Earnings Call Transcript - BBVA Q1 2025

Operator, Operator

Good morning. And welcome everyone to BBVA's First Quarter Results Presentation. Following yesterday's massive power shortage in Spain, the situation in Madrid is now almost fully restored, so we expect to be able to conduct today's earnings call normally. As usual, I'm joined today by our CEO, Onur Genc and Luisa Gómez Bravo, the group's CFO. After their review of the quarterly figures, we will open the line to receive your questions. Let me remind you that, in addition to asking questions live through the conference call operator, you also have the option to submit your questions in writing via the Ask a Question section located just below the video you are watching. This option is available in case you experience any issues with the phone line. Any questions submitted through this channel will be read during the Q&A session and answered accordingly. We apologize for any inconvenience caused by this situation and sincerely thank you very much for your understanding and cooperation. Now I will turn the call over to Onur.

Onur Genc, CEO

Thank you, Patricia. Good morning to everyone and welcome and thank you for joining BBVA's first quarter 2025 earnings webcast. For those who are connecting from Spain or those who have friends and family in Spain, I hope everyone is safe after yesterday's blackout. Let's just jump into it, starting with slide number 3. In line with our strategic priorities of value creation and profitable growth, I would like to start the presentation today by highlighting the two financial metrics that best reflect these priorities, tangible value growth and profitability. On the left-hand side of the slide, you can see the strong evolution of tangible value per share plus dividends, which increased by 14.1% year-over-year and 3.3% in the quarter. In our view, these are very good figures despite the relatively high currency depreciations that we have experienced in the quarter. On the right-hand side, our profitability continues to improve. In the first quarter of 2025, we reached an outstanding return on tangible equity of 20.2% and a return on equity of 19.3%. These profitability metrics would likely place us, assuming others have not announced yet, once again as the most profitable European bank among the 15 largest banks on the continent. Moving to page number 4, on the left side, you can see our net attributable profit in the quarter reaching EUR 2,698 million, another very strong quarter. This represents a 23% increase compared to the same quarter last year and also 10.9% higher than the previous quarter. These results are due to the repeated excellent performance in our view of our core business, as can be seen in the growth of our core revenues that I will be explaining in a second. This profit figure translates into earnings per share of EUR 0.45, a 24% increase year-over-year. Finally, regarding our CET1 fully loaded capital ratio on the right-hand side of the page, it improved by an exceptional 21 basis points during the quarter, reaching 13.09%, obviously well above our target range and regulatory requirements. Moving to page number 5, this page is a summary of the pages to follow, so I will not dwell too much on it but just a quick introduction to the different highlights of the quarter. First, net interest income grew by 8.5% year-over-year, driven by very strong business activity, with a superb 15.1% growth in activity. Second, net fees and commissions showed excellent evolution, increasing by 19%. Third, our industry-leading efficiency ratio continues to improve, reaching 38.2% this quarter. Fourth, asset quality remains solid and is performing better than expected, with a cost of risk at 130 basis points. Fifth, our robust capital position, as I just mentioned. And sixth, continued outstanding growth of our underlying business franchise, attracting a record 2.9 million new customers and reaching EUR 29 billion in sustainable business in the quarter. Slide number 6 provides the summarized P&L of the quarter. You can find the year-over-year quarterly evolution in the second column from the left, in constant terms, and in the third column from the left, in current terms. Basically, the P&L continues its impressive evolution, thanks to the strong core revenue growth, with a year-over-year increase in gross income of 28% in constant and 13% in current euros, while maintaining positive jobs. I would like to point out that last year, net attributable profit in the first quarter of 2024 had a EUR 285 million annual impact recorded in other income and expenses. This year, in the first quarter of 2025, we have booked an EUR 85 million charge in the income tax line for the quarterly accrual of the new banking tax, due to a change in the structure of the tax. So, it's only for the three months, EUR 85 million under the income tax line versus the EUR 285 million in the other income line from last year. The broader messages do not change, but please take into account these one-off impacts when comparing the figures. Slide 7 summarizes the revenue breakdown. First, net interest income growth remains at very strong levels, despite declining rates in our core geographies, with NII growing by 8.5% year-over-year and 1.7% quarter-over-quarter, again supported by robust activity growth. Second, net fees and commissions continue their excellent trajectory, being up 19% versus the same quarter last year. This growth was mainly driven by our payments and asset management businesses. Compared to the previous quarter, there was a 2.7% decline, but this is completely explained by the seasonal success fees that we record in the fourth quarter for asset management activity in Spain. Third, we had another very strong quarter in net trading income, driven by solid performance in our global markets unit, as many other banks have experienced. As a result, gross income grew by an excellent 28% year-over-year and 3.9% quarter-over-quarter. Moving to slide 8, let me now focus on activity and loan growth, which again increased very strongly, 15.1% year-over-year at the group level. This is very encouraging for the coming quarters, especially since this growth is measured profitably. We assess each loan through our return on capital framework. This profitable growth and the increase in activity will help us in the coming quarters. But in Spain, on the right side of the page, you can see the breakdown by country. Loan growth in Spain has continued to accelerate, reaching 6.6% year-over-year growth, a growth level that is unprecedented for quite some time. Within that, our key segments are performing really well. Consumer and credit cards grew by 7.5%, while lending to enterprises, aligned with our new strategic priority, grew by 8.5%. In Mexico, loan growth also accelerated significantly, reaching 17.2% year-over-year growth. If you isolate the FX effect, the currency impact, the growth is still a very strong 14% for Mexico. Consumer and credit cards grew by 15.3%, while lending to enterprises, again, a strategic priority for us, grew remarkably by 25%. Page 9 looks forward. Obviously, we live in uncertain times. However, given the relatively low leverage levels in our footprint countries, we believe in the potential for further credit growth without creating too much cost of risk in our core geographies. For example, in Spain, after many years of deleveraging, we are now below the EU average in leverage. Given the relatively positive macro factors for Spain, we expect the strong loan growth trend to continue. In the case of Mexico, we often discuss it and see one of the lowest levels of leverage even in the emerging markets landscape. With increased banking penetration, we believe that the Mexican financial system is bound to grow healthily in our view. Slide 10 illustrates the positive trend in activity in Spain and Mexico, showing how it translates into solid core revenue growth in the P&L, even in a declining rate environment. Looking at the charts in the middle, in Spain, NII grew by 1.2% year-over-year despite a decline in the ECB deposit rate from March 2024 to March 2025 of 150 basis points. In Mexico, NII rose by a strong 7.6% year-over-year, driven again by robust activity. Once again, despite a decline in the central bank rate of 200 basis points in the last year. Over the last two years, we have actively managed our balance sheet sensitivity to rates in Spain and Mexico amidst a context of higher rates. We increased our ALCO portfolio's size and extended the duration, which we are now seeing the benefits of. We sacrificed some margin in the short term, but we did that in an effort to protect our margin in the future, and again, you can see the positive results. This strategy, combined with solid growth in business activities, makes us confident in the future NII evolution. When turning to fee evolution, the right side of the page shows a 6.8% year-over-year increase in Spain and a 5.8% year-over-year increase in Mexico, mainly driven by asset management. Strong results there as well. Slide 11, on the left side, shows our widened positive jaws at the group level, driven by the strong performance in gross income, with a reported 28% year-over-year increase. The slower pace of growth in costs is 14%, which is also below the group's average inflation rate. As a result, on the right side, you can see our leading efficiency ratio, which has further improved to 38.2%, marking an improvement of 469 basis points compared to last year. Slide 12 outlines the positive evolution of our asset quality metrics, which are performing ahead of expectations. In the bottom left, you see the cost of risk standing at 130 basis points. This improvement is due to better than expected performance across most business units but notable improvements in both Mexico and Spain. On the bottom right, our NPL and coverage ratios are at their best levels for quite some time, standing at 2.9% for NPL and 82% for coverage. Slide 13 focuses on capital, having generated an exceptional 21 basis points CET1 in the quarter, bringing our CET1 ratio to 13.09%. In the waterfall, you see it from left to right, our results contributed 68 basis points, while dividend accrual and AT1 deducted 37 basis points. There was also a 30 basis point deduction due to RWA's growth, which reflects our ongoing ability to reinvest part of our capital generation into profitable growth. It also includes the result of several risk transfer transactions that positively contributed 13 basis points to the ratio. Aligning with our new strategic framework, which emphasizes value and capital creation while using risk transfers, our RWA's in the quarter grew much less than our activity. Additionally, you have another bucket of others at 20 basis points, which comprises several factors, including muted market-related impacts in the quarter and accounting-wise, it neutralizes the deduction in the P&L bucket from hyperinflationary accounting. Page 14 illustrates our continued growth through customer acquisition. I have stated this repeatedly, but we believe that the most sustainable way to grow the balance sheet is by expanding our client franchise across all segments. In Q1 2025, we acquired a record 2.9 million new customers, with 66% joining us through purely digital channels. Given that population and company counts in our markets don’t grow at this pace, maintaining such a strong rate of new customer acquisition requires significant and ongoing effort. Thanks to this effort, our active customer base has grown from 56 million at the end of March 2020 to over 78 million as of March 2025, a remarkable increase in our view over the past five years. Turning to slide 15, sustainability remains a strategic priority for us and is a key driver of our differential growth. We have set an ambitious goal to channel EUR 700 billion between 2025 and 2029, more than doubling the previous target of EUR 300 billion set for the period of 2018 to 2025, which we achieved a year ahead of schedule. This higher, more ambitious target will focus on a shorter timeframe of five years instead of eight, as we are determined to advance our business through sustainability and are generating very impressive results. The first quarter results are particularly strong. Now, I will turn over the presentation to Luisa for the business areas update.

Luisa Bravo, CFO

Thank you very much, Onur, and good morning, everyone. On slide 17, starting with Spain, Spain delivered yet another impressive set of results, surpassing EUR 1 billion in net profit in this first quarter of the year, thanks to strong gross income that increased by more than 6% quarter-over-quarter. NII has performed remarkably well, growing by 1% quarter-over-quarter despite the lower interest rate environment. This performance is driven by sound loan growth, particularly in the most profitable segments, as Onur mentioned—consumer and enterprise lending—with a higher contribution from ALCO portfolios as well. Loan growth accelerated during the quarter, reaching 6.6% year-over-year, driven by a nearly 20% increase in new loan origination compared to the same period last year. It was also a strong quarter for fees, which grew by 5% on a like-for-like basis, with solid growth across all lines. The decline quarter-over-quarter was primarily due to the recognition of asset management success fees in the fourth quarter of the previous year. Overall, strong gross income growth both in the quarter and year-on-year, along with well-contained costs, has brought the efficiency ratio to an exceptional 32%. As for risk metrics, they continue to improve during the quarter, with a further decline in the NPL ratio and an increase in the coverage level, driven by a positive evolution of NPLs. Cost of risk declined to 30 basis points, better than expected. Looking ahead, despite a more uncertain environment, we are maintaining, or slightly improving, our guidance for Spain. We expect low to mid-single-digit loan growth for the year with a positive bias considering a strong start to the year. We reaffirm our guidance for a slight decline in NII, even within a context of lower-than-anticipated rates. We are confident in achieving low single-digit growth in fees, subject to market volatility. Finally, we are improving our guidance on cost of risk to around 35 basis points, supported by the solid start to the year. Now, turning to Mexico. Once again, Mexico delivered exceptional results, with net profit growing by nearly 8% year-over-year, driven by strong core revenue growth of 7.3% year-over-year. Net interest income continued to grow robustly, supported by increased lending activity. Credit demand remains remarkably strong, with solid growth across both retail limits, primarily driven by consumer and assuming lending, and commercial, where we continue to see healthy dynamics following a very strong fourth quarter, particularly in short-term lending. In addition, we're witnessing increased contribution from our ALCO portfolio, which we expect to continue in the coming quarters, as rates continue to decline. Fees continue to grow at a healthy pace, increasing by nearly 6% year-over-year, including strong credit card and payment fees, which represent over 50% of total fees in Mexico, alongside growing contributions from asset management and CIB-related fees. Overall, strong revenue growth has allowed us to maintain our efficiency ratio at an impressive 30%, despite higher expenses, primarily reflecting the carryover effect from salary reviews and headcount increases, especially related to internalizations and IT profiles during 2024. We expect cost growth to gradually slow down in alignment with our high single-digit growth guidance. Finally, asset quality metrics are performing ahead of expectations. Impairments have declined, driven by improved performance in retail portfolios, and the cost of risk decreased to 305 basis points in the quarter. Overall, after a very strong start to the year, we're confident in our ability to meet our guidance for Mexico throughout the remainder of the year. We reaffirm our guidance for loan growth at high single-digit levels, and for NII to also grow at high single-digit levels, albeit lower than that of activity. Despite the expected economic slowdown and potential impacts from IFRS 9 macro adjustments, we are maintaining our cost of risk guidance at 350 basis points, supported by the positive evolution of risk metrics at the start of the year. Moving to slide 19, Turkey reported a net profit of EUR 158 million for the first quarter, representing a 10% increase compared to the previous year. Higher revenues and a lower impact from hyperinflation adjustments are more than offsetting the increase in impairments. As expected, net interest income increased, driven by a significant expansion in the Turkish lira customer spread, which rose by 91 basis points during the quarter. This improvement was largely driven by a decline in Turkish lira deposit costs in a context of decreasing interest rates. Our sensitivity to lower rates in Turkey enables us to benefit from faster downward repricing of our customer deposits. Loan growth continued across both Turkish lira and foreign currency portfolios. Additionally, we see strong performance in fees, supported by payment services and higher contributions from asset management and insurance. On the asset quality front, the cost of risk continues to normalize, standing at 189 basis points in the first quarter, in line with our full-year guidance. Looking ahead, within a context of temporary monetary tightening to anchor inflation expectations, we expect a gradual yet progressive improvement in the Turkish lira customer spread through 2025. Hence, given slightly higher than initially anticipated inflation and interest rates by the year-end, we now expect BBVA's net profit to close somewhat below EUR 1 billion in 2025. Finally, turning to South America. South America continues to deliver a solid earnings contribution to the group, with net profit exceeding EUR 200 million in the first quarter. Solid results this quarter were supported by revenue growth, lower impairments, and reduced impacts from hyperinflation adjustments in Argentina, as the disinflation trend continues. Net interest income performed well, driven by loan growth across the most profitable segments and improving customer spreads in Peru and Argentina. Beyond NII, we also saw a positive contribution from fees and stronger net trading income. Additionally, this quarter, we recorded significantly lower impairments in Peru and Colombia, reflecting improving asset quality trends we anticipated, supported by a more favorable economic environment, including lower interest rates, and adjustments to our risk appetite in the most vulnerable portfolios. Overall, the cost of risk for the region stood at 230 basis points, below our full-year guidance. All in all, the outlook for the region is becoming more positive, supported by an improving economic environment. Now, back to Onur for the final remarks on the quarterly results.

Onur Genc, CEO

Thank you, Luisa. Lastly, the main takeaways from page 21. Let me not take the time by repeating the key messages that are already on the page. There are many positive adjectives. In short, we are quite happy—very happy—with our performance in the quarter. We continue to focus on creating value for our stakeholders. As mentioned, we are optimistic going forward despite macro uncertainties. We see very positive dynamics in our businesses due to our diversified model with leading franchises in high-growth markets. Thus, despite all the uncertainty, we maintain our guidance of return on tangible equity in the high teens, similar to the levels of 2024 shared with you in the last quarterly call. We maintain that guidance, but the environment is uncertain. We have to see how it evolves in the coming weeks and months. Now back to Patricia for the Q&A.

Operator, Operator

Thank you, Onur. We are now ready to start with the Q&A. So, operator, first question, please.

Operator, Operator

Our first question today comes from Antonio Reale at Bank of America.

Antonio Reale, Analyst

Hi, good morning. It's Antonio from Bank of America. Just two questions for me, please. My first one is a follow-up on your guidance on Turkey. It's really around NII and cost of risk in the region. Now, we've seen the rate hike, I think, which was late in the quarter. So, I wonder, how would you expect the sequencing of NII to trend in Turkey and your expectations on cost of risk, which was slightly above your full-year guidance, which seems to be suggesting, in general, for the region, a stronger second half versus the first half? So, if you can share a little bit more color on those two lines and the sequencing, that would be great. My second question is on Spain. We've seen strong activity levels in Q1. On loan growth, you're gaining market share, and even on deposits, despite the usual Q1 seasonality, we've seen positive growth in deposits. Can you talk a bit more about how this has changed, if any, post-tariffs and your expectations for when you would expect to see a trough point in NII in Spain this year? Thank you.

Onur Genc, CEO

Perfect. Thank you, Antonio. Maybe I will take Turkey, and you take Spain, Luisa. On Turkey, as Luisa has mentioned in her presentation, we're expecting somewhat lower than the EUR 1 billion that we guided you. If you remember, in the first quarter's call at the end of January, we provided a guidance of EUR 1 billion, and we were very specific. I remember it clearly. It is documented - that guidance depends on three very important macro parameters: inflation, interest rates, and also the currency level. The interest rates we were expecting at that moment were 31%. Now we think it'll be five percentage points higher by the end of the year, around 36% to 36.5%. Inflation, we initially expected to be at 26.5%. Now, we anticipate it will reach 31% by the end of the year. As for the currency, we were expecting 30% devaluation, with the Euro-Turkish lira reaching 48 at year-end. Higher devaluation may also come due to developments in Turkey. These three numbers drive our expected figure. A 1% increase in inflation impacts our bottom line profit by EUR 15 to EUR 20 million due to hyperinflationary accounting. A 1% increase in interest rates has a EUR 25 million to EUR 30 million negative impact for Turkey. As for 1% more devaluation, it translates to a EUR 5 million to EUR 6 million impact. These independent parameters significantly influence the earnings figure. Hence, Luisa mentioned the guidance of EUR 1 billion will likely be slightly lower. But we are activating levers, specifically the cost lever, and that is why we're stating it will be somewhat lower than EUR 1 billion. In short, how all of this affects the bottom line, I have provided all the detailed sensitivities, and you will see that it is still a very positive figure compared to last year. Antonio, you may proceed to discuss Spain.

Luisa Bravo, CFO

Yes. I would start by highlighting the macro environment, as you mentioned. Obviously, with the recent news, we expect decreasing global GDP in general. However, I want to emphasize that Spain, within the context of tariffs, is one of the countries in Europe that is least affected, as it is a services economy driven by exports and services, particularly tourism. It has experienced strong job creation and wage increases. This has led to robust growth in the market as a whole. As I mentioned, the tariffs in Spain will have less of an impact than in other geographies. We expect Spain to continue growing above the European Union average this year and into next. Given this background, we expect activity trends to remain resilient. We do not see any indications in these activity trends that would suggest we will not maintain our growth guidance with that positive bias mentioned at the start of the call. As for NII, I would highlight several factors. We have been managing the sensitivity of NII to the interest rate environment effectively. We ended last year with circa 55%—sorry 5% NII sensitivity, and today that is around 4%, so slightly reduced sensitivity to the rate environment. We expect that to gradually feed into the NII line over the next few quarters. Additionally, we've increased our ALCO book by EUR 5 billion this quarter, which will also support NII. This helps confirm our guidance of a slight decline in NII this year, despite a slightly negative outlook on rates compared to the 2% terminal rate we're managing earlier this year. Overall, we expect a gradual impact, leading to a slight decrease in NII for the year, but this is again supported by strong activity dynamics, even in a post-tariff situation.

Onur Genc, CEO

I would just like to add two data points regarding Spain. We always analyze spreads in our presentations, which have been a significant metric. However, since we have invested in this ALCO strategy that Luisa discussed, we need to also start analyzing NIM. In the quarter, the NIM of Spain increased by 7 basis points, showing benefits from our prior actions. Regarding loan volumes, Antonio, when you analyze the market, we are gaining market share, as evidenced by the February numbers. The March numbers have yet to be released by the supervisor, but comparing new loan production from the first two months of this year to the last two months of the prior year, there is a 10% increase in the market. We have not seen any decline in that pace in March, April, and so on. So the activity levels remain robust, regardless of global uncertainties.

Operator, Operator

The next question comes from Maksym Mishyn from JB Capital.

Maksym Mishyn, Analyst

Hi, good morning. Thanks for the presentation and for taking our questions. I have two on Mexico and one on the special tax. On Mexico, I was just wondering why you are not improving the guidance for the loan book growth, given the 17% increase in the first quarter, and was there any specific reason for the cost of risk to be lower in the first quarter than what you're guiding for the full year? And then, on the special tax, I was just wondering if you apply any deduction related to the 25% threshold of net taxes paid in Spain on the special tax calculation. Thank you.

Onur Genc, CEO

Perfect. Luisa, maybe we can address the tax topic together? On Mexico, Max, regarding loan book growth, we are not revising our guidance because of the uncertainty resulting from tariff discussions and other matters. Mexico will benefit relatively if these tariffs remain intact, but there's too much uncertainty, leading us to exercise caution. The strong 17% growth observed in the first quarter largely derives from short-term loans. However, we have seen a decline in long-term loan growth, which brings us to be cautious given the current environment. In normal conditions, such a 17% growth would lead to an upgrade in guidance, but we need to remain prudent and see how things develop in the coming weeks and months. There are positive dynamics. The pipelines are strong. The April numbers are promising. However, we need to keep a cautious outlook and assess how it unfolds. Regarding cost of risk, the underlying fundamentals are robust, and we are not upgrading the guidance for the same reason—we need to assess the situation further as well as the impact of these tariff discussions in the U.S., which may reflect in Mexico's economic activity. We don't detect a clear, direct impact from the tariffs, but economic slowdowns in the U.S. tend to hurt Mexico. We would have upgraded our guidance in a typical environment, but we need to see how it transpires within these uncertainties. On tax matters, Luisa?

Luisa Bravo, CFO

It's a short answer—yes. We apply the deductions established in the law that was approved and became effective at the beginning of January.

Operator, Operator

The next question comes from Marta Sanchez Romero from Citi.

Marta Romero, Analyst

Thank you very much. My first question is on capital optimization. So thank you, Onur. You've said 13 bps in the quarter. How much do you expect to generate going forward, and what kind of impact should we expect on the P&L? My second question is about the cost of deposits in Spain and Mexico. We've seen a very good performance in Spain. So you've managed to bring it down to 66 bps in the quarter. Where do you see it going forward? In Mexico, we've seen something different, with the cost of deposits actually increasing despite lower rates. It's true that your loan-to-deposit ratio has improved as well to 1.03. So can you explain what to expect regarding the balance of loan growth and deposit growth? Thank you.

Onur Genc, CEO

Thank you, Marta. On the capital topic, let me defer to Luisa. This will also be a target for you this year.

Luisa Bravo, CFO

Yes, I realize that. This is definitely an ongoing dynamic and ongoing process. We will, of course, be conducting more SRTs this year. It's difficult to pinpoint a specific number because these deals take quite a lot of time to come to market, needing regulatory review. However, I would suggest that we will see a steady pace of SRT contributions on a quarter-by-quarter basis throughout the year.

Onur Genc, CEO

Regarding the cost of deposits, it is important to focus on NIM going forward in both Spain and Mexico. In Spain, as you noted, we should observe a slight decline in NIM, while customer spreads will also decrease. However, in this context, we expect the cost of deposits to decrease alongside as well. The shifts in rates will affect how we analyze these figures.

Operator, Operator

The next question comes from Francisco Riquel from Alantra.

Francisco Riquel, Analyst

Yes, thank you. Following up on a previous question, the loan growth in Spain, which has been accelerating, seems to indicate widening market share gains that you reported in previous quarters. I wonder if you can comment on the profitability of the new lending, given the tough competition in the sector in Spain? I also see the quarter-on-quarter growth in loans is primarily geared toward CIB and public sectors, which typically have lower margins. So, overall, what does the profitability of the new lending in Spain look like? Additionally, in Spain, costs remained flat year-on-year with lower admin costs. Could you explain what changes you are implementing to reduce the cost base, and can you provide an update on your guidance for the costs for the year? Thank you.

Onur Genc, CEO

Okay, very briefly on both questions about the profitability of new lending. As we discussed many times before, we utilize a loan-by-loan profitability framework. Every single loan must pass a certain return on capital threshold. In that context, you see the 10% growth in corporate lending and CIB, but you also see mid-size companies experiencing a 10% increase, which typically yields a high ROIC. Regardless of the segment, every 10% of growth must deliver a cost of equity. Otherwise, it cannot be approved. We are very diligent about this, with clear capital planning frameworks around this. Personally, I can view every loan I have granted and assess its ROCE. Everything is profitable—which is why we are cautious about our mortgage growth, which is currently 1.7%. The quarter-over-quarter rate is approximately 0.3%. We aren’t expanding our mortgage lending at present simply because those ROCEs do not meet our expectations. In all other areas, you can see we are achieving robust returns on capital; if not, we would not be issuing those loans. Regarding costs in Spain, there was a relatively minimal but singular one-off in these numbers—around EUR 16 million, if I recall correctly, related to VATs, etc. If you account for that EUR 16 million, the growth rate would be about 2%, aligning perfectly with our previous guidance.

Operator, Operator

The next question comes from Ignacio Ulargui from BNP Paribas.

Ignacio Ulargui, Analyst

Hi, and thanks for the presentation and for taking my questions. I have just one question. I'm trying to grasp the performance of the corporate loan book growth you see in Mexico, including other commercial and SME performance. Could you provide insight into the nature of that growth? Is it more Capital Expenditure (CapEx), Operating Expenditure (OpEx), or focused on working capital or longer-term lending? This would help provide context on what is driving growth.

Onur Genc, CEO

There is, of course, some long-term natural growth. However, as I previously mentioned, the profile has shifted significantly towards short-term working capital. This change is primarily in response to the ongoing tariff discussions and their implications. Many of our clients have been focused on building inventory and rapidly moving it, which has understandably raised their working capital needs. Consequently, we see elevated short-term lending levels.

Operator, Operator

The next question comes from Benjamin Toms from RBC.

Benjamin Toms, Analyst

Good morning, both. Thank you for taking my questions. Firstly, given the ongoing volatility from global trade wars, can you discuss how rigorously you have to assess your financial plan to maintain a higher teen ROTE over the coming years? Secondly, on capital, could you relay the latest expected capital impact from the Sabadell transaction relative to your previous guidance? Additionally, could you confirm that there are no plans to increase your capital target range in the short term? Thank you.

Onur Genc, CEO

On the first question, I understood your inquiry about managing goals during this current context and how it influences our financial plans. We clarified in our last quarterly call that our mid to long-term goal, as outlined in the new strategic plan for 2025-2029, is to deliver mid-teens tangible book value per share growth, plus dividends. It's too early to ascertain how conditions will pan out. Nevertheless, we stand by that guidance. We have already delivered a 14% growth this quarter, independently of the significant currency devaluation, particularly in Turkey. We maintain that outlook for now. As for capital, the only numbers we can provide are those published in the SEC. In last year's deals, the anticipated impact was 30 basis points, which we updated to 38 basis points. The latest public figure is now 51 basis points. This change arises from dividend payments, as we reserve a portion of our dividend for Sabadell shareholders upon merging. The increase reflects that aspect. Again, we will disclose more details as we approach the transactional stage of acceptance. Regarding short-term capital demand, we reassert that we do not intend to increase our capital target. We’ve mentioned previously that a focus on differences between requirements and targets makes more sense. The highest end of our target is 12%, while our regulatory requirement is 9.13%. This denotes a buffer of 287 basis points, positioning us comfortably against our target.

Operator, Operator

Our next question comes from Carlos Peixoto from CaixaBank.

Carlos Peixoto, Analyst

Hello, good morning. A couple of questions from my side as well. The first one concerns Spain. You mentioned fee income rising by 7% this year; however, you are maintaining low single-digit growth guidance. I was curious if this is purely conservative or if there are reasons to expect a slowdown in fee growth going forward? Similarly, regarding the cost of risk, you previously guided for 45 basis points for the year; however, your first-quarter results show 30 basis points. Is this expectation of cost inputs in macroeconomic forecasts that could drive future cost of risk, or is it a cautious approach? I'm seeking clarity on the reasoning behind this. Lastly, I would like clarification on Turkey. You mentioned earlier that net profit should fall below $1 billion; however, are you retaining the 200 basis points cost of risk indication for the Turkish unit? Thank you.

Onur Genc, CEO

Thank you, Carlos. Luisa, can you address the questions regarding Spain?

Luisa Bravo, CFO

Regarding fee income, I think we maintain our low single-digit growth guidance, especially within this context. Approximately 40% of our fees in Spain originate from asset management, which has experienced significant growth year-on-year. However, we recognize potential impacts of the market on this growth trajectory, which is why we remain comfortable maintaining single-digit growth guidance for the year, subject to market volatility. Overall, the underlying dynamics influencing fees, as you’ve mentioned, are favorable, including payments and insurance fees, which are growing strongly. As for the cost of risk, our early guidance at the start of the year was at or slightly below 38 basis points. The underlying dynamics for the quarter have shown results significantly better than anticipated, allowing us to feel secure lowering our cost of risk guidance to around 35 basis points in Spain for the year.

Onur Genc, CEO

On the Turkish guidance, Carlos, I would like to note that the cost of risk for that quarter was 189 basis points, and our prior guidance was 180 basis points. So the guidance we provided last quarter has not shifted much. We still adhere to the guidance, but as mentioned, prevailing macro parameters may change and could fluctuate. The profit estimates provided may also adapt as conditions evolve.

Operator, Operator

The next question comes from Sophie Peterson from J.P. Morgan.

Sophie Peterson, Analyst

Yes, hi. Thanks for taking my question. My first question concerns the FX volatility experienced recently. Could you remind us how much hedging you’ve done on both the capital and P&L fronts, especially regarding Mexico and Turkey? For my second question, we noted strong performance again in the rest of the business data, with a considerable beat versus consensus estimates. Could you provide further details regarding the rest of your businesses? Are additional details on Italy forthcoming? How should we regard this market?

Onur Genc, CEO

Thank you, Sophie. On the hedging aspect, as you know, we implement several hedge strategies by currency. One type is to safeguard against capital fluctuations, specifically for excess capital. Our policy is to hedge 60% to 70% of this excess capital, which is not naturally hedged through respective currency loans and such. Currently, for the Mexican peso, we're hedging 56% of the excess capital, while for the Turkish lira, we're hedging 24%. Our second set of hedges is aimed at P&L, specifically around the next 12-month profit expectations, for which we typically hedge 40% to 50%. We adjust that hedging policy based on costs and market conditions. Presently, we have 62% hedged for the Mexican peso and 30% hedged for Peru, Colombia, and Turkey, noting that Turkish hedging is slightly lower than standard due to associated costs. We also pursue U.S. dollar hedging for capital preservation; this is crucial since we hold RWAs in dollars but not equity. Hedging activities here reflect on P&L due to accounting regulations. Finally, regarding the rest of the business, Luisa?

Luisa Bravo, CFO

The rest of the business primarily encompasses the CAB segment across our branches, with most relevant activities in CAB Europe and CAB US reflecting our strategic efforts to bolster our presence over recent years. The consistent growth of this sector aligns with CORE part of our strategic roadmap going forward. The robust year-on-year growth in activity—loans increasing around 23%—was also driven by CAB, particularly in investment banking and corporate lending. We accompany our clients in their endeavors throughout these footprints. In terms of profitability and revenue growth metrics, these have benefited significantly from substantial client activity, not reliant on isolated transactions. Our performance has emphasized ongoing client relationships, affirming that gross revenues are positioned from the investments we've made in this space.

Onur Genc, CEO

Sophie, to summarize the percentages I provided earlier, we also indicate the final capital sensitivity to currency fluctuations. You'll find this on page 43, showing sensitivity to devaluation. After hedging actions, the sensitivity of the Mexican peso is nine basis points; thus, a 10% devaluation of the peso would decrease our CET1 by nine basis points. The sensitivity for the Turkish lira is four basis points, while it’s a plus of 17 basis points for the dollar. You can find all these details there.

Operator, Operator

The next question comes from Hugo Cruz from KBW.

Hugo Cruz, Analyst

Hi, thank you. I wanted to query about the Eurozone, NII—specifically in Spain. Should we start considering how yield curve steepness might affect NII trends? There's ongoing discourse that rates will decline, which could lessen your NII. However, with a steep yield curve, could we potentially see increased NII down the line, especially as conditions normalize over a 2-3 year period? Any guidance would be particularly helpful.

Onur Genc, CEO

The steepness would indeed help, Hugo. Nevertheless, the current short-term levels are also crucial. This is important because we hedge and assess based on loans; primarily, the corporate and mid-corporate books utilize a reference rate based on shorter durations—essentially, the Euribor for three months and the twelve-month Euribor for mortgages. Essentially, we price products within their duration frameworks. The key question then revolves around the anticipated shifts in both the curve and the specific segments of it. While the steepness may benefit us, I wouldn't disregard the significance of current short-term rates in evaluating NII outcomes.

Operator, Operator

The next question comes from Britta Schmidt from Autonomous Research.

Britta Schmidt, Analyst

Yes, hi there. Thank you for taking my questions. I have a couple regarding Mexico. You mentioned Mexican loan growth leaning towards short-term lending; how does this factor into net interest margin? Should we still assume that such lending meets your profitability metrics? Additionally, you had some severance payments in Mexico; how much were those? Is that indicative of efforts to adjust profitability amid a weaker outlook? Lastly, a couple of clarifications: What are your expectations for recognizing the Spanish bank tax for 2024, which hasn't been accounted for yet? Any updates on discussions with Sabadell regarding the deal status?

Onur Genc, CEO

Regarding the short-term nature of loans—Britta, regardless of the duration, every loan must meet specific profitability thresholds. We have a structured approach to monitoring this. All loans must satisfy profitability criteria. While we have certain exceptions, the expectation is profitability for every loan issued. Surely, this short-term lending has been profitable. The reason for maintaining our activities and guidance is the uncertainty regarding the sustainability of this growth in weeks and months ahead. In Mexico, we noted significant employee growth over the past years, with approximately 2,500 individuals affected by redundancy programs during the first quarter. This program was standard procedure, aimed at optimizing our workforce for efficiency. The severance costs contributed approximately 3% to the cost growth of 11.7% year-on-year you observed. Regarding the Spanish banking tax situation for 2024, it remains unclear at the moment. We're waiting on clarity regarding legislation before we can finalize discussions on this matter, as mentioned. On the Sabadell deal, we await the CNMC's final decision, which should be coming soon. Once that's determined, I anticipate further procedural steps to follow.

Operator, Operator

That concludes our Q&A session. Thank you very much for joining today's call and for your insightful questions. We remain open to any additional inquiries you may have in the future.

Onur Genc, CEO

Thank you, everyone.

Luisa Bravo, CFO

Thank you very much.