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Edited Transcript of CABK.MC earnings conference call or presentation 28-Apr-17 9:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Caixabank SA Earnings Call

Barcelona May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Caixabank SA earnings conference call or presentation Friday, April 28, 2017 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Michel O’Loghlen

Fundacion Bancaria Caixa d'Estalvis i Pensions de Barcelona - Division Head of IR

* Gonzalo Gortázar Rotaeche

CaixaBank, S.A. - CEO and Executive Director

* Javier Pano Riera

CaixaBank, S.A. - CFO and Head of Finance

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Conference Call Participants

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* Alvaro Serrano Saenz de Tejada

Morgan Stanley, Research Division - Lead Analyst

* Andrea Filtri

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

* Britta Schmidt

Autonomous Research LLP - Partner, Spanish and German Banks

* José Maria Abad Hernandez

Goldman Sachs Group Inc., Research Division - Executive Director

* Mario Ropero

* Marta Luisa 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 Michel O’Loghlen, Fundacion Bancaria Caixa d'Estalvis i Pensions de Barcelona - Division Head of IR [1]

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Good morning, and welcome to CaixaBank's results presentation for the first quarter of 2017. Presenting today is our management team of Gonzalo Gortázar, CEO; and Javier Pano, CFO. Please note that this quarter has entailed a change in scope as Banco BPI has been consolidated from the 1st of February. As a result, the group quarterly results include 1 month of equity accounted BPI and 2 months of full consolidation. That's 1 month of equity accounting and 2 months of full consolidation.

Just a brief reminder of our format for our first-time viewers. We plan to spend around 40 minutes presenting with 20 minutes for live Q&A. The instructions to participate should be on your screen as we speak.

Let me reiterate, my team and I are available after the call. And with that, let me hand it over to our CEO.

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

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Thank you very much, Eddie. And thank you, everybody. Good morning. The quarter highlights are on this page. I think the main news for us is that actually the core business continues to gather momentum -- revenues, core revenues. Mind you, we include there NII fees. And income from the insurance business grow by 11% year-on-year, 1.4% quarter-on-quarter. Again, these are figures for CaixaBank only without including BPI. We'll discuss that later at a group level.

NII, up 6%, fees up 11.6%, both growing also quarter-on-quarter. And insurance revenues, as you know, with very strong growth not only because of activity, but also due to the VIF recovery from Berkshire Hathaway at the end of last year. So a very solid quarter in terms of core revenues. Recurring costs are up 1% year-on-year. And as Javier will explain later on, we expect them to trend down during the year as the impact of, particularly the early retirements that will take place that have been booked, but will take place now, will kick in.

So very solid core revenues and evolution in the quarter. This is obviously due to our commercial activity. We continue to see market share gains, and client funds have been stable in the quarter. The quarter is typically a seasonally negative quarter for on-balance sheet funds due to the peak levels of cash that we have at the end of the year. This quarter, we're stable, which is good news and that's based obviously on that 4.8% growth year-to-date on insurance and AUM. We'll discuss that later in some more detail. The loan book is stable. Again, because we have seen growth in consumer and businesses, in particular, offsetting a reduction of almost EUR 1 billion of lending into Criteria in the context of the deconsolidation of the group. So that is good news. Customer spread is up. We continue to manage the reprice liabilities downwards.

On the asset quality side, we had lower NPLs. Ratio of NPLs now is 6.8% at CaixaBank level. We have coverage stable in our NPAs base at 53%. We have, as expected, seen a quarter of significant capital gains on real estate sales. We had actually 15% on our real estate sales that compares to 4% gain last year in the same quarter and a loss previously. So as we expected, positive news on that front.

Obviously, very relevant, the integration of BPI, the acquisition closed at the beginning of February. As Eddie mentioned, we have 1 month of equity accounting, 2 months of full consolidation. We now own almost 85% on an accounting point of view. We had EUR 159 million of positive impact from the BPI acquisition. This is a combination, we will see it later, of 2 items. So basically, we have EUR 159 million that should be able to offset the expected restructuring costs that we will have in the future as we implement an efficiency program at BPI. You will see, but as a rule of thumb, BPI contributes approximately 11% to CaixaBank on the key metrics, to give you an idea of what it is doing to our figures this quarter.

With respect to the group balance sheet conservatism again, NPL is down to 6.7%, coverage increases to 49%. We have in the quarter 2 one-offs that are negatively impacting our P&L, EUR 152 million from early retirements and the write-down of Sareb, we'll discuss that later, of EUR 154 million.

Liquidity, very strong now above EUR 55 billion. Liquidity coverage ratio, 158%. And capital is up 20 basis points in the quarter. We're now at 11.5%, comfortably within our target range.

Net attributable income, up 48% to EUR 403 million. Those are the highlights, the main figures for the quarter. I will start now with a brief update on BPI. This is the information. You know, on the left-hand side, what BPI is bringing to us, 2 million clients, 535 branches, EUR 33 billion in assets. We announced EUR 120 million of synergies for 2019 onwards, which we expect to deliver with the information we have today. We are currently working on 100-day plan precisely to confirm the potential, the timing of those synergies. That process is not finished, but as of today, we have a good degree of comfort that we will be able to deliver on our commitment.

With respect to the impact on the quarter from the acquisition, we need to separate the one-offs from the normal or recurrent contribution. The one-offs amount to EUR 159 million. As I was saying before, this includes both, let's say, the bad will associated to the acquisition as well as the impact from the sale of 2% of BFA by BPI, which took place in January and had a negative EUR 97 million impact on P&L, and we've reduced that through the equity accounting line. So in total, one-off positive this quarter EUR 159 million of loss after taxes -- sorry, of loss of profit after taxes associated to the BPI integration. And on the other hand, from February and March, we have a net contribution of EUR 60 million to the bottom line from BPI if we exclude those one-offs.

I think, again, important to remind you, we had estimated, and this continues to be an estimate of EUR 250 million of restructuring costs at BPI. We have not booked those yet other than EUR 10 million in this quarter. So the majority -- vast majority of it is to be booked. That figure, after taxes and taking into account that we own 84.5% of BPI, amounts to EUR 155 million. So broadly, we're talking about a one-off positive impact that will be offset in the future through the restructuring costs. Or the restructuring costs, said it in another way, are being funded from the initial acquisition.

On CaixaBank, I'm turning to our commercial activity. Obviously, we have now the complexity of giving you information on CaixaBank stand-alone and on the group, including BPI; the impact on the quarter. So there is a bit more information, but we'll try to be, as always, as transparent as one can be, to make sure that you have a feeling of the underlying trends beyond the actual numbers.

The right-hand side here, you can see what's happening on the customer funds. Really, we had EUR 7.7 billion of outflows in the quarter in time deposits and we had EUR 7.8 billion of inflows into demand deposits. But most of it to insurance and AUM, EUR 5.9 billion growth, a figure that is certainly very relevant, higher than what we expected. You can see the group, ex CaixaBank -- sorry, ex BPI in insurance is up 7.7%; in mutual funds is 3.9%; pension plans are 2.3% up. So for a quarter, year-to-date is quite relevant. Obviously, when we include BPI, we're talking about growth that is substantially higher.

The trend on the bottom side of the page on the right continues to be one where AUM and insurance continue to grow while time deposits are coming down. So we have more customer funds with, I would say, higher value-add. I also want to remind you, the first quarter is usually seasonally negative. And in this quarter, we actually have managed to have stable customer funds, which is good. Certainly, good markets in the first quarter have helped and we will see how that evolves during the year.

Some more detail on AUM, life insurance. You can see in terms of net inflows, very significant figures in life savings, EUR 3.3 billion; also mutual funds, EUR 1.7 billion; and EUR 0.4 billion in pension plans. Market share continues to grow. The year-on-year growth this quarter has been 18%, a remarkable acceleration from previous years -- from, sorry, previous quarters. I have to say again, markets have helped, no doubt, in this quarter, but the activity is actually gathering force. Clients in VidaCaixa continue to grow, we've been adding approximately 300,000 clients per year in this quarter. We're standing in good pace to keep that growth coming in the future.

Moving on to the loan side. It's a quarter where performing loans are stable at CaixaBank level, grow 11.5% of the group, well, including BPI. I think the figures, again, on the right-hand side of the bottom, you can see how we exclude the repayment of Criteria, of that EUR 1 billion. What we can see is that the performing loan book is actually up 0.5%. Obviously, Criteria has reduced their funding from us in the context of the deconsolidation of the group. That means that once we take that into account, the performing loans are flat on the quarter year-to-date. Then we have the almost EUR 22 billion of loans that are coming from BPI.

I think looking at the lines, I would say, CaixaBank consumer loans, up 6.7% on balance sheet is something to highlight. I also -- the 1.6% growth in corporates and SMEs in just 1 quarter is quite remarkable. The good performance on these 2 have allowed us to offset the deleveraging, continued deleveraging in residential mortgages, although slowing down, continues to be the case. And then, in particular, what I was saying, that EUR 1 billion reduction of lending to Criteria.

So on the asset side, we see activity also doing well certainly, relative to the market, same way we did on the -- I mentioned on the customer front. We can see on the asset side positive developments, good level of traction from our franchise in the market. You can see that, particularly in new production, mortgages are up 11.5% to EUR 1.6 [billion]. Most remarkable, consumer lending up 32%. We had a very strong growth in 2016, and we're being able so far to continue the trend, EUR 1.9 billion of new consumer loans in the quarter. Our market shares continued to grow, both in residential mortgages and also in consumer lending in a very meaningful way, particularly when you have a sort of longer-term view. Since 2010, we're looking at 600 basis points on average of market share growth, almost a 1% per year. Certainly, with some impact from M&A, but also with a very significant impact from organic growth.

And on the credit side to business, you see that 47% growth on new production, very positive quarter, certainly, aided by some specific transactions that had accelerated that rate even more than what we expected. But in any case, very good news. And I think a solid trajectory going forward. So that's what I have to say with respect to commercial activity.

Moving on to the results. The results, obviously, have been published this morning. You know the details for them right now. I will just highlight those that I think are more relevant. And again, it goes back to what is our performance ex BPI. So the 2 columns on the right here. And you can see the green circles, 6.3% up in NII; 11.6% up in fees; 72.8% in insurance. This is, I think, something we are very happy with and shows that our activities actually are delivering results that are sustainable and of higher quality.

The total of group revenues is down. You can see that year-on-year, 1.5%. And I think what is most important and remarkable is the breakdown of these revenues, where you can see trading income coming down from EUR 268 million to EUR 43 million, a very significant reduction. You can also see a reduction in income from investments and associates, given the fact that we have been reducing our portfolio of investments and also that loss from BFA, Banco de Fomento Angola, which I discussed earlier. So what we have is a quarter that, I think, is going to set the trend for the year, where our income is increasing its quality, where most of our revenues, in fact, 99% of our gross income, is coming now from core revenues, NII, fees and insurance business. And therefore, from that base, it'll be easy to grow in the future because, again, there is no volatile component integrated in that number.

Costs are up 1%. As I mentioned before, we expect to bring that trend slightly lower during the year due to the early retirements. And then below the line, we have a number of impacts. Loan impairments are 13% up year-on-year. We had some nongranular inflows that explain that increase and then 2 particularly bulky items: Early retirements, EUR 152 million, these are pretax figures; and provisional write-down for our investment in Sareb of EUR 154 million. So these 2 are, obviously, deducting and more than offsetting what has been the contribution from BPI, where we have -- in that line of gains and losses, we have EUR 256 million of capital or as a result of the acquisition, let's say, the business combination result or the bad will in terms that were known to us. Remember that there's another EUR 97 million loss up in the income statement on income from investment and associates. And then what we have is EUR 35 million of positive results from the real estate sales that we've discussed before. So all in all, strong bottom line increase and again, a quality -- favorable quality, at least in our judgment, of the various components of the income statement.

When we look at the P&L by segment, you can see bancassurance at EUR 557 million, that is up 2.4% year-on-year. Again, it's obviously a positive, but then you could see there the impact of the reduction of trading income. Despite that reduction, we see that positive increase. We had negative contribution from investments. Remember that, again, we have there the 2% sale of BFA within investments. It's not within BPI. You will see in BPI, we have the EUR 50 million that is the contribution of BPI in February and March.

The one-off results from the acquisition is in CaixaBank. It's not in BPI. BPI is just showing what it has produced in these 2 months. And then the noncore real estate, where we have the Sareb provision and that's why that figure is relatively higher. Other than that, the trend is a positive one. The BPI contribution to us in the 2 months is on the right-hand side. I think it's quite self-explanatory. I would say, cost of risk, we expect to be around 0. We have made provisions on consolidation on day 0 for the loan losses up to maturity for the lending portfolios, so we would expect in the short term to have that cost of risk trending down to 0. In this quarter, there are some write-backs at BPI that we have reflected.

And then costs, obviously, even though we do not have the comparison here, the BPI results were made public yesterday. So you have all the details. Their costs are coming down once you exclude one-offs in BPI. We expect that trend to continue as we deliver on our cost savings program gradually during the year and then obviously more on to 2018.

A few comments, I'll remind you, in the quarter, we continued to see very strong contribution from nonbanking business to our bancassurance return on tangible equity. In this quarter, it is 9%. I would, again, highlight that you can see trading income is now very low in this quarter. That explains the comparison with the last year. And also, we have in the last 12 months, which is the way we estimate this return on tangible equity, in the last 12 months, we actually had 2 charges for early retirement, which is the reason why that return on tangible equity is slightly lower than it used to be just above 10%. But other than that, I think what highlights this slide, once again, is the pure banking business is contributing 30% of our profitability in the bancassurance segment and the rest is due to the diversification we have in financial services through our main branch channel. You can see how insurance payments, in particular, but also consumer finance and AM, and Asset Management are contributing significantly to bringing our profitability in line to our cost of -- in line with our cost of capital, even though rates continue to be at 0 or even negative.

With that, I hand the floor to our CFO, Javier Pano. Thank you.

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Javier Pano Riera, CaixaBank, S.A. - CFO and Head of Finance [3]

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Thank you. Thank you, Gonzalo. And good morning, you all. I continue making some comments on the different lines of the P&L account and the balance sheet, starting with net interest income, where we think that we have had a strong first quarter of the year with net interest income. Despite some seasonality that is always on the first quarter of the year, we have had strong performance. Net interest income, up by 0.7% compared to the fourth quarter of last year.

Next, on net interest income, BPI is having EUR 69 million for February and March. Thus, net interest income, while compared with the first quarter of last year, is up by 13.1%. It is still lower at both retail and wholesale funding costs, the main drivers for net interest income. Also, a stabilization on loan balances and ALCO volumes also helping. And as in recent quarters, it's also still the negative impact on lower Euribor index resets, which is a clear headwind and also lower ALCO yields. We have to remind that 12-month Euribor for this first quarter of the year is around 10 basis points lower than what it was during the first quarter of last year.

All in all, with this strong start for the year, we think that our net interest income guidance may have some upside risk. We continue analyzing some impacts on the asset side of our balance sheet. That said, loan balance is fairly stable. BPI adding close to EUR 22 billion to our loan balances. And from book yield at the CaixaBank level, fairly stable also in -- as in recent quarters, 311 basis points. We continue focusing on those segments that are more profitable. Also, segment-by-segment, I would say that we continue seeing a progressive stabilization of the competition on the different fronts. The back-book yield comes down by 2 basis points at CaixaBank level at 225, in this case affected by those lower Euribor resets that I mentioned before, and also on some internal rate swap fixings on hedges on fixed-rate mortgages. While integrating BPI, the back-book yield falls by 2 basis points to 223 as the back-book yield of the loan book of BPI is just -- yielding just below 2%.

On the ALCO book, what we have this quarter is stability. We have had some redemptions, some maturities. Also, we have added some new purchases swapped into floating. All in all, the sensitivity of the portfolio fairly stable at -- with a duration of 2.2 years. BPI adds a small ALCO portfolio, a parent -- I would say, a parent portfolio, mainly medium-term notes and corporate bonds.

And I would say that going forward, future development on this portfolio will be dependent on market conditions. But as you know, we're envisaging a slightly larger size for the portfolio. So looking ahead for opportunities to add.

We shift now to the liability side of the balance sheet, on our time deposits, where you can see that we are rolling them now at 0%. So, as a consequence, the back-book deal gradually falling now at 40 bps and trending towards close to 0 at year-end. BPI is adding cheap retail funding on time deposits and together with CaixaBank, the back-book deal now could be 15 basis points.

On wholesale funding, we see a slight increase. So far, the spread of our wholesale funding to 141 basis points from 135 in this case, also impacted by new issues, mainly the issuance of EUR 1 billion subordinated bond at a cost of 330 basis points. Going forward, I would say that the cost of our wholesale funding also would be driven by incoming MREL-related issuances. In coming quarters and years, you can see that also we have some expensive maturities.

Turning to spreads, both improved, our customer spread and our net interest margin. The customer spread goes up to 219 basis points, up by 5 basis points at CaixaBank level. In this case, the lower funding costs are more than offsetting the slight decrease of the back-book deal of our loan book. While integrating BPI, the customer spread falls only 2 basis points to 217. Net interest margin also up by 3 basis points to 130 basis points. Also, allowing BPI fairly stable as the balance sheet of BPI has a low percentage of noninterest-bearing assets.

And now we turn to fees, where we think that we have also had a strong first quarter of the year. And even comparing with the first quarter, the fourth quarter of last year is a quarter that always has positive seasonality. We see a slight improvement. But also the improvement is very clear, while comparing with the poor performance we had during the first quarter of 2016, with fees up by 11.6%.

BPI adding EUR 43 million on fees for February and March. And while looking to the breakdown on different segments, this quarter at CaixaBank level we have had a strong performance on banking fees mainly due to good results on corporate banking and capital markets. On mutual funds and pension plans, we have quarter-on-quarter a slight decrease. These decelerated mutual funds are mainly due to the fact that during the fourth quarter of last year, we had, I would say, an extraordinary positive impact from an upfront fee due to the distribution of third-party funds and on pension plans also impacted by positive impact during the fourth quarter as we collected the success fee on pension plans.

But going forward, as the inflows into both mutual and pension plans continued, EUR 2 billion during the quarter, we expect that the trend will resume upwards. While comparing the first quarter of this year with the poor performance we had on the first quarter of last year, we may see that the improvement is broad-based on banking fees, on insurance and also on assets under management.

As in other quarters, we disclose details of our insurance and pension businesses. And those businesses revenues, at CaixaBank level, EUR 304 million, BPI adding EUR 15 million more for a total increase compared to the first quarter of last year of 33.5%. Clearly, it's a quarter where the recovery of the value-in-force reinsurance contributes. As a consequence, the revenues coming from our risk insurance business, our life-risk insurance business go up to EUR 110 million. Also, those revenues are broad-based across the P&L line, on net interest income, on fees and commissions that, as you can see, are up by 20% year-on-year. And also, on income from associates, our JV with Mutuas or with [Caixas], that's up by 36%. And as mentioned, income from our life-risk insurance, that is up by 73%.

And clearly, those are revenues from a market-leading business that is helping to mitigate the effect of low rates and, thus, with growing contribution to total revenues of our bancassurance business. Now we're standing at 17% of those total revenues, up from 14% 1 year ago.

Now we turn to costs. On costs, always the first quarter of the year is impacted by some seasonality related to own property taxes. But well, compared to the first quarter of last year, costs are up by 1%, affected by also some wage inflation, but also some expenses related to IT investments. You know that during this first quarter of the year, we have had the upfront cost related of EUR 152 million related to an early retirement scheme affecting 350 employees. We're expecting EUR 39 million of annual cost savings coming from this early retirement scheme. While added to previous initiatives, the cumulative annual cost savings now stand at EUR 436 million, pretty close to our strategic plan target set at EUR 450 million.

As commented, you know that we have -- we're envisaging pretax annual cost synergies from BPI by 2019 of EUR 85 million. And for that, we're estimating restructuring costs, pretax, of EUR 250 million. EUR 10 million out of those EUR 250 million already have impacted the BPI accounts during this first quarter of the year.

All in all, we are pretty comfortable with our cost guidance -- for our operating cost guidance to be -- to grow below 1% for the year at the CaixaBank level.

With BPI clearly contributes to sustained improvement of our key operating metrics, our core revenue up by 18% compared to the first quarter of last year. And although, BPI also joins with expenses, the core operating income is clearly up, including BPI, our core operating income at EUR 790 million, up by 34% compared to 1 year ago. While comparing with the first quarter also, you can see that the improvement is broad-based on net interest income, on fees and on other insurance revenues. BPI adding EUR 34 million of core operating income.

On loan loss provisions, this quarter has been affected by some nongranular impairments, the impact of some well-known single large exposures. As a result, the cost of risk is slightly affected by those effects, 47 basis points on an annualized basis. Also, on a 12-month trailing basis, the cost of risk at 47 basis points. But well, we clearly think that the cost of risk will resume its downward trend, and we fully reiterate our guidance for the year for cost of risk to be below 40 basis points. It's important to remark again that after value adjustments on the credit exposure coming out from BPI, we expect that the cost of risk on those portfolios will be close to 0% in coming quarters.

Some comments on OREO. As guided, real estate capital gains are more than offsetting real estate impairments. You can see that the capital gains this quarter on OREO disposals have been 15% of the net book value. Also, real estate impairments keep trending down, only EUR 10 million for this first quarter of the year. This yields the first net gain from real estate since 2012 at EUR 25 million. You know that on this line of gains and losses on asset disposals, also is where this quarter we registered a positive impact of EUR 256 million from the BPI business consolidation.

Precisely on the following slide, let me detail more this impact of EUR 256 million. What we have done is some fair value adjustments after acquisition accounting, EUR 340 million net of taxes adjusting the credit exposure. We have adjusted for lifetime expected losses. This is why we expect the cost of risk to be close to 0 in coming quarters. We have made other fair value adjustments, EUR 82 million, mainly coming from financial assets and liabilities and other intangibles for another total fair value adjustment and net of taxes of EUR 258 million.

That adjusts the book value of BPI by the close of January and together with negative impact of EUR 186 million from the revaluation of the prior 45.5 stake to the bid price of the tender offer, that results on a net business combination, a positive impact of EUR 256 million.

We have to remember, as the CEO has commented, that on top of that, we have had -- or we have registered during the first quarter of the year that negative impact from the 2% sale of BFA that is the recycling through the P&L account of the other comprehensive income related to foreign exchange exposure of EUR 97 million. And also that, in coming quarters, we will gradually have the net -- the negative impact of the restructuring charges being on a net basis EUR 155 million.

A few words on the balance sheet. On NPLs, this quarter, the reduction has continued, although at a slower pace, due to a large exposure default and also to the fact that this quarter, there are no wholesale nonperforming loan disposals. Despite all those factors, the nonperforming loan ratio falls before BPI to 6.8% and BPI at EUR 1.5 billion of nonperforming loans. But with after fair value adjustments, with strong coverage ratio, 78%, adding EUR 1.2 billion of provisions -- to the stock of provisions and as a consequence of that, the overall coverage ratio improves from 47% to 49%.

Finally, some -- on that front, some words on our OREO portfolio, where inflows continued to steadily decline. This quarter, only EUR 200 million. On a net basis at the same time, although there is some seasonality always comparing with the fourth quarter of the year, we think that the pace of sales continues clearly and improving by 6.9% compared to the first quarter of last year.

With all that, we think that with a strong coverage ratio that is stable for the quarter at 59%, with a clear improvement of the real estate fundamentals and making profits on disposals and with this high coverage ratio, all that gradually supports our gradual reduction of our OREO portfolio that now stands at -- on a net basis, at EUR 6.3 billion.

Some final words on liquidity and solvency. On liquidity, BPI joins the group with strong liquidity position, EUR 4 billion of high-quality liquid assets and EUR 4 billion more of other assets eligible as ECB collateral. The total amount of liquidity at group level is standing at EUR 55 billion, with liquidity coverage ratio at 158%, extremely comfortable; with total ECB funding, TLTRO funding standing close to EUR 29 billion as BPI joins with EUR 2 billion more.

And as you can see also, with balanced funding position at BPI with a loan-to-deposit ratio slightly below 108% and for consolidated ratio standing just below 113%. You can see also that the funding structure of BPI is also pretty balanced with a small percentage of wholesale funding and ECB funding. And pretty balanced, as I say, on retail funding between time deposits and site accounts.

And finally, on solvency, we closed the year with CET1 ratio at 12.4% before BPI impacts. Final impacts have been 108 basis points. Thus, on a pro forma basis by December 16, our CET1 ratio would have been 11.3%. During the quarter, we had generated 8 basis points of capital organically, but remember that, this quarter impacted by one-offs; we have the impact of the early retirement scheme; also the impairment on Sareb. Otherwise, the running capital generation would have been more in the range between 12 and 15 basis points, which we think may be our run rate of capital generation. Also, a positive impact on value adjustments coming from mainly our stake on Telefónica with a strong performance in the stock market this quarter, adding 12 basis points for a final CET1 ratio closing the first quarter at 11.5%, well within our long-term target between 11% and 12%.

Just let me close adding that during the quarter, we successfully issued with EUR 1 billion subordinated note, adding to our total capital ratios now standing at 15.1% on a fully loaded basis.

And with that, I'll give the floor back to the CEO before taking questions. Thank you very much.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [4]

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Thank you, Javier. I finish with the highlights. Again, great trends in terms of quality, growth and revenues and core operating income; spreads are in the right direction. The net capital gains from the real estate sales net of provisions, as expected, is taking place. We maintained solid balance sheet, and we are now owners of controlling stake in BPI and working actively in making that acquisition working out for shareholders. So a quarter of increased profitability, but a quarter of a higher-quality earnings, which is as important as the bottom line. Thank you very much.

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Edward Michel O’Loghlen, Fundacion Bancaria Caixa d'Estalvis i Pensions de Barcelona - Division Head of IR [5]

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Okay. Thank you, Gonzalo. Thank you, Javier. It's now time to proceed to Q&A. So operator, if we can, please proceed with the first question including the name and the company of the caller.

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Questions and Answers

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Operator [1]

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The first 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 [2]

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I have a few questions. The first one on BPI. I think -- I would appreciate if you could elaborate a bit more on the 0% cost of risk at BPI level in regard to timing. So we expect this to happen already in Q2? And should we expect actually a more normalized level? And second question is on IFRS 9. Some of your competitors have already been guiding the market, and was wondering whether you could do the same, maybe impact -- are [pruning] back on capital and also what the future impact on future cost of risk volatility per cyclicality, so on and so forth. And the third question is in the order income and losses line. You've reported EUR 30 million gains gross, EUR 25 million net. This is better than what you guided the market -- what probably the market was expecting. So given the strength of the real estate cycle in Spain, should we expect a growing figure in this line going forward?

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

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Thank you, Jose, for your question. Javier, maybe you'll help me out on this, on 2 of them. With respect to the cost of risk of BPI, I think Javier has been relatively clear. We have 2 things happening on the same time. One is BPI actually this quarter has booked write-backs. BPI has, under Portuguese standards, a 3.8% NPL ratio. We have then added provisions on consolidation, on our fair value adjustment, providing for lifetime losses. The total number gross of taxes is actually EUR 468 million. So we do have now, because of acquisition accounting, a very significant cash in here to absorb potential increases in BPI's cost of risk. Today, it's actually been negative, which is obviously something that is not sustainable. But it also talks about the high quality that BPI has had in its own portfolio. And if you look at a 10-, 15-year history of BPI in terms of loan losses before this crisis, cost of risk was indeed very low for BPI, 20, 25, sometimes 15 basis points in the past. We do have -- again, because of acquisition accounting, there are substantial provision at CaixaBank level. So the cost of risk is going to be close to 0 for a very long period. We will obviously need to provide for new production at BPI when this is not healthy; or under IFRS 9, basically, a small percentage for everything. But because we do have at consolidated level these provisions, we expect to have, for a pretty long time, a 0 cost of risk impact. These are round numbers at BPI. I'd say one comment before I hand over to Javier on IFRS 9. You mentioned the real estate sales. We have had a good quarter, certainly, in terms of P&L from real estate, EUR 35 million of profits, EUR 10 million of provisions. Our guidance was that -- we expect profits to exceed provisions or to at least offset provisions. And obviously, in any given quarter, the math may not work exactly that way. Overall, we are comfortable with that guidance. I think it's too early to be more positive or more optimistic on that front. There are reasons to be that way, but we always want to be prudent. We have a new system of accounting for all these new models. And we need a bit more time before we can be, I think, more robust and say this difference between gains and provisions is going to continue. Now for the time being, we'd like to keep our guidance. These lines are not going to detract from the P&L. It's at least going to be neutral. We start with a significant contribution. We will work towards keeping that. But you also should bear in mind that we still have a long stock here -- not a long stock, a large stock. And there will be potentially opportunities to sell large stock over the quarters with maybe a less attractive P&L impact but a more attractive sort of reduction for the balance sheet and going forward for the operating expenses associated with it. So let's be cautious there. It's a very good first quarter, in my view. Some of the very positive news may not be necessarily as good during the year as they look today. Maybe, Javier, you can comment on...

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Javier Pano Riera, CaixaBank, S.A. - CFO and Head of Finance [4]

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Yes. Jose, on IFRS 9, we will update you -- fully update you next quarter. Just let me -- well, 2 things first. Remember that during the first quarter -- the last quarter of last year, we somehow fully know that partially the impact on IFRS 9 due to -- remember that we had an impact on our CET1 ratios between 20, 25 basis points due to deficit of provisions on the advanced models that were impacting our CET1 ratios. And all in all, we think that considering everything, our IFRS 9 impact will be not significant. So -- but we will fully disclose all that during the second quarter.

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Operator [5]

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Your next question comes from the line of Alvaro Serrano of Morgan Stanley.

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Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [6]

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First one is on -- I've got 2 questions. First one on NII. You said that there's upside to the guidance you gave earlier this year. If we think about the next few quarters, what headwinds do we have left? Should we expect more headwinds from the ALCO portfolio? Is there more spreads volume? I mean, just what do you think should we bear in mind in terms of headwinds? Was there any effect? And also, what surprised you in Q1? Because, obviously, your guidance was more conservative -- better-than-expected in Q1. And second on provisions, obviously, BPI had the write-back, which you've already discussed. But I was interested to see what likelihood of very low provisions could be at CaixaBank. Obviously, this quarter, you had a single name. Can you quantify how much that impacted the provision and what would be, kind of an underlying provision charge there? And could we see the similar positive provision that we're seeing at BPI at some point in CaixaBank?

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

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Thank you, Alvaro. Well, I think, Javier, you can focus on -- certainly on the first question, the detail on NII. On provisions, I'd like to say, Javier also mentioned that we reconfirm our minus 40 basis points target for CaixaBank, and that is for CaixaBank in Spain, obviously. Then we have BPI, which, as discussed, it's going to be around 0. There is a potential for better than that. There is a potential for worse than that. We think that our guidance is prudent, is reasonable. We still have a 6.8% NPL ratio in Spain. All the trends are in the right direction. The macro trends are pretty good. We do expect to meet this target and reconfirm that minus 40 basis points. But I would not like at this stage to think that we are going to move towards substantially lower levels. We continue to grow our business. We're growing. We're doing more SME business. We're doing more consumer lending business with very prudent criteria. But obviously, I think the potential for being even lower than that, although exist, is one that we want to not include in our guidance at this stage. But I have to be realistic, it is not necessarily accurate, any guidance we give. And in cost of risk, there's more, I think, volatility. At this stage, it seems that we have a more positive environment than any time in the past, but we need to be prudent on that front. So we would stick to this guidance, and we think we will be around those levels for 2017.

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Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [8]

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Sorry. Could you just clarify how much the coverage on Sareb is (inaudible)?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [9]

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Sure. We have covered now 2/3 of our initial investment in Sareb. We invested EUR 593 million in Sareb, where current book value after this impairment is EUR 200 million.

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Javier Pano Riera, CaixaBank, S.A. - CFO and Head of Finance [10]

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Alvaro, on net interest income, it's true that we have had the strongest start for the year. You asked me about question marks for potential headwinds. Well, the first one for me is market rates. And you know that while making our projections in the year, we were considering, and according to market estimates back then, that 12-month arrival would be almost 0% by the end of the year. But -- well, today, we are already almost in May, and 12-month arrival is at minus 12 basis points. So well, this is a potential headwind going forward. That's not looks like ECB will be aggressive on short-term raising rates or giving guidance to raise rates. So this is clearly having an impact into short-term rates. So this is the first one. The second one is the pace of loan growth will come from 2 quarters with strong -- fast pace, I would say, mainly on corporate and SMEs. Well, we are happy with that. We are recovering market share on both fronts, on SMEs and corporates, but difficult to assess if this pace can be sustained for the whole year. So remember that last quarter, while being asked about our forecast on loan volumes, we said, well, we think that maybe a flattish year as we will always focus more on margins than on volumes. And this is our approach to the pricing. And I would say that -- although on an annualized basis, I would say that it may look like we will exceed our targets, we think that there is upside, but we still remain somehow cautious ahead of those 2 main factors.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [11]

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And Alvaro, just to make it clear, I think I said -- reconfirming our minus 40 basis points, I would refer to less than 40 basis points for CaixaBank. He's very kind to remind me that obviously minus 40 basis points is where we would be. I know you know about yesterday, make sure everyone in the audience is clear about that.

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Operator [12]

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

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [13]

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It's Sofie Peterzens from JPMorgan. I was just wanting to ask on the other real estate loss space there, the fourth quarter numbers you guided for no additional other loss space. For CaixaBank, you had EUR 369 million in this line in the first quarter, clearly Sareb and early retirement costs are included. But could you just explain what the remaining around EUR 60 million is for? And also, when we look at your foreclosed assets, you mentioned that you are selling them at a 15% gain. However, foreclosed assets net numbers are not really moving down. They're flat -- almost flat quarter-on-quarter. Why are you not selling or reducing your foreclosed assets more? And then my second question is around one-offs going forward. Is it just the BPI one-off around EUR 150 million, we should expect going forward? Or will you still have more additional early retirement cost or other one-offs? And lastly, could you remind us of your rate sensitivity?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [14]

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Thank you, Sofie. I hope we'll be able to answer all the questions. But if we'll not be able, remind us at the end. And you had a first question with respect to the breakdown of other gains and losses. And the difference is -- I'm sorry, I think -- Sofie. Apparently, my mic was not on. I am starting again. Hopefully, you'll hear me now. I said, we'll try and answer all the questions. If not, just remind us at the end because there's a few relevant points that you have asked for. With respect to other gains and losses, we do have another within that, where you would also include potentially other contingencies, including legal contingencies, et cetera. So to be clear, our guidance has been that -- associated to the sale of real estate. We expect that we will not have a negative result, so that our sales and gains will offset or exceed as it has been in this quarter, provisions that we need to be making for that stock of real estate. So from that point of view, this quarter has been very positive in line with the guidance we gave. But we will have in others -- basically, as always, there's another including contingencies in general, some of them related to some of the legal aspects that are currently being in question in Spain. With respect to the second question was the gain on foreclosed assets, the 15% gain. Obviously, we do have a very large stock here. We will see how it evolves. In this quarter, there's been basically granular sales mostly. At some point, we may be tempted to do something slightly larger, meaning that maybe we do more but with a less positive impact on profitability. BPI, the one-off, are there more additional one-offs? Well, the problem with one-offs is by definition they appear. We have lower ability to forecast those. We clearly have one in front of us, which is that we will be incurring in costs associated to the restructure of BPI. Over time, we have from time to time looked at ways to reduce our recurrent costs. And this is -- as I've said many times, this is something that needs to be evaluated constantly. And therefore, I will not rule out that, at some point, you will see further one-offs associated to us, investing in -- being more efficient, finding ways to reduce our cost base. But at this stage, it's very difficult for me to say if there would be and of what size any investment in making us more efficient, normally associated to reduction of headcount. We have been quite active in the past. This year, we have managed to reach an agreement with 350 employees that are leaving. We're only in April. So if there's the ability for us to do more around these lands of restructuring, being more efficient going forward, even if it is this same year, we'll certainly consider it. And I think it will always take place if it is value creative. But I think on that front, conceptually, there will be one-offs from time to time. We may call it one-off. Exactly when and what is very difficult. And then we -- Why not? There will be, why not? Also positive one-offs from time to time. There's also a question on rates. And probably, I forgot. Anything you want to add to what I said, Javier, please go ahead.

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Javier Pano Riera, CaixaBank, S.A. - CFO and Head of Finance [15]

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No. Perhaps just adding some more color on BPI. You know that we are not only working on -- from, I would say, landing different cost reduction initiatives, but also some -- also, we are working on revenue synergies. On the [full], we showed you on the BPI contribution for those 2 months. I would say that while looking, for example, to the combined result of -- for net interest income and fees, we think that this should be considered a good guidance as a run rate for coming quarter, for the future for this year. Although, as -- revenue synergies also will readily kick in. On cost, it's clear. We have set a target for restructuring costs, pretax EUR 250 million. That will gradually phase in. That will depend on the base of the different initiatives that also will be decided after we close in coming days, in fact, next week, our 100-day plan. And we would clearly update you next quarter on more detail on the cost base. And on cost of risk, I think that the comments have already been pretty clear. I don't remember the last question on rates. In fact -- ah, the sensitivity, okay. No changes to what we guided. Remember that what we said is that if rates were to raise by 100 basis points in one shot, something that will not happen, fortunately, because it would have, I would say, unintended consequences. Our net interest income could improve by the second year because you have to reprice all assets and liabilities, and the full effect is not felt until the second year. We'll grow -- net interest income will grow between around 14% and 20%, 14% to 15% and 20%. That will depend also on the behavior of site deposits, to what extent those time deposits -- those site deposits migrate again into time deposit. This is why we give for rent, and the figures are the same as overall the sensitivity of the balance sheet is the same during the quarter.

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Operator [16]

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(Operator Instructions) Your next question comes from the line of Marta Sánchez Romero of BIML.

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Marta Luisa Sánchez Romero, BofA Merrill Lynch, Research Division - Director and Analyst [17]

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My first question is on Angola. How much has been the contribution first quarter? Sorry, if I missed it in your report. And second one is on real estate, and here I've got 2 questions. We've seen the pre-provision losses going up by 15% year-on-year. How do you see the cost of keeping your real estate portfolio progressing going forward? And related to this, how do you tally your strategy of holding on to your assets and pursuing only modest sales with strategies that we see in other banks with similar exposure and similar coverage that you have, which one would you want to be out of the real estate at a faster pace and not only with your competitors but also with the ECB guidelines, which seems to be quite explicit about banks holding on to their foreclosed assets?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [18]

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Thank you, Marta. On Angola, we had obviously 2 impacts. One is EUR 97 million of the sale of -- the 2% of BFA, which is negative and one-off. And then we had EUR 44 million from the equity income line of BPI in -- it was EUR 37 million in February, March and EUR 7 million in January. Although this equity line includes a couple of other investments from BPI that are not related to Angola, most of it comes from Angola. So that gives you the number of up to EUR 44 million in the first 3 months of the year. If you exclude these other investments, the number is for the last 2 months of the quarter that EUR 37 million is EUR 34 million plus EUR 7 million in January. It will be EUR 41 million in 3 months. Javier, correct me if that's not right. On the rest of the questions, I think, there was one around the strategy on real estate. We obviously would like to own no real estate in -- as a concept. We are at the same time very conscious that we do have that EUR 6.2 billion of available for sale real estate, plus only EUR 3 billion of real estate in rentals. We want to reduce it, but we want to reduce it in a manner that is shareholder friendly given the overall trends of nonperforming assets. Given our levels of provisions, our track record, we will be -- and that is our expectation, it will be up to us as a management team and up to our shareholders to decide how fast we want to reduce those. Obviously, the answer is very fast, fast or moderately fast. But in any case, we're not going to hold on to these assets. We've been selling EUR 1.3 billion, EUR 1.4 billion a year. And as the market continues to help, we will be looking to exceed that. But there will always be a trade-off between speed and price. It's not a matter of reducing price. In some locations, you may sell a building at 100. But if you bring the price down to 80, you may just sell 1 building because the capacity of central locations is what it is. This is -- real estate cannot be moved around. We need to adopt to the market, and the process will take time. What is important is that we are active sellers. We have been active sellers for 7 years, at least we continue to be. And I think regulators know that we are serious about it. And therefore, it's up to us. And it should be that way to fix finally the speed. But clearly, there's a trade-off. We are willing in some occasions and we would be willing in some occasions to leave something on the table in exchange for selling more quickly. And for that reason, we will again continue to explore opportunities to accelerate these sales. And that is consistent with what I was saying. We had good results in real estate this quarter, but we want to be prudent with respect to sort of extrapolating that trend going forward.

Javier, what else?

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Javier Pano Riera, CaixaBank, S.A. - CFO and Head of Finance [19]

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Just to mention also that on Angola. The figures mentioned by the CEO are the contribution of Angola into the P&L line of our income from investments. But while considering minority interest and also taxes paid on -- at BPI level on this income, the net contribution to net income of CaixaBank at the group level is EUR 32 million for the quarter, just to clarify this.

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Marta Luisa Sánchez Romero, BofA Merrill Lynch, Research Division - Director and Analyst [20]

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And on the cost for your run-off portfolio, the trends there?

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Edward Michel O’Loghlen, Fundacion Bancaria Caixa d'Estalvis i Pensions de Barcelona - Division Head of IR [21]

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Should I take that? Marta, there's a -- yes, you're talking about the operating cost for Q1. Q1 is seasonal because you have the EVs, the property tax there. Obviously, the stock in Q1 '17 is higher than '16. And therefore, we have around EUR 10 million more of EVs associated there. Then as you could see also from the information we produced given that the gross stock is higher, you also have a higher funding cost. Now that is at the operating level. The important thing, I think, this quarter is when you look beyond that and take away the side of exceptional, what you see is a much better trend in terms of the provisions now being offset by the real estate profits. And as a result of that, if you strip out Sareb, the pretax of that division is now minus EUR 100 million versus EUR 200 million versus last quarter 2016, I'm referring to. But we can take that offline as well if you want to go into further detail.

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Operator [22]

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

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Mario Ropero, [23]

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Two questions. The first one is you mentioned volatility in the fee income line due to the corporate and investment banking business. It sounds like maybe there were nonrecurring income there. If you could clarify these and maybe quantify the size of this that were probably not fully recurrent. And then on the 15% gains on the real estate, these gains are going up. Is this an actual trend that you are seeing? Or was it highly impacted by the mix of assets that you sold in the quarter?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [24]

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If I may, on the first question. This is just one quarter. We have been selling -- we have been seeing double-digit gains also in the last quarter of last year. That is what our expectation is. Whether it's 15% or a bit less, we will have to see. But that figure is not impacted by one given transaction in a quarter as a result of multiplicity of transactions. But it is only one quarter. Again, let's not extrapolate too much. It's a good quarter, but it's only one quarter. And we have a lot to sell. And hence, this figure may be lower in the future. We will work for it not to be lower, but it may well be because we want to split the first question. I think, Javier you want to answer that one.

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Javier Pano Riera, CaixaBank, S.A. - CFO and Head of Finance [25]

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Mario, well, you know that the first quarter of the year usually is a strong quarter on corporate banking fees, many transactions, et cetera. Always with the year starting, there is more activity. I would say that compared to last year where, clearly, we had good performance in this segment due to market conditions. But even comparing with the fourth quarter of last year, our fee revenues on wholesale banking and capital markets are up. I would say that a couple of years ago, we took the decision to improve our capabilities on this area, where we were clearly aligned compared to BBVA and Santander on that front. And now we are starting to have some results on that. But you know that on this front, there is always some volatility attached to that. Looking to the figures and compared to the -- for example, to the fourth quarter of last year on those lines on corporate banking fees and capital market fees, we are up by EUR 40 million. So well, this is the figure. But when you put that in numbers quarter-on-quarter and percentage, that may look like something more important. And I would like also to add on real estate disposals. Yes, we are selling across the board, as we always do. We have the portfolio split into 3 main buckets, A, B, C, from -- depending on the geographical area and also on the quality of the asset. And it's a portfolio that is split almost by 1/3 in those 3 main buckets -- the stock is split by 1/3. And I would say that on the disposal, always with some minor, I would say, differences. But overall, the approach is to sell on -- off the same percentage of the 3 buckets. And we are following this path. And so the result of the quarter is not distorted by any different mix during the first quarter of the year.

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Operator [26]

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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 [27]

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It's Stefan from Citi. Two quick questions here. Number one, what is CaixaBank's attitude towards owning BFA for the long term? And number two, when we look at the pretty good performance that you are showing in terms of market share in corporate and SME lending, that's been quite a nice improvement over the past few years. Can you just share with us in terms of the new production that you're putting on your books in corporate and SME lending, what is the split between working capital and CapEx? And how would you describe the yields on the new production versus the stock from 1 or 2 years ago?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [28]

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Thank you, Stefan. On the first question, BFA, we have nonbinding recommendation from the ECB to reduce our stake in BFA. It's a recommendation that has no deadline, has no target to what level we should reduce it. And again, it's nonbinding. We agree with the ECB that for us to own 48% in BFA not having control is a level in which we shouldn't be in the long term. And hence, we will be working towards that objective. It will take some time. It's a great asset, but it has its own specificities. And hence, in the long term, our expectation is that we will own less than 48%. What size and what speed is difficult to forecast at this stage.

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Javier Pano Riera, CaixaBank, S.A. - CFO and Head of Finance [29]

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On the -- on our activities on SME and corporate banking lending, I would say that on SMEs, just 0.5 year ago, I would say that new production was strongly focused on working capital lending, I would say, for working capital purposes. Now we start to see the first signs of SMEs starting to ask for more front-end funding. So we think that this is a positive sign. No doubt that with the economy doing well, with GDP growth over -- growing over 3% 2 years in a row and with, I would say, good expectation for -- also for this year, it looks like SMEs are starting to think about something, I would say, more structural. So yes, that's a positive development. Also, you know that as mentioned before, we have been investing on the corporate banking area recently. And we are starting to see the fruits of that. And you asked about some figures. I would say that both the back-book and the front-book deals are fairly stable recently. For example, on SMEs, we have a back-book deal now, I would say, around 2% and pretty stable since many quarters ago. And on corporate banking, slightly higher. In this case, more influenced by -- from time to time some larger transactions, a back-book deal closer to 200.2 -- sorry, 220 basis points. And front-book deals obviously on corporate banking, more volatile, depending on the size of different transactions, but I would say around or slightly higher than 2%. On SMEs, I would say that also around 2%. So I would say that it's a pretty stable picture since at least 3, 4 quarters in a row.

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Operator [30]

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

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Britta Schmidt, Autonomous Research LLP - Partner, Spanish and German Banks [31]

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I've got 2 questions, please. The first one would be on the NPL recognition for BPI. BPI itself reports credit at risk under Portuguese regulations of around EUR 890 million, report on EUR 1.5 billion of NPLs. Can I assume that this is under the CaixaBank definition? And how does that impact the offset of PPA? Because obviously, you might have provisions against the larger classification of nonperforming loan? And the second one would be just an update on litigation risk. Are you still comfortable with your provision for the mortgage floor cases? Is the provisioning in line with the claims expense that you're seeing? And can you update us on any sort of risk regarding the issue of underwriting cost for mortgages (inaudible)?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [32]

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Sure. Thank you, Britta. In terms of the NPLs, you're right. The definition in Portugal is different than the definition -- well, there are a number of definitions in Portugal. But the one that is most used is credit at risk. BPI has published 3.8%. When we look at NPLs under Bank of Spain rules, and therefore, unconsolidation for BPI, BPI has an NPL ratio of 6.1%, okay? So the 3.8% of credit at risk under the BPI Portuguese definition is 6.1% NPLs under CaixaBank definition. And yes, we are providing for the whole book of BPI on our basis. So we're providing, in fact, for that 6.1% ratio and for the overall risks in the loan book, even for those that are not necessarily nonperforming. That's why we have made that additional provision on a gross basis, so EUR 468 million associated with credit portfolio of BPI that it is now in CaixaBank books. With respect to the update in litigation floors, we're still at the beginning of the process of returning and -- or not returning that money to clients. But at this stage, we feel comfortable with the provision that we made at the end of the year. And we're not expecting to increase that provision. I think generally, obviously, there is an environment in Spain of certain challenges, of certain aspects of mortgages, set of fees and other contingencies. We feel that we are well provided for the current situation. But obviously, this is one area to be watching with closely in terms of future developments. Again, my personal concern as CEO is not so much the financial impact of it with the information that I have, but the fact that it is creating an environment that is not positive for banks, in general, for the reputation or for the normality that needs to be associated with the business. We're actively working with clients to make sure they understand when they have a potential question, whether they have the right or not to certain things. But obviously, this is not a positive environment for the business. But from a financial point of view, our position is that we are well covered, we're being prudent as always and we do not think that at this stage we have something not quite provided for.

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Operator [33]

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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 [34]

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Can you update us on your TLTRO II upstake? How much is the Q1 contribution and what will be in coming quarters? And are you seeing any flight to quality of the positive flows from weaker competitors? Secondly, you are already meeting your capital targets post-BPI. Can you give us your priorities of usage of new capital between accelerating growth, growing capital payout -- cash payout, accelerating real estate disposals and making acquisition?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [35]

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Thank you. With respect to deposits, we have not seen deposit flight from weaker competitors. We're gaining customer funds from weaker, stronger and mid-shape competitors. Because we are, I think, offering the right kind of products and services and particularly the right approach to the business now. But I will say that this is particularly coming at the cost of one institution or another. With respect to capital priorities, obviously, we want to increase the profitability of the bank. Our target for next year is to, about 9% to 11%, meet that cost of capital. Hopefully, after next year, there will be more increases in profitability to seek any investment that we think we can make and that it is above our cost of capital. When we have a reasonable degree of probability that it will be that way, we make -- obviously, the profits that we are making even if we make investments in developing our business organically, we are generating significant capital excess. That's what we have said: one, that our cash payout policy would be 50% or more; and second, that we exceed our capital levels, we will analyze how to return that excess capital to our shareholders. So acquisitions, it's just not in the picture. Acquisitions is not something we're looking for. Acquisitions usually tend to appear if at some point someone needs or wants to sell. And then our duty is to look at whether those acquisitions make sense. We're going to be reactive, not proactive. And certainly, we'll only consider acquisitions if they clearly meet our cost of capital requirements, otherwise we'd rather continue to develop our own business, generate capital, paying through dividends or through other extraordinary measures to our shareholders. On TLTRO, Javier?

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Javier Pano Riera, CaixaBank, S.A. - CFO and Head of Finance [36]

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Andrea, an easy question. We are accruing the benefit of the minus 40 bps on TLTRO II since last June. We closed the year at this level with facility outstanding of EUR 27 million, thus the impact for the quarter is around EUR 28 million. So quite easy.

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Edward Michel O’Loghlen, Fundacion Bancaria Caixa d'Estalvis i Pensions de Barcelona - Division Head of IR [37]

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Thank you, everyone. I know we have to take some calls after this, catch up with you on the next quarterly presentation. Thank you.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO and Executive Director [38]

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Thank you very much.

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Javier Pano Riera, CaixaBank, S.A. - CFO and Head of Finance [39]

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Thank you.