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Edited Transcript of BKT.MC earnings conference call or presentation 30-Oct-19 6:00pm GMT

Q3 2019 Bankinter SA Earnings Call

Madrid Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Bankinter SA earnings conference call or presentation Wednesday, October 30, 2019 at 6:00:00pm 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 evening, everyone, and welcome to Bankinter third quarter results presentation. As usual our CFO, Jacobo Díaz, will take you through the main highlights of the presentation. 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 evening, and welcome to the presentation of Bankinter's earnings from the third quarter of 2019 and the 9 months period ended in September 2019.

Unfortunately, the presentation today we are performing during the evening. This is exceptional and rest assured that next quarter, we will come back to the normal time. The main reason is basically, there's too many banks at the same time presenting results and according with our Communication department, we've agreed to perform this webcast of the session later today.

The related financial statements were posted on the website on the CNMV after markets close and all related documents can also be found at this time on the Bankinter corporate website.

First, I would like to highlight that we closed the first 9 months of 2019 with a remarkable performance in our recurrent business in Spain, Portugal and now in Ireland after its full quarter. This is the first quarter with our operations of EVO Banco and Avantcard in Ireland are registered in this quarter.

This is sum up by positive results consistently quarter-by-quarter supported by recurrent customer activity with a strong return on equity above the cost of equity. Secondly, increased growth in net interest income, gross operating income and pre-provisioning profit even excluding inorganic growth.

We are presenting adequate solvency levels with NPA, liquidity and capital ratios at expected levels. And therefore, in spite of the much -- challenging environment, we maintain our guidance for this year earnings in all our income and cost lines.

To start with a brief comparison of key financial indicators in the first 9 months of this year with the previous year, these are the CET. The group's total loan book grew by 8.4%, up to EUR 59.4 billion, while domestic lending continued to shrink year-on-year.

Gross operating income reached over EUR 1.5 billion in the first 9 months. It showed year-on-year growth close to 5% or 9% with respect to the same quarter last year. These are both an improved growth rate from the one at the first half of 2019.

Banking efficiency jumped to 48.7% as a consequence of the integration of EVO Banco with most of the increase being nonrecurrent. Like-for-like efficiencies maintained at the 46, 45 due to income growth over cost growth.

NPL ratio continues on its long-term downward trend despite a 2 basis points increase since the EVO deal was closed. It dropped by 47 basis points year-on-year up to 2.73%. Consequently, group's net profit of EUR 444 million increased 10% from last year. Without the impact of our acquisition of EVO and Avantcard, this should be 2% increase, an improvement from the growth rate of the first half of the year. At the same time, our CET1 fully loaded capital ratio stands at 11.6%, which is comfortably within our guidance for the year.

The group's ROE has grown steadily in recent years and now, it stands at solid 12.6%, clearly above the cost of capital used by most equity analyst. It should be highlighted that Bankinter recurrently delivers outstanding return on equity and remains as an outlier with respect to its peer in Spain and the rest of Europe. Still our goal is to continue improving ROE and total returns to shareholders.

Now we'll move on to our income statement performance in the first 9 months of the year and the third quarter. Our income statement for the first 9 months of 2019 has again showed positive trends in the most significant lines of revenues, interest income and fee income. Here, you can see the group's cumulative and comparative P&L account as of September 2019 on the left and then like-for-like comparison without EVO group on the right.

Looking first at the total group. Net interest income is up by a solid 7.3%, while net fee income has risen by 4.3%. Other operating income, including trading profits, is slightly down by 0.8% year-on-year, mainly due to increasing regulatory expenses and a small decrease in our insurance income.

We can reassure that our net interest income remains strong. These organic growth rates can be adjusted positively should we consider a small contribution from NPL recoveries in Portugal to the net interest income, EUR 4.3 million in the period versus 11.7 from last year. The negative seasonality affecting third quarter commercial activity every year and the continued market volatility did not help income -- fee income or assets under management volumes in the quarter. Thus, fee income growth was 4.3% with respect to the same 9-month period last year and just 1% less than in the previous quarter, although 7% up from the same quarter last year. Like-for-like fee income remains in line with our guidance. It is up by 4% year-on-year owing to our continued commercial activity and a somewhat better market environment.

Other operating income and expenses show a decrease of EUR 17 million, 6% from a year ago, due to 2 different factors: First, the regulatory charges increased by 22% or EUR 8 million. Second, the slowdown in the insurance income coming from Linea Directa with a 3% reduction in its technical margin. We'll go over its premium pressures and its effort to offset them partially with a strict cost control later on.

Gains on financial transactions continued to be slightly higher than in 2018, but its contribution to earnings is still very low. It is 38% more than the previous years, but it only represents less than 4% of all group's revenue.

Total gross operating income has reached over EUR 1.5 billion, up 5% from last year. It is keeping its pace from the second quarter and increasing its year-on-year growth rate from the first half of the year. At the same time, income quality remains high as the weight from extraordinary revenues coming from Portugal and EVO has fallen.

Group operating costs continue to be under control. They have grown by 5% year-on-year, including the acquisition of EVO. On a like-for-like basis, the group's costs are clearly under control with a 1% decrease with respect to the previous year. The positive income and cost performance has caused pre-provisioning profit to increase by 4.3% with respect to the first 9 months of 2018 and by 6% over the same third quarter last year. Like-for-like growth for the period was up by more than 7% and by 13% over the same quarter last year. Loan-to-loss and other provisions are up by 32% in the first 9 months, or 23% without EVO. This speaks to our efforts to mitigate the positive impact of nonrecurring bad will from the acquisition of EVO. The difference in these rates are due to the growth of the loan book and at the same time, our commitment to enhance our provision buffer for legal contingencies.

Finally, group's net profit has grown by 10% to EUR 444 million in the period, with help from the bad will from the acquisition of EVO group and another underlying like-for-like recurring plus 2% growth rate in the net profit, as you can see on your right. This is an improvement on the half year growth rate.

Here, you can see the quarterly income statement we were discussing before for each specific line. Based on our resilient quarterly income performance, we can assert that we have closed out a very positive 9-month period. We feel comfortable about our guidance for the full year on all our income and cost line.

The group's loan book has grown by a remarkable 8.4% a year, bringing in over EUR 4.6 billion in new loans, including EUR 1.3 billion of inorganic growth coming from the EVO group. Here, you can see where this growth comes from in the breakdown between Spain, Portugal, EVO and Avantcard. In Spain, while the sector continues to contract, we showed EUR 2.6 billion in net new lending, up 5% and not including EVO. Lending growth in corporate banking accounts for less than half of this decrease over EUR 800 million, even after repaying of the government supplier's payment facility that I'm sure that you remember last November for EUR 912 million.

Second relevant contributor to this growth is the new mortgages, which account for additional net EUR 500 million in the first 9 months of the year. With such a differential growth rate, our market share in mortgage lending has continued to grow to close to 6% as of July of this year, which is the last data available.

In Spain, we continued to be an outlier in the lending. Across the sector, loan book is down by almost 1%, by minus 1% in mortgages and by minus 2.3% in corporate lending, according to Bank of Spain data from August.

In Portugal, lending is up by 14% or an additional EUR 700 million. This is in line with our business plan for Bankinter Portugal, where our market share are still smaller than in Spain. I will discuss its performance in greater detail later on.

Retail deposits across both geographies continued to grow strongly at over 13% year-on-year without EVO that are up by 7% in Spain from a year ago. Despite this, group's customers deposits have grown by EUR 6.9 billion and deposit costs have been kept almost flat and under control.

Net interest income continues to show strong resilience. It has grown by more than 7% in the period and by 13% from the same quarter a year ago. EVO's and Avantcard's balance sheet were integrated last June, as you can remember. So their contribution to our net interest income of EUR 23 million is for 1 full quarter.

Net interest income in Spain also saw excellent results in the quarter. Growth is close to 6% with respect to the same quarter last year, and 4.8% or EUR 30 million more than the previous quarter.

In Portugal, net interest income has also grown by 5% with respect to the previous quarter and by 15% with respect to same quarter last year. In the first 9 months of the year, excluding extraordinary recoveries, the recurring net interest income in Portugal is up by 17%.

Customer margin continued to show resilience despite 2 basis points drop from last quarter highs. It is still up 10 basis points from the same quarter last year. This is clearly owing to the variation in asset yields of minus 2 and plus 10 basis points in respective periods, with no variation in deposit costs. Even though deposit repricing is possibly -- is probably close to the bottom, we expect our customer margin to remain resilient in the coming quarters given the positive delta between our mortgage front and back books and the continued improvement in mix in our loan book. We expect these 2 tailwinds together with a little help from the cost of deposits will be able to offset part of the additional drop in the headwind of the 12-month Euribor. Based on these trends we should be able to maintain our customer margin and our year-on-year net interest income guidance of low single-digit growth for the group excluding EVO and despite facing a more difficult interest rate environment.

Composition of our ALCO portfolio has changed slightly since last December. Its size increased by EUR 1.7 billion, reflecting additional liquidity after the integration of EVO group. Still today over 50% of the portfolio remains under amortized cost and over 55% of its on Spanish government bonds. The entire portfolio average maturity is close to 9 years and its yield stands above 2%. Unrealized gains on the total portfolio amounted to approximately EUR 700 million. Maturities for the coming years are minimum and well spread out till after 2025.

Fee income in the quarter has performed as expected with some negative seasonality from the previous one. In the first 9 months, it continued to be fueled by growth in recurring business and now shows an increase of 4.3 year-on-year with an improvement from the first half rate of growth. All in all, it now accounts for 22% of our gross operating income. The largest contributor is always asset management with 32% of total fees, still down by 10% 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 volumes that still compares with a robust first half in 2018. We expect this situation to continue to reverse during the second half and making possible to meet our mid-single-digit guidance in fees by year-end.

The second largest contributor to fee income with 25% is payment and collections with corporates and SMEs as the main contributors. They continue to grow steadily, having posted a solid 19% increase on the back of a strong international trade commerce and supply chain finance activity. This recurring income helps to offset other more volatile sources of fee income such as brokerage, which still fell by 2% or our FX business with customer, which is flat year-on-year. Life insurance sales, risk-related transactions like endorsements and other fees from the business are also improving. They are up 6%, 15% and 14%, respectively from a year ago and showing similar rate. Furthermore, fees on structured finance from investment banking are up by 41%. It's true from low base but in a continued effort to increase our contribution going forward.

In a difficult environment for market-related fees but with a better year-on-year comparison during this second half, we are maintaining our guidance of mid-single-digit growth for full year 2019 on the reassumption that the market environment will not worsen in the last quarter of the year.

In other operating income and expenses, the contribution from LDA, Linea Directa's insurance margin continues to be 3% smaller than the previous year. This is due to greater competition in premiums, like in previous market. However, some of this pressure has been offset by strong cost control in a very flexible cost structure.

As usual, regulatory charges had the most negative effect on the other income and expenses, which have grown by 22% or EUR 8 million year-on-year. Nonetheless, the quarterly performance of this income line is improving and we expect the year-on-year difference to flatten by the end of the year.

Overall, gross operating income at the end of the first 9 months stands as a new high of EUR 1.545 billion, an increase of 5% from a year ago. Quarterly operating income has grown close to 9% with respect to the same quarter a year ago and by 8% from previous quarter.

In Portugal, gross operating income grew about 17% from the same quarter last year as well as from the previous quarter. This is due to the good performance of recurring business and with less extraordinary NPL recoveries as we had anticipated. The graph on the right shows the contribution from various sources to gross operating income. This indicates a good diversification under lower net interest income exposure than peers to counter the extremely low interest rate environment and also the very small contribution of 4% from our noncustomer business.

Let's now look at operating costs, which totaled EUR 793 million in the first 9 months, up 5% from last year, excluding the costs arising from the EVO integration, which are EUR 48 million as of September. Group costs have been 1% lower than a year ago.

Over 70% of total group operating costs corresponds to banking business, including Portugal and EVO. The remaining 30% is from Linea Directa insurance business, which has a much more flexible business model with tight control this year. Thus, operating cost had different growth rates. While Linea Directa's cost dropped by 5% from the same quarter last year, the recurring banking cost increased by 3% compared to the same quarter last year, if we exclude the EVO acquisition.

Following our business plan, Portugal's operating expenses have remained almost flat. By tightly controlling our operating expenses, we expect we will end the year within our mid- to low single-digit cost guidance, in order to keep cost increase below income of growth and to keep our efficiency in an overall banking operations, not including the integration of EVO, of course.

Group's cost-to-income jumped almost 200 basis points after the increase in perimeter from the EVO and Avantcard acquisition and the nonrecurrent integration expenses. Despite these 2 items, recurrent growth remained positive and bridged recurrent cost-to-income to 46.7. After integration period, we aim to keep our banking cost-to-income ratio within the 45%, 46% range as we did after the Portuguese acquisition, as we show in the graph.

Cost of risk remains slow at 23 basis points of total credit risk, increasing by 12 basis points from the year. Should we take in consideration the provisions that were reclassified in 2018 from credit risk to litigations, more than EUR 50 million in the year, EUR 43 million of which were recorded in the first 9 months. With this effect, the adjusted cost of risk for 2018 would have been 19 basis points. Thus, the small 4 basis points increase from last year has to do only with the recent integration of EVO and Avantcard.

Adjusted for reclassification, cost of risk continues to stand at all-time lows and in line with asset quality and with no signs of deterioration. Going forward, we maintain that total cost of risk will be in line with the previous year and with a long-term trend of 35 basis points, as we mentioned in previous sessions.

We will go now over our management of credit risk, liquidity and solvency. Nonperforming loans have remained almost flat in the quarter and since December of last year. The increase of EUR 20 million since last June is only due to the growth in both Bankinter Consumer Finance business and Avantcard loan book and consequently in the delinquencies levels. However, in both cases, well within our KPIs for this type of business as we will see later on.

All in all, NPLs have fallen by 7% year-on-year across the group and by 50% in Portugal after the year-end sale of NPLs. The group's NPL ratio now stands at 2.73% from 3.2% a year ago or 2.9% of last December. On the contrary, it has slightly risen to 2.75% in Spain due to the integration of EVO and Avantcard business, with a relatively higher cost of risk. Finally, in Portugal, the NPL ratio now stands at a normalized 2.7%, down from 6% a year ago.

Total provisions account for EUR 914 million, up EUR 53 million or 6% since December. Despite yearly asset sales, we have maintained our NPL coverage at 51%, similar level to our peers. Coverage for foreclosed assets is up 1%, up to 46%, well above the average discount on sold assets.

The group's foreclosed asset portfolio is 16% smaller than a year ago, having decreased by EUR 58 million year-on-year. It now amounts to EUR 308 million. Total sales in the first 9 months amount to 25% of the stock from the beginning of 2019. We continue to sell repossessed assets through our commercial network with an average discount of sales of 30%, below our provision coverage and after all the maintenance and selling expenses with a small impact on earnings.

Let's move into capital. Our fully loaded CET1 ratio stands now for 11.57% at the end of the third quarter. Since December, our organic capital generation brings an increase of 57 basis points, 19 basis points more than last June. This increase is able to offset all the negative impact of risk-weighted assets growth of 42 basis points, 8 basis points more in the quarter and most of the 29 basis points owing to the EVO acquisition. Finally, value adjustments, mainly coming from our ALCO portfolio, brings additional 13 basis points and other small issues, as insurance business, et cetera, detracts 17 basis points to the September ratio.

Total capital ratio and leverage ratio remains mostly stable at 13.9% and 4.8%, always within our guidance. Therefore, and once more, we are reiterating our guidance of CET1 ratio in the range of 11.5%. And I also would like to mention that we mentioned, this week, we have received the confirmation that our capital requirements will be the same until the end of 2020.

Volumes increasing deposits and loans plus the incorporation of EVO's and Avantcard's balance sheet since June 1 has helped to manage to close our funding gap, now at a new record low of less than EUR 700 million from close to EUR 4 billion a year ago. Even more, now the gap is positive by EUR 600 million in Spain, but still negative by EUR 1.2 billion in Portugal, where it shows the strong growth in lending over deposit. As a result, our loan-to-deposit ratio has improved to over 100%, its lowest level ever, owing to the continued growth in retail deposits of our lending in the past few years. The maturity structure of wholesale funding is well-balanced with no more amortizations in this year and EUR 800 million next year. We can the easily assume any forthcoming amounts over the next year with an increase EUR 14.7 billion in liquid assets and our current capacity to issue over EUR 6 billion in cover bonds.

Let's move to the performance of the core business lines and their contribution. All the contribution remains well diversified and at similar levels to previous quarter as shown in the graph.

Let's move into the corporate and SME banking. The loan book grew by almost 4% year-on-year, while the sector shrunk by more than 2%. This loan book has been growing for more than 9 years in a row without suffering any major changes in the bank's risk profile and in the required rev rec this for this business. This recurrent loan growth helps to increase in transactional corporate activity and collateral business volumes, which are one of the main sources of fee income for the bank.

In Portugal, where we still have a small market share in the corporate sector, new lending is up by 34%, reaching EUR 1.6 billion. Our long-term goal is to increase market share in the mid-corporate market to reach a similar level to Spain. The breakdown of our corporate loan book in Spain shows half in loans to large enterprise, which grew by 1% last year. The rest is split between loans to medium-sized enterprise, 37% of the book, with an 8%, and a small and medium enterprise, 23% with an increase of 5%. Therefore, we continue to improve the asset mix in the loan book as a way to preserve asset yields despite greater competition.

In Spain, the number of active corporate customers continues to grow organically are 4%, 5% year-on-year, while our market share in new lending continues to spend in these strategic segments.

As we have been following through all this year, our corporate international business continues to lead in loan book growth, now by 22% year-on-year and has become a very important source of income for the corporate segment. It's gross operating income is up by 11% in the year and more important half of its revenue have come from fees rather than interest.

In investment banking, ongoing activity with new products and services have made both its loan book and operating income to increase by 22% and 18%, respectively, from the same period last year. Also, fees collected have been -- have increased by 26% with respect to the year before.

Private banking, customer wealth grew by EUR 3.3 billion in the first 9 months, while the market effect has positive -- has been positive by EUR 1.2 billion. This result in a 5% increase in managed customer wealth, up to EUR 39 billion. Collecting fees in value-added management funds now stand at EUR 16.3 billion, 42% of all our managed assets. This is EUR 1.4 billion more than in December. The launch of new products, such as a new equity broker for the mobile have helped to increase the number of customers and assets managed in this strategic segment.

Personal banking, assets under management are up by 5%, customer wealth is up by EUR 1.4 billion in the first 9 months with a positive market effect of EUR 0.8 billion. Our delegated and advised assets represent over 32% of total managed assets in the segment with clear room for improvement.

Commercial banking continues with its strong performance in the principal products. Payroll account balances are up by 25%. New mortgage production of over EUR 2 billion in the first 9 months climbed 12% from the same period last year with 32% being fixed rate and with a loan-to-value of 65%. Our market share now stands close to 6% at 5.9%. As a result, the total mortgage book keeps leading the growth in the Spanish and Portuguese market without losing any of the good quality indicators, loan-to-value of 58% and 9% of total book at fixed rates.

Off-balance sheet funds are growing again after a more depressed 2018 year, although the low interest rates, high volatility environment persist. As of September, total assets amount to EUR 29.6 billion, a 4% increase with respect to the same date last year and 11% increase since December. Year-on-year mutual funds remain almost flat, although growth refers mainly to pension funds, the new Portugal business and other managed assets.

As for our differential mix of funds, just under 60% are managed by third parties and 41% are own managed. Average fees on owned funds managed in September stands at 71 basis points, down only 1 basis point from a year ago after MiFID 2 effect.

Now let's look at Linea Directa's contribution year-to-date. Linea Directa has continued to perform relatively well for another quarter. Total insured risk, what we used to call the number of policies, have increased by 6%. Linea Directa maintains market share of 7% in motor insurance and close to 3% in home insurance. This increase in new policies and the slightly lower increase in premiums reflect the before mentioned strong pricing competition in the sector, particularly in motor insurance. Nonetheless, Linea Directa's growth in motor premiums continues to double sector growth and almost triples home insurance sector growth.

Linea Directa combined ratio of 87.3% continues to be well below that of the sector. It has improved from the previous quarter, benefited from the reduction in the claims ratio in the quarter to 67.8% after a more difficult start of the year and by the cost ratio reduced by 5 basis points. So in better behavior in cost during this year. The combined ratio under 90% represent a strong competitive advantage that will allow Linea Directa to outgrow the industry in the coming quarters. New health insurance business, Vivaz, continues to grow in policy, mostly due to insurance customer. Total policies are now approaching 70,000. This is within the plan for the year and with an impact of expenses of less than EUR 7 million.

If we look at its cumulative income statement, net profit is down by 5%. This is due to 11% cost increase in net claims, which exceed the 6% increase in net earned premiums. This behavior reduced revenues from business by EUR 6.2 million. Nonetheless, well-managed cost control offset EUR 2.2 million to bring its technical insurance down by -- down only EUR 4 million to EUR 81 million, 5% decrease from a year ago. This relatively modest earnings performance is still translating to a very high return on equity of 36%, while increasing the company solvency ratio to 216%, thus keeping profitability and growth as the main drivers on the company behavior.

Bankinter Consumer Finance in this slide does not include Avantcard figures, it only refers to our subsidiary in Spain, since new Avantcard still belongs to EVO Banco. In the period ended September '19, our loan book continued to grow by EUR 600 million, along with a number of customers, which now are up to well over 1.4 million. This pure organic growth brings the total consumer finance loan book to EUR 2.3 billion or up 27% over a year ago. Credit quality ratio remains under tight control, NPLs stand below 9%, provisions coverage at 101% and cost of risk at 3.5%, which brings the risk-adjusted return of the business to 8.4%, which continues to look good, particularly since over 40% of our business is with current Bankinter customers with a much better risk profile. Moreover, the riskier revolving credit card [outstandees] had been reduced from EUR 800 million to less than EUR 600 million adjusted by some EUR 170 million that are debit cards payable only at the end of the month. We can maintain that growth continues to come only from personal loans rather than credit card lending.

Our small consumer lending book in Portugal is included in this figures and already accounts for 8% of total portfolio or EUR 196 million. Once we include the current Avantcard loan book of EUR 430 million, it will account for 19% of the total book. Then, consumer finance total exposure will show much better geographical diversification.

I'll go now over Bankinter Portugal main figures. Balance sheet continues to grow in line with our expectations. Loan book increased by 14%, mainly in corporate loans, which grew by a remarkable 34% to EUR 1.6 billion.

Commercial banking loan book consisted mainly of mortgages and small consumer lending increased by 8% to EUR 4.4 billion.

With respect to the first 9 months of last year, customer -- with respect to the first 9 months of last year comparing to the last year, customer deposits are also up by solid 15%, while off-balance sheet funds have increased 7%.

As for earnings, the small 1% increase in net interest income is impacted by the decrease of extraordinary NPL recoveries, EUR 4 million this year versus EUR 12 million last year. Otherwise, net interest income should be close to 17% increase. This positive, a very positive performance adjusted for extraordinaries will bring out 12% increase in total operating income for this first 9 months. At the same time, strong control and positive cost of risk have led to a strong 17% increase in profit before taxes. Recovered NPLs and the year-end sale of NPL portfolio have freed up credit provisions, which have improved from last year. The extraordinary contributions are expected to finish by the end of the current year or of latest, the first quarter of next year. So we'll see the Bankinter Portugal's cost of risk coming to a normalized situation.

Recurrent business trends in Portugal continued to improve, where you can see quarterly performance in recurrent net interest income up 17% with respect to same quarter last year as well as recurrent total income with a 17% increase with respect to same quarter last year, since fee income growth is not that relevant. As in our business plan, Bankinter Portugal's cost performance is well constrained, showing an increase of only 2% from the same quarter last year or less than EUR 0.5 million.

Finally, its profit before taxes is more volatile due to the NPL recoveries, quarterly impact, but with a clear downward trend on those underlying profit before taxes is improving quarter-after-quarter.

In this slide some data for EVO and Avantcard business. EVO balance sheet stands at EUR 0.9 billion in net loans in total, of which EUR 800 million are home mortgages and EUR 80 million personal loans and only EUR 15 million 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, pension funds, equities and unit links. Client acquisition has been over 25,000 between -- 25,000 clients between June and September to a total of 461,000 customers. As per management ratio, customer margin stands at 1.71%, NPL ratio 1.65% and provision coverage of 61%.

And for Avantcard, our consumer finance unit in Ireland, the book is EUR 0.4 billion, split 69% credit cards and 31% consumer lending to Irish customers with a 19% growth year-on-year with total gross yield of 12.8%. NPL ratio is at 1.4% or less than EUR 5.7 million in default and with a cost of risk of EUR 9.5 million of 3.2%. Both new ventures in the Bankinter group are developing their business plan for the coming years and we will communicate in due course. Avantcard is a very profitable business with a current return on equity above 20% and its main task will be to grow within the limits for the group and without deteriorating the credit quality standards. In the case EVO Banco and after its reorganization, this is a nonprofitable operation for the time being with a solid growth in customers. Task here is to become profitable after the investment needed in product offering and service development. Those are 2 long-term objectives.

Finally, quick recap. A consistent delivery of results and appropriate solvency level and we maintain our guidance. Here is the summary of the figures and this is a little bit too late today, so I'm not talking anymore and wait for your questions. Thank you very much for your time.

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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. We -- as usual we will group the questions through the -- we will cull through different topics. Let's start with P&L. We have some questions regarding your outlook for NII on fees and also for costs. What can we see there -- what do you see there?

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

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NII, we maintain our low single-digit growth guidance. I mean let's say, in a like-for-like situation, I'm excluding the EVO and Avantcard, which, of course, will adopt new interest income, but excluding the new contribution of EVO and Avantcard, I think, we will be very close to the current situation.

Fees, we maintain our mid-single-digit growth for this year. And as we mentioned, we maintain also our guidance for the cost. So no major changes from our perspective.

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

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Okay. That's clear.

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

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This is the low -- mid- to low single-digit cost guidance as I did mention before.

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

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Okay. Still on the NII, we got some questions, whether you can add some color on the NII growth in the quarter and whether we see any changes on the NII sensitivity?

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

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Okay. I think the NII growth in the quarter is -- has been -- is fueled by the same, let's say, components that in their previous quarter. I think growth in loans is still very -- is the main contributor. We are keeping a very good margin over a very good spread. I think we are managing very well the yields, even if Euribor has started to reappreciate in our mortgage loan book. We are keeping a very strong spread in margin. I think the mix of our book also is contributing to have a quite resilient client margin. And, of course, the contribution of the ALCO portfolio and the contribution of the bonds that we have in the ALCO portfolio, basically the management of the current rate. Sorry, I didn't find the right word in English.

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

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Okay, we...

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

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No major changes in net interest income. The same components in growth. And hopefully, we'll see similar rate of growth in the coming quarters.

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

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Okay. Specifically on the ALCO portfolio, we had an analyst asking about the strategy, and whether we start to expect any changes from the contribution to the NII?

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

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I mean the ALCO portfolio, as you know, has increased by during the year for around EUR 1.8 billion. This is originated by the purchase of EVO Banco. The yield is a little bit lower in this quarter, is at 2%. We don't have any maturity as you've seen in the presentation in the coming months, in the coming quarters. So we expect the contribution to be sort of a stable. We have around EUR 700 million of unrealized gains and duration is around 4% to 5%. -- sorry, 4 to 5 years. So there is no major changes.

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

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We move to expenses now. We have seen some nonrecurring expenses accounted in the quarter, shall we expect any more of that? Or any further nonrecurring provisions in the coming quarters?

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

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Nonrecurring costs or provisions?.

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

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Both.

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

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Both, okay. In terms of nonrecurring costs, during this year, we have always registered it around EUR 46 million of new costs, EUR 30 million of them approximately come from the new, let's say, contribution from -- of EVO and Avantcard, that means EVO and Avantcard are bringing EUR 30 million of new costs, and the others are related to the integration of the transaction. Obviously, we expect that costs related to EVO and Avantcard will stay there for the coming quarters. And all in all, integration cost, we will see -- probably in the last quarter, we'll still see some integration cost quite equivalent to what we've seen in this third quarter. But this will be one-off. Next year, we will not have this nonrecurring cost, which is not related to the proper EVO and Avantcard activity. I'm not sure it's very clear.

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

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Yes. I mean regarding the bad will, are we still planning to expand that against the restructuring costs and also provisions 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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Okay. Bad will, of course, will be dedicated to cover integration cost and potential additional provisioning.

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

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Moving now on to asset quality, can you explain the reasons behind the growth in NPLs in the quarter and also the increase in the cost of risk that we have seen?

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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. So we have -- because they are 2 different questions. First of all, there's a lot of -- we have a new EVO and Avantcard coming to its full quarter. So the volumes have increased, first of all, due to the presence of EVO and Avantcard. We -- the second quarter and last quarter, EVO and Avantcard will brought just 1 month of new provisions. In this quarter, we have 3 months of full provisions. So this is one of the main reason. We have also seasonality. July and August are months, at least in Spain, which is a little bit more difficult to recover positions. We don't see any change in terms of the cycle, but it's true that this seasonality has been there and we need to recover those positions from the summer season.

We -- in addition to that, I must say, that in terms of NPL ratio, that this 2 basis points increase, the end of second quarter has extremely high peak in loans, the last couple of weeks of June that generate or create that NPL ratio, probably a little bit more optimistic than the reality. Now this quarter, loans are more stable and probably this NPL ratio is probably more real than the one we saw in June. But basically for that peak in loans and loan growth at the end of the quarter. This is something that -- even though this 2 basis points increase is -- from our perspective is almost not a concern at all.

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

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Okay. On capital, we have also a few questions. Can you just remind us on the capital target?

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

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Our guidance is around -- is CET1 fully loaded ratio of 11.5%. This is a place where we feel comfortable. And as I mentioned before, we had a decision from -- the SREP decision that we will continue with the current capital levels up until the end of 2020. Therefore, we feel comfortable with the current levels of capital.

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

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Okay. Also on capital, what sort of impact shall we expect from IRB models in the next few quarters?

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

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So from IRB models, we should expect some sort of release of basis points, probably at the end of this -- probably in this fourth quarter, we should see an increase of somewhere between 10, 12 basis points increase. And potentially the first quarter of next year, we should see, again, some around 10 basis point increase, okay? As we mentioned, we had approved from authorities, new IRB model for large corporations. So from what site we will -- we have not released all the potential benefits from the lower density. And this is something that we would release over the current quarter and the first quarter of the following year.

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

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Okay. Still on capital. Any feedback from the SREP communication already confirmed by the regulators?

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

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Nothing new, apart what I've just mentioned is, all -- the SREP decisions that we received this year will be maintained exactly what it is until the end of 2020. So there's no news from that perspective. Basically, I think, it's a good news to stay where we are for at least 1 more year.

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

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And last one on capital, obviously, interest topic. Any guidance we have for Basel IV?

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

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For Basel IV, it's still a little bit too early to have proper guidance. There are still many technicalities to be clarified. As far as we know, we do not expect major impact. At least in our cases, we do not expect major impact. But as I mentioned, there's still a lot of technicalities that need to be clarified.

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

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We are also getting questions whether we have any updates on litigation expenses. Should we expect the similar run rate going forward?

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

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Well, you've seen the effort in provision this quarter has been lower than in the previous quarter. So it was within our guidance for our quarterly effort that we mentioned earlier this year. So everything sticks to the plan. We still think that we are making an extraordinary effort in 2019. And our expectation is that the effort that we will need to make in 2020 will be definitely lower than the one that we are doing today. That means that for next quarter, we should expect something similar to this quarter because this is the plan.

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

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Moving now on to Linea Directa. We are getting questions on

what sort of premium growth on combined ratios shall we expect from here?

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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 combined ratio will always stay very competitive. So this is not a concern from that perspective. The cost expenses -- the expenses in Linea Directa can be managed very well. So the cost control is very tight and this shouldn't be any problem at all.

In terms of growth, if we think about premiums, premiums as we mentioned, premiums have grown at 5% and almost double than the market. And we have the -- the motor has grown at 3%, home has grown at 11%. Therefore, the company is growing quite well. So this is not a problem from the growth point of view.

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

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Apparently, we weren't clear enough with the question regarding the one-offs in the quarter regarding to the restructuring costs, can you just quantify that in the third quarter?

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

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Yes, so we got -- in -- we got -- overall, in the year, we have -- as we represent in the P&L, there is a difference in cost of EUR 46 million in the ninth month. Yes, in the ninth month. Out of this EUR 46 million, EUR 30 million are brought from EVO and Avantcard, and the other EUR 16 million are one-off costs that will be not generated the following year. Out of this EUR 16 million, EUR 6 million were in the second quarter and EUR 10 million has been in this quarter. And our expectations for the following quarter is that it should be somewhere between EUR 6 million and EUR 10 million. I mean very similar. We do not expect an additional effort different from this 2 quarters. But definitely, into the fourth quarter, we will see again integration costs.

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

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Very clear. And final question from is -- any comments regarding M&A?

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

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No, no. I mean we are not thinking about doing any transaction. We have just bought EVO Banco and all our efforts and thinkings are focused on make EVO transaction successful, not only the Spanish operation but also the Irish operation. So I don't see any other potential transaction been or Bankinter could be able.

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

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Thanks again, Jacobo. Thanks everyone for joining us today, given the timing of the call. For any further questions you might have, please contact our Investor Relations team. Goodbye.

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

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Thank you very much, nice evening.