Banco Bilbao Vizcaya Argentaria, S.A.
Q2 2014 Earnings Call Transcript

Published: 30 Jul 2014

[Luisa Gomez Bravo:]

Good morning, everyone, and welcome to the second quarter result presentation of BBVA for 2014. I am Luisa Gomez Bravo, Head of Investor Relations for the group. And joining us today on the call will be Ángel Cano, President and COO of the group; and Jaime Sáenz de Tejada, BBVA's CFO. As usual, we're running on a tight schedule, and we do need to end the call by 11 a.m., therefore, I apologize if we're not able to answer all the questions that are coming in. We will definitely try our best. But if not, you can count on the IR team to resolve any of those questions or any new ones after the call. So without any further ado, Ángel, please?

[Ángel Cano Fernández:]

Thank you, Luisa. Good morning, everyone, and thank you for joining us on our audio webcast of results for the second quarter of 2014. As you will see during the presentation, the second quarter has confirmed the main trends that were mentioned during the presentation of the previous quarter's results, namely, a good performance of recurring revenue, at interest income plus fee income, which has increased year-on-year by 11.6%, excluding the FX effect; second, costs are under control; third, a decline in loan loss provisions; and finally, no significant FX effect -- impacts of FX in the second quarter, although first quarter negative impacts still rock [ph] year-on-year results. These factors have once again led to strong growth, excluding corporate operations, although unrelated to this quarter figures, I would like to comment briefly on the Catalunya Banc transaction announced last week by Jaime and Luisa. I am delighted with the outcome of the process, and I would like to thank all the teams involved for their efforts. BBVA is allocating capital to this geography because we have capabilities to generate returns. At the moment, when the Spanish economic cycle is changing, we are acquiring a health institution, boosting market shares in both Spain and Catalonia, where BBVA will be the largest and second largest in the market, respectively. And most importantly, it adds 1.5 million customers to the group. The terms and conditions of the deal allow us to generate stakeholders value with attractive returns and as well with manageable capital impacts, and risk is limited. The transaction contains adequate guarantees, conservative assumptions of expected loss from the credit portfolio and low execution risk. Moving on to the presentation. Let me start, as we usually do, summing up the highlights of the quarter in terms of earnings, risks, solvency and liquidity. From the point of view of earnings, as we said before, the trends of the previous quarter remain unchanged, delivering strong growth in net income, excluding corporate operations. So this is the main feature of earnings. The second, moving on to risk management. We have again here good news. The figures show us strong improvements in risk indicators. Net entries to NPAs have declined by 76%, and cost of risk has decreased by 17 basis points year-on-year. In terms of solvency, BBVA continued to manage its capital actively. The group ends the quarter with a phased-in Basel III core capital of 11.6% and a fully loaded ratio of 10.0%. These are strong levels far above the minimum requires -- required. Lastly, in terms of liquidity, we maintain an adequate financing structure. Furthermore, as of June, BBVA compliance with LCR regulatory requirements is more than 100%. And now let me move on to a more detailed analysis of the group's P&L accounts. Revenue evolution was explained this quarter by specific factors, such as the lower net trading income, higher dividends and the impact of hyperinflation in Venezuela. That is why we are talking about the overall performance of revenue in terms of gross income, highlighting their recurrence and resilience. As you can see in this slide, gross income in current terms decreases 2.8% year-on-year. As I already mentioned, the main FX impact occurred in this -- in the first quarter. So in the quarter-on-quarter figures, we see a 5.3% growth in current euros. In the second quarter of this year, we received dividends from Telefónica and from CNCB. These offset the lower contribution from net trading income in the quarter after having taking advantage of market opportunities in the first quarter of the year. There was also a remarkable adjustment for Venezuelan hyperinflation in the second quarter of 2014. As you can see in the next slide, the growth of operating expenses continued to slow down in year-on-year terms. In current euros, minus -- or 5.4% decrease. And over the last 5 quarters, it has been steadily decreasing and is lower than the growth of gross income. As a result of the above revenues and expenses, you can see in the next slide the group's operating income growing at 11.2% at constant euros. This allows BBVA to maintain its leadership in terms of profitability. Impairment losses on financial assets have fallen significantly compared to the average quarterly level in 2013, consolidating the first quarter's trend. The main reasons behind this decline are the lower level of NPA entries and an increase in the volume of recoveries basically in Spain. As a result, the group's cost of risk in the quarter was 1.2%, as you can see in this slide. And as a result of the above, the first half attributable profit came to EUR 1.3 billion, down to 54% (sic) [down 54%]. Net income, excluding corporate operations, has increased 11.7% in current euros. To sum up, the main components of the group's income statement were as follows

[Luisa Gomez Bravo:]

So Ángel, we will move on now to the Q&A session of the call. If you like, we'll start with the broader themes, and then we'll move on to the geographies. In terms of broader themes, moving -- starting with regulation. Arturo de Frias from Santander is asking if we can talk about our recent views of how the AQR is evolving, especially regarding real estate valuation, and if it has been more demanding than the Oliver Wyman exercise that we did in the past.

[Jaime Sáenz de Tejada:]

I think as you are all already aware, the AQR phase has already been done with. KPMG, our auditor, has finished its work and has sent Dane [ph] for -- over to Frankfurt. As you also know, we do not know yet, and we will not know until November, the final results. Our expectations are that no significant impact will take place regarding the AQR.

[Luisa Gomez Bravo:]

Thank you. Regarding liquidity in ALCO, Mario Ropero from Fidentiis asks about the ALCO portfolio size, average duration, average yield, Spanish sovereign bonds. How has it evolved in the quarter?

[Jaime Sáenz de Tejada:]

The total size of the ALCO portfolio is EUR 35.7 billion. It has increased only EUR 1 billion from the first quarter. The total sovereign exposure is EUR 33 billion, which has increased over this -- over the first quarter by also another EUR 1 billion. Average duration is 2.75, and so the deal is around 3%.

[Luisa Gomez Bravo:]

Thank you. A couple of questions on strategy regarding consolidation in Spain. Juan-Carlos Calvo from Espirito Santo and Andrea Filtri from Mediobanca are asking us is after the acquisition of Catalunya Banc, if we are interested in participating in the potential sale of Barclays in Spain and if we are satisfied with our present market share or if we are looking to do any other corporate movement.

[Ángel Cano Fernández:]

Well, first of all, we are very satisfied with the Catalunya Banc acquisition. It gives us a differential share in this region. One of the ways of -- one of the regions with the highest potential growth in this country. So we are reaching 24, on average, percent of market share in the region. And we are going to be the first largest in terms of market share in Spain as well. So from this competitive point of view, we are really satisfied with the acquisition. We are buying, as Jaime and Luisa announced last week, a health institution, where the -- over the last couple of years, they were working very hard on fixing and cleaning up most of the bad assets and bad business they had in the balance sheet. So for us this, as I said before, is a really good acquisition. So in terms of Barclays, as you know, we are analyzing -- as every opportunity in all of the markets where we have presence, we're analyzing depth. And as always, right now, we are not ready to talk about any corporate operation. Maybe just talking a little bit about the restructuring process in Spain, our opinion is we are at the very end of this process, so maybe we -- the country has completed 95%, 98% of the total restructuring process. And just now we have in front of us just the normal competitive landscape in terms of the normal business.

[Luisa Gomez Bravo:]

Thank you. Moving on to capital, a few questions there. Luis Peña from Jotabe (sic) [JB Capital] is asking whether our core -- our core capital phased-in is increasing by EUR 278 million in the second quarter quarter-over-quarter. Can we explain why the generation of core capital is below the EUR 700 million of net income generation in second quarter 2014? Should I just -- I'll ask all the questions, and then you can answer them.

[Jaime Sáenz de Tejada:]

Whatever you prefer.

[Luisa Gomez Bravo:]

Yes, because some of them are related. Andrea Filtri from Mediobanca -- so that's the first question from Luis Peña. Andrea Filtri from Mediobanca is asking whether we are planning any specific actions to prop core capital fully loaded ratio up post our CaixaBank acquisition. And Raoul Leonard from Deutsche Bank asks why the Basel III phased-in has risen significantly in the quarter. RWA movement was limited, so what else is happening? And in this regard, also, Britta Schmidt from Autonomous is asking about the restatement of RWAs versus the Basel III reported figures in the first quarter. And also, what was the FX impact on the capital? So 4 or 5 questions there.

[Jaime Sáenz de Tejada:]

Okay. I'll try to answer them in order. If I forget any, please remind me at the end. First of all, regarding the evolution of core capital in the quarter, it has on a phased-in basis, it has increased by 4 basis points. It is true that results have generated 21 basis, but we've paid an all cash dividend this second quarter. The drain is 13 basis points. The FX impact has generated 6 basis points in core capital but mainly by the prudent valuation adjustment has drained an additional 10. So on a phased-in basis, only 4 basis points have been generated. On a fully loaded basis, the impact on -- the prudent valuation impact is offset by the capital gains in the available-for-sale portfolio. So on a fully loaded basis, we've generated 11 basis points during the quarter. Second question regarding any capital plans regarding the Caixa acquisition, the CatalunyaCaixa acquisition, we feel that the impact is very manageable. It's between 55 and 60 basis points. And we feel very comfortable that we have enough tools at our disposals to offset in very few quarters this impact. So no immediate plans here. Regarding the restatements of the phased-in, it is true that we've restated the phased-in core as of March, the reason being Bank of Spain has issued new guidelines in order to make core capital comparisons with Europe much more standard. So goodwill on the phase-in period will be phased-in, applying the similar haircuts and other deductions, 20% each year. That has allowed us to increase our core by 149 basis points. The fact that the Tier 1 cap comes into place means that 78 basis points have been generated by the phase-in of the goodwill. This implies that if in the future we issue additional Tier 1, it will generate core capital. As you all know, this does not affect the fully loaded ratio and only affects the phase-in period. This also affects the thresholds and deductions mainly in the insurance company and all their subsidiaries plus a little bit risk-weighted assets, but this is a minor change. And I think I've answered all questions.

[Luisa Gomez Bravo:]

Yes. Thank you. We move on now to Spain. First, talking about the banking business and then, perhaps, a few questions on asset quality. So regarding the banking business, a lot of you are asking about the evolution of net interest income. Alvaro Serrano from Morgan Stanley, Daragh Quinn from Nomura, Rohit Chandra from Barclays, Mario Ropero from Fidentiis, Raoul Leonard from Deutsche, Marta Sánchez from KBW, Mario Lodos from Sabadell, David Vaamonde from MainFirst, all are asking about the evolution of net interest income. It was flat quarter-over-quarter when competitors are reporting net interest income figures going up. Can you give us some color on what's holding back NII other than loan contraction? And what are your expectations for the second half of the year and 2015? And specifically, can you talk a little bit about what is performance of customer spread?

[Jaime Sáenz de Tejada:]

Okay. It is true that NII quarter-on-quarter has remained pretty much flat. It has only increased by 0.2%. So I think what we already stated in the past, we are going to experience a significant movement of income from the NII line to the fee income line. I think we've shared that with the market already. That's true for deposits. Some deposits will migrate to funds. And that's also true for part of the corporate business. Some volume in -- especially in the corporate sector, will move to the commission line, thanks to our strength in the capital market franchise that we have. So for us, the better way to analyze underlying business evolution in Spain is to take into account the fee income line. NII plus fee and commissions are increasing fairly significantly quarter-on-quarter a total of 3%. And to us, that's the better proxy for business evolution in Spain. It is true that we're still not seeing volume growth, but what we're also -- but what is also true is that new production is increasing fairly significantly not only in the consumer portfolio but now also in the SME portfolio, and that's also true for the mortgage book. Year-to-date figures are down by only 1%. So our expectations for volume increase in 2015 remain in place. Customer spreads, we've restated these areas, especially on the deposit cost, have increased by 6 basis points this quarter. That's driven by massive spread contraction of 4 basis points but more than offset by the deposit cost reduction of 11 basis points. So we've seen during the year a total deposit cost reduction of 32 basis points, that it's partially offset by the 7 basis points spread contraction that we've seen on the asset side. Going forward, the guidance that we're giving is for NII to be flattish at best in Spain, mainly driven, again, by a reduction in the deposit cost going forward.

[Luisa Gomez Bravo:]

Okay. I think the question that Luis Peña from Jotabe Capital (sic) [JB Capital] and Arturo de Frias from Santander ask about the trends in net interest income have already been answered. They were specifically asking about volume and spread evolution in the next quarters. I think the guidance with net interest income flat over the year, basically, is the answer. Juan-Carlos Calvo from Espirito Santo, Mario Ropero from Fidentiis, Raoul Leonard from Deutsche, Alvaro Serrano from Morgan Stanley and Benjie Creelan from Macquarie are asking about the evolution of deposits cost in Spain, front versus back book. And do you believe that the front book will continue to go down, reprice downwards in the following quarters?

[Jaime Sáenz de Tejada:]

Deposit cut will continue to go down. As you know, at the end of first quarter, total deposit production was below 100 basis points when the total spot was at 1.7%. The second quarter total deposit production is below 90. And the total stock is at 1.6%. It's not easy to have a clear view of how low deposit production can go, but it is true that we remain positive that going forward further room is available. The second half of the year, we will face significant maturities, so it will be the most important contributor to NII still in the second half of the year.

[Luisa Gomez Bravo:]

And Mario Ropero for Fidentiis is asking specifically also about yields on the asset side, the number that we've given. Can we give a little bit of more color on to that?

[Jaime Sáenz de Tejada:]

Segment-wise, I would imagine, right? Okay, as I mentioned before, we've seen 5 basis points asset spread contraction in the quarter. By segment, the mortgage portfolio has remained -- the front book has remained pretty much flat as was the case in the first half of the year. That has been also true in the corporate book, okay, stopping the reduction trend that we've seen in the 2 previous quarters, and that is also true in the institutional -- in the public sector portfolio, although it has been affected by one-off transactions. What continues to remain in place, it's slowly -- slow but still persistent reduction in the spreads of the SME portfolio. It hasn't been too significant but it remains in place for a second quarter, for the -- for also for the second quarter.

[Luisa Gomez Bravo:]

Okay. Arturo de Frias from Santander is asking a more general question about credit trends or volume trends of lending in Spain. When do we see growth kicking-in in mortgages, SMEs, corporates? Do we see further spread compression from competitive dynamics and from the impact of the LTROs?

[Jaime Sáenz de Tejada:]

As we've already stated in the first quarter guidance, we expect total loans to reduce -- to be lower at the end of this year. Still, the bank will continue to gain market share in this deleveraging market. We hope to be able to remain flat in 2015, maybe to grow a little bit, and volume will only be significant after 2016. In terms of loan production, as I said already, we're seeing increases in the Mortgage portfolio around 5%, increasing the consumer book around 34%, 35% and increasing -- increases also in the SME portfolio around 15%. So loan production is increasing quarter-over-quarter. So we remain fairly positive on volume-wise. The fact that internal demand is growing faster than what we expected, today, we've seen new guidance by the government. Second quarter GDP will grow between 0.5 and 0.6. The government is already looking for 1.5% GDP growth rate this year, mainly driven again by internal demand moving towards the 2%, 2.5% number in 2005, allow us to remain very positive that we could perfectly see surprises to the upside. In terms of spreads and also taking into account the impact of the LTRO, we do expect some normalization of spreads in certain segments. So we do expect some additional competitive pressures going forward.

[Luisa Gomez Bravo:]

Okay. And specifically regarding the LTROs, Robert Noble from RBC, Arturo de Frias of Santander and Alex Koagne from Natixis are asking how much the LTRO money are we intending to take in the first 2 ECB operations?

[Jaime Sáenz de Tejada:]

We still haven't made a final decision. We are allowed to obtain EUR 5.6 billion either the 18th of September or the 18th of December. Our initial expectation is to get the funds. We currently have no outstanding on the LTRO. We've paid everything back, but we still haven't made a final decision on whether we're going to ask for it in September or in December.

[Luisa Gomez Bravo:]

Okay. And also regarding liquidity in the European context, Carlos Peixoto from BPI is asking if we could please update on financing schedules, current ECB exposure and amount of ECB eligible assets. I think that we can send you the details after the call so that we can send them directly to you. Going on to fees, in Spain, Daragh Quinn from Nomura is asking what drove the increase in fees in Spain in the second quarter and what is the outlook?

[Jaime Sáenz de Tejada:]

I think I partially answered without giving the actual number in a previous question. Quarter-on-quarter increase in fees and commissions has been 10%. Insurance products, pension and investment funds, structure deposits, fees from the CIB business, especially on the capital market side, are bustling fees and commission growth. Our expectations are for these levers to remain in place going forward, and we -- as we are significantly improving our pipelines.

[Luisa Gomez Bravo:]

Okay. And about restructuring cost. Luis Peña from JB Capital, Alvaro Serrano from Morgan Stanley; Britta Schmidt from Autonomous, and Marta Sánchez from KBW, are asking about the restructuring cost included in the P&L in the second quarter of about EUR 250 million. Why has that grown so much versus previous quarters, and will that continue going forward?

[Jaime Sáenz de Tejada:]

Okay. Restructuring cost has increased slightly in Spain this quarter. Two different reasons. First of all, additional restructuring at the Corporate Center and in the business, especially after the end of a project that we had in Spain to reduce back-office functions in the branch network. That was the plan that has lasted for over 2, 3 years that we finished in May. That completely eliminated full-time back-office jobs in branches and now, all back-office is centralized in [indiscernible] in Malaga. On top of that, we closed 94 branches, 2/3 of them coming from the Unnim acquisition to -- that will -- that indeed involved additional cost.

[Ángel Cano Fernández:]

Technically, what we've done in the first half of the year is bring in forward part of these provisions because we've speeded up this restructuring process. Again, to end it up as soon as possible and just trying to make the most of this restructuring process.

[Luisa Gomez Bravo:]

Okay. Thank you. Regarding asset quality in Spain and permanent charges. Mario Ropero from Fidentiis and Daragh Quinn from Nomura, and Britta Schmidt from Autonomous are asking about the update of our guidance regarding cost of risk in Spain including real estate loans. It seems -- it looks like it's going to end up below 100 basis points. Can you update your guidance?

[Jaime Sáenz de Tejada:]

What I can update is the numbers. It is true that costs of risk, taken into account loan loss provisions for real estate, is down to 1.02 in the first half of 2014, going down from 1.11 in the first quarter. Our guidance was for cost of risk within the 110 and 120 range. It is clear that with these first half numbers, we will definitely be on the lower end of that guidance.

[Luisa Gomez Bravo:]

Thank you. Real estate now. Benjie Creelan-Sandford from Macquarie asks regarding the growth stock of foreclosed assets in Spain. He sees that it continues to increase despite sales and he is asking us when do we expect this portfolio to begin to consistently decrease?

[Jaime Sáenz de Tejada:]

It is true that they have increased but just as slightly. What I think is more significant is that the total exposure, the total mix exposure in real estate is maintaining. It's maintaining its -- the good trend that started in the first quarter. Total exposure decreased by an additional EUR 400 million in the second quarter, repeating the number of the first quarter. Total sales increased 16% over 2013, reaching almost 11,500 units. In terms of euros, those numbers were up 38% because as you remember, we sold certain singular buildings in the first quarter. So the trend remains positive and the underlying remains intact.

[Luisa Gomez Bravo:]

Okay. And also regarding real estate. Britta Schmidt from Autonomous is asking us about the sales volume of foreclosed assets. She would like to know what the volume of foreclosed assets to sales are in million euros in the first quarter and second quarter. I think it is best that we send you the details after the call with the numbers, which I don't have at hand right now.

[Jaime Sáenz de Tejada:]

Well, I just answered them. It was EUR 910 million in the first half, foreclosed assets.

[Luisa Gomez Bravo:]

Okay. Moving on to Mexico, reforms. Arturo de Frias, Santander, is asking us to give an update regarding Mexican forecast in terms of the reforms that need to take place and are taking place in Congress. There were several parliamentary -- extraordinary sessions coming up in July and August, and can we update what will happen there?

[Ángel Cano Fernández:]

So the schedule for the approval of the secondary ruling, which is the case right now on the structural reforms is underway, maybe starting with telecommunications reform. The approval of secondary ruling is already accomplished. This reform is expected to reduce price over time, thanks to a higher degree of competition in the industry and boost investments in Mexico. The other really important one, the -- and as you, reform, the secondary ruling has been partially approved right now. Meaning that private investors are now allowed to invest in this industry. Of course, in association with semiofficial entities such as PEMEX, for example. The whole set of secondary rules is expected to be passed in the first days of August. So maybe the most positive impacts are going to come from the second reforms. And maybe could be even higher than initially we anticipated by BBVA. I mean, the impact research. Maybe the only important part of your question is to answer the impact on GDP growth. And according to our BBVA research department, all the structural reforms, we have a global positive impact of between 1% and 1.5% in potential GDP growth, and to be materialized in the next 2, 3 years' time.

[Luisa Gomez Bravo:]

Thank you. Robert Noble from Royal Bank of Canada asks regarding the impact on BBVA from the recent competition review on the financial sector in Mexico.

[Jaime Sáenz de Tejada:]

The Comision Federal de Competencia Economica has very recently issued its report. We are not surprised by the results. They've issued 36 different nonbinding recommendations, trying, in general, to incentivize consumer mobility and access in better conditions to the current financial infrastructure, meaning mainly ATMs. Further report, we will issue after the summer. Currently, we would expect maybe additional pressures on transparency on the -- on fees and commissions structure and also interest rates and -- but in general, no surprises, and conclusions are aligned with our expectations.

[Luisa Gomez Bravo:]

Thank you. Regarding lending, Mario Ropero from Fidentiis, asks us to comment on guidance for the year on lending growth. Do we expect double-digit growth still?

[Jaime Sáenz de Tejada:]

Yes. We remain positive in Mexico. We maintain our guidance mainly driven by the same segments that were already growing in the first quarter, meaning the consumer portfolio and the SME book.

[Luisa Gomez Bravo:]

And regarding net income, Britta Schmidt from Autonomous, asks about our expectations for net income growth in Mexico for 2014. Also an update on guidance, do we still expect an improvement in second half of the year, and to what extent?

[Jaime Sáenz de Tejada:]

Yes. Our guidance remains intact. It is true that as we shared with all of you, the beginning of the year was a little bit slower than what we expected in terms of GDP. That forced us to reduce our GDP growth expectations for the year to 2.5%. But as Ángel [ph] has just said, secondary loss are pretty much done in our work with and we expect a much better second half of the year. So guidance remains intact.

[Ángel Cano Fernández:]

What I think as well is we went to see the similar look and feel of the -- its income statement. As I said during the presentation of the first half of this year, double-digit top line growth is translated into the bottom line with net income growth over 12% at the end of this first half and this premises [ph] will be more or less the same at the end of the year.

[Luisa Gomez Bravo:]

Thank you. Now regarding asset quality, a few questions. There's actually 2 questions which are pretty much related so I'm going to ask them together. Hugo Cruz from Redburn, Robert Noble from Royal Bank of Canada, Mario Ropero from Fidentiis; Raoul Leonard from Deutsche and Carlos Peixoto from BPI, are asking why the Mexican cost of risk grew 10% quarter-over-quarter. Can you please comment on the asset quality trends in Mexico? And Daragh Quinn from Nomura and Alvaro Serrano from Morgan Stanley specifically asked what is behind the increase in loan loss provisions in Mexico and what is the outlook for the second half of the year?

[Jaime Sáenz de Tejada:]

It is true that cost of risk in the second quarter has increased in Mexico from 3.5% to 3.7%. The reason being the slow start to the year has increased a little bit the cost of risk on the credit card portfolio. And also we have the one-off impact of the one-off of the Walmart portfolio in the finance book. The last reason is the very significant increase in the consumer portfolio that I've just mentioned before. Our internal models are very strict, and we provisioned a lot in the first few months whenever a transaction is given. Going forward, our guidance remains intact, and we will converge to the 3.5% cost the risk that we've mentioned in the first quarter.

[Luisa Gomez Bravo:]

Okay. Moving now to South America. The -- I am thinking to start -- how about we start it with Venezuela, okay? A few questions here. I'll read them, they're related, so I'll read the questions regarding Venezuela and then move on to the rest of South America. Venezuela, Hugo Cruz from Redburn; Robert Noble from RBC. Please comment on the risk of moving the exchange rate to Sicad 2 P&L and capital impact. Raoul Leonard from Deutsche Bank asks about our outlook for Venezuela for the rest of this year. Should we expect any drastic FX adjustments? Benjie Creelan-Sandford from Macquarie is asking, given the hyperinflationary pressures and risks in Venezuela, are you happy to continue growing the asset base here? Would you consider limiting the growth of that business? And Mario Ropero from Fidentiis and [indiscernible] from JPMorgan specifically asked about what has been the impact hyperinflation in Venezuela and what are our expectations going forward? So a few questions there on Venezuela.

[Ángel Cano Fernández:]

Maybe just one generic answer, Jaime, and you can give then some more details afterwards. Maybe what we are seeing in Venezuela in the second quarter is a really limited net income contribution. Just talking by heart, is maybe EUR 15 million in the quarter. So what we are doing is producing, first of all, its contribution to the total net income, that now is under 5%. So this is the first comment. The second one is the capital impacts of where the valuation process in the next quarters is going to be, again, limited because of the reduction in the consumer -- capital consumption because of reduction on the risk-weighted assets, as you could see, in the first quarter of this year, after the first devaluation process. This is the second one. And maybe the third one is we are trying to take advantage of our business activity, just self-financing with their own resources, so we are not moving some other resources from the group. So from that point to a view, we are trying to -- we are continue working very hard on improving this franchise in Venezuela whilst we are in the process of reducing its contribution to the group and limiting -- and trying to have limited impacts in capital.

[Jaime Sáenz de Tejada:]

Yes, trying to give a little bit more light to the quarter results in Venezuela. The total FX impact that the group has experienced coming from Venezuela in this first half of the year has been EUR 51 million in net attributable. We've been able to compensate through local hedges, EUR 23 million. This means that the incremental impact that we've seen in this second quarter has been very minor. As you remember in the first quarter of the year, the impact was EUR 44 million. So very, very limited impact on FX charges in the second quarter. In terms of hyperinflation, things have been different. First quarter inflation was 10 -- a little bit over 10% while second quarter inflation, it's over 16%. So the total impact in net attributable of hyperinflation has almost doubled in the second quarter to EUR 93 million from EUR 47 million in the first quarter. As Ángel has said and we've always stated, we have a wonderful bank in Venezuela, very close to its clients, with a very low loan-to-deposit ratio, extremely low cost of risk offering a very good service quality and that's what we are working and trying to achieve every single day. The impact in core capital is completely minimized by our long U.S. dollar positions locally. And if Sicad 2 is eventually applied, we will pass through the P&L the necessary impairment. And that's as much as I can say. As you know, we apply Sicad 1, it's the only exchange rate that banks are allowed to use, as Sicad 2 is not open for banks.

[Ángel Cano Fernández:]

Maybe just one last detail. When I talked about this less than 5% contribution to the group from Venezuela net income, maybe what we are expecting for the end of the year is a 50%, 60% reduction in its contribution compared with previous year.

[Luisa Gomez Bravo:]

Okay, thank you. Argentina, Daragh Quinn from Nomura, Robert Noble from RBC, Britta Schmidt from Autonomous and Andrea Filtri from Mediobanca, David Vaamonde from MainFirst, are asking about the potential impact on our bank from a theoretical or potential default in Argentina.

[Jaime Sáenz de Tejada:]

Our total position in Argentinian bonds in the group is a little bit under EUR 150 billion -- EUR 150 million, yes. So it's completely immaterial. 95% of it, it's in Banco Francés. So the direct impact of an incident with the holdouts will not materially affect us. It is true that if an agreement is not reached today, Argentina will probably face additional pressures, maybe in terms of devaluation and additional devaluation, maybe in terms of GDP growth, maybe that will affect our activity and potentially our cost of risk. Our expectation is for an agreement to be reached because it is beneficial for everybody. We must realize that Argentina has been taking very significant steps in the last few quarters to normalize relations with the financial community. Paris club or the agreement with Repsol and a lot of orthodox decisions locally. We've received the first dividend payment in 2 years this second quarter after we comply with the 75% capital buffer above minimums and we have received the approval from the Central Bank and the dividends were paid. So normalization is taking place in Argentina, and we look forward to an agreement with the holdout.

[Luisa Gomez Bravo:]

Okay. So maybe ending up South America with a few general questions on the region from Mario Ropero from Fidentiis. He would like to ask about the evolution of net interest income, which he says it's much higher than the evolution of business volumes? Is it sustainable, this growth in net interest income? And also, he asks about the high growth of loan loss provisions and what are we expecting there since NPL ratios are still dropping?

[Jaime Sáenz de Tejada:]

The NII line in South America is growing very significantly. Volumes are still increasing by between -- around 24%. That's true for loans and that's also true for deposits and the NII line is growing at 17 -- at 38%, sorry. But that is affected by hyperinflation. So, to us, a better proxy of the underlying evolution, it's operating margin, okay? And operating margin is growing exactly at 25%, which is the average growth of business, meaning loans and deposits. In terms of cost of risk, the news in the regions are good. We don't see any significant changes, and they are increasing as volume grows. So no alerts there.

[Luisa Gomez Bravo:]

Thank you. We'll move on to Eurasia next. Robert Noble from RBC asks about Turkey and net interest income has been surprisingly resilient given the move in interest rates. Is any negative impact expected in the second half?

[Jaime Sáenz de Tejada:]

No, on the contrary. I think guarantees management has managed very well the increase in local interest rates. Now interest rates are going down, and we expect further reductions going forward. That will be positive for NII growth. So no surprises there. Volumes are increasing better than expected, so nothing that could -- we don't see anything in the horizon that would affect our growth. We -- it's true that we have presidential elections in August, but I think the market is expecting stability after the results.

[Luisa Gomez Bravo:]

Thank you. And Carlo Digrandi from HSBC asks about Eurasia coming in way stronger than consensus and HSBC estimates. Is this the new run rate, main drivers of this result, I think obviously Turkey has been one of them?

[Jaime Sáenz de Tejada:]

Turkey is clearly the most significant driver plus the dividends coming from CNCB, that it is true, came out significantly above consensus. We received EUR 139 million when consensus was around EUR 90 million. So yes, from Eurasia, very positive news.

[Luisa Gomez Bravo:]

And the U.S., Santi Lopez, from Exane BNP. Are you going to buy another bank in the U.S.A.?

[Jaime Sáenz de Tejada:]

No.

[Luisa Gomez Bravo:]

Okay. Then going on to Corporate Center, Mario Ropero from Fidentiis, Raoul Leonard from Deutsche Bank. Can you comment on the positive evolution of net interest income in the Corporate Center? Why? Okay, I think we'll get back to you with the details of the line of positive margin. Maybe what we can do is comment a little bit on the guidance for the year in the Corporate Center.

[Jaime Sáenz de Tejada:]

Right. As I think it's important to understand that -- there's a lot of issues affecting the Corporate Center. The guidance for the year, it's for the Corporate Center to drain around EUR 1 billion as a number that's very close to what we've seen last year.

[Luisa Gomez Bravo:]

Okay. Maybe to end up with a few general questions regarding the group that have also come in on the P&L side and also on the balance sheet side. Benjie Creelan-Sandford from Macquarie asks whether there was a sharp reduction in the negative impact of valuation adjustments in shareholder equity this quarter. What drove that?

[Jaime Sáenz de Tejada:]

Yes. It was -- during the quarter, there has been a positive impact on the valuation of the available-for-sale assets, as I said before. That was 11 basis points. Okay.

[Luisa Gomez Bravo:]

And regarding P&L for the group Luis Peña from JB Capital asks whether net attributable of EUR 1.3 billion in the first half, the run rate for the year is EUR 2.6 billion which is notably below consensus. How do you see results coming in in the second half of the year?

[Ángel Cano Fernández:]

First of all, what we expect from second half of the year is a similar trend. First of all, from operating income, just trying to talk about these 2 lines of the income statement, when is the operating income, which is for us the most important in terms of trying to guess the trend for the rest of the quarter. So what we expect is a continuous positive trend in the next 2 quarters of this year. So our expectation is having more than double in the second half. And looking at the bottom line, our expectation obviously is to continue with the trend of what we'll see in the first half of the year, but increasing quarter-by-quarter until the end of the year when we are going to compare with a much lower volume of net income, if you remember, when we made the Chinese adjustment. So our expectation is to continue working in line with expectations.

[Luisa Gomez Bravo:]

Thank you. Another question from Luis Peña from JB Capital regarding the tax rates for this semester. Tax rate is at 27%. Should we assume the same rate for the year end -- for the whole year 2014?

[Jaime Sáenz de Tejada:]

No. It will normalize to reach around the 25% level.

[Luisa Gomez Bravo:]

Okay. I think a general question from Hugo Cruz, Redburn regarding margins. We've talk a little bit about this region by region. Margin seems to be mixed, up in Spain, down in Mexico, U.S. and LatAm x Venezuela and Argentina. Evolution in the quarters, I think, we've already guidance in each of the regions and if you need anything else, we'll give it to you after the call. Raoul Leonard from Deutsche Bank. NPL coverage ratio and cost of risk outlook for the group. The group's NPL coverage ratio rose to 62% in the quarter. What level are you comfortable with going forward? Should we expect this to rise towards 70%? Has your guidance for cost of risk for the full year 2014 estimates and the full year 2015 changed at all?

[Jaime Sáenz de Tejada:]

No. I think we haven't changed the guidance yet. We remain, I guess, fairly conservative. We feel very comfortable with the current 62% coverage ratio, and we don't feel that additional provisions are required.

[Luisa Gomez Bravo:]

Well, thank you very much. We haven't received any further questions. I would like to thank all of you for being on the call. Thank you, Ángel. Thank you, Jaime. As always, the IR team remains available for any further questions, anything that we need to clarify or provide more information on. Also, I take advantage of the opportunity to ask you for feedback on the changes we've done to the format of presentation. So we've added new information on the Annexes. We've obviously changed the format which you have seen. So please feel free to please provide us feedback on what you think of the new format. And that's all for today. Thank you.

[Jaime Sáenz de Tejada:]

Thank you.

[Ángel Cano Fernández:]

Yes. Thank you very much.