Earnings Call Transcript - BBVA Q3 2023

Operator, Operator

Good morning and welcome everyone to BBVA’s Third Quarter 2023 Results Presentation. I am joined today by Onur Genc, our CEO; and Luisa Gomez Bravo, BBVA CFO. As in previous quarters, Onur will start discussing the group figures, and then Luisa will go through the business areas. Afterwards, we will open the line to receive your questions. Thank you very much for your participation. And now I turn it over to Onur.

Onur Genc, CEO

Thank you, Patricia. Good morning to everyone. Welcome, and thank you for joining our third quarter ‘23 results audio webcast. Before going into the presentation, I want to welcome Luisa to the results presentation in her new role as the CFO of the group, although I believe that most of you have already met her here, but welcome Luisa. So results, starting with Slide #3. On the left-hand side of the slide, you can see the net attributable profit reaching €2.83 billion, showing another quarter of record results. Again, over the €2 billion mark, the second quarter that we are passing the €2 billion mark and the 13% above the results of the same quarter of last year. These results also represent at the bottom of the page, €0.33 earnings per share, an 18% year-over-year growth, a higher growth rate, obviously, than the one on net attributable profit due to the share buyback programs that we have been executing. The graph on the right-hand side of the slide shows our capital ratio at 12.73%, reflecting a 6 basis points increase in the quarter after discounting the 32 basis points impact on the ratio from the €1 billion ongoing share buyback program we are currently executing. Our CET position remains very clearly above our target range and above the regulatory requirements. Moving to Page #4 showing the consistent growth in our operating income with a very robust upward trend, in our view, that serves as an indication of our potential going forward. It underscores also the strength of our franchises and the success of our profitable growth strategy. Page #5, our tangible book value per share plus dividends continues to show the outstanding evolution of previous quarters, with an 18% increase year-over-year and an exceptional 5.5% quarterly growth in the third quarter. And regarding profitability, on the right-hand side, we continue to improve our excellent profitability metrics, reaching 17%, actually surpassing 17% in ROTE and 16.3% in ROI, these numbers being the highest figures over the last 10 years. With these numbers, we remain clearly one of the most profitable European banks, and we keep advancing on these metrics. Slide #6, focusing on the quarterly results, the third quarter results and year-on-year comparisons. In the second column from the left, what stands out is the impressive 29.1% year-on-year growth in gross income, along with 32% growth in operating income, which then explains the year-on-year net attributable profit growth of 29.6% in constant euros and 13.4% in current euros. Slide #7, regarding the first 9 months, cumulative 9 months of 2023 versus the same period last year. Once again, I would highlight the very positive gross income evolution, increasing 31.8% in constant euros, led by a 36.5% increase in NII and also a great fee income performance in our view, growing 17.5%. All in all, the strong gross income growth, coupled with the positive jaws and the sound performance of the risk metrics in the current cycle led to an outstanding recurrent net attributable profit of almost €6 billion, implying a 32% growth in constant euros and 19% in current euros, excluding nonrecurring impact, as you see in the second line from the bottom in the table. Then Slide #8, we would like to shed some light, as we always do, into the revenue breakdown and the quarterly evolution. We are very pleased with the trends that we see on this page. As we improve our revenue capacity quarter after quarter, our net interest income has increased 36% versus last year and 13.4% compared to last quarter, driven by the solid activity growth and the customer spread improvements. Second, on the page, we observe a positive evolution of net fees and commissions at the top right, increasing an outstanding 28% year-on-year and 13.6% versus last quarter due to payments, asset management, and transactional businesses, and all our businesses regarding the fee income are performing really well. Third, we have seen strong quarterly performance in net trading income, driven by the developments, especially in Global Markets. Overall, we witnessed excellent growth in gross income of 29% year-over-year and 9.5% quarter-over-quarter. Slide #9 focuses on Spain and Mexico, allowing you to isolate the mix effect of countries. The left side of the slide highlights our clear conviction for continued revenue growth for the bank and group in the coming quarters. On the left side, strong loan growth in the most profitable segments in both Spain and especially Mexico is evident. The center section displays the evolution of customer spreads, with Spain's spreads reaching 3.33% and Mexico's customer spread maintaining a high level of 11.94%. On the right side, due to both activity growth and customer spread improvements, core revenue growth year-over-year shows 39% growth in Spain and 19% growth in Mexico in constant and also on a quarterly basis, above 5% quarter-over-quarter growth in both countries. I've had several inquiries asking about the peak, asking, "When is it going to peak?" As we have commented in the past and as this page shows, due to the continued spread improvement in Spain and strong lending momentum in Mexico, we believe we will continue to post healthy core revenue growth in the coming quarters. In fact, today, we are further upgrading our NII growth expectations for 2023 for both Spain and Mexico. Slide #10 continues showing positive jaws at the group level, thanks to the good performance of gross income, which is growing at 31.8% in the first 9 months of the year, while costs are growing at 22.3%, mainly due to the impact of high inflation in various countries. The right side of the slide shows our efficiency ratio, which demonstrates outstanding improvement to 41.8%, 328 basis points lower than last year. With this number, we clearly remain one of the most efficient European banks. Turning to Slide #11, you can see the evolution of our asset quality metrics in the context of activity growth, as we just discussed in the most profitable segments and also the context of higher interest rates. The left-hand side of the page at the bottom shows our accumulated cost of risk, which increased 7 basis points in the quarter, totaling 211 basis points year-to-date, mainly explained by two factors. The first, and the majority of the impact comes from the mix effect, where we observe more activity growth in highly profitable but high cost of risk retail segments along with more growth in emerging market geographies, especially in Mexico. The second reason for the increase is a gradual deterioration of the macro financial environment in South America with downward divisions, as you know, the economic growth, tight funding conditions, and other idiosyncratic risks, especially in Peru. Despite these numbers, we still see relatively benign asset quality trends. We stick to our original guidance of cost of risk in all geographies, with exceptions for South America. However, due to the deterioration in some parts of South America and mostly due to the aforementioned mix effect, we anticipate our group cost of risk to be slightly above current levels for the 2023 year-end. Our NPL ratio on the same page is at 3%, slightly improving quarter-over-quarter and also compared to the same period last year, mainly due to the underlying positive dynamics, especially in the wholesale portfolios and the specific portfolio sale in Spain that we executed in July. Our coverage ratio on the same chart is at 79%, broadly stable compared to June. Slide #12, regarding capital evolution. Turning to the waterfall at the top of the page and beginning at the 1,267 CET1. That is the last quarter ratio after the impact of the share buyback we are executing, the main impact of the quarter. First, our strong results generation, 60 basis points; second, the dividend accrual and AT1 coupons, which is a negative 33 basis points. Third, minus 39 basis points due to RWA growth, somewhat higher than a typical quarter; however, due to the profitable nature of such growth, this will result in even more organic capital in the coming quarters. Lastly, a bucket of various factors contributes a plus 18 basis points, mainly due to the credit adjustments that are accounting-wise neutral, which neutralizes the deduction in the P&L bucket due to hyperinflation accounting, partially offset by the negative market impacts altogether, amounting to 18 basis points. Finally, at the bottom of the page, we share our latest shareholder remuneration decisions. At the bottom left, our interim dividend of €0.16 paid this month reflects a 33% increase versus last year's interim dividend. Then there is the €1 billion share buyback program being executed; we expect to finish this program before year-end and then amortize the shares by year-end period, hopefully. As I mentioned last quarter and highlighted in previous pages, we are netting a 17% return on tangible equity, with as discussed, an 18% year-over-year growth in tangible book value per share. With such metrics, we will continue to create value and share that value with our shareholders. Moving to Page #13, some of the metrics that reflect our strategic progress. Our first metric concerning new customer acquisition, as I have shared many times before, we believe that the healthiest way of growing the balance sheet is through expanding our client franchise. In the first 9 months of 2023, we acquired 8.3 million customers, more than doubling the client acquisition that we had five years ago. Even more impressive is that the share of those acquired through digital channels, another record this quarter, has increased to 65% in the first 9 months of the year. This is our key differentiation from most of our competitors. Moving on to Slide #14, as you all know, we remain committed to sustainability and other strategic levers. This quarter, we have channeled €16 billion into sustainable business, the second-best figure ever after last quarter’s record; bringing our total to €185 billion since 2018. Therefore, with this number, we maintain our target of channeling a cumulative €300 billion to sustainability by 2025. On the right side of the page, you can see the results of our efforts to extend the business of sustainability to all our customer segments; we are beginning to see the results of our specialized teams, the expansion in the sustainable products catalog, and the strong growth of all segments, especially in enterprises and retail segments, as you can see on the page. Moving to Slide 15, I would like to highlight our positive impact on society. Through our primary activity of lending, we continue to help our clients achieve their life and financial goals. We have increased our loan book by 8% in the last year, as illustrated on the page. This figure is impressive, but allows us to point out that in the first 9 months of this year, we have granted more than 100,000 mortgages, housing 12 families. We have supported more than 400,000 SMEs and self-employed individuals in financing their growth, in addition to providing support for more than 70,000 larger corporates. Through these efforts, we promote employment, investment, and overall societal welfare. Finally, on Slide 16, regarding our long-term targets announced on Investor Day, I will not delve into each one for time purposes, but in all metrics, we are well on track to realize our upgraded expectations as announced last quarter, clearly outperforming all of our original goals. Now to update on the business areas, I turn it over to Luisa. Luisa?

Luisa Gomez Bravo, CFO

Thank you very much, Onur, and good morning to everyone. As anticipated, we are happy to share with you a very good set of results. Our organic profitable growth strategy remains well on track in all geographies, as you have witnessed throughout the year, with momentum especially in those products and segments where we see the greatest value. Moving to Slide 18 in Spain, you will see an outstanding set of results in the quarter, with the loan book remaining broadly flat despite uneven developments by portfolios. I would highlight the growth in the most profitable segments in consumer and SMEs, where we continue to gain market share in the quarter and year-on-year comparisons. This quarter, I would also like to emphasize the positive evolution in mortgages, supported by new production levels. However, early repayments, despite starting to show a declining trend, continue to weigh down on the loan stock in year-on-year numbers. Still, the year-on-year numbers are slightly better than those presented last quarter. In terms of P&L, we are posting a robust pre-provision profit, with an SCC growing 24.5% in the quarter and 42.6% year-on-year. As in past quarters, this is driven by NII. NII continues to be supported by the customer spread improvement that Onur mentioned earlier, and the repricing of the loan portfolio continues, while deposit costs remain well contained. As there is still excess liquidity, and I mentioned earlier, limited loan growth in the system, our loan-to-deposit ratio stands at 90%, very much in line with the banking system in Spain. To date, we are not facing major pressures on positive remuneration, with a deposit mix remaining very solid and limited shift from demanded time deposits. This situation leads us to upgrade our NII growth estimate for 2023, expecting it to close at close to 50% compared to our previous guidance of 40% to 45% range. Additionally, on the side of fees, the results mirror our mix in the quarter, where we witnessed a decline in fees primarily due to seasonality, also driven by lower CIB fees in the quarter. Excluding these current account drags, we would observe an increase in fees year-on-year. The efficiency ratio continues to improve to 39.4% as of September due to the highly positive jaws in this geography. On the asset quality side, impairments and increases in the cost of risk are well in line with our forecast. In the current higher rate cycle, provisioning needs for retail portfolios are unsurprisingly slightly higher. Therefore, we maintain our expectation for the cost of risk to stand at roughly 35 basis points for the year. Overall, another very positive quarter for BBVA Spain, with net attributable profit reaching €2.1 billion, which is 62% higher than the 9-month figure of last year. Moving on to Mexico, as we transition to Slide 19, we remain very positive about this market. The economy continues to outperform expectations, and we’ve upgraded our economic forecast to 3.2% from 2.4% last quarter, bolstered by a strong labor market and resilient consumer demand. In such an environment, the banking sector is bound to grow at even higher rates. Our loan portfolio is benefitting from this momentum, with the most profitable segments, such as consumer loans, credit cards, and SMEs growing by more than 4% quarter-on-quarter, while commercial lending has also shown acceleration this quarter. In terms of the income statement, we are delivering strong results on the top line, with core revenues growing by 23% year-on-year, bringing net attributable profit at €1.3 billion this quarter. This success is rooted in very solid NII dynamics, leveraging the sound activity across the board and effective price management. Throughout 2023, we have managed prices effectively on the asset side and maintained our deposit cost well-contained despite the prevailing interest rate environment, and below the average of our peers. The trends observed are quite robust and bolster our confidence in NII evolution close to a 20% growth rate this year, on top of which we have also seen outstanding growth across the board in fees, specifically in areas like credit cards and payments, as well as increased contributions from asset management and our insurance businesses. The jaws evolution remains decidedly positive as revenues continue to grow well above expenses, leading to a further enhancement in the cost-to-income ratio, which currently stands at a low 30.3% as of September. Finally, regarding asset quality trends, these remain in line with expectations, closely aligned with our portfolio growth strategy. The NPL ratio remains impressively low at 2.55% as of September, with a robust coverage ratio close to 130%. The increase in impairments has mainly been driven by higher provisioning needs in the retail portfolios, which have been steadily growing in a highly consistent and profitable manner. All in all, our cumulative cost of risk stands at 294 basis points for the first 9 months of the year, in line with our expectations, and we maintain our forecast for the cost of risk to end below 300 basis points for 2023. Mexico continues to deliver extraordinary results quarterly. Moving on to Turkey on Slide 20, since the elections we have observed the initiation of the normalization of monetary policy and ongoing adjustments in regulatory frameworks, which are positive indicators for what promises to be a lengthy process toward standard monetary policy. The highlight of the quarter has been the notable rate of inflation, peaking at 25%, a significant increase from the 6.4% registered in the second quarter. This inflation surge has adversely impacted our results this quarter, resulting in a reported quarterly loss of €158 million. Further impacting Turkish results has been the increase in the corporate tax rate, which rose from 25% to 30% retroactively effective from January 1. The Turkish Lira has remained broadly stable since June during this quarter. However, examining our key operating trends, we observe that NII evolution has been supported by activity growth in short-term Turkish Lira loans, a higher total customer spread driven by foreign currency loans with improved loan yields and lower deposit costs, along with greater contributions from the securities portfolio. On the Turkish Lira side, customer spread saw a decline in the third quarter, prompted by higher deposit costs in a competitive environment. Nevertheless, we observed a turnaround in July, benefitting from recent interest rate hikes and alterations in the regulatory landscape. We anticipate the third quarter will represent the lowest point for customer spread in Turkish Lira. In terms of the remaining P&L, positive dynamics persist regarding fees and trading income, while the cost of risk remains exceptionally low, even in a negative real interest rate environment. For the entire year of 2023, in what is still a highly uncertain environment, contributions from Turkey could mirror or slightly underperform those of 2022. Looking ahead in South America as detailed on Page 21, the region continues demonstrating positive activity trends, predominantly in retail segments, evidencing growth in profitable portfolios aligned with our strategic focus. We are accruing sound pre-provision profit and notable efficiency improvements, despite rising costs amidst still-above-target inflation levels in the region. On the asset quality front, in South America we observe increasing provisioning needs from retail portfolios in light of heightened rates and a deteriorating macroeconomic setting, especially in Peru. This compels us to revise our cost of risk guidance for the region to around the current figure, which currently stands at 250 basis points for 2023. Overall, net profit in the region reached nearly €500 million in the first 9 months of the year, reflecting a 20% increase compared to last year. Now, I’ll turn it back to Onur to highlight the main takeaways.

Onur Genc, CEO

Perfect. Thank you, Luisa. I will not read what is already on the page. The only thing I would like to add is that once again, we have reported very strong results. More importantly, we firmly believe that we have positive prospects moving forward. Now, let’s open it up for the Q&A session. Patricia?

Operator, Operator

Yes, sir. Thank you, Onur. We are now ready to start the Q&A session. So, please go ahead with the first question.

Operator, Operator

Thank you. The first question today comes from the line of Maks Mishyn from JB Capital. Please go ahead, Maksy. Your line is now open.

Maks Mishyn, Analyst

Yes. Hi, good morning. Thank you for the presentation and taking our questions. I have two on Spain. The first one is on customer spreads. It seems that the migration to term deposits has been slowing down and so too has the beta. I was wondering what your expectations are for the through-the-cycle customer spread and how you expect it to evolve in the next quarters? My second question is about loan volumes; your corporate loan book grew quarter-on-quarter. Could you share more insight on where the demand comes from and what your expectations are for the upcoming quarters? Additionally, what's driving the uptick in new mortgage production? Thank you.

Onur Genc, CEO

Perfect. On the Spain deposit beta, we indicated it would be around 20% by year-end, and we still uphold that guidance. You're asking for further prospective insights regarding the spreads. Generally, we don't know how deposit costs will evolve; it all depends on competition. The situation in Spain is somewhat different from other European markets, particularly due to the abundant liquidity in the system. Moreover, the banking system is contracting. In August of this year, loan balances fell by 3.5%. This means the available liquidity, already substantial, may continue to increase. Because of the excessive liquidity, deposits will not be in short supply. Therefore, even if you experience some attrition, it will not be a concern. Competitive dynamics are crucial. However, macroeconomic factors lead us to believe that deposit costs will largely remain stable going forward. Despite this uncertainty, I can say that lending yields will rise due to repricing yet to be performed on some mortgages. As you know, two-thirds of our mortgage book reprices every six months, and one-third annually. This means it takes into account the Euribor rate from two months ago. Thus, we still expect lending yields to increase until the second quarter of 2024, indicating that spreads are expected to rise over the next one to two quarters. Regarding corporate lending volumes, the growth this quarter was partly seasonal with short-term factoring deals. The lending environment for large corporates remains soft, primarily focused on short-term financing. In terms of mortgages, you rightly observed that the quarter-on-quarter stock did not decrease, which marks a change after many quarters. We are gaining market share, particularly in new production, supported by the market environment we are currently navigating. Last year, we halted better long-term mortgage lending due to our concerns regarding the rate environment, which has led us to grow our market share in new lending from 6% to 16%. This has resulted in an uptick in activity in mortgages and a more stable loan stock in the third quarter.

Operator, Operator

Thank you, Maksy. Next question, please.

Operator, Operator

Next question today comes from the line of Benjamin Toms from RBC. Please go ahead. Your line is now open.

Benjamin Toms, Analyst

Good morning and thank you for taking my questions. Firstly, could you clarify your revised FY '23 guidance regarding the cost of risk, given that you are currently running at 111 basis points relative to a guidance of 100 basis points? Is this slightly above 111 basis points the correct way to think about the run rate for 2024? Secondly, on costs, consensus indicates a growth rate of 4% in 2024; does this feel light in your view relative to weighted average inflation? Thank you.

Onur Genc, CEO

Very good. To clarify on the first question, yes, it is slightly above 111 basis points, not 100%. Differing from our original guidance, this slight increase is primarily due to positional mix impacts. If you analyze the growth rate across geographies, the geographical mix indicates our growth in Mexico has surpassed expectations, while Spain has experienced a minor deleveraging, leading to a variance of 4 basis points. The growth mix within Mexico, where we're focusing heavily on retail segments, also contributes another 4 basis points. Additionally, there has been a real deterioration in South America, which has led to an increase above the original target 225 basis points to a revision around 250 basis points. The core situation in Peru and Colombia, with low GDP growth, has contributed to this real deterioration. Our overall cost of risk set at 100 basis points at the year’s outset will slightly exceed current levels at year-end. Regarding costs, Luisa, we do not provide specific 2024 guidance just yet.

Luisa Gomez Bravo, CFO

No, we don't.

Onur Genc, CEO

Next quarter, we would give guidance. But we indeed expect profit from BBVA to see better numbers than previously anticipated in 2023.

Operator, Operator

Thank you, Benjamin. Next question, please.

Operator, Operator

Thank you. The next question comes from Sofie Peterzens from JPMorgan. Please go ahead. Your line is now open.

Sofie Peterzens, Analyst

Yes, hi. This is Sofie from JPMorgan. Thanks for taking my question. I was just curious about Turkey. As your strong loan portfolio experiences a cost of risk fall to 26 basis points, how should we interpret this going forward given the move towards normalizing interest rates? What should be the normalized cost of risk for Turkey? Regarding capital returns, as your share buyback is expected to conclude by the end of this year, what is your outlook for capital returns in '24? How do you intend to balance this with the growth opportunities you see and any potential capital headwinds for next year?

Onur Genc, CEO

Very good question. The cost of risk in Turkey at 26 basis points, as you noted, is markedly low compared to our historical averages, specifically in 2018 and '19, when we saw figures at 288 and 244 basis points, respectively. Last year, which was deemed more normalized, saw a cost of risk around 94 basis points. Currently, at 26 basis points, the figure is too low given the high level of inflation impacting customer payment capabilities. There will undoubtedly be some deterioration once normalization occurs, but allow us to provide outlook guidance next quarter. Regarding capital return, we have reiterated multiple times that we will maintain our strategy consistently. In terms of shareholder returns, the priority will always be to deliver strong financial results that exceed our competitors'. Our returns on tangible equity of 17% and 18% YOY growth in tangible book value signal our commitment. Given this situation, further share buybacks could proceed. We firmly believe these metrics are sustainable, and we maintain the stance that excess capital will indeed return to our shareholders over time.

Luisa Gomez Bravo, CFO

No.

Onur Genc, CEO

No, okay.

Operator, Operator

Thank you, Sofie. Next question, please.

Operator, Operator

The next question today comes from the line of Alvaro Serrano from Morgan Stanley. Please go ahead. Your line is now open.

Alvaro Serrano, Analyst

Good morning. I have two follow-up questions. One pertains to Spain regarding your deposit mix; I noticed your term deposits are nearly flat quarter-on-quarter, which is quite impressive. I realize it’s summer and people tend to spend more than save, but could you provide insight into the anticipated deposit mix over the next few quarters in light of offers from CaixaBank and Sabadell? Regarding your second question, in Q3, the cost of risk stood at approximately 325 basis points. Acknowledging your guidance for the full year being below 300 basis points, could you comment on whether this is a reasonable run rate considering an increasing consumer-heavy growth? Thank you.

Onur Genc, CEO

Luisa, do you want to take the Mexican one on the cost of risk? Regarding Spain, we remain uncertain about how the competition will evolve going forward. However, I’ve provided some structural factors for why we think that beta will be relatively limited compared to other countries. If you look at the beta structure of BBVA, which is around 16%, the breakdown indicates that for large clients, it’s estimated at 85%. For midsize enterprises, it’s around 35%. The retail sector, which is primarily the mass segment, has a beta of less than 5%. A significant portion of our profits arises from retail, with nearly 70% coming from this sector, alongside 55% of our deposits being under the €100,000 deposit guarantee scheme. Given our extensive customer base, the betas we are observing are relatively contained. But once again, for further insights, I recommend waiting for the next quarter when we provide the full trajectory. However, I can share positive trends on this topic. As for cost of risk in Mexico, Luisa, please go ahead.

Luisa Gomez Bravo, CFO

Yes. The cost of risk in the quarter has indeed risen to 308 basis points, largely due to an increase in NPL entries in the retail segments, particularly in consumer loans and credit cards, where we are currently expanding our market presence. This aligns with our commitment to capture market share in these segments, which yield an average of above 26%. However, we have observed heightened provisioning needs stemming from our early warning signals factored into our behavioral risk models. This means that when we identify a customer lagging on payments, we must forecast potential losses, which are not actual losses yet but are anticipated. Our customers generally maintain a strong engagement with BBVA Mexico, boasting exceedingly positive Net Promoter Scores. While we believe this is in line with our expectations for the quarter, we remain vigilant and monitor the evolving customer environment closely, and should remain optimistic regarding the mix effects driving cost of risk in the future.

Onur Genc, CEO

As previously mentioned, the reasoning behind the mix effect includes the appreciation of the Mexican peso, which brings positive influences. If isolated from currency fluctuations, our growth in the lending book is about 11% on average, around 15% for retail loans. The reported 7% growth in corporate loans is lower due to the peso appreciation, which has shifted the growth outlook in that sector. In this context, we maintain our 300 basis point guidance and continue to adhere to it, as evidenced by the impact of the mix and currency on loan performance.

Operator, Operator

Thank you, Alvaro. Next question, please.

Operator, Operator

The next question comes from the line of Francisco Riquel from Alantra. Please go ahead. Your line is now open.

Francisco Riquel, Analyst

Thank you for taking my questions. First, I'd like to inquire about Mexico's customer spread, which has been flat quarter-on-quarter. Given that the deposit beta is still low relative to peers and spreads are resilient despite the improved mix, what do you forecast for the coming quarters? What's your outlook on terminal deposit beta? Additionally, the loan-to-deposit ratio has risen to 105%; do you have a threshold at which you would start to enhance deposits or consider alternative funding through wholesale debt? Secondly, regarding capital returns, could you explain why you wouldn't return all excess CET1 of 12% in the upcoming buyback program? Are you planning to keep a capital buffer similar to the prior buyback strategy? Thank you.

Onur Genc, CEO

On the customer spread, as we have previously indicated, our portrayal of the spread in Mexico suggests minimal increases moving forward. I would highlight that spreads are likely to remain stable in the coming quarters. We've been consistent in expressing that the main narrative for the NII in Mexico is the anticipated volume growth rather than spread improvements. You were asking for specifics on spreads; I can tell you that we view these as nearing peaks. I want to reiterate that in terms of profitability and the macroenvironment in Mexico, several key factors indicating our corporate growth trajectory are evident. Regarding the profits for this quarter, you should consider two significant macro factors. First, concerning Turkey, significantly reducing profits due to inflationary pressures and losses. The second factor is integrating negative carry to secure future revenues from lowering rates. This tactical approach is aimed at reducing revenue sensitivity to rate cuts in Mexico and Spain. Our overall results reflect these proactive adjustments, with solid growth in revenues despite the Turkish performance impacting results. Regarding your loan-to-deposit observation, while the ratio stands at 100%, we have functioned with considerably higher ratios in the past. We regularly evaluate whether to seek more deposits, and there is no immediate concern surrounding the loan-to-deposit range as it currently stands. Therefore, we do not have a predetermined threshold for loans. As for capital return discussions, we've reiterated our long-term commitment to gradual implementation, allowing strategies to evolve periodically. We're focused on our evolving share price and compute considerations accordingly. So, there's no urgency to pursue a large buyback immediately, but we are poised to execute when prudent.

Operator, Operator

Thank you, Francisco. Next question, please.

Operator, Operator

The next question comes from the line of Andrea Filtri from Mediobanca. Please go ahead. Your line is now open.

Andrea Filtri, Analyst

Hey, sorry. I was on mute. First question on your CET1 capital's composition; as your payout is in euros yet, you cannot extract capital from various subsidiaries, does the FX composition of your CET1 skew toward hyperinflation currencies? Is there a supervisor adjustment affecting what is distributable CET1 based on the FX capital composition? Regarding the digital euro, what are the perceived risks and opportunities tied to its implementation? Have you budgeted its impact on your business model, and if so, could you share your insights?

Onur Genc, CEO

Thank you for your questions, Andrea. Regarding the capital composition, we purposefully clarify this in the appendix of our presentation each quarter, where you can find the book values from various subsidiaries of BBVA. If dividends from particular regions cannot be repatriated, this affects the book values. We've repatriated €350 million from Turkey in 2023. The solo profit and capital ratios of BBVA SA would be negatively affected by non-repatriated earnings in hyperinflationary countries, but we do not see this as an issue. Unlike many competitors in Europe, we focus on profits and consistently emphasize the importance of tangible book value growth per share, incorporating risk factors into our management discipline. When it comes to the digital euro, a discussion may be necessary since we’ve outlined our perspective on the ECB's objectives, which primarily center around strengthening payment systems across Europe. However, we maintain a position regarding the potential risks associated with implementing something unnecessary for the existing structure, particularly in the way they're approaching it. There's a process unfolding, and we’ll need additional clarity in the coming years on how to adapt, but as of now, I wouldn't categorize it as a significant threat.

Operator, Operator

Thank you, Andrea. Next question, please.

Operator, Operator

The next question comes from Carlos Cobo from Societe Generale. Please go ahead. Your line is now open.

Carlos Cobo, Analyst

Hi, thanks for taking my questions. My main question pertains to Mexico regarding your risk appetite. I've been wondering whether you are adjusting your appetite for consumer loans, given rising rates, and how might this impact the cost of risk? Specifically, do you believe the message you are conveying today suggests your portfolio remains attractive despite rising provisions? Additionally, your cost of risk for corporate loans appears abnormally low amidst the rate hikes. Could you elaborate on this aspect? Is it sustainable going forward? Lastly, could you provide more details concerning your mortgage strategy in Spain? Are you focusing on fixed-rate loans, or are you also observing a trend toward mixed products with various fixed tranches? What pricing dynamics enable you to successfully grow market share while others are struggling? Finally, a note on trading; could you provide an elaboration in this area? It seems quite volatile, where visibility is restricted, and whether you're optimistic for trading next year? What drove the increase in trading this quarter, and is this recurring or caused by one-off events?

Onur Genc, CEO

Regarding risk appetite, Luisa may want to take on trading-related matters. But specifically on the cost of risk in Mexico, the wholesale and retail risk segments have shown promising performance. We've maintained our guidance of below 300 basis points for cost of risk in Mexico, staying on track for the year. Large corporates engage in relatively low-risk activities amidst a positive macroeconomic environment. You'll recall that we upgraded Mexico's GDP growth forecast to 3.2%, supporting investment and driving our loan growth in developing portfolios. So, we feel the cost of risk holds steady in Mexico. On a retail basis, we see cost of risk affecting lending within the consumer segment, so despite presenting higher numbers in retail—600 basis points—we believe it remains an attractive portfolio. The overall quality signals are robust at present, and we are confident in its sustainability moving forward. Regarding mortgage dynamics in Spain, I suggest that around 85% of our new production mortgages are fixed rates. While we also offer mixed products, they comprise a minor portion of our product mix. We're confident in our growth in mortgages due to our improved market share and positioning compared to competitors who are uncertain or unwilling to engage in fixed-rate products given the environment. Lastly, regarding trading in Q3, Luisa.

Luisa Gomez Bravo, CFO

This year, we’ve seen NTI increasing mainly due to global market activity across different geographies. Our growth reflects gains made from both franchise activity and leveraging global market resources. I would also like to emphasize certain developments seen in Mexico. During the quarter, NPI observed a negative response primarily due to an exchange where we substituted short-term sovereign bonds from 5.5% yield to 9.45% yield bonds, which accounted for around €80 million. Therefore, while this quarter shows lower NTI performance in Mexico, we still anticipate strong bottom-line growth moving forward—especially as Turkey has generated outstanding NTI from global markets geared towards FX trading. Overall, our teams have efficiently capitalized on volatility to bolster results quarter-on-quarter.

Operator, Operator

Thank you, Carlos. Next question, please.

Operator, Operator

The next question comes from Marta Sanchez Romero from Citi. Please go ahead. Your line is now open.

Marta Sanchez Romero, Analyst

Good morning, and thank you. First question on Mexico: The Mexican Government has approved tax credits for CapEx for certain exporters. What impact could this have on your corporate loan book growth in the upcoming quarters? A follow-up to your risk appetite in Mexico would be helpful; how can investors be assured of your risk appetite, and is there an exposure to defaults in consumer loans? Have you been testing new segments? Lastly, could you please provide an update on the equity hedges in Turkey and Mexico?

Onur Genc, CEO

In relation to the tax credits in Mexico, we have not quantitatively assessed the specific impact this will have on our lending books. However, we see it as a positive trend regarding promoting exporting industries and incentivizing near-shoring. Concerning your question about our risk appetite, we maintain our guidance for Mexico at less than 300 basis points despite any fluctuations in this quarter. The current rise in defaults reflects a mix effect seen in our retail books, where we focus on high-yield portfolios but enable predictive metrics from behavioral analysis. Hence, we are positioned to monitor cash flow and credit quality closely, signaling that we remain stable regardless of external pressures. As for equity hedges, Luisa will provide further details.

Luisa Gomez Bravo, CFO

As you know, we typically hedge around 60% to 70% of the aggregated amount of excess capital. In Mexico, we are currently hedging approximately 60% of excess capital, while in Turkey, we are hedging around 50% of the excess capital. Post-election, we've slightly shifted the dynamics of equity hedges, increasing sensitivity modestly against depreciation, especially as we anticipate a stable currency in the upcoming months. Our equity hedging sensitivity stands at approximately 5 basis points for Turkey and around 9 basis points for Mexico, factoring in 10% depreciation respectively. On cost of hedges, remember that we account for this in our CET1 costs: in Mexico, we are around 1 basis point per month, while Turkey’s hedging costs have marginally increased to approximately 1.3 to 1.4 basis points per month.

Operator, Operator

Thank you, Marta. Next question, please.

Operator, Operator

The next question comes from Britta Schmidt from Autonomous Research. Please go ahead. Your line is now open.

Britta Schmidt, Analyst

Yes. Hi there. Thank you for taking my question. Two fairly short ones. Firstly, in Turkey, you described the customer spread as having bottomed out, but could you provide a figure related to its performance in September, October versus early in the quarter? Will net interest income growth assist in countering cost base inflation pressures in Q4? Finally, what are your expectations regarding the cost-to-income ratio, both total and José development for Q4, especially considering some revenue impacts like the deposit insurance fund charge in Spain?

Onur Genc, CEO

On the customer spread, specifically in July, it was about minus 240 basis points; in September, it reached about 190 basis points. As we say, it appears to have peaked. Since we observed improvement from the quarter, we expect it to stabilize or provide further growth opportunities moving ahead. On the matter of the cost-to-income ratio, we do not have fixed guidance. However, we expect clearly positive jaws for the year, and that will remain consistent across the business despite the pressure of the deposit guarantee fund adjustments.

Operator, Operator

Thank you, Britta. Next question, please.

Operator, Operator

The next question today comes from Carlos Peixoto from CaixaBank. Please go ahead. Your line is now open.

Carlos Peixoto, Analyst

Yes, hi, good morning. I have three quick questions. First, on the group’s cost of risk guidance, your earlier projection was around 100 basis points; however, just now you're indicating it's at 111 basis points. Do you still view the original target as achievable? Secondly, on cost of risk guidance in Turkey, I apologize if this has come up before. Lastly, regarding the bond swap in Mexico, could you provide more details on amounts swapped and the implications for NII moving forward?

Onur Genc, CEO

You're correct, our revised view aligns at slightly above 111 basis points, which is indeed above our original forecast. Increased cost of risk was primarily driven by shifts in mix and geographic considerations. On Turkey, I haven't provided specific cost of risk guidance up to this point, but we do expect some upward movement from the current 26 basis points as monetary conditions normalize. Regarding the bond swap, the gross amount swopped was around €2.5 billion; we exchanged bonds from 5.5% yields for bonds with a 9.5% yield. This swap holds immediate impacts on our NTI as it accounted for a decrease of around €82 million. We believe this will enhance future earnings, reaffirming that pursuing this strategy was indeed beneficial.

Operator, Operator

Thank you, Carlos. Next question, please.

Operator, Operator

The next question comes from Ignacio Ulargui from BNP Paribas. Please go ahead. Your line is now open.

Ignacio Ulargui, Analyst

Hi, this is Ignacio Ulargui from BNP Paribas. Thanks for taking my questions. I have two inquiries. First, could you clarify the percentage of deposits yielding interest in Spain, specifically focusing on the corporate side? Secondly, your strategy has suggested additional bond accumulation on the euro balance sheet. With your increased mortgage growth efforts aimed at securing long-term yielding assets, what is the relationship between sensitivity on the euro balance sheet and the fixed-rate mortgage repricing?

Onur Genc, CEO

To answer your first question, in the context of deposit yield rates, you can see the breakdown across various segments. Currently, corporate deposit betas are around 85%, while midsize business deposits comprise about 35%, and retail deposits yield less than 5%. As you pointed out, the liquidity in Spain has led to less competition. In regards to your euro balance sheet strategy, we previously indicated that our NII sensitivity was 10% to 15% at the close of last year. In response to current market conditions, we’ve adjusted that figure down to about 6%, indicating a steady decline. The modifications stem from proactive management strategies, including adopting a negative carry approach to shelter future earnings from forthcoming rate declines.

Operator, Operator

Thank you, Ignacio. Next question, please.

Operator, Operator

The last question comes from Fernando Gil from Bestinver. Please go ahead. Your line is now open.

Fernando Gil, Analyst

Hi, thank you for taking my questions. The first question pertains to your ALCO portfolio regarding unrealized mark-to-market losses, which grew to almost 2.5% of tangible net asset value. Could you address that? Secondly, what is your outlook on the single resolution fund going into 2024? Lastly, could you comment on capital requirements moving forward?

Onur Genc, CEO

Regarding the whole-to-market and mark-to-market losses, you noted an increase to around 2.4%. This is indeed attributable mostly to Turkey, where rate conditions have fluctuated significantly. This encompasses various bond types, including euro-denominated bonds. With regard to the single resolution fund that should transition positively into 2024, we expect substantial reductions, while we maintain a close eye on evolving conditions. Lastly, on capital requirements, SREP requirement increases suggest that it will rise from 8.77% to 9.01%. As these requirements become clearer, we will communicate the specifics moving into next year.

Operator, Operator

So, this was the last question. Thank you very much for your questions and your interest. As always, the IR team is available for any further inquiries you may have. Thank you very much.