increasing cross-sell and transactionality were made possible through digital transformation. As you can see on the left-hand part of the -- left-hand side of the page.

Customer acquisition by digital channels in Spain, it has grown 33% in the last 2 years. On engagement, on the middle side of the page, creating a world-class customer experience. I mean we are being recognized by Foresters 3 years in a row now as the best mobile app in Europe. And it has helped BBVA to lead Spanish NPS, ranking for the last 2 years among the large banks in Spain. And also, it has helped us reduce the attrition rate by 18%.

And finally, on efficiency. Thanks to digital transformation, a convenient relationship model with a seamless integration between digital and people. It helped us to lower the cost of doing business. Again, past 2 years, total costs has declined by 8%. So I'm now handing it over to Jaime. Jaime maybe you talk to us about the countries and the business units.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you very much, Onur, and good morning, everybody. Let me begin with Spain, the economy here remains quite strong with GDP expected to grow by 2.3% in 2019 and more than 1% above the European average. We expect GDP growth to continue at healthy levels, around 2% also in 2020. Net attributable profit in the half decreased by 1.7% versus last year. The decrease is fully explained by significant reduction in NTI, down 67% and the release in other provisions. 2018 included significant provision releases from the real estate area. Both impacts are only partially offset by the provision release coming from the sale of the mortgage portfolio that was closed this quarter. The most relevant P&L drivers are first significant NII recovery versus Q1, up over 5%. Thanks to a good commercial activity and an improvement in the customer spread up by 3 basis points, a higher contribution from the ALCO portfolio. And the lower cost of excess liquidity, as we have reinvested part of the excess cash at the ECB in high-quality liquid assets. As a consequence of this improvement, the evolution of NII on a year-on-year basis improved significantly to minus 2.4% in the half, in line to meet our year-end guidance of NII decreasing slightly by between 1% and 2%.

The second most relevant driver is again expenses. They continue to go down 3.5% on a year-on-year basis, thanks to the success of our transformational efforts. And finally impairments, that showed a positive figure, driven by provision releases. Excluding the one-off already mentioned, cost of risk would have been 18 basis points year-to-date, more in line with our year-end guidance of around 20 basis points that excludes this positive one-off.

Let's move now to the U.S. We continue to expect a good macro for the Sunbelt Region, which will be growing around 2.8% in 2019 and 2.7% next year. Outperforming once more the U.S. average in the period. Revenues in the U.S. are growing by 5% year-on-year, driven by NII and NTI, mainly due to ALCO portfolio sales. NII is also growing around 5%, supported by loan growth, up 4% year-on-year and higher customer spread, up 21 basis points versus the first half of 2018. Benefiting both from the change in mix towards higher-yielding consumer products and last year's rate increases. For the whole 2019 and then considering the change in interest rate expectations for the U.S. dollar, we now expect NII to grow at the low single-digit level. We continue to enjoy positive operating loss in the U.S. as expenses remained flat.

In terms of asset quality, impairments increased versus last year. As Onur has already mentioned, in the first half of 2018 provisions were extremely low, positively impacted by provision and provision releases, both from hurricanes and some commercial portfolios and a positive IFRS macro impact. The increase in provisions is explained as follows: 50%, more or less, comes from retail portfolios, mainly consumer loans or write-offs; 25% due to negative macro impact; and the remaining 25% due to high provisioning needs from wholesale portfolios. Having said, these impairments show a meaningful decrease versus Q1 of this year, down 24%, mainly explained by lower provisioning needs in retail books. Driving cost of risk from 106 basis points in Q1 to 82 basis points in Q2. We want to reiterate our 80-90 basis points guidance for the year.

Let me focus now on Mexico. BBVA Research has revised down its GDP growth expectations for Mexico in 2019 2.7%, despite this BBVA Mexico continues to deliver very strong results. Net attributable profit increases by over 7% in the half in current euros, so 1% in constant. The comparison is impacted by a 40 million capital gain post-task from the sale of 2 real estate assets that took place during the first half of 2018. Excluding these, net attributable profit would have increased by 11%, 4% in constant euros. NII remains as the main P&L driver in Mexico, growing by 8% in constant euros and supported by activity and a higher contribution from the securities portfolio. Activity grows by 5% year-on-year, bias towards retail portfolios, particularly consumer loans, growing at 12%, where we continue to gain market share. The commercial segment growth is likely 2.3% excluding the FX impact. And as you remember in Q2 of last year, we had a strong lending growth rate as companies cover their funding needs ahead of the presidential election. All in all, we remain committed to our year-end guidance of loan growth at the high single-digit level.

Positive jaws are maintained with core revenues growing 6.2% versus 4.7% growth in expenses. Expenses growth continues to be impacted by the additional contribution to the BBVA foundation, which doubled this year. Excluding this effect, OpEx would have grown by 3.7% and well below the 12-month average inflation of 4.5%. Impairments are up by 8.4% and above activity growth and explained fully by negative IFRS 9 macro impact. Cost of risk stands at 298 basis points year-to-date in line with our 300 basis points guidance for the year, and as you know, significantly below the historical average of the last 9 years, which is 340 basis points. These solid results continue to reflect BBVA's leadership position in Mexico, both in terms of market share and profitability, proving its resiliency even in lower GDP growth estimates -- scenario, sorry.

Let's move now to Turkey. Despite the domestic and geopolitical tension, the macro recovery is on track. Positive quarter-on-quarter growth in Q1, points towards the end of recession. We expect a positive GDP growth rate already in 2019 and to reach 2.5% next year. In this context, guarantee continues to surprise, putting better-than-expected results. Net attributable profit in the half decreased by 24% year-on-year, and mainly explained by the TL depreciation. In constant euros, and despite a much more challenging environment, the net attributable profit was down by only minus 2.8% versus the first half of last year, proving guarantees earning us resiliency. Pre-provision profit is up by 12% versus the first half of last year, thanks to our robust core revenue growth and expenses growing below inflation. NII is up by 15% year-on-year, due to a higher contribution from the CPI linkers and also the foreign currency portfolio versus (inaudible) is up by over 75 basis points in half, more than offsetting the pressures in TL customer spreads due to the increasing deposit rates. Following the Central Bank July decision to cut rates by 425 basis points, our 2019 guidance of flat [NIIX] the contribution of the linkers has clearly put upside potential.

Fees increased by 24% year-on-year with good performance across the board. This double-digit pre-provision profit growth was upset by the increase in long loan provisions by 37% due to the deterioration in some retail portfolios as a consequence of the worsening economic conditions, partially mitigated though by lower provisioning needs for some large tickets.

It is worth mentioning that provisions are down versus Q1 by 26%, driving year-to-date cost of risk to 157 basis points as of June, down from 182 in March and clearly much better than expected. This leads us to improve our cost of risk guidance for the year. We now think we will probably end the year closer to 250 basis points below the 300 basis points previously guided. Other provisions for contingent liabilities have also increased this year, while in the first half of last year, we had a positive result coming also from the sale of a real estate asset. And finally, South America. Colombia's and Peru GDP growth rates have remained quite healthy around 3% for 2019. In 2020, they should continue to behave well. Colombia's net attributable profit in the half is up by 13% with NII increasing 4% year-on-year on the back of higher volumes, improving customer spreads and a higher contribution from the securities portfolio. Expenses remained flat, it's even again positive jaws. And year-to-date cost of risk significantly down after Q1 one-offs. Peru's net attributable profit also grows, in half around 13% year-on-year with NII up 14%, and remains as the main P&L driver, growing above activity thanks to lower funding cost. Positive jaws are also maintained in Peru.

Argentina reported net attributable profit of EUR 110 million in the first half, improving its contribution versus last year. Thanks both to NII boosted by the contribution of the securities portfolio as the excess liquidity is invested in high-yielding, short-term treasury notes, and also don't forget the positive results from the sale of Prisma that took place in Q1 of this year. And now back to Onur for some final remarks.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Perfect. Thank you, Jaime. Finished -- I'm now finished with the presentation highlights and the few key messages that we mentioned. First of all, I would like to reiterate very strong core business fundamentals. Double-digit growth in net interest income, in our view is a very good result to be happy about; then number two, I would say best-in-class efficiency, continuous improvement in the jaws, continuous improvement in the operating jaws; number three, sound risk indicators, very positive evolution in the year; number four, our capital position, it's even stronger today with CET1 fully loaded ratio, we are already within the target range, again, earlier than expected; number 5, we continue delivering on outstanding shareholder value creation, double-digit profitability, return on tangible equity, leading our European peer group. And finally, we continue ahead of the curve in digital transformation, positively impacting key business drivers, such as growth, customer engagement and efficiency, as we have explained to you in the first part of the presentation. All in all, I would say, we had excellent results in the second quarter driven by our unique and diversified footprint and our business model, and obviously, driven by our talent base and our employee base.

With this, I conclude the presentation. So Gloria, back to you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Our first question comes from Francisco Riquel from Alantra.

--------------------------------------------------------------------------------

Francisco Riquel, Alantra Equities Sociedad de Valores, S.A., Research Division - Head of Research [2]

--------------------------------------------------------------------------------

I will start with NII in Spain. I appreciate, you keep the full year guidance at minus 1%, minus 2% despite the lower interest rate. However, the following in the EURIBOR has only happened in June. So I wonder, you can elaborate what is -- what happens after 12 months? And if you can give some sensitivity on what if the EURIBOR is a bit lower next year on average compared to this year and under the main drivers of the NII going forward? And then the second question is different is Mexico cost of risk. I see that you have done great at GDP forecasts for Mexico twice this year, but you are still maintaining the 3% cost of risk guidance. So I wonder, if you can give more details on what you're seeing on the ground, by loan portfolio I see a small pickup in NPL ratio? And then also on the spectral loss model. How far are we to a change and if you revise again the macro assumptions, so some sensibility also there?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Perfecto. Thank you, Francisco, for the questions. Let's start with NII in Spain. So are we sticking with the guidance of minus 1% to minus 2%? We are sticking with the guidance. What were the key drivers that led to relatively positive results in the second quarter? There were 3, I would highlight the 3 of them. First of all, activity continues to grow, although 0.7%. You see it in the activity growth that it is there. And as you can see, the growth is coming from portfolios that we have prioritized, where we can generate much better returns. So activity growth, core business, plus if you look into the spreads regarding Spain in one quarter, we have gone from 196 to 199. So it's like 3 basis points, very small figures. But it takes a lot of effort to get those 3 bps. So that's the first lever, very important core business related. Number 2, as we mentioned at the first quarter quarterly call, we were trying to manage our extra liquidity, and we were investing in the ALCO portfolios. So the impact of reduction in extra liquidity and the ALCO portfolio decisions is also helping. So their impacts or effects they are to stay. So we expect those positive effects to continue in the second half of the year. And as a result of this, we are sticking with our minus 1% to minus 2% guidance that we have given in the first quarter quarterly call.

Regarding the future years and the EURIBOR impact and everything, we are publishing this, as you know. So minus 9% is the 100 bps parallel decline in EURIBOR curve impact that we have on net interest income. So if the curves go down by 100 bps on a parallel fashion. So the impact on our net interest income is minus 9%. So that's the impact that we highlight, but we have multiple management levers to compensate for this. And in a lower interest rate environment activity turns out to be better, cost of risk turns out to be better. So as you know, we don't provide guidance beyond the existing year for 2020, I'm not going to provide any guidance yet. But net interest income sensitivity, we published it, it's again 9%, but we will try to manage through it. Then Mexico, cost of risk. Are we sticking with our guidance, if that's the question? We are sticking with our guidance of 300 basis points. You are right, we have revised down our growth estimates for Mexico. As you all know, it used to be 2% at the beginning of the year then we came down to 1.4%, and now the latest forecast that BBVA Research has published is 0.7%. So there's that impact. But we still stick with the 300 basis point guidance. And this is a very good number to note. As you might know, if you take -- I think it was the past 8 year average was 340 bps for Mexico and that 340 bps is now hovering around 300, which is again very, very good news for Mexico.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Our next question comes from Alvaro Serrano from Morgan Stanley.

--------------------------------------------------------------------------------

Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [5]

--------------------------------------------------------------------------------

Just on -- my 2 questions are actually both from Spain. You've given the NII sensitivity, thank you very much for that. But you didn't mention among the management levers or among the levers, I don't think you mentioned costs. And I just want, conceptually, how much room do you have to cut costs in the event the margin sort of turns out, the rate cuts turn out to be worse than expected? How much room there is to take out costs even further? And related to that, if I take a step back, my impression at least for BBVA is more in Spain is a low-risk, low-margin business in Spain and hopefully, low cost. But in a world of increasingly more negative rates that seems more challenged than the past. To what extent do you think M&A is necessary to -- in Spain in this sector? And under what circumstances would you contemplate that given the outlook looks definitely worse than we expected at the beginning of the year? Is that not a necessarily source of cost-cutting M&A in Spain as a whole and then for BBVA in particular?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

How much room is there to cut costs? I think we have proven quarter after another. And if you compare ourselves with the Spanish, Roman banks, you would see that good performance, again, it's also obviously in the numbers. If you look into the second quarter costs versus second quarter of last year, we have reduced our OpEx by 3.5%, which is in our view a good performing figure. So we have proven, and we will continue on that trend. So 3.5%, it might not be as much going forward, but we are very disciplined on costs, and we will try to create value to compensate for some of the macro and interest rate dynamics that we are facing.

On the low-risk, low-margin business, overall -- I would a bit back to differ on that one. If again looking look in to the Spain numbers, the growth for Spain is coming from high-margin portfolios. Again, based on pure numbers. If you look into consumer, consumer year-over-year growth for us is 18.2%, very small businesses as you call it [PNS], the growth year-over-year is 4.3% and back the commercial business, middle-market business, our growth in lending for that book is 7.5%. So we are growing in areas where we see margin, and we are doing this by gaining market share. If you're looking to also, the stock market shares are not published, but you're looking -- you can do the production flow market shares, we are gaining market share in those portfolios. So we are changing the profile. That's why in the context of EURIBOR, I think Francisco asked it and I missed it, so the resetting of the mortgage portfolio based on EURIBOR it takes a while, yes. But even in that context, some resetting has already happened and is happening. And despite that, we have increased our spread by 3 bps. And again, 3 bps margin gain in Spain is not easy, and it all goes back to the debt mix adjustment. So we are growing in those.

Then your last question about M&A, I hate to give the same answers that I do, but M&A is a separate topic. We focus on our daily business and organic growth, and we need to perform every single day to get better figures from what we have. And then M&A, we always look into it as well. It's a value lever. It only happens when we see there is a clear opportunity out there for value creation.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question is from Mario Ropero from Fidentiis.

--------------------------------------------------------------------------------

Mario Ropero, Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst [8]

--------------------------------------------------------------------------------

The first one is a follow-up on the NII comment that you made. A 9% negative sensitivity to 100 bps decline in rates. Given the guidance you have given for Spain. This is a decline of only -- roughly EUR 30 million, EUR 35 million for NII for 10 basis points. But you have a mortgage book of over EUR 70 billion. So please, could you help us understand why it is only 9%? And then another question is, could you please tell us the percentage of fixed-rate mortgages in your back book?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Let me do the second one right away. The back book is 7% to 8% in the stock, and it's 50% in the flow in the new originations roughly. I'm giving you the rough figures. Regarding the 9% how come? Because there are other dynamics that kick in. So this is a modeling based on the full macro-related drivers. So when the rates come down, our cost of funding -- wholesale cost of funding directly, it comes down. This also rebundle everything. And then also the volume impacts are considered in that modeling as well. We are quite confident in that because we have tested that modeling in the past. So I'm giving you the final output rather than a direct impact on one piece of the balance sheet.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question is from Sofie Peterzens of JPMorgan.

--------------------------------------------------------------------------------

Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Here is Sofie from JPMorgan. So with -- going or continuing on the NII line, could you just also remind us what's your NII sensitivity is to a 100 basis point move in interest rates also in other geographies. So for example in Turkey, where we saw quite big costs, also in Mexico, where expectations are that they are going to buy trades? So that will be my first question. And my second question is on your capital. You have 11.5% core equity Tier 1, which is what you basically target. Could you just remind us what additional impacts do you expect from Trim model 4 and other regulatory measures? And how we should think about that? And also, on the capital, what really you do with any capital that is kind of above 11.5%? How should we think about excess capital, how it will be deployed, is it M&A or will redirect it to shareholders?

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [12]

--------------------------------------------------------------------------------

Sofie, very clear questions. NII sensitivity, let me immediately respond to that one first. So again, 9% for the euro balance sheet. It's around 9%, a bit less then -- but around 9% for USA as well. This is net interest income sensitivity to 100 bps parallel decline for a year for the consecutive 12 months. Mexico is 3.4%, around 3%. South America is a blended geography, it's around 2.7%, 3% again. And Turkey has the least sensitivity for multiple reasons that we will take on another call. It's around 1.4%. So the least is in Turkey. So that's the NII sensitivity by country. Then regarding capital and what additional impacts are we expecting? So as I mentioned, this quarter we have done 13 bps from Trim. And in the first quarter, we did 11 bps for IFRS 16, if you remember. For the rest of the year, we are expecting around 10 bps from Trim on the mortgage portfolios, basically, another 10 to be there. Then there are -- there is one final Trim remaining. The fieldwork is still continuing, as you'd all know, the Trim was an exercise where the fieldwork was going to be done between 2017 to end of 2019. So the only remaining fieldwork is on the low default portfolios, as we call them, low default portfolios, corporate FIs and so on. That low default portfolio will be done it seems by the end of this year as originally planned, but the letter and the process will be in 2020. We don't have that visibility on that book yet. So that impact is going to come in 2020 though.

So this year, if you remember, we guided the market 20 to 30 bps impact in 2019 from Trim. And if we get that additional 10 bps that we are expecting in the third or fourth quarter, the total for this year would be 13% of this quarter and then 10% that would be coming in the rest of the year in total 23%. So it's basically within the range that we have guided you at the beginning of the year. For 2020 for the low default portfolios, again, we don't have any visibility now. Then the last question, what do we do with the excess capital? Again, we always look for opportunities. If the opportunity to value creation opportunity is there we will leverage it and other levers can be also leveraged. But at the moment, we are not there yet. So let's get there and then we'll discuss them.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question comes from Marta Romero from Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Marta Sánchez Romero, BofA Merrill Lynch, Research Division - Director and Analyst [14]

--------------------------------------------------------------------------------

I've got a follow-up question -- a couple of follow-ups on capital and the NII in Spain. On capital, the 13 basis points. Where is it coming from? Because I was surprised to see the risk-weighted assets in Spain flat with flat activities. I would have thought that we would see some inflation there. On NII in Spain, how much of the growth is 5% quarter-on-quarter growth we've seen is coming from your -- from managing your liquidity, increasing your ALCO portfolio. Can you give us a sense of your risk appetite going forward? So what is the total volume between ALCO and liquidity in Spain? And how do you -- if you expect to grow that book? And quickly, sorry, on Turkey, what is driving your reduction of cost of risk? The environment remains quite challenging. Your stage 2 loans probably need higher coverage. And you've mentioned that you're starting to see some mass quality deterioration in retail. What is driving that reduction in guidance? And what do you see for next year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Martha, I partially responded to the first 2, but maybe we can have Jaime add another perspective to it. So Jaime on capital overall and then the NII in Spain, then I'll take the Turkey question if that's okay.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, okay. Yes, maybe the -- Martha, maybe the surprise on RWA growth in Spain comes because of the fact that the only impact that of -- coming from Trim that it's already in the Spain's RWA numbers. It's part of the add-on from the Trim and market risk review. The 10 basis points that we have potentially recognized in this second quarter have been assigned to the Corporate Center, okay? So that's maybe the reason why you don't see that RWA inflation. Okay. Second question is regarding NII contribution from the excess liquidity and the high liquid asset portfolio. NII contributions are coming from the -- ALCO book is up roughly EUR 9 million, EUR 10 million in the quarter versus Q1. Having more or less the same amount in the ALCO portfolio, roughly EUR 23 billion.

So we've done some net acquisitions but of fairly limited amount. We tried to share with the market a little bit more clarity on the ALCO portfolio. So you have in the annex further info that I think you can take advantage of. The yield of the euro ALCO book is 1.2% and the average duration is more or less 5 years, very similar to what we had last quarter. In terms of Held To Collect -- and Held To Collect and Sell mix, it hasn't changed much from the previous quarter. Out of the EUR 23 billion, roughly 12.5% for -- in the Held to Collect portfolio and roughly EUR 10.5 billion come from -- are accounted in the Held To Collect and Sell part. And then the last part of the question is the excess liquidity. What we've done with excess liquidity, remember that we were holding roughly EUR 25 billion in excess liquidity at the ECB at the end of last year. We've been progressively reducing this amount to roughly EUR 14 billion, EUR 15 billion at the end of the first quarter and EUR 5 billion at the end of the second. And we've been reinvesting those amounts into high-quality liquid assets, reducing the net of (inaudible) 40 basis points that we were holding. That -- the size of that high-quality liquid asset is roughly EUR 50 billion or so. I hope this answers the question.

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [17]

--------------------------------------------------------------------------------

And Martha, regarding Turkey, as you know, I mean, if you break it down into different components, the retail portfolios are very clear. The rules are very clear. What you take as a provision is very clear, IFRS 9 and forecasting for the future, is very clear. So the gap that you mentioned, which is why it's turning out to be better than otherwise, it's mainly because of wholesale clients. And they're all individual one-by-one client assessment. And so far, we are not seeing what we were expecting at the beginning of the year in those respective clients one by one. Then you refer to stage 2, and given our provisioning levels in stage 2, they basically -- I guess you're asking whether we're feeling comfortable with that and we are. Again, it vary client by client. And again, I have the list in front of me, a client-by-client perspective on all of them.

And let me give you a few numbers, for example, I mean, roughly 30% of the stage 2 is not delinquent at all. They are not even showing signals of any problematic situation. But we still -- just because we want to be prudent, have taken them into stage 2 and we're provisioning for them, close to 26% of that stage 2 is restructured loans, and we see complete alignment with the restructuring plans. And then the 32%, it still -- some of them are not delinquent, we kind of put them into this category or watch list. And again, client-by-client assessment is showing us what we need to provision for. So overall, in the stage 2 IFRS 9 reporting, you would see that we are 10% provisioning for stage 2, but looking into the portfolio, and we're looking into the client-by-client situation, we feel comfortable with where we are.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question is from Stefan Nedialkov from Citigroup.

--------------------------------------------------------------------------------

Stefan Rosenov Nedialkov, Citigroup Inc, Research Division - Director [19]

--------------------------------------------------------------------------------

It's Stefan from the Citi team. Two questions from my side on Mexico. Just looking at the fee evolution year-on-year and Q-on-Q, it looks like to be the weakest performance in at least 5 years. And then kind of trying to not put it together with the doubling of the foundation contribution. But should we be combining those? I mean have you basically committed to Amort to contribute more in social causes? How should we think in terms of fee evolution going forward? What's the political impact from Amort on you basically, for the next 12 to 24 months? The second question is on the U.S. Onur, I did hear your explanation about the 3 basis points Q-on-Q increase in spreads in Spain. But then when I was at the U.S. spreads they're basically flat, and you guys are increasing. You're basically going down the credit risk curve in terms of previous emphasis on C&I lending, and now it's a lot more credit cards, consumer lending, et cetera. How should we think about the change in your loan mix split going forward? You're obviously not increasing your spreads, but your credit costs should be going up going forward? Any color on that would be great.

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [20]

--------------------------------------------------------------------------------

Perfecto. Stefan very good 2 questions. Mexico, the fee decline. You're 100% right, as you -- as the numbers also show. It's mainly related to CIB, the Corporate and Investment Banking. And the lack of deals and lack of activity in CIB given the market context. We are seeing in the pipeline, we are seeing some pickup in those deals in the third and fourth quarter. So the pipeline is relatively strong. But there was nothing -- let me say, structural in that decline. So you asked about the BBVA Foundation and the social causes, yes, we do prioritize and care a lot about it. We have this balanced approach towards our business, we have to be carrying for all the stakeholders of the bank, and one of the stakeholders of the bank, it's the communities that we serve, it's the countries that we are in. And given the excellent performance of Mexico, we have decided that the -- we should be increasing our foundation contribution there as well. So that's part of it. And then you asked a question of what is the political impact of -- on low to our business? We don't comment on politics, as you know. The country is the country. Mexico is -- I was just there last week. It's a wonderful market to be in, we have a wonderful franchise in Mexico. Independent of the political developments and macro developments, I think we will do well in Mexico. I always care about the track record. So what happened in the past is always a great signal. It's not the only signal, but a great signal of the past -- of the future. If you look into Mexico, the macro growth of Mexico in the past 10 years is around 2.2%, which is much lower than other Latin American countries and the emerging economies. And in that context, BBVA has grown close to double-digit every year because the bankarization level in the country is very low. And again, we have a wonderful franchise in Mexico. So I'm not going to comment on the politics dimensions of this, but we are confident on our value creation capability in Mexico.

The second question is also very well-established U.S. The cost of risk is going up but the margins are not going up, so what's going on? First of all, I would like to once again clarify this notion on how we approach our business. We approach our business as optimizing these cash resources that we have. One of these costs beyond liquidity and other things, other resources. Capital is one of our most scarce resource. So we have to optimize the capital allocation. So if you look into our business at micro level with that plans, are we deploying capital to the places that we are making good returns out of it. Now in that context, some of those portfolios that you mentioned, it might be increasing the cost of risk, but under and through the cycle, under a long-term perspective, if we are creating very good returns from those books we will invest on those books. So just picking the cost of risk is not telling us the full story because the implication of that book is in fees, is in net interest income and so on. So are you optimizing the capital is the critical question. But then I haven't answered your question on what about -- why are the net interest income is not going up? It's again, obvious in the page, the volumes have not been that good in the first half of the year in the U.S. and the volumes are going to be -- again, the pipelines are relatively better for the second half.

So the C&I business, the commercial business that we have in the U.S. is a wonderful business. So we will keep growing in C&I. So we are not changing our mix at all. What we are doing is if we can find portfolios and capabilities that we have that we can deploy in creating better returns for our capital, we will do that. In the case of U.S., it implies that we will grow maybe in SMEs, in consumer EBIT, but the bulk of our portfolio will still be commercial. And we will be growing in commercial in the second half of the year.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Next question is from José Abad from Goldman Sachs.

--------------------------------------------------------------------------------

José Maria Abad Hernandez, Goldman Sachs Group Inc., Research Division - Executive Director [22]

--------------------------------------------------------------------------------

I think most of my questions have been answered already. Only one, maybe follow-up on capital. So to the previous question, was asking you actually how you plan to allocate any capital beyond the current levels of 11.5%. You said that you are always looking for opportunity. So I just wanted to clarify, so you -- do you consider any capital accumulated beyond 11.5% as excess capital? Or you plan to keep commodity capital and get closer or even above the upper bound of your target range now, which is actually 12%? Now second, I mean, a sub question, if you want, is that I -- my understanding has always been -- actually, this target is pre-Basel IV target. So I think someone asked this and I didn't get. So apologies if you already replied this now. But maybe if you could actually give me or give us actually some color on how you are thinking about Basel IV? And in particular, what's the operational risk going forward, so we can actually estimate a proper Basel IV target for BBVA?

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [23]

--------------------------------------------------------------------------------

Perfecto. Thank you, José, for the question is very clear. The first one is, that we consider above 11.50% excess capital. No we don't. And we guided the market on this one as well. We have a range, 11.50% to 12%. And as we have stated before, we expect to be towards the upper end of that range by the end of 2020. So 11.50% is not the goal. It's the range, and we want to be towards the upper end of that range as we mentioned before. Then the Basel IV, and the impact of that. It's too early to calculate the full impact, José. The only thing I can say is, it's our hypothesis, let's say that way, but relatively strong hypothesis. The impact on the BBVA would be probably less than others, given our usual modeling and given our footprint and how we approach. And then you can also see it in the density, the RWA density of our bank. So we would expect lower than the peers than the European banks. But it's too early to put that number to it yet. And we will hopefully guide you on that one in next year and so on, but it's too early at the moment.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Next question is from Andrea Unzueta from Crédit Suisse.

--------------------------------------------------------------------------------

Andrea Unzueta, Crédit Suisse AG, Research Division - VP [25]

--------------------------------------------------------------------------------

And I'm going to go back to fees in Mexico. I'm not sure I fully understood the answer or your expectation for the year. If I go to commerce release from Q1, it clearly states that you are revising the charges made to customers, looking for changes into digital channels. So are you revising your commissions in Mexico? And what should we expect for the year? Is it a stable fee line that we should expect?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Andrea, as I mentioned, the key difference the minus 3% quarter-over-quarter. This quarter versus last quarter of 2018, the minus 3% is primarily driven by CIB, Corporate and Investment Banking. As you all know, when you do deals, you get some upfront fees in those deals. And if you look into the sub-drivers of our fee line, it's -- that line, which is showing a decline. And why? Because the market activity in Mexico in the second quarter was muted. So are we revising our fees, in general? We are revising our fees in general everywhere as part of regular business, but are we doing something beyond normal, beyond business as usual? Of course, obviously, not. The key difference, again, is the CIB. So what is the expectation for the third and fourth quarter? You're asking, I guess, very specifically about the remainder of the year. Given the pipeline that I'm seeing, I would expect that we would be better than the minus 3%, but again, it's dependent on the conditions all those deals happening in the CIB book. So we would be -- probably be better but it's not structurally negative topic that you should be alarmed about, is what I'm trying to say.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Next question comes from Andrea Filtri from Mediobanca.

--------------------------------------------------------------------------------

Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

Could you please elaborate on the drivers of the other income line in Spain, Turkey and Mexico in the quarter as they look particularly good versus expectations? Also on TLTRO-III, from your moves on excess liquidity, can we assume, therefore, that you will not be taking TLTRO-III? And are you expecting other Spanish banks to do the same? And is this -- if so, is this expectation already factored in your NII guidance? And finally, on U.S. NII, your funding costs are going up. Is this the driver behind the lower NII guidance? Or is it the lower rates going forward? And can you update us on the specific consumer issue and how you're solving it?

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [29]

--------------------------------------------------------------------------------

I will take the U.S. maybe. Jaime, do you want to take the first 2?

--------------------------------------------------------------------------------

Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [30]

--------------------------------------------------------------------------------

Sure. Okay, on the other income line, I think I said something on the speech, but I'll try to expand a little bit the answer. You see clearly one of the line items that have changed the most versus the first half of last year, I'm going to try to distinguish between the first half of -- compare the numbers between the first half of 2019 and the first half of 2018.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I didn't -- it's in Q2. Because that is the result that we struggle to understand.

--------------------------------------------------------------------------------

Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [32]

--------------------------------------------------------------------------------

Well, okay. Versus Q2, it's -- the reasons are pretty much the same, but the numbers are slightly different. Okay, so the difference between Q2 is EUR 47 million, and it's mainly explained by both Spain and the U.S. In the case of Spain, it's up EUR 58 million. As in Q1 of '19, we included higher restructuring charges, okay, that did not take place -- took place in the second quarter. And in the case of the U.S. in Q2, we include some provision releases for contingency risks, while in Q2, we've had some provision charges. Those are the most important changes. On TLTRO-III, we clearly think that it's an interesting funding source for the bank as we feel conditions are quite favorable, although at this point, it's not easy to precise when and how we will participate. We will try to take into account what are the actual terms. Those terms will change depending on what happens with the interest rate environment after the summer, and how our liquidity generation capacity evolves in the next 6 months. We would probably not draw in -- during 2019, although that decision is not yet taken. And probably the first drawing, if at all, will take place in 2020.

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [33]

--------------------------------------------------------------------------------

Okay. And Andrea, regarding the third question about the U.S., there are 2 sub questions. I understand, the first one is the net interest income. Is the net interest income slowing down because of the cost of funding. And going forward, is the cost of funding the key reason? No, it's both. It's both. As you might know, in the U.S., the book -- the impact on the books come in different sequence. So for the loans, when the rates go up, for example, it's immediate impact on the commercial book, it's immediately repriced. But then the reflection of the increase in the rates to deposits comes with time when the customers review their CDs, certificates of deposits and so on. So what we are seeing now is the impact that is coming after the successive rate rises that we have seen in the U.S. in the past 2 or 3 years. So we are seeing it partially over time, that's why the cost of funding is going up, and it's not unique to BBVA. If you take any other U.S. bank, you would see that the cost of funding gradually goes up since the past 2 years. So that is one impact.

But going forward, if you are asking, is this going to be the key, the negative impact on the NII line? Obviously, not. As I mentioned at the beginning of the call, we are asset sensitive, which means -- and I did give you the numbers. The NII would come down by 9% if we see a 100 bps decline in the rates for the successive 12 months. So a step function change in the curve, impact is around 9%. So that is going to also, obviously, depending on the rate situation in the U.S., is going to affect us, it has already started affecting us because our book -- commercial book is mainly driven by LIBOR, 1 month and LIBOR 1 month independent of the Fed decision, obviously, had been coming down since February, March, and that is immediately affecting the yields that we have in the book. So what you see today is already reflecting those changes. So both of those will affect NII. That's answers to the question.

Then about the cost of risk. I partially mentioned it, but let me give you maybe better figures. As you see in the presentation, our first quarter asset quality cost of risk is 106 bps, 106. And as you can see in the second quarter year-to-date, that number has come down to 94 bps. If you take only the second quarter and annualize the second quarter, the second quarter's only cost of risk was 82 bps. And if you -- again, remember in the first quarter quarterly call, we guided all of you that we would be between 80 to 90. So 82 was the second quarter figure. So we feel comfortable with that guidance for the remainder of the year. And again, as long as we create returns in portfolios, we will invest in those portfolios. And that perspective is not a very short-term sporadic perspective, it's a through-the-cycle, meaning putting some buffers, taking into account that the economy might slow down and so on. So if through-the-cycle return is good for our portfolio, we do invest in those portfolios. And that's what we will continue to do in the U.S. But the bulk of our portfolio, as you can see also in the presentation, is going to be the commercial book.

--------------------------------------------------------------------------------

Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [34]

--------------------------------------------------------------------------------

Andrea, I think you asked me -- well, you asked about the other income line.

--------------------------------------------------------------------------------

Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [36]

--------------------------------------------------------------------------------

Right. I answer, other -- the difference in the other provision line, okay? So let me answer the question on other income. Okay. The other income at group level is in the second quarter minus EUR 18 million, okay, which compares to Q1 at plus 8%. We need to take into account that, as Onur said during his speech, that in Q2, we include in Spain the contribution to the Single Resolution Fund, okay, which was EUR 144 million. This negative number was offset by EUR 53 million of dividends coming from Telefónica that as you always know, that as you know, they normally come in Q2 and Q4, which is accounted in the Corporate Center. This line also includes quite a good number in Mexico in insurance results, which behaved quite well in the quarter. Overall, EUR 62 million in the quarter versus EUR 40 million in Q1. And then lastly, in the case of Turkey, we also had quite a positive number in this line, EUR 24 million versus EUR 6 million in Q1, and this is partly explained by the reversal of a tax fine that we did in Q2. I hope this explains better, Andrea.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question comes from Britta Schmidt from Autonomous.

--------------------------------------------------------------------------------

Britta Schmidt, Autonomous Research LLP - Non-Designated Member [38]

--------------------------------------------------------------------------------

I've got 2 questions, please. Thank you for providing the net interest income sensitivity. Can I just ask, maybe you can reformulate it slightly differently. What will be the NII sensitivity for a 10-basis point reduction in Spain over 2 years? I'm just asking because I assume that it's probably more than 0.1 of the 9% that you've provided due to loans, for example, hitting the floors.

And then my second question will be on loan growth in Mexico. Are you still guiding to high single digits year-on-year? I think this quarter was a bit lower due to the strong Q2 last year. But there are several other banks that have cut their loan growth outlook for Mexico quite recently. What gives you the confidence that you'll still achieve the high single-digit growth? And which segments do you intend to focus on?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay, I'll take the Mexico one. On the first one, if I start, it's going to take 10 minutes. So I'm going to give it to you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. You're right, Britta. You cannot divide simply the sensitivities. The sensitivity in the Euro balance sheet was a 10-basis point decline on a 12-month forward-looking basis. Again, parallel decrease is EUR 52 million. We don't disclose impacts beyond the 12 months.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Regarding Mexico, we still stick to our guidance, high single-digit loan growth. You do see that there are certain portfolios, which are not growing as much, but there are also certain portfolios that we are growing and growing healthily, and also return wise, very good returns. So consumer book, as you can see, it has increased 12.4% year-over-year -- sorry, year-to-date, so very -- year-over-year, which is very, very strong. And same for other books as well. So we stick with our guidance, basically, let me be more open, we stick with our guidance by the end of the year.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from Fernando Gil de Santivañes from Barclays.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Most of my questions have been answered. But just a quick question on deposit pricing in Spain. And what -- and how do you feel about corporate deposits, what is your mix? And if you plan to translate any further cuts or negative rates to the rest of our clients. That will be my question.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Fernando. Yes, we are managing that extra liquidity, as I mentioned at the beginning of the call. If you look into the breakdown of our deposits in Spain, so demand deposits is like 82%, and time deposits is like 18%. But you were asking specifically for the commercial or corporate enterprise deposits. We do have this policy that for very large ticket, depending on the relationship with the customer, depending on the book that we have with the customer, we differentiate pricing. And there are cases, there are cases that we are charging on deposits. And depending on the evolution of the curve, we will continue with the same practice, basically.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Our next question is from Carlos Peixoto from Caixabank.

--------------------------------------------------------------------------------

Carlos Peixoto, Banco Português de Investimento, S.A., Research Division - Analyst [46]

--------------------------------------------------------------------------------

Most of my questions have been answered, yet already sorry, but just a bit of a follow-up. In Turkey, you're getting towards the cost of risk below 250 basis points. If I look at the first Q, it was 180, second Q, 160, so let's say, 170 for the first half as a whole. My question here is, are you expecting some additional -- some increases on cost of risk because of asset quality, the duration that is still ongoing? I noticed that the NPL ratio went up quarter-on-quarter. Or are you just being cautious simply in playing it safe, but you do see it well below 200? I'm just trying to understand here what is the move there in Turkey? Then on NII in Turkey as well. Do you still maintain the guidance of a flat NII? Or could we see a better performance for the rest of the year, given the evolution that we saw in the first half?

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [47]

--------------------------------------------------------------------------------

Very good questions, Carlos, really quickly on both. First of all, let me just clarify one thing. In the documentation that we provide on cost of risk, the numbers are year-to-date. So the second quarter number that you see for Turkey, the cost of risk of 157 bps. That is the year-to-date number. So which implies that the second quarter was actually better than that one. And the second quarter number is actually 129 bps. So the blended is the 157. Those are year-to-date figures. So -- but what do we expect for the rest of the year? If you remember, at the first quarterly call, we guided less than 300 for Turkey. Obviously, there's some upside to that one. We would update that we want to be still prudent. We wanted to be -- we want to be still prudent, for sure. So given that we are going to be, at the end of the year, around 250 is the latest that we are foreseeing. Again, just to be on the prudent side.

Regarding net interest income, excluding CPI linkers, our guidance, as you said, was flat. And given the latest decision of CBRT, the Central Bank of Turkey, to cut the rates by 425 bps in July, we do think there's an upside potential there. So probably, it's going to be better than flat. But again, we'll see. But in terms of guidance, there's an upside in both metrics for Turkey.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Our next question is from Daragh Quinn from KBW.

--------------------------------------------------------------------------------

Daragh Joseph Quinn, Keefe, Bruyette & Woods Limited, Research Division - Analyst [49]

--------------------------------------------------------------------------------

One question, just on Mexico net interest income. (inaudible) here as you were maintaining the guidance there as well of high single-digit growth, in particular given the outlook for rates and slower GDP rate cuts, if you could just clarify that. And then a follow-up on Basel IV. I appreciate, you're not able yet to give guidance. But maybe you could point us in the right direction in terms of magnitude, particularly from operational risk. Is it a 0 to 20 bps number, 30 to 50 bps or 50 to 100? I don't know if there's any additional color you could provide there. And maybe just one final question, kind of moving away from results. And I'm thinking that your digital strategy and the strong and continued progress you're making there in terms of digital sales, et cetera, as that penetration level increases, and I don't know whether it's 60%, 70%, 80%, but how do you see, over the medium term, both the size of the branch network and a number of employees evolving of that digital distribution increases?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Very good questions, Daragh. Thank you so much. The first one, Mexico, let me be very straight to the point. Are we retaining the guidance? Yes, we are keeping the guidance. We are keeping the guidance as what it was, high single digits. On the Basel IV, I understand you want to get a range, but we don't have an estimate yet. So I'm -- if I was younger, I could have given you a range, but I cannot there.

On the third one, digital strategy. What is the implication on the rest of the cost structure and the branches and so on? Daragh, on this one, I mean we are measuring it very, very clearly in every single market. And the situation of every single market is very different. I will give you 2 examples. In the case of Mexico, for example, we are not reducing our branches in the past 3, 5 years, if you look into the numbers. But in Mexico, our, what we call target customers, which are really active customers, active customers beyond a certain threshold. It has grown 50%, 50% growth in number of customers in the past 3 years. So they are wonderful numbers. So we don't need to reduce the rest of the cost structure because for that additional customer base, we still need to serve them through these channels because some of them, at least, they still demand those channels. In the case of Spain, the situation is a bit different. It's a very mature market. Obviously, the growth in number of customers is much less. We are, by the way, in target customers, we are growing even in Spain. We are growing even in Spain because of that digital strategy. But in Spain, given the fact that the growth is not going to be as high because the bankerization level is much higher. Then those levers. Those levers around cost reduction becomes more relevant. And that's what we are doing, that you can see from the numbers.

What we care about is this notion of the jaw. Again, the growth in revenues, should be higher than the growth in costs. If you can create growth in revenues, then the cost structure is there to serve that revenue base because there would be more customers to serve. So it's a balance. But what I can tell you is on an apples-to-apples basis, meaning for the same number of customers, for the same set of services, digitalization is definitely -- and I'm underlining definitely going to help us on efficiency, and that's what we are seeing in the numbers.

--------------------------------------------------------------------------------

Gloria Couceiro Justo, Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR [51]

--------------------------------------------------------------------------------

There are 3 to 5 people on the line. So let me ask you to try to be short in the answers. So next question, please.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

The next question come Ignacio Cerezo from UBS.

--------------------------------------------------------------------------------

Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [53]

--------------------------------------------------------------------------------

Can I go back to, I think it's the first question by Paco around the NPLs in Mexico, if you can explain the pickup we have seen actually in that line segment-by-segment? What are the chances of a pickup of cost of risk in the second half due to recalibration of models for IFRS 9? And the second question on capital. I know you cannot give a number in terms of Basel IV, but do you expect to cover whichever headwind you have within the next 2 years? Or do you think you can phase it out from '22 to '27.

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [54]

--------------------------------------------------------------------------------

Well, the Mexico, the pickup in NPLs or the cost of risk, it's not a major pickup, I would say. And the cost of risk of 293 to 298 in cost of risk, for example. But I mean, there was, what you call, this pulling effect because the -- and also, there was this macro adjustment. As you know, we have reduced our macro, I mentioned it at the beginning of the call, from 2% at the beginning of the year to 1.4% first, and then to 0.7% as of last month. So the impact of that is being reflected into the figures and the cost of risk figure. So -- but we don't -- if the question is, again, are we sticking with the guidance? We are sticking with the guidance. We don't see any major negative effect that would be coming along as we see the business drivers.

Jaime, do you want to add something? Yes, go.

--------------------------------------------------------------------------------

Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [55]

--------------------------------------------------------------------------------

Yes, actually -- and on the recalibration, the recalibration will probably be positive this year. It won't take place in the fourth quarter of the year. It will take place in the third quarter of this year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

But I care a lot about vintages, vintages of the portfolio, the retail and the SME and so on in the vintages, which is the new production that you do. And what happens after the same period, basically, the harvest, we don't see any negativity at all on the contrary, to be fair.

So was it only Mexico? No? Because I was looking for something else. Is there another question? No? Okay, then next one.

--------------------------------------------------------------------------------

Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [57]

--------------------------------------------------------------------------------

And the next one was Basel IV. Basel IV, the answer remains as we've said.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

Next question comes from Carlos Cobo from Societe Generale.

--------------------------------------------------------------------------------

Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [59]

--------------------------------------------------------------------------------

Yes, everything has been discussed already. Just a quick one on ALCO. And if you could provide some more detail on -- same as you've done with the Spain, the ALCO portfolio in Mexico, size, duration and sensitivity to 100 basis point change in rates, please? That will be very much helpful.

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [60]

--------------------------------------------------------------------------------

Okay. The rate sensitivity, as I mentioned at the beginning of the call, it's minus 3%, minus 3.4% to 100 bps parallel decline. So a step function change in the curve for the consecutive 12 months, the impact would be 3.4% in net interest income. On the ALCO portfolio, Jaime, do you want to add anything?

--------------------------------------------------------------------------------

Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [61]

--------------------------------------------------------------------------------

Yes, ALCO portfolio, yes, bear in mind that the sensitivity of the ALCO...

--------------------------------------------------------------------------------

Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [62]

--------------------------------------------------------------------------------

in particular, is it possible?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The ALCO portfolio size went down in Mexico in the quarter by almost EUR 1.5 billion from 6.5% to 5%. The split between Held To Collect and Held To Collect and Sell is -- it's pretty much everything is in Held To Collect and Sell EUR 4.2 billion, and EUR 0.8 million -- not even EUR 1 billion is in Held To Collect. The duration is much shorter than in Spain. It's 1.7% -- 1.7 years. And the contribution to the NII is actually negative. And the carrying cost of this book is negative. So the reduction in rates will definitely help on this.

--------------------------------------------------------------------------------

Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [64]

--------------------------------------------------------------------------------

On the graph here, which are the cost of funding, could you say that, please?

--------------------------------------------------------------------------------

Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [65]

--------------------------------------------------------------------------------

We -- no, I don't have that in front of me, so -- but it should be roughly 8%, 7.9%, but please take this in quotation, okay?

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Next question comes from Benjamin Toms from RBC.

--------------------------------------------------------------------------------

Benjamin Toms, RBC Capital Markets, LLC, Research Division - Analyst [67]

--------------------------------------------------------------------------------

Have you invested excess cash that appears (inaudible) ECB? What assets have you invested in? It looks like it might be predominantly Italian bonds. Is that correct? And secondly, do you expect any material impact from the switching of U.S. LIBOR to software?

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [68]

--------------------------------------------------------------------------------

On the first, I'll take it, the extra liquidity, what we did with the extra liquidity? No, we did not invest in Italian bonds. It's more -- it's basically all of it, actually, that extra liquidity switch is to a high-quality liquid assets. So they're all high-quality liquid assets. In terms of the switch, sorry, Benjamin, I missed the question. What was the question again?

--------------------------------------------------------------------------------

Benjamin Toms, RBC Capital Markets, LLC, Research Division - Analyst [69]

--------------------------------------------------------------------------------

Changing rates to the U.S.

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [70]

--------------------------------------------------------------------------------

LIBOR 2? Okay. So it's the process. It's ongoing. It's actually a major project. It takes a lot of time of management and everyone else. That's in the process. But as you know, it's going to be a while. So it's not immediate yet. The key one that we are preparing for is the EONIA as the change. And again, it's a major, major project that we are dealing with a lot these things.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

Our last question is from Ya-Lan Liu from ACF.

--------------------------------------------------------------------------------

Ya-Lan Liu, Ahorro Corporacion Financiera, S.V, S.A., Research Division - Analyst [72]

--------------------------------------------------------------------------------

I got some follow-up questions on Mexico, from nacho and tacos, regarding cost of risk and recalibration of models. I'm surprised to hear that the impact is going to be positive, or should be positive by the recalibration in third quarter. Because I would say that the macro parameters would be -- again, the increases when we engage the provisions. So what would be the sensitivity of those models to an hypothetical case for a deterioration in the macro parameters, let's say, with a -- with a recession in GDP growth?

And then the next question on capital allocation. I noticed -- well, congratulations on your results in South America because being around 8% of your total assets is yielding you around a 16%, 15% contribution to your gross margin. Does that mean that you would allocate more capital to that vision? And then last one, if I may. Do you have any views on what kind of measures the ECB could be take going forward in order to alleviate the penalty on your NII in the sense of measures like a clear deposit rate or expanding the APP program by buying financial credit or even, let's say, equity? Do you have any views on that, please?

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [73]

--------------------------------------------------------------------------------

Thank you so much for the questions. Let me do the second and the first, I will give the cost of risk to you, Jaime. On the capital, are we going to invest -- divert more capital to South America? We are putting capital where the return is. If there's a return in your highlighted debt. And it's not done at the country level, it's done at the micro level. Whatever the capital return is, we put capital right there. So in that context, the answer is yes. If we get returns, we put it in those areas and portfolios.

The expectations on the tiered deposit scheme and so on, obviously, it the ECB's decision. We are waiting for the decision. There's the expectation that there would be some sort of that scheme getting in place. But we are preparing our plans to mitigate the impact of interest rates through many other measures. And if tiered interest scheme comes along, we welcome it. If it doesn't, we move along. On the first one, Jaime, very quickly, and then we wrap up.

--------------------------------------------------------------------------------

Jaime Saenz de Tejada Pulido, Banco Bilbao Vizcaya Argentaria, S.A. - CFO [74]

--------------------------------------------------------------------------------

Yes. Okay, we need to distinguish between a recalibration of parameters, which we do once a year and the macro adjustment that we do every quarter. If you remember, last year at the end of the year in the fourth quarter, we recalibrated with -- including all the info from 2017. What we're doing as we speak and will be accounted for -- in the third quarter is to input in the models, all the data from 2018. And this will, of course, affect the [PDs] and [LGTs] because of the inclusion of these new vintages. That is what we call recalibration. 2018 vintages were probably the best been produced in the last 10 years. So when we share with you guys the impact -- the negative impact last year, we also said that this was going to be probably a positive recalibration as we are expecting to have. And as Onur has already said, the negative macro that we are having in Mexico, it's already affecting a little bit the numbers quarter-on-quarter, and it fully explains the increase in cost of risk in second quarter versus the first because the negative macro affected us by EUR 26 million quarter-on-quarter.

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [75]

--------------------------------------------------------------------------------

So (inaudible), for macro, we might still register a negative. We might still register a negative from a macro perspective, macro modeling perspective in the numbers. But recalibration, which is based on the portfolios, based on the credit quality that we are seeing versus what we were expecting, that's the impact that we were referring to when we said recalibration. And on that one, it's going to be a positive effect, it seems. That's what we were trying to explain. We passed our time. Gloria, anything else you want to add?

--------------------------------------------------------------------------------

Gloria Couceiro Justo, Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR [76]

--------------------------------------------------------------------------------

No, just to thank you for participating and to remind you that the entire IR team will remain available in case you have further questions.

--------------------------------------------------------------------------------

Onur Genç, Banco Bilbao Vizcaya Argentaria, S.A. - CEO & Director [77]

--------------------------------------------------------------------------------

Well, thank you so much again for attending the conference call. And hopefully, if you haven't done so, have a great vacation period. Thank you so much.

--------------------------------------------------------------------------------

Gloria Couceiro Justo, Banco Bilbao Vizcaya Argentaria, S.A. - Global Head of Shareholder & IR [78]

--------------------------------------------------------------------------------

Thank you.