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Edited Transcript of BKT.MC earnings conference call or presentation 23-Jan-20 8:00am GMT

Q4 2019 Bankinter SA Earnings Call

Madrid Jan 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Bankinter SA earnings conference call or presentation Thursday, January 23, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David López Finistrosa

Bankinter, S.A. - Director of IR

* Jacobo Díaz Garcia

Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets

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Presentation

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David López Finistrosa, Bankinter, S.A. - Director of IR [1]

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Good morning, and welcome to Bankinter Full Year '19 Earnings Call. Our CFO, Jacobo Díaz, will now comment on the figures in more detail. Thank you.

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [2]

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Hello. Good morning, and welcome to this presentation of Bankinter's earning from the fourth quarter of 2019 and the full year of 2019. The related financial statements were posted on the website of the CNMV a few minutes ago and before market open. All related documents can also be found at this time on the Bankinter corporate website.

First of all, a few words to emphasize that we have closed 1 more year with a remarkable performance based on our recurring business in all geographies, Spain, Portugal, Luxembourg and Ireland, with us for 7 months so far. 2019 has been our seventh consecutive year of increased net profits for the group. Among others, our achievements this past year were consistent quarter-on-quarter performance supported by our customer activity, resulting in a return on equity clearly above cost of equity.

A solid growth, maintaining net interest income, gross operating income and pre-provisioning profit, even excluding inorganic growth. Adequate solvency with decreased NPL and liquidity and capital ratios at expected levels [are] even improving. All this despite a much more challenging environment, together with negative rates, significant investments in the digital front and with lower extraordinary earnings in Portugal originated from the acquisition.

In this brief comparison of key financial indicators, group loans -- group total loan book grew by 9% to EUR 60.4 billion, while domestic lending continued to shrink during the year. Gross operating income reached almost EUR 2.1 billion in the year. It shows a growth close to 6% over the previous year. NPL ratio continues its long-term downward trend. The few basis points increase coming from the EVO and Avantcard integration were more than offset by the last quarter sale of NPLs in Bankinter consumer finance subsidiary. Year-on-year, it dropped 39 basis points to 2.51%.

Finally, group's net profit reached EUR 551 million, an increase of 5% from last year. Without the acquisition of EVO and Avantcard and other integration costs, this would show an increase of 2.4% from the previous year profit before taxes, a new record high. At the same time, our CET1 fully loaded capital ratio stands stable at 11.61%, which is comfortably within our guidance for the year, and our return on equity stands at 12.98%, 13.0% if you round it.

Thus, we can affirm that after closing the full year 2019 in an increasingly difficult interest rate environment that we continued growth in our recurring commercial activity has been the driving force of revenue growth. And that with costs and provisions under control, we have been able to post a new record net profit, the seventh in a row and with annual compound rate of growth of 24% in the period.

Before we look at all our performance indicators, once again, I would like to highlight our differentiated story and strong return on equity. The group's return on equity has maintained steady growth in the last 5 years, as shown in the chart. It now stands at a solid 13%, clearly above cost of capital.

Now we will move on to our income statement performance for the full year. Our income statement for the full year of 2019 has proved positive trends in almost all lines of revenue: interest income, fee income, trading income, bringing operating income growth to close to 6% and meeting our guidance across the year. Here, you can see the group's cumulative and comparative P&L account as of December 2019 on the left and a like-for-like comparison without EVO group on the right. You will easily notice the impact from integration, EVO and Avantcard, as of 1st of June and in the second half of the year, which is an additional EUR 48 million in net interest income and fee income; an increase of EUR 79 million in expenses, including EUR 23.7 million in integration expenses; as an increase of EUR 32.6 million in impairments and other provisions, EUR 22 million of them are nonrecurring.

The total group's net interest income is up by a solid 8.8%, and the net fee income finally rose by 6.6%. Other operating income and expenses is slightly down by EUR 27 million or 8% year-on-year, mainly due to increasing regulatory expenses and a forecasted decrease in our Linea Directa insurance income. Finally, our trading income grew by 29% [but] only EUR 68 million in a year on a better year for debt markets. We proved that group's net interest income remained strong despite a negative interest rate environment. Thanks to our solid growth in lending and a positive asset mix, it is up by almost 9% in the year or by 13% since the same last quarter the previous year.

The positive seasonality in the fourth quarter commercial activity like every year and improved market condition did help commercial activity, and therefore, fee income and asset under management volumes in the last quarter. Thus fee income finishes the year growing at 6.6% with respect to the previous year and 15% more than in the previous quarter. It is also up 13% from the same quarter last year. Like-for-like fee income ends right in our mid-single-digit guidance. It is up by 5% year-on-year owing to our increased commercial activity. Other operating income and expenses show a decrease of EUR 27 million or 8% from a year ago due to different factors: first, regulatory charges increased by 19% or EUR 15 million; second, the slowdown in the insurance income coming from Linea Directa with a 4.4% reduction in its technical margin for the year. We will analyze later in detail Linea Directa in the following specific chapter.

Gains on financial transactions were 29% higher than in 2018, but its contribution of EUR 68 million to earnings is still very low, and it continues to represent less than 3.3% of all group revenues. Total gross operating income has reached close to EUR 2.1 billion, up by 5.9% from 2018. At the same time, excluding EVO and Avantcard, income growth was 3.1% and quality remains very high as the weight from extraordinary revenues coming from Portugal has fallen by EUR 10 million to only EUR 5 million in this year.

Group operating costs continue under control despite EVO and Avantcard acquisition and integration expenses. They have grown by 7.2% year-on-year, mainly due to the acquisition of EVO and Avantcard. On a like-for-like basis, the group's costs are clearly under control with almost a 1% decrease with respect to the previous year. The positive income and cost performance have caused pre-provision profit to increase by 4.4% with respect to the full year and by 4.5% over the same fourth quarter last year. Like-for-like growth for the year was up by more than 7.4% and by 9.7% over the same quarter last year.

Loss -- Loan loss and other provisions are up by 38% in 2019 or 27% without EVO. After the positive impact of the EUR 62 million of nonrecurrent badwill from the acquisition of EVO, our profit before taxes reached EUR 741 million or 2.8% more than in 2018. This will became 2.4% without the EVO and Avantcard integration.

Finally, group's net profit has grown by 4.6% to EUR 551 million in the year with the help from a lower tax rate, as you know, badwill is not a tax item. Using most of the badwill in the year, group net profit is a true reflection of the real recurring growth rate in another very good year for Bankinter but an increasing difficult environment.

Here, you can see the quarterly income statement, we were discussing before, for each specific line. As always, the fourth quarter is affected by the contribution to the deposit guarantee fund, almost EUR 50 million in 2019. And relative to the same quarter last year, the main impact is on the quarterly cost of risk, last year affected by the NPL asset sale in Portugal and reclassification between impairments and other provisions.

Moving on, the group's loan book has grown by a remarkable 8.9% year-on-year, bringing in over EUR 4.9 billion in new loans, including EUR 1.4 billion of inorganic growth coming from the EVO transaction. In Spain, while the sector continues to contract by 1%, we showed EUR 2.7 billion in net new lending, up 5%, and not including EVO. In the new mortgages, our market share in new lending jumped to close to 6.4% as of October 2019, which is the last data available. We're moving from 5.8% to 6.4%. On the other hand, in Portugal, lending up is by 13% or an additional EUR 800 million, somehow ahead of our business plan for Portugal, where our market shares are still -- markets are still smaller than Spain and we plan to increase them. I will give you more detail in the Portugal slide. Regarding retail deposits, both geographies continue to grow strongly at over 14% year-on-year. Without EVO, they are up by 7% in Spain from a year ago, while market is growing by 6%. Together with Portugal and EVO, group's customer deposits have grown by EUR 7.2 billion to almost EUR 58 billion despite deposit costs being kept under control.

Net interest income has shown strong resilience. It grew by more than 8.8% in the year and by 13.3% from the same last quarter a year ago. EVO and Avantcard's balance sheet were integrated last June, and their contribution to our net interest income has been of EUR 41 million for the 7 months of the year. Net interest income in Spain alone saw an excellent performance in the quarter. Growth was 6.8% with respect to the same quarter last year and 2.8% or EUR 7 million more than in the previous quarter. In Portugal, net interest income has also grown by 9.8% with respect to the same quarter 2018 and a 3% reduction in respect to the previous quarter due to EUR 2.4 million less extraordinary recoveries. For the full year, excluding extraordinary recovers, recurrent net interest income in Portugal is up by 17% year-on-year. Also, you can see the EVO and Avantcard contribution for each quarter of every year.

Customer margin. Customer margin continues to show resilience, and it increased in average by 9 basis points from the last year. It is up 1 basis point from the previous quarter. This is only owing to the variation in asset yields of plus 9 basis points and plus 1 basis point in respective periods with no variation in deposit costs. The yearly yield increase is due to a better asset mix that has been able to offset the impact of the negative repricing of our mortgage back book. The quarterly 2 basis points drop in yields were offset in 1 basis point, thanks to the drop in cost of deposits, now at 5 basis points at December. We expect our customer margin to remain resilient even under market pressure in the coming quarters given the positive delta between our mortgage front and back books, the larger proportion of fixed-rate mortgages and the continued improved asset mix in our loan book. Going forward, we expect that asset mix, together with a little help from the cost of deposits, will be able to offset the headwind of the drop in the 12-month Euribor. Based on these trends in margin and recurring volume growth in deposits alone, we hope to be able to grow group net interest income by mid-single-digit in 2020.

The composition of our ALCO portfolio has changed slightly in the year. Its size increased by EUR 1.7 billion, indicating additional liquidity after the EVO integration. Today, over 50% of the portfolio remains under amortized cost and over 53% of it is in Spanish government bonds. The entire portfolio's average maturity is 8.8 years. Its average yield stands at 1.8% as of December. Unrealized gains on the total portfolio amounted to approximately EUR 610 million, some EUR 100 million lower than in September. Maturities for the coming years are minimal and well spread out until and after 2026.

Moving into fee income. Fee income in the quarter has performed as expected with positive seasonality from the previous one and with a better market environment. It continued to be fueled by growth in recurring business and now with increasing assets under management volumes. This indicates an improvement from the first half and 9 months rate of growth. As a result, it now accounts for 23% of our gross operating income. The largest contributor continues to be asset management fees with 32% of total fees, still down by 4% with respect to a year ago. Despite the market's slow recovery in the quarter, it's been a very difficult year in equities and mutual funds volume that still compares with a robust first half of 2018.

The second-largest contributor to fee income with 25% is payment and collections and credit cards with corporates and SMEs. They continue to grow strongly, having posted a solid 19% increase on the back of our international business, such as the supply chain finance activity. Market recovery from the last quarter helped to offset some of the more volatile sources of fee income, such as brokerage, which ended growing by 4%; or FX business with customers, which is up 1% up year-on-year. Life insurance sales risks-related transactions, basically endorsement fees, commercial credit fees, nondisbursed fees, et cetera, and other fees from the business are also improving. They are up 6%, 12% and 7%, respectively. Fees on structured finance from investment banking are now EUR 24 million, up EUR 74 million (sic) [74%] from a year ago and in continued effort to increase their contribution going forward. Therefore, we will continue to push forward volumes and value-added products that will make fee income to grow by mid-single digit this 2020, under, obviously, assumption that the market environment will remain somewhat stable through the year.

In other operating income and expenses, the contribution of LDA's insurance margin ends the year 4.4% lower than a year ago. This is due to greater competition in premiums like in previous quarters. However, some of this pressure was offset by strong cost control of our very flexible costing structure, and as we will see later. Regulatory charges increased by 19%, amount to EUR 95 million in the year. This has a negative effect on other income expenses, which grew by 8% or EUR 27 million year-on-year.

Gross operating income for the year stands at a new high of EUR 2,055 billion -- I'm sorry, EUR 2.055 billion or EUR 2,055 million, an increase of almost 6% from a year ago. Quarterly operating income grew close to 9% with respect to the same quarter a year ago and reduced by 5.6% from the previous quarter due to the annual contribution of the recurrent fund. In Portugal, gross operating income grew by 2.6% from last year, considering EUR 10 million less in the contribution from extraordinary income, EUR 5.3 million in 2019 versus EUR 15.3 million in 2018. All in all, group's operating income grew above mid-single digit in 2019. We expect this growth rate to hold for 2020 revenues.

The chart on the left shows the contribution to operating income in the first -- in the last 5 years. In 2019, net interest income accounted for 58% and fee income at 23% of total operating income. This -- the contribution from other income and expenses, mainly Linea Directa, fell to 15%, and the contribution from noncustomer operations remained at 3%.

Looking at cost, looking at the group operating cost, which totaled over EUR 1 billion, they are up 7% from previous year. You'll see in this pie, the EUR 79 million costs arising from the EVO integration. Recurring banking costs, including Spain and Portugal, we have increased by only 0.2% over a year ago, while Linea Directa insurance costs were 2.8% down, lower than the previous year. Over this EUR 79 million in EVO transaction extraordinary costs, EUR 24 million only relate to integration expenses, therefore not recurrent and will be not in the next year. Recurring costs in EVO were EUR 55 million in the last 7 months of 2019. We expect these expenses to be under control in 2020 with the objective of improving their efficiency.

Like-for-like personnel expenses remained under control in both the banking business and Linea Directa with a small 2% growth and general expenses on a clear reduction in both businesses. By controlling all our operating expense tightly, we expect to be able to finish the year 2020 with a guidance of mid-single-digit growth -- mid-single-digit cost growth in order to keep cost increases always below income growth and maintain our efficiency in overall banking operations.

Group's cost to income jumped 60 basis points after the acquisition of EVO and Avantcard, in addition to nonrecurring integration expenses. Excluding these 2 items, the JAWS of recurring expenses remained positive, bringing recurring cost to income to 45.3%.

Moving into cost of risk. Cost of risk remained low at 23 basis points of total credit risk, although increasing by 4 basis points from previous year cost of risk or EUR 32 million. The small increase in cost of risk from last year has to do only with the recent integration of EVO and Avantcard and the growth in the loan book of banking operations, although mainly due to consumer finance activity. 2019, total impairments went up by EUR 76 million over the last year, EUR 51 million of them has to do with last year reclassification of provisions. Therefore, the EUR 25 million year-on-year increase is due to the incorporation of EVO group and our growth in consumer lending. Although slightly increased from last year, cost of risk continued to be at all-time lows and in line with asset quality and with no signs of deterioration in the recurrent business. Therefore, we maintain that total cost of risk, which includes credit-related provisions and cost of selling foreclosed assets, will be slowly growing towards our long-term normalized cost of 30 to 35 basis points.

I will now -- I will go over our management of credit risk, liquidity and solvency. Nonperforming loans continued to drop for another consecutive year, although at lower rate than previous ones due to the already low level. NPLs fell by 5.8% year-on-year across the group to EUR 1.68 billion, a drop of 4.5% in Spain and by 40 -- I'm sorry, 23% in Portugal. The reduction of almost EUR 100 million since last September in Spain is mainly due to the sale of the NPL portfolio from Bankinter Consumer Finance, (inaudible) [reviewed] our nonperforming levels to close to 5%, and we will see later on. The group's NPL ratio now stands at 2.51% from 2.90% a year ago, a drop of 39 basis points due to the ongoing reduction in NPLs and the sale of the NPL portfolio in the consumer business. In Spain, it remained below half of the average of the sector, which is at 5.0%, as you see in the slide. Finally, in Portugal, the NPL ratio now stands at a normalized 2.4%, down from 3.5% a year ago.

Total NPL provisions at EUR 814 million after asset sales had a small impact in our provisions coverage, now standing at 48%, similar to other -- to our peers. And coverage for foreclosed assets also went down after the yearly sales at 44%, but maintained above the average discount on sold assets. The group's foreclosed assets portfolio is 20 -- sorry, is 17% smaller than a year ago, having increased by 58 -- having decreased by EUR 58 million year-on-year, a larger reduction than in previous year. This is a small portfolio, now accounts -- amounts for EUR 291 million. Total sales in the year amount to 34% of the stock from the beginning of 2019. We continue to sell repossessed assets through our commercial network with an average discount on sale slightly higher of 34% but below our provision coverage.

Moving into capital. Our fully loaded CET1 ratio stands at 11.61% at the end of the year. Since December 2018, our retained earnings bring an increase of 67 basis points, 10 basis points more than in September. This increase can offset all the negative impacts of risk-weighted asset growth of 33 basis points after the implementation of the new IRB model in corporate -- saving over 10 basis points approximately in this quarter. And most of the 28 basis points owing to the EVO acquisition. So we've been able to offset half of the impact of EVO.

Finally, value adjustments comparing with last year, mainly coming from our ALCO portfolio, brings additional 3 basis points. However, compared with last quarter, we had a negative 10 basis points impact from this portfolio. Other issues, such as IP amortization, et cetera, detracts 22 basis points to the December ratio. Total capital ratio and leverage ratios remains mostly stable, up 13.9% and 4.8%, respectively, from previous quarter and within our guidance. Once more, we reiterate our guidance of CET1 ratio in the range of 11.5% for 2020.

Volumes. Volume increases in deposits and the incorporation of EVO and Avantcard since June has helped to close our funding gap in Spain from over $10 billion 5 years ago. Now the group funding gap is only EUR 1.3 billion, 66% lower than a year ago and only coming from Portugal, where it shows a strong growth in lending offer deposits. As a result of all that, loan-to-deposit ratio is at 101.8%, the lowest level ever, owing to the continued strong growth in retail deposits over the last few years.

The maturity structure of our wholesale funding is well balanced with only EUR 800 million in this year and 0 next year. We enjoy a very comfortable situation with respect to the coming years with an estimated EUR 13.4 billion in liquid assets and our current capacity to issue over EUR 6 billion in covered bonds.

Just a reminder, in 2019, we issued EUR 500 million in MREL-eligible senior preferred debt. And in July, we issued a benchmark senior nonpreferred bond issue for EUR 750 million also to fulfill yearly MREL requirements. I remind you, MREL requirements, 18.87% of our risk-weighted assets or 8.52% of [TLOF], the lowest of all Spanish banks. For 2020, issuance plans are similar to last year in terms of size and instruments, more probably senior nonpreferred.

Now let's review the performance of our business lines and their contribution to group income. Contribution from different businesses has improved its size and diversification, if you compare with 5 years ago, as is shown in the graph. While Linea Directa's contribution decreased to 20%, other new businesses, such as consumer finance, which now represent 13%; and Portugal, now 6% of our income, became a strong and recurrent source of customer businesses. And finally, the new EVO group's contribution with 2% of our income. All of this reduced noncustomer operations, such as treasury or other corporate operations, to only 6% (sic) [3%] from 17% in 2014.

The corporate and SME banking loan book grew by over 5% year-on-year in Spain, while the sector shrunk by 2.7% at November 2019. This is our tenth year in a row growing this loan book. This recurrent loan growth is key for the increase in transactional corporate operations and collateral business volume growth, now a very important source of income and fees for the bank. In Portugal, where we still have a small market share in the corporate sector, new corporate lending is up by 26%, reaching EUR 1.7 billion on a continued effort to increase market share in the mid corporate market.

The breakdown of our corporate loan book in Spain shows no major change. In Spain, the number of active corporate customers grew organically at 4% year-on-year, while our market share in new lending in the year continues to expand.

As we have been following through all this year, the main drivers of income in corporate banking are our corporate international business that continues to lead in loan book growth, now by 14% year-on-year. It has become a very important source of income for the corporate segment with 29% of its total operating income.

International business operating income is up by 7% a year. And more importantly, half of its revenues have come from fees rather than interest. Transactional business volumes with corporates, including commercial credit balances, are up 14% as well as the fees generated by very sticky business, where we are specialized. In investment banking, new products and services have made its loan book and operating income increase by 19% and 22%, respectively, from the previous year. Those collected fees increased by 52%. In private banking, customer wealth grew by EUR 4.8 billion, almost EUR 5 billion in the year, 13%, with a positive market effect of EUR 2.1 billion. Our year-end amount of EUR 40.4 billion resulted in a 7% compound annual growth rate in managed customer wealth from the 5 years ago, which are EUR 23 billion in 2014. At the same time, the proportion of managed funds moved from 17% in 2014 to 42% at the end of 2019 with a positive implication in fee income for the group.

Personal banking. Assets under management are up by 9% from the last year. This rate of growth increased quarter-on-quarter. Total customer wealth is up by EUR 2.1 million in the year with a positive market effect of EUR 0.8 billion in the period. Net new money was up by EUR 1.4 billion, a 47% increase from last year. Our delegated and advised assets, including mutual funds, only represent 29% of total managed assets in this segment with a clear room for improvement.

Commercial banking continues with its strong performance in the main products. Salary account balances are up by 25% to reach EUR 10.4 billion. New mortgage originations set a new record in recent years at almost EUR 3 billion production in the year, climbing 17% from the previous year, now with 38% being fixed rate. Our market share in new mortgages jumped from 5.8% to 6.4% in the last 12 months. As a result, the total mortgage back book grew by EUR 1.7 billion, EUR 900 million organically and keeps leading the growth in the Spanish and Portuguese market. Loan to value of the portfolio maintains a strong 58% ratio.

Off-balance sheet funds are growing again after a more difficult first half of the year, although the low interest rate, basically negative interest rate, high volatility environment persists. As of December, total off-balance sheet funds amounted to EUR 30.4 billion, up EUR 3.6 billion, 13.7% increase and 3% more since September. Year-on-year, mutual funds grew by 15%, while pension funds grew by 12% and other managed assets with private banking customers grew by over 6%.

Let's move on, on consumer finance, Bankinter Consumer Finance. This slide refers to our consumer finance activity in Spain and Portugal and do not include Avantcard in Ireland since it still belongs to EVO Banco. In the period ended December 2019, our loan book continued to grow by EUR 400 million, along with the number of customers, which now stands more than 1.4 million clients. This pure organic growth brings the total consumer finance loan book to EUR 2.4 billion or up 21% over a year ago, somehow slowing down from previous year rate of growth.

Meanwhile, revolving credit card outstanding decreased by 2% to less than EUR 670 million; while standard credit cards, those cards payable only at the end of the month, went up by 5%; while personal loans grew about 44% in the year. After this fine-tuning and an NPL sale of EUR 100 million approximately in the quarter, credit quality ratio improved and remained under tight control. Now NPLs stand at below 5.7%, provisions coverage reached 111% and cost of risk is at 3.6%. All of the above brings the risk-adjusted return of the business to 8.4%, which looks good and in line with plans, particularly since over 40% of our business is with current Bankinter customer with a much better risk profile than the ones in pure consumer finance.

Consumer lending in Portugal continues to be relatively small and is included in this figure. It accounts for 7% of the total portfolio or EUR 211 million.

I will now go over Bankinter Portugal, where balance sheet continues to grow in line with our expectations. Loan book in Portugal increased by a strong 13% with respect to 2018, mainly in corporate loans, which grew by a remarkable 26% to EUR 1.7 billion; and by 9% in commercial banking, mainly mortgage lending, to EUR 4.5 billion. With respect to customer deposits are also up by a solid 7%; while off-balance sheet funds, mostly unit-linked and mutual funds, have increased by 12% to EUR 3.4 billion.

As for the earnings, the 3% increase in net interest income will be EUR 10 million higher, up 17%, not including the impact of the decrease in extraordinary recoveries, EUR 10 million less this year, EUR 15 million in 2018 and EUR 5 million in 2019. This positive performance adjusted extraordinaries, together with a 3% increase in fee income, will bring an 11% increase in total operating income. As in the previous year, strong cost control and positive cost of risk have led to a 9% increase in profit before taxes to EUR 66 million. The extraordinary contribution from NPLs recoveries of EUR 18 million in 2019 are expected to finish this year. Thus, cost of risk in Portugal for 2020 will be nearby 0. And therefore, Portugal is expected to reduce its contribution to the group after eliminating all excess provisions since the 2016 acquisition. Efficiency will continue to improve once again.

Recurrent business trends in Portugal continued to improve. Here, you can see our quarterly performance and recurrent net interest income, up by 27% with respect to the same quarter last year. As well as our recurrent total income with a 28% increase with respect to the same quarter last year, since fee income growth continued (inaudible) relevant.

In the following slide, we have updated some figures from EVO and Avantcard businesses. EVO Banco's balance sheet amounts to EUR 0.9 billion in net loans, of which EUR 800 million are home mortgages and EUR 85 million granted since September this year -- sorry, 2019. And EUR 80 million personal loans, of them only EUR 15 million in credit -- in revolving credit cards. As for the liability side, EVO shows EUR 3.1 billion in retail deposits and EUR 319 million in off-balance sheet, split between mutual funds, insurance funds, equity and unit linked.

Client acquisition has been over 50,000 clients since June to a total of 481,000 customers at year-end. Strong commercial activity is now on its way. As per management ratio, customer margin stands at 1.62%, NPL ratio at 1.62% as well, with a provision coverage of 60% approximately.

And for Avantcard business in Ireland, our consumer finance unit in Ireland. It has a loan book of EUR 0.46 billion, split into 2/3 in credit cards and 1/3 in consumer lending to Irish customers, with a 23% growth year-on-year and with a total gross yield of 12.6%. NPL ratio for Avantcard is 1.2%. Avantcard is a very profitable business with a return on equity over 20%. And its main task will be to be growing its marketplace, always within the limits for the group, and without deteriorating the credit quality standards.

Let's move into Linea Directa -- Linea Directa's contribution in 2019. Total insured risk, this is the old number of policies, continue to increase by 5%, allowing Linea Directa to continue to increase its market share, now 6.8% in Spanish motor insurance market. The increase in premiums grew by 4.5%, reflecting a strong price competition, particularly in motor insurance. Nonetheless, Linea Directa's growth in motor premiums continued to almost double the sector growth. And in home insurance, growing by 10.6%, which is almost 3x the market growth. These are excellent track records.

In the new health business -- the new health insurance business, a company called Vivaz. It continues to grow in policies, mostly to new customers. Total policies closed the year at 69,460, within the business plan for the new company. Linea Directa's combined ratio of 87.9% continues to be well below that of the sector. It improved from the first half of the year, but continues 230 basis points below that of the previous year, impacted by the increase of the claims ratio to 68.1% from 64.8% a year ago. The Baremo adjustments, extraordinary weather issues and a more difficult start of the year are responsible for this 330 basis point increase. But due to 100 basis point decrease in the cost ratio during the year, they offset 1/3 of this increase in the combined ratio. Still a combined ratio of under 90% clearly represents a very strong competitive advantage that will allow Linea Directa to outgrow the industry in the coming years.

If we look at its cumulative income statement, net profit is down by 8% from last year. This is due to the 10% cost increase from net claims due to higher-than-expected claims and nonrecurring provisions, which exceeds the 5% increase in net earned premiums. This behavior reduces revenues from businesses by EUR 15 million. And thanks to a strong cost control, it's technical insurance is down by 12% to EUR 104 million, a 12% decrease from a year ago. This relatively modest earnings performance is still translated in a very high return on equity of 33%, while maintaining the company's Solvency II ratio at 211%.

Now let me finish with a brief recap of what we have seen in 2019. In our opinion, it's been a consistent delivery of results year after year in an increasingly more difficult environment, supported by ordinary and recurring income from our customer activity and profitability expressed by a solid return on equity clearly above cost of equity. We have an appropriate solvency levels with a stable asset quality, capital ratio at expected levels and a solid buffer for regulatory requirements and integration of EVO and Avantcard with no major impact in our performance, quality of asset and capital structure.

These are the figures that we've shared with you in this session. A solid -- a very solid balance sheet growth, 9% in lending and 14% in deposits, which we believe it's an outstanding performance. Customer margin, fees and volumes supports by 5% net interest income and 6% operating income growth, which, again, we believe it's an excellent performance. Strong growth of recurrent core banking business to offset volatile markets. Cost to income in our recurring business continues to show positive JAWS. Total cost of risk maintained clearly below the normalized long-term 30 to 35% -- basis points. And capital at 11.6% after the acquisition of EVO, right in our guidance.

And also, I would like to summarize what we expect in 2020. A net interest income growth of mid-single digit, fee income growth in mid-single digit, group's operating income, again, in mid-single-digit growth and group's cost below gross operating income at mid-single digit.

And of course, that's -- as usual, I'll be very happy to take your questions after this long speech.

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Questions and Answers

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David López Finistrosa, Bankinter, S.A. - Director of IR [1]

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Thank you, Jacobo, for the effort. Obviously, we have a few questions already here. You have answered in part. Thank you for the late wrap up on guidance for 2020. Just could you please confirm that this guidance is on -- based on the reported figures rather than like-for-like as we did in previous years.

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [2]

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Yes. Yes. I think I confirm it is up on the reported figures.

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David López Finistrosa, Bankinter, S.A. - Director of IR [3]

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Okay. And finally, just on the guidance for 2020. Can you just go through the loan growth expectations in both Spain and Portugal? And also touch on the cost of risk that you expect for this year.

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [4]

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Okay. As this year, we have grown EUR 4.5 billion, but out of this -- EUR 4.9 billion, some of them have been inorganically from the contribution of the new base business of EVO and Avantcard. Excluding this inorganic growth, I would say that like-for-like growth, it's been of EUR 3.5 billion. For 2020, there is no reason why we shouldn't grow at again this amount, EUR 3.5 billion or somewhere around those figures. And of course, including some levels of growth from the new businesses. So I confirm you that growth should be somewhere between EUR 3 billion and EUR 4 billion and probably repeating this EUR 3.5 billion that we've seen this year. This, in percentage terms, I think, it's somewhere between 5% and 7% increase on loan book.

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David López Finistrosa, Bankinter, S.A. - Director of IR [5]

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Okay. Thank you.

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [6]

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I think there was another question.

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David López Finistrosa, Bankinter, S.A. - Director of IR [7]

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There was, cost of risk. If you just can repeat for 2020, your guidance.

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [8]

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For 2020, our guidance for 2020. So there is an increase because we have the EVO and Avantcard businesses in-house. So that means there is an increase in impairments, just because new business are here. Let me remind you that in Portugal, we've been releasing provisions all these years, and we've come into an end. Therefore, in next year, we expect no release of provisions. So basically, a nearby 0 release of provisions. And in Spain, the increase of the cost of risk will be reaching the normalized 30 basis points reference that we have for our business, and it will be correlated with the level of growth of our book that I just mentioned. And I believe the asset mix will be pretty similar to what we've seen this year.

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David López Finistrosa, Bankinter, S.A. - Director of IR [9]

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Okay. Thank you. Let us start now with the quarter performance. Let's, for example, move to the NII. What would you say that are the drivers in the quarter of the growth? And also, you can just break down the main drivers here.

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [10]

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Net interest income in this quarter in our -- I think it has a very [insolent] behavior. Once again, we have the impact of EVO and Avantcard business. I think in the slides were stated the level of contribution of those business to the NII in this last quarter. We have loan growth and the asset mix that is still improving the level of NII, and it's compensated the expected decrease in the levels of Euribor 12 months. We have also the impacts of the tiering that is contributing to a better net interest income. And there is a little contribution from the releases in Portugal that we've been able to offset with loan growth in Portugal as well.

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David López Finistrosa, Bankinter, S.A. - Director of IR [11]

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Okay. What's the ALCO contribution going forward to the NII?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [12]

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I would -- ALCO contribution for 2020 will be a little bit lower than in 2019. So we normally account for 12% of the net interest income, so it should be probably somewhere between 11% and 12% contribution the next year.

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David López Finistrosa, Bankinter, S.A. - Director of IR [13]

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Okay. Moving now on to the fee income. Would you highlight any one-offs in the quarter? Or again, what are the drivers for the growth quarter-over-quarter?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [14]

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Okay. So the last quarter has been an outstanding quarter. There is only one one-off, which are success fee on our funds and products related to advisory services, which is a EUR 5 million of, let's say, nonrecurrent fees based on successes of our products. But apart from that, everything is recurrent. We have a good quarter on income related to investment banking products, which is something which we don't know exactly when it happens during the quarter or even during the semester. But we know it's recurrent. So this type of business, we will see, again, the following quarters in the next year. We had a very good performance in asset under management and management fee and mutual fund fees. And this is based, first of all because last year was very bad, then the comparison is very good. We have been increasing the volume of our assets under management quarter-after-quarter, and this quarter has been a good quarter of commercial activity. It is true that market environment has helped to improve the confidence in the market and the confidence of the clients in order to increase our position in mutual funds. Of course, the third -- the last quarter of the year is also a good quarter of commercial activity. Therefore, the nonrelated -- nonrelated to market fees -- the nonrelated -- nonmarket-related fees had, had a very good behavior. Anything related to endorsement, everything related to international commerce activity, everything related to insurance, all this activity have performed very well in the last quarter. And apart from the EUR 5 million of nonrecurring fees that I've just mentioned, the rest is totally recurrent.

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David López Finistrosa, Bankinter, S.A. - Director of IR [15]

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Excellent. On the expenses, how much are the nonrecurrent expenses that we have booked this year?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [16]

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I think I've mentioned, there's EUR 23 million, out of the EUR 79 million, which are new from EVO and Avantcard transactions, EUR 23 million were nonrecurrent.

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David López Finistrosa, Bankinter, S.A. - Director of IR [17]

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Okay. Moving down on the P&L. Okay. Can you explain on the NPL performance in the quarter and also what happened to the consumer NPL ratio?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [18]

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Okay. In the last quarter, the fourth quarter, we have sold a portfolio of EUR 100 million of NPL's position from the consumer finance business, and this has improved the level of our NPL ratio of the company from 8.8%, I think, or 8.9% to 5.4%. This is the main impact. There is no major impact apart from the growth of the business, apart from the growth in the consumer finance business, which, as you know, accounts for a little more of impairments than the rest of the book and the integration of our EVO and Avantcard.

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David López Finistrosa, Bankinter, S.A. - Director of IR [19]

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Okay. Just to confirm, the NPL impact on the P&L -- sorry, the P&L impact of the sale of the assets was neutral?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [20]

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Neutral.

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David López Finistrosa, Bankinter, S.A. - Director of IR [21]

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Okay. Perfect. Moving now forward to our provisions. Any updates on the litigation charges?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [22]

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This quarter has been, I think, the best quarter in litigation charges of this year comparing -- I mean, the overall year has been around 12% less effort compared to the previous year. And this quarter compared to last quarter of 2018, it's been a reduction in [VF] of around 20%, okay? So we think that the worst moments have already been tapped, and we expect that this reduction will continue over the next quarters.

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David López Finistrosa, Bankinter, S.A. - Director of IR [23]

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Thank you. On liquidity, regarding our TLTRO strategy and also issuance plans regarding MREL strategy, you can put any light there?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [24]

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Okay. Regarding the TLTRO strategies, what we'll do is we will slowly replace the TLTRO-2 program with the TLTRO-3 program. In fact, we have already replaced around EUR 2 billion of it. And we will continue to do this in several -- in the following quarters. And regarding to MREL requirements. As I mentioned, we have the lowest MREL requirements. We have 18.85% of risk-weight assets or 8.52% of [TLOF]. We are meeting MREL requirements, and we will -- over this first half of the year, we will issue, again, similar levels than we've done into 2018. These are not very relevant levels overall. And so we feel very comfortable in meeting those requirements.

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David López Finistrosa, Bankinter, S.A. - Director of IR [25]

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Thank you. Moving on to the businesses. We have questions on the strategy and consumer finance. And how is the growth expected there?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [26]

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Okay. As we've mentioned, the growth in consumer finance this quarter -- this year has been a 21% growth, and now we are -- we have operations also in Ireland. The strategy is to continue to grow mainly in loans, mainly in loans. As you've seen, the growth in 2019 has been 100% in loans. And our position in credit cards, it's been very stable, with indeed a different mix with more standard credit cards and less revolving credit cards. There is no changes in those strategies. We will still grow in loans, in personal growth, in each geography, in Spain, Portugal and Ireland. And we will focus on taking care of cost of risk and NPL ratio that, as you know, for Bankinter is very important.

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David López Finistrosa, Bankinter, S.A. - Director of IR [27]

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Thank you. Moving now to Linea Directa topic. First of all, any comments about the performance in the quarter? And then moving on to the guidance or the outlook for 2020.

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [28]

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I think Linea Directa has -- is performing from a commercial activity very well. I mean it's -- their growth -- the level of growth, honestly, I think, is outstanding. In motor, they are more than doubling the industry. In home insurance, they are almost multiplying by 3 the level of growth of the industry. And of course, in health, which is a new business, they are growing at a very, very large growth rate. So from this business activity, I think they're performing an excellent, an excellent year, and it's been an excellent quarter as well. Obviously, there are pressures on the market, and the level -- the margins are under pressure, but I think Linea Directa will continue to be very competitive in this environment as it has been over the past quarters.

The level of efficiency is stable. I think the level of flexibility of their costs and the level of reduction of costs in this quarter is demonstrating that they can properly manage their efficiency ratio. Return on equity has been again very -- performance with 33%. Level of solvency with 211% is still very good and probably one of the best-in-class. And as you know, this company -- Linea Directa is a company that tends to be very prudent and very conservative, therefore, the level of provisions tend to be normally a little bit higher or higher than the industry.

From the claims perspective, it has been another very good year. As you remember, the first quarter, we have a couple of nonrecurrent and unexpected extraordinary claims. We had in the third quarter another claims due to these climate issues in Spain. Apart from that, the claims quarter -- or the fourth quarter has been average in claims. It's been a normal, I would say, a normal quarter. What is true is in this fourth quarter, Linea Directa had to increase the level of provisions of about EUR 6 million due to the new health business. So the new health business is required to have larger level of provisions due to the still small size. So this one-off provision will potentially be partially returned over the next quarters in correlation with the level of growth in the number of policies.

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David López Finistrosa, Bankinter, S.A. - Director of IR [29]

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Okay. Now moving on to 2020, what's the outlook there in terms of, obviously, premiums, business and also combined ratio?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [30]

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I think in terms of premiums, the guidance is to keep similar levels of growth since we've seen in the last quarters. Level of activity of policies, of number of insured risks, those levels should stand similar in terms of relative performance compared to the industry. That means that motor insurance, we expect that we're still doubling the level of growth of the market and home insurance probably, multiplying by 3 the level of performance -- the level of growth of the industry. From that perspective, we should see still growth. Efficiency or combined ratio level should stand similar levels that we've seen today. We expect not extraordinary provisions. And we just expect that next year, the claims -- we don't find any extraordinary claims as you've seen this year. So we expect a better year than this year for 2020 in Linea Directa.

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David López Finistrosa, Bankinter, S.A. - Director of IR [31]

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Okay. Finally, any updates on the announced transaction on Linea Directa?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [32]

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Not really. We have our Annual General Meeting in March 19. So until there -- up to that, if everything goes as we expect, there will be an approval for the transactions. And after that approval, we will put in place all the mechanism to share with you the process. As I mentioned in my session in December, there is -- the objective is to return the premium to our shareholders by the fourth quarter of next year and therefore, to Linea Directa by the fourth quarter of next year, if everything goes as we plan.

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David López Finistrosa, Bankinter, S.A. - Director of IR [33]

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Okay. Last topic, capital. We're getting questions on the performance of the quarter. How much of the trends that we have seen in the quarter of the performance, it comes from IRB models that we gave some guidance regarding the one-offs there? And also, if you can just elaborate on the outlook for 2020, whether you see any one-offs there?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [34]

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Okay. So what we've seen this quarter is a reduction in the risk-weight assets, which are mostly due to this corporate model. So we have some lower consumption in risk-weight assets. This accounts for around 10 basis points. And we have seen also is in the CET1 amount a reduction and this is mainly due to valuation adjustments from the ALCO portfolio, which account negatively around 10 basis points. The outlook for the rest -- for the next following quarters is, again, as I mentioned, to have a guidance around 11.5%. This is a level where we feel comfortable. I'd like to remind you that we have our minimum SREP level at 8.20%, which is one of the lowest or the lowest in the space. So that's why we feel comfortable with this level. We do not foresee any surprise. As you know, we have already offset half of the 30 basis points of the EVO transaction, so for this first 6 months with EVO. And there is no reason why we see that we could fully compensate in, again, 2 quarters this transaction. And we -- as we are today in a quite adequate level of CET1 ratio.

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David López Finistrosa, Bankinter, S.A. - Director of IR [35]

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Okay. Last one. Any updates on our dividend policy payout?

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [36]

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Nothing new in terms of -- we still have a 50% payout policy, and there is no changes for the time being, neither in the future.

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David López Finistrosa, Bankinter, S.A. - Director of IR [37]

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Thank you, Jacobo. Thank you, everyone, for joining us today. Obviously, for any further questions, the Investor Relations team will be at your disposal. Thank you.

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [38]

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Thank you very much. And just to congratulate Alfonso. Today is the Saint Alfonso Day in Spain, Saint Alfonso. So please join me in congratulating Alfonso for his happy day.

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David López Finistrosa, Bankinter, S.A. - Director of IR [39]

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Congrats.

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Jacobo Díaz Garcia, Bankinter, S.A. - CFO and Area Director for Corporate Development, Products & Markets [40]

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Thank you, and hope to see you soon. Thank you, and bye-bye.

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David López Finistrosa, Bankinter, S.A. - Director of IR [41]

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Thank you.