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Edited Transcript of CABK.MC earnings conference call or presentation 26-Jul-19 9:30am GMT

Q2 2019 Caixabank SA Earnings Call

Barcelona Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Caixabank SA earnings conference call or presentation Friday, July 26, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Edward O'Loghlen

CaixaBank, S.A. - Director of IR

* Gonzalo Gortázar Rotaeche

CaixaBank, S.A. - CEO & Executive Director

* Javier Pano Riera

CaixaBank, S.A. - CFO

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Conference Call Participants

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* Andrea Filtri

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

* Andrea Unzueta

Crédit Suisse AG, Research Division - VP

* Britta Schmidt

Autonomous Research LLP - Non-Designated Member

* Carlos Cobo Catena

Societe Generale Cross Asset Research - Equity Analyst

* Daragh Joseph Quinn

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Javier Francisco Echanove

Grupo Santander, Research Division - Equity Analyst

* José Maria Abad Hernandez

Goldman Sachs Group Inc., Research Division - Executive Director

* Mario Ropero

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

* Marta Sánchez Romero

BofA Merrill Lynch, Research Division - Director and Analyst

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst

* Stefan Rosenov Nedialkov

Citigroup Inc, Research Division - Director

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Presentation

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [1]

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Good morning, and welcome to CaixaBank's Second Quarter of 2019 Financial Results. With us today is the usual management team of Mr. Gonzalo Gortázar, the CEO; and Javier Pano, the CFO. We plan to spend around 30 minutes of presentation followed by a live Q&A of an estimated 45 minutes. (Operator Instructions)

Without further ado, let me hand it over to our CEO, Gonzalo Gortázar.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [2]

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Thank you, Eddie. Good morning to you all. I'll get directly into the summary of the quarter. Obviously, results are down due to the restructuring agreement, but I think it's important. And there's weakness in core revenues. We've changed our guidance. You've seen all of that. I think it's important to keep in mind that our business is associated with clients and that these 2 quarters -- and this particular quarter has been extremely successful in our activity with clients.

Performing loans are up 2.3% quarter-on-quarter, 3.3% year-to-date, well above our peers on average. Customer funds are up 6.2% year-to-date. Obviously, part of these customer funds are on balance sheet, they're generating creating more liquidity for us. That's in the short term, negative. But this is not a short-term business. This is a business that is associated to clients. All these liquidity and clients are going to provide revenues for us going forward. So let's not lose sight of this. Commercially, the machine is as productive, as successful at it has ever been.

We've been also good in defending margins. Despite the lower rates, customer spread is almost flat versus last year. And we feel the organization, the commercial network is doing as much as it has ever done, with a great deal of success.

However, our core revenues, even though they improved quarter-on-quarter, clearly, at this stage, given the lower rate environment, are forcing us to revise, being realistic of our guidance to do that circa 1% from the current 3% that we had put at the beginning of the year.

The second quarter, again, is being better than the first quarter. Obviously, there's some seasonality associated with that, but we see in fees and in insurance revenues, writes a positive trajectory during these quarters and during the year.

NII is flat quarter-on-quarter. Well, not flat, it's plus 0.2%. Javier will elaborate on that, but that's also associated to some portfolio sales that we've made in the quarter and associated with our higher trading results.

Obviously, the environment is a more difficult environment. We've seen that progressively during the year. So we have already taken action, and that's why we have advanced our restructuring, letting 2,000 people go. These 2,000 people are actually producing, doing things with our clients. And hence, it was not the plan that they will leave at once. We've decided reorganized, and you will see that in the following pages, that we can actually manage to get everyone or basically almost everyone to leave the bank at the end of July.

That means that our restructuring costs are higher than expected, EUR 978 million. It's also due to the mix, as Javier will explain. But it also means that our cost savings are going to be higher. And particularly, they are going to be faster in terms of its implementation. That's allowing us to reduce guidance in terms of increasing costs for this 2019 from 5% to 3%. And obviously, we're going to continue looking at ways to contain cost growth in this weaker revenue environment, which is well known to all of us.

On top of that, balance sheet is moving in the right direction. I think it's worth highlighting the asset quality. 4.2% nonperforming loan ratio. It's gone down 46 basis points. Cost of risk is approaching 0 with 2 basis points. And we've managed to maintain our capital levels in a quarter that, given the very low results associated to the large restructuring costs, was a difficult one, 11.6 and growing year-to-date 5 basis points.

We are building quickly our MREL. Thanks to good job of Javier and his team, we're very closely to the 22.5% that has been required from us of 22.2%. So those headlines are obviously incorporated to a large extent already in our numbers, and we keep a very high level of liquidity even though we have actually reduced our TLTRO by almost half, by half of what we had at CaixaBank, let alone at BPI.

So it's a quarter where obviously net income comes down. It comes down -- it's a positive quarter with EUR 89 million despite the fact that we had these EUR 978 million extraordinary charge associated to the restructuring agreement. We'll look at return on tangible equity, and we exclude the impact of the restructure agreement. We're still at levels 9.4%, in line with what we achieved by the end of 2018.

Moving on to the commercial activity. And I just want to spend a bit of time here because this is not easy. We are actually changing our distribution network in a very significant way. We announced that we will bring down our traditional branches in the urban centers, and that we will create more of those store branches. We've managed to accelerate this. This is also necessary in order to make sure that we let 2,000 people go at the end of July and at the same time would not have trouble in terms of managing our business. So in order to do that, we have accelerated the opening of the new store branches. We are now projecting that we will have the 600 store branches by mid-2020, so in 12 months from now, rather than by the end of 2021.

There's quite a lot of activity, as you can imagine. Some impact on costs because we are having our restructure earlier than that, but it's allowing us to have faster savings on the personal line, and I think it's situating us in a place to continue grow our revenues significantly higher in terms of activity.

inTouch, the remote service, is also in a similar trajectory. It's working very well, and we have now plans to advance by 1 year full deployment in terms of reaching the 2.6 million clients that we had forecasted for 2021 in our strategic plan. We continue to have very productive statistics there. Our -- inTouch service, every manager actually manages to reach 3x more in terms of clients and business volume. So it's obviously more effective, and it's been very commercially productive. We're very happy about their progress so far.

We have now agreed with our unions the restructuring of our rural network, which is based on maintaining the number of branches but attacking the cost base by reducing the people in these branches so that 80% of these branches are going to have 3 employees or less. And that is now agreed with unions and actually be effective very quickly as people are leaving at the end of this month. This rural network is actually doing very well. We are now the largest agricultural bank in Spain. It's a sector that we like, where we're growing nicely and where we've, obviously, been profitable, and we'll be profitable in a sustainable manner after this restructure.

Continue to do progress on the digital front. You have a number of statistics there, whether it's payment or biometrics. The omnichannel strategy that we're following for a lot of our products and the number of digital clients that we have that continues to grow and continues, obviously, as we have more and more digital clients, we can actually switch them from a traditional service based on branch to a service that is more effective based on digital and the inTouch service, which is much more productive, as I said, so it's important

We are reducing our cost guidance. It's not just we're spending a bit more money on the restructuring now. It's also that we have made it possible because we have advanced in a major fashion all of our transformation initiatives in the strategic plan.

In terms of clients, continues to be good clients. We now have 8 million relational customers. Those are the customers that have 3 or more products. Continue to increase, this is obviously our main focus now.

Market share; in payrolls, it's now 27.3%. We have 4,100,000 payrolls at the end of second quarter of '19. And yes, based on the market share figures that we have, our market share in payrolls is now higher than the addition -- our next -- our nearest 2 competitors. So quite a lot. Obviously, payrolls are not productive on day 1. They are actually generating more balances, but the payrolls is the first step into selling insurance, selling consumer lending, mortgages, et cetera, et cetera. So this is actually great news. It's not great news for the P&L this quarter. It's great news for the P&L structurally going forward.

Look at customer funds. There's the large increase that I described both on balance sheet as well as off balance sheet in year-to-date and also quarter-on-quarter. Particularly good performance in pension plans, also the rest of the balance sheet. And yes, significant increase in demand deposits, no?

You can see there, because this second quarter is seasonal, we tend to have -- because of the extraordinary payrolls, we tend to have higher increases in this quarter. So you can see what has been the comparison in the last 7 years. So actually a record year. This is, obviously, record year of activity for us. Our market performance has actually been quite helpful. As you can see, EUR 5.9 billion of increase is also associated to market recovery.

Asset management and insurance. Again, when we -- we again have some different implications, depending on how we look at it from the balance sheet and from a client perspective and the P&L. And obviously, I'm sure we'll spend some time on that during the Q&A.

Productivity is good. You can see where we are in terms of long-term savings insurance, mutual funds under discretionary management portfolios. We are above EUR 20 billion with an 11% growth. That is 45% of our assets under management. We have a disproportionate share of this in the Spanish market, and this is because we have moved our model into advisory compliance with MiFID II explicit payments for clients. And really, I think we are one step ahead of the market on this front. We have over 17,000 now employees with certified -- certificate in financial advisory.

Overall market share in pension funds, mutual funds and life insurance is up 45 basis points. So is market share in insurance, insurance premia. You can see how life-savings insurance continue to grow, up 6% compared to June last year. And obviously, there are challenges associated to now the very low long-term rates that have finally arrived to Spain. But we are still finding ways to grow. And on the nonlife and life risk side, we have had a great degree of success with the new commercial offering, MyBox, which really started in March, and some products like health were not only -- were not available until, really, June. But still, even in that context, we have actually 185,000 new contracts, new policies, and it has been launched, and this product has is having a tremendous success. And it's going to build up, given the nature of this product, is going to build up revenues quarterly nicely on a cumulative fashion. And hence, it's another investment into our future, particularly into 2020 and beyond.

On the lending side, very significant growth, 3.3%. There's always this seasonal impact associated to advances related to pension. So if we exclude that, which is a few days outstanding at the end of the quarter, we still have a 2.5% growth. And again, when we look at it, compared to other June closings and hence without that impact of seasonality, you still see how positive has been June versus the previous 6 years. So good performance here, and I think good performance also particularly in consumer and business lending.

You see how quarter-on-quarter, we grow 4.7%. This is in the context of an overall sector that is slowing down and in the context of improving credit quality statistics on this portfolio. As we have gone up the learning curve here, we're doing more and with better asset quality characteristics, which have always been good, but they are certainly not deteriorating for us.

On the corporate side, again, very good performance. Obviously, market is competitive. A lot of this business is done at spreads that are creating value for us in terms of return on risk-adjusted capital, but there's not big margins there. But certainly, we have increasingly a larger part of the wallet share of our clients in Spain, in these markets.

There's, I think, really positive news on this front. This 3.3% is obviously very large, 2.5%. But certainly, we're moving away from that flat loan growth that we had been seeing up until very recently. New production mortgages is up 3% last 12 months. Consumer lending up 7%. Business lending very significant, up 24%. Again, our commercial machine continues to be operating 100% of its capacity.

Now we move on to our financial results. Obviously, we see weakness in core income year-on-year, and I think that it's important to see some good development quarter-on-quarter. And obviously, quarter-on-quarter is helped, as I said, also by some seasonality impacts, but it's not just that. The trends of what we can do in fees and in income from insurance are quite positive.

On the noncore revenues, we obviously have lower equity accounted income. We've lost now Repsol, and we've changed BFA from equity accounting into fair value. We have recorded the dividend from BFA this quarter. But still, there is a significant difference between the equity accounted income from last year and the dividend this one. Costs are growing 4.5%, but now will start to grow at lower levels to meet that 3% by the end of the year that we have guided to. Cost of risk is at very low levels. It's about 2 basis points or 14 if we adjust for that one large recovery we had last year.

Profitability is obviously down given the restructuring charge. But if we exclude that, it's appropriately both quarter-on-quarter and year-on-year growing, and that 9.4% return on tangible equity.

BPI just 1 page we highlight. We continue to be quite satisfied with the evolution of BPI. You see NII at 1% growth, and fees coming down by 3%, but this is due to the businesses that BPI sold to CaixaBank that were fee-generating. If we exclude those fees, really, the adjusted rate is double-digit, 13.6% growth in fees overall. BPI continues to do well, and it's investing for the future, and that's reflected in the cost line, which is increasing 4.5% these 6 months. But obviously, because the investment made to do more business and to -- adequate processes and controls to CaixaBank is being felt. But significant contribution, positive dynamics also in terms of balance sheet growth, consumer lending, savings insurance, business lending, even though the market has been a bit weaker in Portugal for these 6 months, they are moving in the right direction.

So with that, I'll pass it on to Javier. Thank you, Javier.

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Javier Pano Riera, CaixaBank, S.A. - CFO [3]

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Thank you and good morning. And as always, I will start commenting the main lines of the P&L account before shifting to the balance sheet. As usual, starting with net interest income, that is slightly up this quarter by 0.2% and 0.9% year-on-year. I would say that the main headwind here has been the ALCO portfolio disposal. If not for this, NII would have been, we estimate, around -- up by around 1%.

On the positive side, I would mention, as Gonzalo was commenting, higher average loan balances. This is delivering positive and also going forward. I would also like to mention the contribution from BPI after a strong loan growth last year, that now is having its impact in net interest income.

And talking about net interest income, I would also like to remark that the EUR 13 billion TLTRO prepayment is not going to have any impact in coming quarters on NII as we used extra cash already deposited at the ECB to redeem TLTRO funding.

So more focus on retail funding and the loan book. We see that our retail euro deposits continue to be rolled at extremely low levels, just 1 basis point. Our total funding cost goes up by -- retail funding cost goes up by 1 basis point. This is due to some more weight of foreign exchange deposit and also the impact of our retail note that we issued in March.

Shifting to the loan side. I would say that the front book yield comes down by 7 basis points this quarter to 280 basis points, but this is due to small changes in the mix of the new production. Once looking to the spreads per segment, I would not say that things are compressing compared to previous quarters.

The back book yield comes down by 4 basis points. This is a seasonal effect that probably we can comment later on. And as a result of all this, our customer spread comes down by 5 basis points to 222 basis points. If you compare it to the situation we had more or less 1 year ago, you may see that fairly stable.

Some comments on the ALCO portfolio, as said, we have disposed. Remember that earlier this year, we decided to expand the portfolio as we had the view that long-term rates could be turning again to the downside. And well, the market has clearly gone beyond our expectations, and we have decided to dispose around EUR 3 billion of Spanish -- 10-year Spanish government bonds, contributing significantly to our trading profits this quarter.

On the liquidity portfolio, remember that we set this portfolio in order to be prepared to redeem TLTRO in 2020. It remains unchanged as we have been able to reduce our TLTRO funding with excess cash, not touching this portfolio, thus not affecting net interest income. Wholesale funding costs ticked down -- ticked up, sorry -- by 7 basis points this quarter, reflecting new issuances to 123 basis points over 6 months of LIBOR, but at the same level that we had 1 year ago.

Let's now turn to fees. We have a better quarter this second quarter of 2019. Fees are up by 4% but down by 4.7% compared to the second quarter of last year. Last year, the second quarter had very -- a very strong contribution from wholesale banking, which has not been the case this quarter. If not for this, year-on-year fees could have been down by 1%. You may see the breakdown by main categories. Recurrent banking fees do well, mainly impacted by very positive dynamics in payment fees. General -- banking fees going up by 6.4% quarter-on-quarter, also up year-on-year.

On asset management, we clearly improved quarter-on-quarter, up by 4.5%, thanks to larger average AUM balances, almost flat year-on-year, here impacted also by some extraordinaries last year. In insurance distribution, we start to recover, quarter-on-quarter is slightly up, but year-on-year clearly down, as here we have the impact of the different timing of the new product rollout, something that Gonzalo was explaining is proceeding very well from now on. On wholesale banking, as I mentioned, clearly down compared to the situation last year, down on this front by almost 50%.

On the right-hand side chart, you may see the evolution of AUM balances. The end-of-period balance is already higher than the average of the second quarter. Thus, if markets can sustain a good performance, we can expect better fee contribution on this front for the next quarter.

Some more focus on our core revenues. As said, have been improving this quarter, up by 1.5%. It's here interesting to look at the breakdown across the different engines we identified for growth in our later strategic plan. You may see that this quarter, our long-term savings related revenues are up by 5.3% or so. Protection is already recovering, up by 0.9%. And payments, that is doing really well, up by 7.6%. The other core revenues in this case also impacted by this weaker performance from wholesale banking. If we put together all those key businesses, that is long-term savings, protection and payments, this already represents 40% of our core revenues, up by 1.2% quarter-on-quarter, shielding the bank in the coming environment of lower rates for longer.

Let's now turn to costs. On this front, so far we don't have news. Costs are up year-on-year by 4.3% and flat quarter-on-quarter. You know that costs are being compensated -- recurring costs are being compensated by savings in real estate expenses year-to-date. But the key development this quarter, as commented, is the restructuring. We have executed it swiftly. 2,000 people that is going to leave in a few days. This is the new aspect that is important to remark. All departures will be in a few days in August 2019.

As a result of this, we have higher restructuring charges compared to the initial estimate. This is in part due to the front-loading impact, but also a mix effect as we have had higher weight of people with longer tenure than initially expected. This results into annual cost savings gross of EUR 200 million from 2020 instead than from 2021 than before, and we already have EUR 80 million of those savings in 2019, which allows us to reduce guidance -- cost guidance for this year to around 3%.

To end with the P&L, some comments on loan loss provisions that, as you may see, remain at very low levels. Our cost of risk on a 12-month trailing basis, just 2 basis points, even not including an extraordinary write-back during the third quarter of last year. Our cost of risk clearly below guidance for this year. It's at 14 basis points. Remember that we guided cost of risk to be below 20 basis points guidance that we reiterate today.

Now I shift to the balance sheet. Some comments on our nonperforming exposures. We have had this quarter a steep reduction of our nonperforming loan exposure, down -- the ratio -- nonperforming loan ratio down by 40 basis points in just 1 quarter. In this case, clearly helped by a portfolio disposal, EUR 300-plus million. This portfolio disposal, but, well, you know that this is part of the business, and we continue working on different projects in order to reduce our nonperforming loan ratio below 4% by the end of this year.

The coverage ratio remains sound -- stable and sound. You may see also that the coverage ratio from our uncollateralized, nonperforming exposure remains at very sound levels. Our OREO exposure also remain at low levels, EUR 900 million of real estate assets available for sale. The pace of disposals continues to be sound, EUR 142 million sold of real estate this second quarter and making 17% capital gains.

Some words on liquidity. We continue to hold a really strong liquidity position, EUR 88 billion of liquid assets. The mix between high-quality liquid assets and collaterals has changed a little bit as we have reduced our TLTRO funding. But our liquidity metrics remain really strong with a liquidity coverage ratio by the end of period and at CaixaBank level after redeeming TLTRO at 180% and our net stable funding ratio after TLTRO redemption at 124%.

As commented, we continue to have market access successfully. EUR 1.5 billion issued this quarter, mainly senior nonpreferred, and progressing towards our MREL targets at good pace, as Gonzalo commented.

On solvency, some final words. It's a quarter that clearly impacted by the restructuring. We don't have organic capital generation, small market and other impacts, but our CET1 ratio remains stable at 11.6%. We have already full disposed of Repsol, of our Repsol stake. Our tangible book value per share remains stable during the year at EUR 3.30, EUR 0.11 from the first half result, which coincides almost perfectly with the dividend paid -- the complementary dividend paid last April, EUR 0.10. As commented, our MREL ratio at -- already at 21.2%.

And from my side, just a few words to wrap up. It's a quarter with solid loan volume growth, resilient margins, although clearly impacted by the restructuring. Core revenues improved this quarter, and we think we'll keep improving in next quarters, but unfortunately not enough to meet our fiscal year guidance for this year. And on top of this, clearly, with lower rate environment going forward.

Thus, we'll revise our core revenue guidance to around 1% but at the same time, we have managed our costs, we have executed swiftly the restructuring. This allows us to reduce our guidance for costs to around 3%. Balance sheet metrics continue to be clearly reinforced with, I would remark here, our nonperforming loan exposures. And going forward, we expect the non-NII core revenue will continue to improve, and this will help support our profitability during the second half of the year.

Thank you very much. And with this, I think that we may be ready for questions.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [4]

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Okay. Thanks, Javier and Gonzalo. Operator, let's move on to questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Andrea Unzueta of Crédit Suisse.

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Andrea Unzueta, Crédit Suisse AG, Research Division - VP [2]

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The first one is on insurance. This is the second quarter that you disappoint on this line, and I wanted to understand how to think about this going forward. I can see the progress that you're making on long-term savings, which are growing by more than 10% year-on-year, but your revenues from production are declining and are offsetting all the improvements that you make on long-term savings. How should I think of that going forward?

The other question is on your guidance. On revenues, your previous 3% core revenue guidance was split in 2% growth on NII, 3% growth on fees, and you had more than 6% growth on insurance. How does the new 1% core revenue guidance split amongst those 3 lines? And same for costs. What does the new guidance mean for the 3% CAGR that you have had for -- by 2021?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [3]

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Thank you, Andrea. Let me answer part of your questions, then Javier will be able to provide some more detail. Let's start with the last question, the costs one. We have focused on reducing the cost inflation in 2019. And clearly, that means a lot of effort. From a financial point of view, you see, okay, it's a higher charge because they leave early. From the operational side is a big thing, and that's what has kept us busy in these months, to make sure that we were able to anticipate and make sure that we're able to anticipate all these exits, and at the same time, continue to have the success that we are having on the commercial front. That's done now in terms of planned. Obviously, we need to execute on it. And obviously we're, as we speak, thinking of new ways in which we can contain cost growth.

We are not ready at this stage both in terms of costs and also, to be honest, in terms of revenues because there's also revenue-enhancing measures that we are analyzing and that we can take. We're not ready now to say exactly what that's going to mean beyond 2019. Clearly, we're saying for 2019 we're going to have revenues that are not going to grow as we would have liked to or we would have expected, which is unfortunately something that is happening to many of our peers in Europe. And at the same time, we can do better by 2% on costs. We are growing in terms of what can we do beyond that to reduce the expected cost growth that we had by the time we presented the strategic plan. We're not done yet. And hence, I cannot commit now on exactly what that will be. But certainly, we work day and night on it. And my expectation is that we will be able to deliver. How much we can deliver? We'll see, but we're working on it. And again, it's not just about costs. It's also about revenues.

There's another question about insurance, and insurance has not been helpful to the P&L in terms of comparing with last year in terms of protection, life risk and nonlife. The activity is being higher than it was. We have changed the product offering. The new product offering has been extremely successful. The new product offering is going to mean that we will build revenues because of -- accounting, here, everything is accrued. There's nothing paid upfront or nothing that is significant. And hence, our new policy, and this MyBox offering sold in June, is going to produce very little this quarter, but it will produce for the next 3 years. And as it adds on what we sell in July and August. August will not be that much, obviously for seasonal reasons, September, October and into the next year, we're going to have a cumulative build and impact that gives us quite -- a lot of confidence that we're on the right way.

It's unhelpful for the quarterly result. It was unhelpful in the first quarter, where we actually did not have pushed the offering until the end. We had the figures of April, and that's why we explained to you in the first quarter that we're optimistic now. We have the figures of June and how July is going, and we see that we have really got it right. And unfortunately, at the same time, you see actually weakness in the line, which is a bit of a contrast. I will hope that either send comfort on what we had delivered in the past, and we cannot be sort of straight exactly every quarter, we're moving in the right direction.

In terms of life risk, the number of transactions is up 12% if we compare this first quarter -- sorry, this first half of the year with the first half of last year. So yes, again, because the change in the product, we're not seeing the logical positive impact on that income line, but it will come. And what I can say is that we are quite happy with the current product offering, how it is being affected by clients. In life risks, we have had also some slowdown in June as we had the changing the new law of -- so new mortgage law, the ley de credito inmobiliario. And because that's -- as it has changed the system, the visit to the notaries, the notaries periods, et cetera, before you sign, it has had some slowdown in June on the margin. But clearly, we have very good potential and expectation that, quarter-on-quarter, after having adjusted to this level, we're going to see growth.

And Javier, I actually follow you and, I'm sure, complement this.

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Javier Pano Riera, CaixaBank, S.A. - CFO [4]

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Yes. There was a question about the split on the revenue guidance. Well, here on NII, the main impact comes this year from -- precisely from this portfolio disposal. I would say that with this, we are now getting closer to 1%, for guidance for NII, I would say. But here, we are also considering different initiatives in order to -- how to deal with this environment of lower yields. We have a situation where the loan book is going, I would say, better than expected, with a performing loan book that is up year-to-date by 2.5%. So this is a clearly positive supporting NII. Then there is all this question about the wholesale deposits and whether or not to charge for the large deposits. Obviously, we are already doing so for financial counterparties and the strong large deposits of large corporates. And it's something on what we keep thinking if to expand. Something we think we'll do.

Then you have potential upside here if we are able to reinvest the ALCO portfolio at some point. Who knows? Obviously, now there's obviously a rush for yields but at some point, the market may revert. Who knows? Time will tell. And also, I would like here also to comment that on our hedging activities, so far we have decided not to hedge our -- the new production of mortgages for 2019. This is something that was pending to be done. But in this environment, for this -- the vintage of this year, we have decided not to hedge.

I think that all this will result into a net interest income type maybe around somewhere, with probably -- with a wider margin than initially expected around 1%. Thus fees, we think that we may have a positive year on fees, approaching also 1%. And as Gonzalo was commenting, insurance is expected to gradually improve its contribution.

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Operator [5]

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The next question comes from the line of José Abad of Goldman Sachs.

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José Maria Abad Hernandez, Goldman Sachs Group Inc., Research Division - Executive Director [6]

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My first question is on precisely a follow-up on what you just mentioned, Javier, so on charging large corporates. You said, you mentioned, that you're already charging actually large deposits so from large corporates, and you were thinking about whether to expand this. So my question is whether your thinking is about expanding within the corporate segment or expanding into other segments. And in that regard, what's the rationale for charging or not charging actually retail depositors like SMEs and households?

My second question is on M&A. There were 2 failed attempts actually in first half of the year, and the operating environment is getting worse. Therefore, more conducive to M&A at least in theory. And then I think my question for you is what's, in your view, actually holding local players back from further consolidation?

And if I may, a third question on dividend policy. Bank of Spain, in particular the deputy governor, has been very vocal lately about banks who are using cash payouts returning to scrip dividends. That was new, I think, a couple of weeks ago and even linking dividend guidance to payout over reported earnings. So in light of these things, should we expect any changes in your dividend policy going forward?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [7]

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Thank you, José. Let me try and address the questions. In terms of the charging for deposits, we are obviously separating the retail world where we're not charging, and we will not charge. We think that is what makes sense. Our strategy there is to make sure that our clients have a relationship with us that overall provides with appropriate profitability. And that is something that we're achieving to a large extent. I mentioned the increase in customers that have 3 or more products with us, again to 8 million. And I think that's how we are going to be able to make the bank profitable. And at this stage, whether we like it or not, the perception of retail in Spain about being charged for bringing money into the bank is not positive. And we're not going to -- for those reasons, we're not going to compromise our long-term successful strategy. We think we have the ability because we have all these products and services that we can offer, I think, more than most or all, or at least most of our peers have been successful in developing these other insurance payments, et cetera, to make an overall relationship profitable. And clients are not prepared to accept those charges. And certainly, there are many new entrants looking at the opportunity to enter the market. And I think, if the industry moves in that direction, that threat will become more visible.

Now obviously, at the other end of the spectrum, we have financial counterparties and large corporates and not so large corporates with plenty of cash, where we're really talking about a financial cost that is very significant, and that obviously we want to look again in a harder way at it. And there is no question that as a result of the review the we are undertaking, we will be charging more or to more corporate customers. And that is one of the sources of revenues or less pain, depending on how you want to look at it, in terms of our excess liquidity that we're developing vis-à-vis the plans that we had in November last year when we announced the strategic plan. So yes, we are moving further into that direction, but at the same time, we have a clear view that, that will not impact retail. We may be right or wrong. But certainly, we're not going to move in that direction.

You mentioned consolidation. The reasons for other transactions to go or not go ahead are, obviously, for other institutions to answer. But I agree with you that the current environment is in a way further incentivizing consolidation. And we have -- and I personally have been very clear that I thought that in this environment, consolidation was a logical response for the system in Spain and some other European countries. As anomaly is getting worse because of the rate situation. Obviously, if anything there is some more resource. And it's not just about pressure on sort of -- due to monetary policy. It's also transformation, entrance of new competitors, et cetera, et cetera. [It makes sense]. What is holding it up? Consolidation is always difficult to see since they are existential decisions for at least 1 or 2 of the organizations, depending on the kind of transaction. And they take time and at some point, they accelerate. You never know. They are very difficult to predict. If I may, we are of the view that, for CaixaBank, consolidation this is not something that we actually need to do. We decided to do a very large restructuring of people in the absence of consolidation, which is something that we had not done before and that we're -- is not that typical in Spain because we have a market share. Because the machine is working in terms of gaining commercial presence. And there's a lot that we need to do in terms of transforming the business. And consolidation is also a distraction for us.

But the reality is we have a return on tangible equity of 9.4. And we had it last year, I mean, when I exclude the restructuring cost. So we feel we have a sustainable business. And hence, we feel that we do not need to. It means, on the other hand, that we are, obviously, always open if there's something that makes a lot of sense to move on it, but it's not that we are being proactive on that front. And I think, obviously, not all institutions are likely to be in the same position. So we'll see. But I agree, it's something that is somewhat logical.

The cash and the payout, we have no plans to move our dividend policy. Our dividend policy is a variable dividend policy which is what -- somewhat -- the Bank of Spain has been demanding, and we have said very clearly from the beginning we'll have a payout. It's based on reported earnings. If reported earnings go up, dividend per share will go up. If reported earnings go down, dividend per share will come down. We, obviously, have some room to play with between these 50% to 60% that we have said. We have no plans to return to scrip dividend. We have plenty of capital. We're actually at positive in terms of capital generation going forward.

In a quarter where we've actually booked EUR 978 million of costs in 1 quarter, we are actually not having a negative impact on capital is by itself a statement. Our SREP levels that are well known and our current capital levels imply there's a 285 basis points management buffer. I think, and we say this publicly, the right way to look at the capital levels for the institution, I'm sure you will agree, we have a variable minimum because various banks are fixing different SREP levels. Then it's how much excess you have above that minimum. With 285 basis points now, and obviously, going up because we are planning to build that -- get to 12% and beyond, 12% will be up 325 basis points, and we have that 1% extra buffer that we want to build in the next 2.5 years. We're very comfortable about our capital position. Dividend policy, no plans for a scrip.

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Operator [8]

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And your next question comes from the line of Javier Echanove of Santander.

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Javier Francisco Echanove, Grupo Santander, Research Division - Equity Analyst [9]

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I was wondering if you could give us a little bit more color on the drop that we've seen this quarter in the yield of the loan book, which for me seems a bit counterintuitive as the -- what you've been saying that the front book has been -- the yield of the front book has been ahead of the yield of the back book. And also I would've expected to see some positive support from EURIBOR resets of the mortgage portfolio. So I was wondering what's happened and what do you think is likely to happen going forward? And whether this is an element of competition, gaining market share through pricing? Or maybe some impact from hedging of part of the loan book?

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Javier Pano Riera, CaixaBank, S.A. - CFO [10]

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Okay. Thank you, Javier. Well it's a technical issue, but let me explain it into detail. We have 60% of our loan book that is accruing interest on a 30 -- 360 basis, and we have 40% of the loan book that is accruing interest on an actual-actual basis. So this -- what means is that there is 60% of the loan book that, independently of the number of days of the quarter, it accrues the same number of euros. As the first quarter of the year is shorter, once you split those euros into lower rates results into a higher back book. Every first quarter of the year, you will have this uptick on our back book yield, and this is an impact of around 3 basis points. And thus, of this reduction of 4 basis points from 229 to 225, 3 are due to this.

The other basis point is due to fine-tuning on the accrual of the mortgage costs that we have been fine-tuning on the accrual on our back book, and that's it. So if you compare this back book yield with the situation 1 year ago, as I commented, we are almost flat. It's what you say that, in one hand, the front book yield is having an accrual impact. But also on top of this, remember that since last October, we are having also the impact of mortgage costs that is now paid by banks. This is, obviously, having an impact on the back book yield. So this is the reason.

But if you look at the front book spreads per segment, as I said in the presentation, you -- we don't see signs of tightening. This does not mean that there is no competition. So competition is extremely strong, mainly precisely on mortgages. You know that we are making around 2/3 of the new production of mortgages at a fixed rate. We have been able to increase a little bit the front book yield for fixed rate mortgages. And this together with long-term yields that have clearly come down, as all of you know, we have been able to accommodate the extra cost for the new production of mortgages at fixed rate. This extra cost, we estimate is around 40 basis points running, but this is not the case on floating rate mortgages, where mortgage costs are absorbed by banks. But unfortunately, due to strong competition, we have not been able to pass on these extra costs on the spread. So this is the main reason. Sorry. Because it's a very technical issue, but I think it's worth to note.

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Operator [11]

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Your next question comes from the line of Carlos Cobo of Societe Generale.

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [12]

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A couple of questions, one on capital, one on ALCO. Could you please elaborate a little bit more on the capital evolution in the quarter? I want to make sure I'm not missing anything. I want to understand how much dividend was accrued because if, in theory, the full year dividend is based on your payout policy's accrual throughout the year, and you have no retained earnings this quarter, and the balance sheet was -- so the loan book was growing with a higher profile -- higher risk profile of the growth. I didn't understand very well why the CET1 ratio remained flat even when you have some additional few basis points from the markets. If you could explain, that will be much appreciated.

And the second one is just about your ALCO policy. You sell the -- a big chunk of it, EUR 5.5 billion. So what's your ALCO policy going forward? And what's the rationale for frontloading those gains, which maybe I understand that it could have -- make a financial sense, but in order to protect the net interest income from lower rates, why didn't you consider it was more conservative to maintain that contribution when rates are not looking to go higher at any point?

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Javier Pano Riera, CaixaBank, S.A. - CFO [13]

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Okay. Thank you, Carlos. To your question, we are accruing a payout ratio of 60%. This is the maximum according to our dividend policy. Remember, over 50%, maximum 60% for this year. This 60% going to be reviewed every year. So we are accruing the maximum, which is, by the way, what is required by the regulation. I think that this explains probably your question, it's a quarter with the impact of the restructuring charge, thus, organically. We have to consider this chart as organic, so let's be clear on this. And we have almost no capital accretion this quarter. Per the -- as for the ALCO...

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [14]

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Sorry.

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Javier Pano Riera, CaixaBank, S.A. - CFO [15]

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Yes.

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [16]

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My point is if you're accruing 60% payout on the full year earnings, and there's no retained earnings because of the restructuring charges [or some] growth in the balance sheet, how can the EBIT ratio remain up?

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Javier Pano Riera, CaixaBank, S.A. - CFO [17]

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Well, because you -- organically, we have had very low risk-weighted asset inflation. And on the other hand, we don't have organic capital accretion because once you deduct the 60% on the profit of -- the net income of this quarter, you almost now have a positive impact, no? So this is the reason why we don't have...

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [18]

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[The gains you -- except]

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Javier Pano Riera, CaixaBank, S.A. - CFO [19]

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Okay. The...

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [20]

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But you don't accrue on the full year? It's -- you accrue on the quarter.

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Javier Pano Riera, CaixaBank, S.A. - CFO [21]

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Well, this quarter is for the quarter, yes.

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

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Okay. No, I thought it was the full year expectations divided throughout the whole year.

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Javier Pano Riera, CaixaBank, S.A. - CFO [23]

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No. It's every quarter, according to the actual results. As for the ALCO, well, remember that 1 quarter ago there was a little bit of questions about why we had increased the ALCO portfolio. Well, we had the view earlier this year after the Federal Reserve decided to no longer keep raising rates that probably long-term yields could at least remain stable, if not slightly down. What happened after this is known by all of you. The situation, the market situation has gone clearly beyond our expectations and probably beyond the expectations of anyone, with the Spanish government bonds rallying by more than 100 basis points. And thus, we have decided that it makes sense to take profits, to position ourselves more comfortably, to shield our CET1 ratios for market volatility by disposing and to -- from now on, we have more flexibility whether to add or not. So we don't have here, I would say, a prefixed policy. So we don't -- we have no plans. So probably, we want to add, so we think that we would like to add to the portfolio, but we'll decide how and when to add. Time will tell and market conditions will tell.

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Operator [24]

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Your next question comes from the line of Andrea Filtri of Mediobanca.

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Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [25]

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3 very quick questions. The first is where do you see your initial net loan growth in 2020 given the good momentum you're having, i.e., how much are you going to be able to bring over to next year from the good production of this year?

The second is on capital and specifically on TRIM. Have you got any better visibility of -- if there's anything else to come following your 25 basis point charge that you've already taken last year?

And finally, on capital accretion, just a follow-up from what my colleagues have already asked. What was the capital accretion in the quarter from the move of spreads on your bond portfolio? And where are unrealized capital gains after the sale of the EUR 3 billion that you have made in the quarter?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [26]

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Thank you. [First] let me start and Javier will, obviously, be more specific. In terms of 2020, we have not, at this stage, started to predict how 2020 is going to look like. And clearly, where we are in 2019, we see upside to our projections of loan growth for the overall plan. And that's clear. We see downside in other places. Obviously, the level of rates is one. That is one that is certainly positive. We have not yet started to do our detailed analysis on budget for next year, which we will do after the summer. And hence, I prefer not to be more specific, but clearly, we see some upside.

And in terms of TRIM, we have to wait for the final TRIM exercise on a lot of our portfolios, which we do not expect to be affecting our capital allowance this year. And hopefully, we'll have an outcome. We don't know if it will be positive or not. We hope it will not be material in any case, but it looks like it's not going to be finishing this year 2020, although you can never be 100% -- sorry, 2019. It's more likely to be in 2020, although it depends on the ECB and hence not on us. Javier may want to add and also have the final discussion on capital allocation.

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Javier Pano Riera, CaixaBank, S.A. - CFO [27]

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Yes. On TRIM, we don't have further news this quarter. So the situation remains the same. We're still working on it. As we see, the timetable probably this is a process that will not have finished before late this summer. So probably, we'll not have the final recommendations this year.

As you had a question on the unrealized capital gains, it's -- by the close of the quarter is EUR 375 million. We have a small impact this quarter, but the main one has already been crystallized in trading profits. So it's not significant impact on our CET1 ratio this quarter.

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Operator [28]

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Your next question comes from the line of Sofie Peterzens of JPMorgan.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [29]

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Here is Sofie from JP Morgan. I wanted to ask around your 2021 plans and the guidance that you gave at the Investor Day. So I recognize that you have reduced the cost growth for 2019, but how should we think about the absolute cost base in 2021 of EUR 5.1 billion that you guided for last year at the Investor Day? Does that EUR 5.1 billion cost guidance for 2021 still hold?

And related to this, I would also want to ask, is the core revenue guidance of EUR 9.5 billion that you guided for at the Investor Day for 2021, does that also still hold? So are you still targeting to achieve EUR 5.6 billion of net interest income, EUR 2.9 billion of fees and EUR 1 billion of insurance by 2021? Or the guidance that you gave today, does that imply that these numbers should be lower? And if so, which numbers will be lower? Will it be mainly fee NII? Or will it also be fees and insurance?

And then my second question would be on rate sensitivity. Could you just remind us on how you -- how we should think about NII impact from 100 basis point fall in interest rates?

And if I may, just a very quick question. How come your foreclosed assets actually increased by EUR 80 million in the quarter to EUR 1.4 billion, even though you sold assets of EUR 142 million?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [30]

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Thank you, Sofie.

(technical difficulty)

affecting 2021 because it's basically having these savings earlier, but those are the savings that would, in any case, have been achieved by 2021. So the good news is limited to having it earlier, but not through what we have announced. We have already benefit for 2021. That does not mean that we're not going to work on bringing down that target. That's what I mentioned at the beginning, that we have spent a lot of time in advancing these redundancies, the actual exit of people, and that means accelerating the transformation plan, et cetera, et cetera. In an environment where rates are lower, we clearly have more pressure to look at other revenue-enhancing ways and certainly cost-reduction ways, and we are in that process. We do not have now an outcome of what we can do. And hence, I can only guarantee work. I cannot guarantee results at this stage. But obviously, we're quite conscious that we need to have a very, very hard look at our cost base.

At the same time, I was reminding yesterday the Board that the need for digital transformation is as acute as it was. It's not that because there's more pressure, there's not going to be a need to do the right things for the business the long term. So juggling these 2 things is not easy. But certainly, it's our work. You have our commitment and actually we're working on that front. It's too early at this stage to say what impact that may have.

And I feel the same way on revenues. So obviously, there's been a quite a sudden change of level of rates. We did explain at our Investor Day that if rates didn't go up, the sensitivity was to move the 12% down to 10%. Unfortunately, rates are not -- only not going up, but they are actually coming down, which means a bit of further pressure. And obviously, you can quantify that easily because you've asked the question that Javier will answer better than us, in terms of better than me in terms of sensitivity. We're talking of ranges that are not that radical, but there is an impact.

We are, as we look into the fourth quarter of this year or the second half of the year, we're going to start working in the detailed budget for 2020. As always, we'll come to the market when we announce results in January or, at least, to expect to come to guidance for 2020. And I think it's at that time where, given that 2021 will be, obviously, the next year, so when we will have looked hard at 2020. We'll see if it means that we have to make any changes or explanations about 2021. But at this stage, the only thing I can say is a lot of work to reduce the cost inflation that we provide. A lot of pressure on revenues, but also initiatives to offset that pressure and commitment to, obviously, update the market as we have enough information to provide some [sensitivities], sensible that we're comfortable enough to provide our -- at least intended credibility that we stand by what we say.

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Javier Pano Riera, CaixaBank, S.A. - CFO [31]

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Sofie, for the rate sensitivity, I would say that the situation remains probably the same. Remember that we have been guiding the market for sensitivity of 15% for -- to an increase of 100 basis points on rates. This also works to the loans rate, although a little bit less due to for some technical reasons, but probably too long to explain here. But you can assume that for every 10 basis points, our net interest income may be down between 1.25% and 1.5% next year. So I think that this is probably the number.

You had a question on foreclosed assets. Available for sale assets go up. We still have repossessions. It's -- a bank will always have repossessions, and there is a lack from -- when you repossess and that this asset is really available for sale. And on top of this, the disposals include not only disposals on available-for-sale assets but also disposals on rented assets. Our rental portfolio has decreased this quarter. It's now standing at EUR 2.3 billion net.

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Operator [32]

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Your next question comes from the line of Stefan Nedialkov of Citi.

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Stefan Rosenov Nedialkov, Citigroup Inc, Research Division - Director [33]

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It's Stefan Nedialkov from Citi. Two questions from my side. Sorry to bother you again on this topic of costs. Obviously, it's front and center for a lot of us. So is it correct to assume that you are reiterating the 3% CAGR from 2000 -- from 3Q '18 through 2021? And given that you've just changed your guidance for 2019 to 3%, we can safely assume that the CAGR for 2020 to '21 is also going to 3%.

And additionally, if you can provide some color on the EUR 200 million of saves. How much of that is people versus non-people, branches, processes, et cetera? And given that you guys seem to have taken a higher restructuring cost because of the longer tenure of the people that are leaving, does that also mean that the savings from those people leaving are going to be higher? Supposedly, they are on higher salaries as well.

And then just sort of second question, which is not on costs, it's more on TLTRO and liquidity. Is it safe to assume that your decision to sell a part of the structural ALCO portfolio was driven by the desire to pay off the TLTRO? And if you can just explain what do you mean by the repayment -- the prepayment of the TLTRO will have no impact? Is that on cost, on liquidity or something else?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [34]

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Thank you, Stefan. Let me just make a statement. I think Javier you can -- on the 3%, mathematically, as long as we keep our guidance on 2021, we will bring 5% to 3%, but we're not changing the 3%. Obviously, there's 3-3-3 in order to achieve that, but what I'm saying is not that. It's I have certainty as much as we can have on 3% for this year, and we're working on bringing down the 3% for 2020 and bringing another figure for 2021. But I am only committing that we are working. I cannot tell you now exactly what that is going to mean. And hence, I apologize for being unspecific on 2019 because we are always very candid, and I would say we think as a bank we can deliver that. And we're working, we have ideas, and we're taking it very seriously on 2020 and 2021, but we cannot at this stage put a different figure. And we are not also at this stage, putting in question the overall plan. It's a [cheap] plan, I think it's helpful for us to keep that as a reference, a reference which is what we would like to achieve, knowing that today it's much more ambitious, it's much more difficult than it was 7 months ago. And as we approach 2020, we're going to have to have the confidence on 2020 as much as one can have because obviously, the future no one can predict exactly. And at that point, then we can see if there's deviations in 2021. We may actually make that clear, not just about 2020, but also about 2021, but it's kind of dependent on events and how things stand. Obviously, there's a lot of uncertainty about what exactly the monetary measures or policy are going to be in tiering and level of rates, et cetera. There's quite a lot of moving pieces. So it's too early. We fail to venture more than there is more pressure on the revenue front. And on the cost side, it's just that we don't know exactly what is the scope of what we can really achieve without hurting our long-term competitive position, which is the limit to any cost-saving measure we can put in. We want to do something that is sensible, needed for the short term, but doesn't put into question the overall position of the bank because I will be so excited. This is a very difficult to juggle. And at this stage, we have no specific numbers on costs beyond 2020 and 2021. And hence, we're keeping what we have.

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Javier Pano Riera, CaixaBank, S.A. - CFO [35]

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You had -- Stefan, you had a question about the EUR 200 million, the EUR 200 million are only personnel costs, and these are the running -- those are the running savings from 2020 only for this -- the personnel costs related to this restructuring. You also had that question about TLTRO and the portfolio disposal. Let's be clear. So the portfolio disposal has absolutely nothing to do with the TLTRO redemption.

We were already holding excess cash on -- deposited at ECB. We were holding more than EUR 20 billion last quarter, and this is on top of that portfolio of securities that we set for TLTRO redemption. And what has happened here is that we have been accumulated -- accumulating cash, not only because of the strength of our commercial activity, but remember that we had the real estate disposal, we had the Repsol disposal. So this adds to our liquidity position, and this was not initially on our plans a few years ago. We were able to redeem TLTRO, reducing the extra cash we were holding at ECB. That cash at ECB is paid at minus 40 bps, and we pay the same for TLTRO funding. Thus, we have balance sheet perfectly matched with an asset at minus 40 and liability at minus 40. What we have done is to reduce the size of the balance sheet, thus also having some savings in terms of Single Resolution Fund, for example, because TLTRO is considered on the perimeter for the Single Resolution Fund. So nothing to do with the portfolio disposal. We still keep cash at ECB. We are closing the quarter with cash at ECB around EUR 15 billion, 1-5. So as you may see, no need to dispose portfolios to reduce our TLTRO funding.

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Operator [36]

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Your next question comes from the line of Marta Sánchez Romero with Bank of America Merrill Lynch.

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Marta Sánchez Romero, BofA Merrill Lynch, Research Division - Director and Analyst [37]

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I've got a couple of follow-ups on loan yields on the ALCO. So on loan yields, what's the yield you're currently accruing on your NPLs? And what's the effect on NII every time you sell an NPL portfolio? Let's say you sell with a bigger loss than -- the loss, given default implied on your coverage ratios? Have you seen any impact of that this quarter?

And then based on the way you're growing your loan book, do you expect to see an expansion of back book spreads over the next few quarters? Do you think it will be enough to offset your overhead wins?

And a follow-up on the ALCO portfolio. This new rate environment, what do you think is the right size of the bond portfolio relative your equity and your sight deposits? Because compared to some of your peers, there's a clear scope to increase the risk profile of your portfolio. I'm trying to understand what is your appetite. Are you willing to do this? Or do you still think that a bond portfolio should be more a liquidity pool rather than a source of income or a way of supporting revenues in the short term?

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Javier Pano Riera, CaixaBank, S.A. - CFO [38]

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Thank you, Marta. I will start for the -- by that latest one. Well as I said, we have positioned ourselves in a more comfortable situation in order to have a chance to add to the portfolio. You may remember me saying that we think that a portfolio of around EUR 40 billion is something that we think is in line with our -- I would say, our risk profile, our business model and in line with the liquidity that we think that we may be holding over time. We are clearly below. We are at EUR 30-something billion, so we have room to add. Now it looks like it may be impossible. But who knows? The market can do many things. My view, personally, is that we are not heading into a recession, nor in the U.S., nor in Europe. Thus, if the central banks are successful, probably we may face a situation where inflation expectations raise again. This is what they are working for. And we may have higher long-term yields, and we may have the chance to add at some point. But probably -- we may be wrong, we may be facing into a recession. We may face Spanish government bond yields below 0. Who knows? But we decided to take profit and put us in a more convenient position in order to add if there is an opportunity.

As per the back book spreads. Well here the problem is that going forward, we no longer want to have positive repricing impacts, something that was initially expected. Well, I think that still this year probably we don't -- we'll not have this negative impact, but obviously, in 2020, this will be the case. So you may see our back book spread tick a little bit higher in the next quarter or the following one, but probably to resume downwards in 2020 as LIBOR fixings kick in. So I think that is -- unfortunately, this is the situation. I gave you numbers about our sensitivity.

And you had a question on the loan yield of the NPLs. Well, you know that this -- all this changed with the IFRS 9, and what we are doing is that we are accruing interest on the original loan, on the net value of the original loan. So this is what we are doing, but this is following IFRS 9 rules.

As per the question of how much was this quarter, we can probably follow up later because I don't have this figure now here.

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Operator [39]

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Your next question comes from the line of Britta Schmidt of Autonomous.

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [40]

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I've got a question on the bond portfolio, please. Can you give us any idea about what the maturities are until year-end and also in 2020 and 2021? And what sort of impact that is going to have on the income from the bond portfolio? And we're talking about reinvesting maturities, but also extending the bond portfolio. What sort of opportunities are you looking for? Would you consider extending the investment-grade corporate bonds portfolio, for example?

My second question would be on the size of the corporate deposits that you are charging on, what sort of volume are we talking about, euro billion? And what sort of volume could you potentially be looking to charging on?

And my third question is quite a quick one. Can you just confirm that the stock of your ECB deposit at the end of the quarter? I don't think I've seen much -- of what that's been (inaudible)

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Javier Pano Riera, CaixaBank, S.A. - CFO [41]

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Sorry. I missed the third one, Britta.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [42]

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The ECB deposit stock.

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [43]

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The stock of the ECB deposits. I think you mentioned at the end of last quarter, it was EUR 20 billion, but given that you have repaid the TLTRO, I was interested in what the volume was [versus profit] ?

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Javier Pano Riera, CaixaBank, S.A. - CFO [44]

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If I may, on the -- your last question, we are now holding -- I think I answered already Stefan on this. We are holding an average of around EUR 15 billion at ECB right now. So I think this is the situation.

You had also a question about the maturity on the bond portfolio. We are having a few maturities this year. If I remember well, it's around EUR 2 billion, but we have between 2020 and 2021, maturities of around EUR 10 billion. Remember that here we are having much [revision] on this, let's say, liquidity portfolio that we set ahead of the TLTRO. So that's part of those maturities are for these.

I think that you had a question about expanding into different assets. We did that early this year. Remember that we started to diversify on our corporate bond portfolio, but it's always a question about opportunity and if it makes sense, on risk/reward and capital consumption basis. So we are always looking at different opportunities on this front. Our teams work on it, and we have a flexible approach. So we'll see.

But probably, the take should be that we are willing to increase the size of the portfolio if there is a chance. I think also you had a question about if we have estimated volumes that may be involved on additional deposit charges, if I understand well. Really, not. So we -- as I think, the CEO was quite clear that we are working on it. So we are making a step-up on this process, and we are already charging to all financial counterparties that are not much, but mutual funds, even our own mutual funds, obviously and the insurance companies, et cetera, we are charging. Remember that we charge fees because it's not possible to charge negative rate in Spain, according to Spanish laws. So we charge fees, and those fees are not in the net interest income line, are in fees. That is important to keep in mind, as this part of the, let's say, of the revenues may increase going forward. And we are working on it, Britta. We are charging already to some large deposits of some corporates, and we are working on it to whom it makes sense to charge, to which amounts the distinction between operational deposits and nonoperational deposits. So there is an important discussion here that we are working on.

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Operator [45]

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Your next question comes from the line of Mario Ropero of Fidentiis.

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Mario Ropero, Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst [46]

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The first question is could you please clarify the noncredit provision charges that we continue to see? We saw EUR 43 million this quarter. Was it basically foreclosed assets? Or what was it? And then my second question is, could you please tell us the percentage of the back book, mortgage book and nonmortgage book that is fixed rate?

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Javier Pano Riera, CaixaBank, S.A. - CFO [47]

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So the first one was?

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Mario Ropero, Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst [48]

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Yes. The first one was about noncredit provision charges. We saw EUR 43 million again in the quarter. So could you please explain the nature of this charge?

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Javier Pano Riera, CaixaBank, S.A. - CFO [49]

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Well, on other provisions, I think that we have given -- even if I remember whether it is our guidance on this, you always have things to provide for. And we gave guidance to be more or less around EUR 50 million per quarter. We are down -- just to clarify that there is nothing related to IRPH here.

And on the percentage of the portfolio that is at fixed rates, it's -- if I remember well, and I can reconfirm this, but it's approaching to 30%, between 25% and 30%.

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Mario Ropero, Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst [50]

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Sorry. 25% or 30% of the mortgage book? Or of...

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Javier Pano Riera, CaixaBank, S.A. - CFO [51]

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Of the total loan book.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [52]

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Okay. I think we have time for one more. Could we have the last question, and then my team and I will follow up with anyone who is left in the queue.

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Operator [53]

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Your final question comes from the line of Daragh Quinn of KBW.

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Daragh Joseph Quinn, Keefe, Bruyette & Woods Limited, Research Division - Analyst [54]

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Just one question to kind of follow up on the bond portfolio, and here I'm thinking particularly about the bonds held by the insurance business. So I think there was roughly around EUR 60 billion or so of bonds there, and it's quite -- at significant or reasonable decent yields at the moment. If obviously, it's en Depósito, if Spanish bond yields stay at these negative rates, how long -- what is the evolution or outlook for the insurance business? How do those -- how long will it take for that portfolio to reprice or reset then to a lower level?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [55]

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Thank you, Daragh. I would say on the insurance business, we have run a very conservative book of portfolios matched. And hence, we may have accounting gains and losses, but this is much in our liabilities on the other side. So not much impact, obviously. That's the first. Now there's always some of the details, depending on duration, complexity, et cetera, that always suggests that there's some twists that we can make. But basically, the main message is much the stable portfolio. What's different is for new production. And obviously, as longer-term rates have come down to the 40 basis point area, new production of fixed annuities, let's say, is challenging because there's, obviously, no margin there for the insurance company to retain or for the client to gain something. That's not a problem for us. It's a problem for every insurance business.

In Europe -- and some insurance business in Europe have been living with this problem for a long time because, let's say Germany had a negative 10-year bond rates for a while. While for Spain, it's really been this last push in monetary policy that has put in that. What we have is other products which generally our competitors are not really developing, combining sort of -- taking some risk with some protection in terms of fixed income and also some life risk elements. Given the size of our company and the easiness the network has on these, meaning insurance products, what we are doing is obviously now again, rethinking some of our product offering, i.e., that there was long-term fixed income based into some other mixes, which we think will be successful and will be differential versus the other players in the Spanish market. So while there's no impact on the book, there's impact on the kind of product mix for new business and also as confidence we have the ability to develop solutions that are innovative, differential and that we can even further outperform in these conditions vis-à-vis other players. But that is obviously also in work in progress.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [56]

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Okay. Well thank you very much, Daragh. I think that's all we have time for today. So thanks. We'll reconvene next quarter, and have a great summer break.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [57]

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Thank you.