Earnings Call Transcript
BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (BBVA)
Earnings Call Transcript - BBVA Q3 2025
Operator, Operator
Good morning, and thank you for joining us for BBVA's third quarter results presentation. As every quarter, I'm pleased to be joined by our CEO, Onur Genç and our Group CFO, Luisa Gomez Bravo. We will start with a review of the key figures for the quarter, and then we will open the floor for your questions. So without further delay, let me hand it over to Onur.
Onur Genç, CEO
Thank you, Patricia. Good morning to everyone. Welcome, and thank you for joining BBVA's Third Quarter 2025 Earnings Webcast. As always, let's jump into the slides, starting with Slide #3. The value creation numbers on the left show a strong evolution of tangible book value per share plus dividends, which increased by 17% year-over-year and 4.5% in the quarter, which I believe are excellent figures. On the right, the profitability ratios are sustained at very high levels, with an industry-leading return on tangible equity of 19.7% and return on equity of 18.8% in the first nine months of 2025. Moving to Page #4, we delivered another strong quarter in terms of net attributable profit, exceeding the EUR 2.5 billion mark even in a lower rate environment. The net attributable profit decreased compared to the previous quarter mainly due to higher inflation in Turkey and one-off positive impacts from the second quarter. Specifically, this was related to the release of fiscal provisions affecting the tax rate and calculations around value-added tax and operating expenses. The net attributable profit is also slightly below last year's figure, largely due to the appreciation of the Mexican peso compared to the depreciation during the same period last year. This had a negative effect on the FX hedges of the net trading income line in the Corporate Center this quarter, but we anticipate benefiting from the appreciated Mexican peso in the coming quarters. On the right, our CET1 capital ratio improved by 8 basis points during the quarter, reaching 13.42%, providing us with the capacity to increase shareholder remuneration, which I will explain later. On Page #5, our cumulative profits for the first nine months continued their upward trend, reaching almost EUR 8 billion, a 4.7% increase year-over-year in current euros. On the right, our profitability metrics compared to European peers show that our 19.7% return on tangible equity remains high, clearly positioning us as one of the most profitable banks in the industry. Moving to Page #6, this slide summarizes the pages to follow, so I will proceed to Slide #7 which summarizes the P&L of the quarter. I want to highlight the impressive evolution of core revenues, with net interest income and fees growing 18% and 15% year-over-year, respectively, and 7% and 6% quarter-over-quarter in constant euros. Slide #8 shows the summarized P&L over the first nine months of the year, again highlighting the positive evolution of core revenues leading to a gross income increase of 16% in constant euros year-over-year. This growth, combined with positive jaws and controlled growth in impairments, led to our record net attributable profit of almost EUR 8 billion. On Slide #9, we delve into the revenue breakdown. We continued to deliver quarter-on-quarter revenue growth, mainly driven by net interest income and fees and commissions. This trend has characterized BBVA in recent years, and this quarter's performance is particularly strong, with NII growing 7.1% and fees growing 5.8%, resulting in a 4.4% growth rate in gross income despite the uncertain macro environment and declining interest rates. The annual decline in net trading income is largely due to the strong gains from FX hedges linked to last year's depreciation of the Mexican peso versus a negative impact this quarter due to the peso's appreciation. As I mentioned, we welcome this change as it will support us in the coming quarters. Moving to Slide #10, I want to focus on our activity and loan growth, which has maintained a strong pace of 16% year-over-year, leading to excellent NII performance. In Spain, loan growth accelerated to 7.8% year-over-year, while Mexico continues to align with our ambitious guidance at 9.8% year-over-year. If we exclude the U.S. dollar currency impact, the loan growth figure as of September 2025 would have been 10.9%. On the right side of the page, due to our strong loan growth and proactive price management, we continued to expand our core revenues, with NII and fee income increasing in both Spain and Mexico on a year-over-year and quarter-over-quarter basis. If we annualize our quarterly core revenue figures, they reflect strong performance. This is one of the key messages of the presentation. While banks typically react to rates, despite the rate compression, our unmatched loan growth and proactive price management are enabling us to continue growing our core revenues. On Page #11, you see another reason for our optimism. Over the last two years, particularly the last year, interest rates in Spain and Mexico have decreased significantly. We believe interest rates are now at or near their expected terminal rates, around 2% in Europe and approximately 6.5% in Mexico. We proactively managed the implications of these rate declines, which occurred more rapidly in Mexico compared to Spain. Our customer spreads already reflect these impacts, and with limited room for further rate cuts, we expect relative stability in customer spreads moving forward. In short, if spreads remain stable along with continued activity and loan growth, we believe revenues and profits will strengthen in our core markets in the coming quarters and years. On Slide #12, we again show positive jaws at the group level, supported by solid gross income growth of 16.2% year-over-year, while operating expenses increased by 11%, remaining below average inflation across our footprint. On the right side of the slide, our efficiency ratio improved, reaching 38.2%, below last year's figure. Slide #13 depicts the positive evolution of our asset quality metrics, which are outperforming expectations and guidance at the beginning of the year due to strong activity growth, especially in profitable segments with typically higher costs of risk. Our cost of risk stands at 135 basis points, slightly above last quarter’s figure, with numbers reflecting the negative impact from the annual risk model calibration process, partially mitigated by positive quarterly macro adjustments. Meanwhile, our NPL and coverage ratios continue to improve. Slide #14 focuses on capital and shareholder remuneration. Our CET1 ratio increased by 8 basis points to 13.42%. This reflects our ability to reinvest part of our capital generation into profitable growth. We also expect a positive regulatory impact of 40 to 50 basis points in the fourth quarter, further strengthening our capital position. Now that the Sabadell transaction is concluded, we will resume our shareholder remuneration programs, beginning with a nearly EUR 1 billion share buyback program starting tomorrow, and distributing a record interim dividend of EUR 0.32 per share on November 7. Additionally, as soon as we receive the necessary ECB authorization, we will initiate another significant share buyback program, with details to be shared upon authorization. On Page #15, I want to briefly touch on our strategic progress regarding new customer acquisition. In the first nine months of 2025, we acquired a record 8.7 million new customers, with 66% joining through digital channels, demonstrating a clear competitive advantage for BBVA. Moving to Slide 16, we are making strong progress in our sustainability efforts, channeling a record EUR 97 billion into sustainable business during the first nine months of 2025 across all segments. Finally, on Slide #17, we reaffirm the ambitious financial goals we set for the 2025-2028 period. We will provide updates on our progress versus these goals every quarter. Overall, we are in the early stages, but so far, our performance in the first nine months of 2025 has exceeded our original expectations across all metrics. Now, for the business areas update, I turn it over to Luisa. Luisa?
Luisa Gomez Bravo, CFO
Thank you very much, Onur, and good morning, everyone. In Slide #19, let's start with Spain, which has shown a strong momentum throughout the year and once again has delivered excellent results in the third quarter. Net profit reached EUR 3.1 billion in the first 9 months of 2025 with around EUR 1 billion generated in the third quarter alone. These results, in line with previous quarters, reflect solid business performance and outstanding NII evolution despite lower rates, robust fee income, strict cost discipline and continued strength in asset quality. Starting with net interest income, it has continued to perform exceptionally well this quarter, up 3.2% quarter-on-quarter, driven by strong loan growth in our most profitable segments. As you can see, consumer lending and midsized company loans both grew by around 10% year-on-year, well above the overall loan growth of 7.8%. We also continue to benefit from the positive contribution of the ALCO portfolio fully aligned with our strategy to lock in higher rates. Based on this solid performance, we are raising our NII guidance for Spain to low single-digit growth in 2025, up from slightly positive previously. Fee income this quarter was affected by the usual summer seasonality. Year-on-year, performance remains very solid, up 4.2%, mainly driven by strong growth in asset management fees, nearly 10% year-on-year higher together with increasing contributions from insurance and credit cards. On the cost side, the quarterly increase mainly reflects a one-off related to VAT payment calculations recorded last quarter, which you may remember. Excluding this impact, expenses were very well contained up only 1.3%, clearly showing our continued focus on cost control. Finally, asset quality remains very solid with both the NPL ratio and coverage ratio improving, cost of risk remained contained at 34 basis points in line with our guidance. Overall, a remarkable quarter in Spain with solid activity driving robust core revenue growth even in a low rate environment. Moving now to Mexico on Slide 20. For another quarter and despite a challenging environment, BBVA Mexico delivered a very strong set of results with net profit of EUR 1.3 billion in the quarter, driven by core revenues growth. Net interest income grew by 3.3% quarter-on-quarter, supported by robust lending activity, especially in retail, where we continue to focus on the most profitable portfolios, consumer and SMEs, both growing 4% quarter-on-quarter. Corporate lending also remained strong, increasing by 9.1% year-on-year, excluding the FX derived from the Mexican peso appreciation. Fee income performed very well, up 2.6% quarter-on-quarter with growth across the board, mainly driven by credit card payments and asset management fees. Moving to cost. The increase in expenses mainly reflects higher IT investments as we continue investing for future growth while personnel costs remained stable in the quarter. Overall, efficiency stands at close to 30% in the first 9 months. Turning to asset quality. Impairments decreased in the quarter, driven by both a net positive impact from the IFRS macro adjustments and solid underlying asset quality trends. As you may know, BBVA Research has reviewed upwards its GDP growth forecast for Mexico now expecting positive growth of 0.7% in 2025 compared with a contraction of minus 0.4% in the previous GDP forecast. This revision reflects the resilience of Mexican economy even in a highly uncertain global environment. All in all, the cumulative cost of risk stands at 327 basis points as of September, better than expected, leading us to also improve our guidance for the full year; we now expect the cost of risk in Mexico to remain below 340 basis points. Finally, net profit reached EUR 3.8 billion in the first 9 months of the year. That's a 4.5% increase in constant euros, confirming the strength, resilience, and superior profitability of our Mexican franchise. Moving now to Turkey on Slide 21. Turkey delivered net attributable profit of EUR 648 million in the first 9 months, a strong increase, close to 50% compared to the same period last year. This solid performance was driven by higher core revenues and lower impact from the hyperinflationary adjustment, supported by disinflation trends observed in the country. If we briefly look at the income statement in the first 9 months of the year, a few key points to highlight, first, we've seen a solid performance in NII, supported by strong activity growth mainly driven by retail, significant year-on-year increase in the TL customer spread, but also an improved liquidity management during the quarter. In a context of declining rates, we have benefited from lower cost of deposits, while also improving loan yields, supported both by our disciplined price management and our targeted loan growth strategy focused on the most profitable segments. As you know, in Turkey, our balance sheet shows a positive sensitivity to lower rates as deposits reprice faster than loans. This means we will continue to benefit from the current easing cycle. Second, fees continued to show a positive trend, underpinned by robust performance in payment systems and asset management fees as in previous quarters. Finally, the cost of risk slightly increased to 176 basis points in the first 9 months in line with our expectations. Impairments increased this quarter is mainly explained by the higher provision releases related to big ticket exposures recorded last quarter, which you may also remember. Provisioning needs remain high in retail, although we are starting to see stabilization in NPL inflows in this part of the portfolio. Now let's turn to South America on Slide 22. The region continued to make a strong contribution to the group's results, posting a net profit of EUR 585 million in the first 9 months, a 24% increase year-on-year in current terms. During the quarter, NII remained solid, supported by healthy loan growth across the region and customer spread expansion, particularly in Peru and Colombia. This positive evolution of margins was partly offset by Argentina where ahead of the legislative elections, we saw a sharp compression in spreads amid a highly volatile rate and currency environment. Fee income, on the other hand, showed a remarkable increase in this quarter with growth across all geographies, reflecting our continued effort and renewed focus on strengthening this revenue stream. Turning to asset quality. We continue to see positive trends in Peru and Colombia supported by a more favorable macroeconomic outlook and rate environment. Meanwhile, Argentina continues to show some deterioration in the context of strong loan growth and sharp increase in real rates. Overall, the stock of NPLs remained flattish this quarter, while the NPL ratio improved to 4.08% and the coverage level increased to 93%. The cumulative cost of risk stands at 243 basis points as of September, in line with our full-year guidance. And finally, let's move to the rest of the business on Slide 23. It's an area that we haven't usually covered on these calls, but given the strategic plan focus on CIB business and commercial banking business, we have decided to also give you some indications of how this P&L is moving on because its strong performance and growing contribution to the group's overall results are already very worthwhile. Just as a reminder, this unit mainly includes our CIB business conducted through our BBVA branches outside our core geographies. This activity accounts for more than 90% of the area's total loans and net profit. In addition, the digital banking operations in Italy and Germany are also reported under this business unit. This unit is already delivering around EUR 480 million in profits. This solid performance reflects robust business momentum across the board, supported by cross-border activity and sustainability. Higher activity levels have led to revenue growth of close to 25% year-on-year in the first 9 months, driven by a strong increase in NII, up 15% year-on-year, thanks to greater business volumes and disciplined price management and outstanding contribution from fee income showing very positive dynamics across all key geographies supported by both investment banking and global transactional banking fees. On costs, the increase reflects the rollout of our strategic growth plans, building the capabilities that will enable future growth. Finally, risk metrics remain very solid in this segment. The NPL ratio improved to 18 basis points, and the cost of risk for the first 9 months stands at just 10 basis points. Overall, we see this as a very promising business area where we are leveraging our diversified footprint to support clients wherever they operate not only in our core markets but also in other strategic geographies for them, such as the U.S., the U.K., continental Europe, and Asia. And now back to Onur for the key takeaways.
Onur Genç, CEO
For the main takeaways, it's on Page 24. Let me not take time because they are quite obvious on the page. But let me once again repeat the very high-level overall message, which is we are, once again, very happy with the performance in the quarter, especially the quarterly core revenue evolution, and we are very focused, very focused on creating organic capital and resuming our distributions to shareholders, which will be starting tomorrow morning. And with that, we go to Q&A. Patricia?
Operator, Operator
Yes. Thank you very much, Onur, and Luisa. So we are ready now to start with the Q&A session. Operator, please?
Operator, Operator
Our first question comes from Maks Mishyn from JB Capital.
Maksym Mishyn, Analyst
I have 2 questions. The first one is on loan book growth in Spain. Can you please talk more about the type of demand you are seeing in corporate loans? And also why growth in mortgages is below the average for the sector? And the second one is on cost of risk in Mexico, even though you improved guidance, the new guidance implies a pickup in the fourth quarter, and I was wondering why.
Onur Genç, CEO
Loan growth in Spain, particularly in corporate loans, is strong. Midsized companies are experiencing an 11% growth rate, while the corporate and CIB sectors are expanding at 18%. This growth is widespread across various sectors, driven by investment activity. The Spanish economy is performing well, with an upgraded GDP growth forecast of 3% for this year and 2.3% for next year. Several factors contribute to this positive outlook: immigration is boosting the population; Spain's service-based economy, particularly tourism, is thriving; next-generation EU funds are positively influencing growth; and there is an uptick in investment across the country. Two key areas stand out: energy and renewables are attracting significant investment, and the housing market is experiencing high demand. Currently, about 300,000 new households form annually in Spain, while new housing supply is around 150,000, resulting in a demand-supply mismatch. The construction of new homes has increased from 100,000 two years ago to 150,000 now, indicating a vibrant sector. However, mortgage loan growth is lagging due to pricing issues, as we don't find value in expanding our mortgage portfolio under current conditions. We have been losing market share in mortgages since the start of this year, and we are okay with that given the lack of returns. As for Mexico, we are raising our cost of risk guidance to below 340 basis points. The outlook is favorable, bolstered by improved macro expectations. In the third quarter, we experienced a positive impact from macro adjustments, but there was a larger negative effect due to the annual recalibration of IFRS 9 modeling, which caused a slight increase in cost of risk compared to the first half of the year. Overall, we are optimistic about growth dynamics and cost of risk in Mexico. Would you like to add anything, Luisa?
Luisa Gomez Bravo, CFO
I want to add to your point for full transparency that the IFRS annual recalibration update we conducted this year occurred in the third quarter, whereas last year it took place in the fourth quarter. This update was implemented across all our geographies and coincided with a positive macro IFRS update in those regions this quarter.
Onur Genç, CEO
Very good.
Operator, Operator
Thank you, Maks. Next question, please.
Operator, Operator
The next question comes from Antonio Reale from Bank of America.
Antonio Reale, Analyst
It's Antonio from Bank of America. A couple of questions from my side, please. The first one, you forgive me if I go back to the Sabadell bid, but as a management team, you've put a lot of energy and resources into the project, which, for one reason or the other didn't work out. So looking back, is there anything you think you would have done differently or maybe just your takeaway, what do you walk away with? I mean we've seen 2 failed bids in Europe and not something we've seen very frequently in the past. So that's my first question. My second question is more forward-looking and relates to sort of capital and your distribution outlook. Your 13.4% today and you flagged some additional capital tailwinds of 40 to 50 basis points coming through. And that's in Q4. Now you've confirmed also that your go-to capital target is at 11.5% to 12%. How quickly do you think you can go to that level? The market seems to be a bit skeptical about you running your business with that capital buffer. So maybe you can touch on that as well.
Onur Genç, CEO
Very good. Thank you, Antonio. As always, good questions. On the Sabadell topic, as you can see in the presentation today as well and as we have been operating since that day of Friday, we closed that chapter. We closed that chapter. We do think it's a missed opportunity; it's a missed opportunity for our shareholders, our clients, our employees, but definitely for Sabadell shareholders as well, Sabadell clients and Sabadell employees as well. For Spain, for Europe, for Catalunya, we do think it's a missed opportunity, but we closed that chapter. We closed the chapter for one very good reason: because we always care about our own stakeholders, our shareholders, our clients, our employees and for the benefit of our own shareholders, our stakeholders, it's much better to move forward, to look into the future and to focus on what we do best, which is running our business. And in that sense, again, we closed that chapter. The learnings, obviously, we are reflecting on the learnings, but the chapter is clearly closed for us. On the capital, 13.42%, as you mentioned, we are expecting another 40 basis points to 50 basis points in the fourth quarter only from a positive regulatory impacts. If you add that and if you also add the organic capital generation that we would be creating in the fourth quarter, fourth quarter is typically a better quarter in terms of SRT activity also. You would see that we have a lot of excess capital. And as we said many times before, we are fully committed to the target, 11.5% to 12%. If you take the upper end of that range 12%, we are going to be basically distributing that capital back to our shareholders to get to that 12% level. That's why we said that we are waiting for ECB approval for this extraordinary significant share buyback. And we'll go from there. Now coming back to the question of, you said, I don't know what word you used, but the 12% is that the right target and so on. I repeat the same thing every quarter, but I will do the repetition once again. We have to look not at the absolute level of that number, but we have to look into the difference versus the requirement because that requirement that is set by the ECB, by the supervisor is basically set based on many things, based on the results of the stress test. Once again, we come as one of the best in the stress test results. Based on return on tangible equity and the organic capital generation capacity, based on the volatility of your organic capital generation, based on multiple, multiple metrics. In all these metrics, not only we create much better levels of organic capital, if you take 5 years, 10 years, 15 years, you also see that the volatility around the trend line is one of the lowest in the European banking sector for us because we have these wonderful franchises in our view, in the different markets that we operate, one of the best franchises in every single country that we operate. In short, as a result, our requirement is 9.13%. If you take the upper end of our capital target range, 12%, it's 287 basis points difference, okay? So the buffer that we have versus our requirement is 287 basis points. We have a peer group. We keep reporting our numbers against the peer group, 15 largest banks of Europe. If you take out the non-EU banks from that list because the list is European geography, which includes some U.K. banks and Swiss banks. If you take out those, the EU banks, for which the requirements are set by the same supervisor, ECB, the average of the buffer of the rest, which is the 10 other banks in our peer group is 240 basis points. So our buffer is actually one of the best and clearly above the average of our peers. And we feel very comfortable operating with 12%, and we are going to be distributing our excess capital back to our shareholders to get to that level.
Operator, Operator
Thank you very much, Antonio. Next question, please.
Operator, Operator
The next question comes from Francisco Riquel from Alantra.
Francisco Riquel, Analyst
I want to ask about margins. First in Spain, the customer spread has fallen below 2.9%. And I thought 3% was the trough of this interest rate cycle. So I wonder if you can share guidance on customer spread going forward. I have seen the loan yield falling 21 basis points Q-on-Q. So how much of the fall is mix related? You have mentioned fast growth in CIB and public sector. Price competition, already some banks have flagged about this, Euribor resets pending and then the cost of deposits falls very slowly, just 3 basis points and I see fast growth in time deposits. So you can explain the trends on the liability side as well. And then my second question, margins on Mexico. They are proving, on the contrary, very resilient despite the sharp fall in interest rates that you have mentioned. So I wonder if this is just a timing issue, given the speed of the repricing between the assets and liability? And where do you see the 11% customer spread once the balance sheet is fully repriced to lower interest rates and how fast is the repricing?
Onur Genç, CEO
Thank you for your questions. There is a common theme that I want to address first, and then I will go through each of the countries you mentioned. The theme is that the rate cut cycle is coming to an end. There's more to be done in Mexico, but overall, our view is closely aligned with the marginal rate. We believe that the customer spreads you see will likely remain at similar levels going forward. For Spain, you referred to 3% as a floor. We did not quote that number, but the quarterly average of 2.88% is accurate. The monthly average for September was around 2.83%, and we expect margins to stabilize at these levels unless the ECB begins cutting rates again. Stability is already starting to take hold. You asked why lending yields have decreased significantly. It's a mixed situation, but primarily due to repricing. The reset frequency for our corporate lending book is typically one or three months, while two-thirds of the mortgage book resets every six months. Given this, there is some delay in reflecting rate cuts in lending yields. The decline in lending yields is influenced by a mix of factors, but more so by the market rate declines observed over the past two years. We are optimistic for several reasons. Despite the decrease in customer spreads, the net interest margin in Spain was flat this quarter due to our substantial ALCO book, which we believe we managed effectively. The average yield of that book is at 3%, benefiting our overall net interest margin. Additionally, front book yields are now outpacing back book yields, indicating that the curve is nearing its end. We're also seeing growth in areas like consumer and SME lending, which will help with our mix and spreads going forward. In summary, we think we're very close to the bottom of customer spreads in Spain. Regarding Mexico, there has been a slight increase, and you also inquired about deposits. In Spain, there was significant growth in wholesale deposits this quarter, creating a mix effect on deposit costs. Our deposit prices are much lower compared to other Spanish peers, so the decline from the initial point is less pronounced. This is the key reason for the change. Overall, we expect some stabilization in Mexico, slightly below current levels. The quarter's increase is due to a mix, as retail lending has grown more than corporate lending. We believe that these levels are relatively close to what we will see going forward.
Luisa Gomez Bravo, CFO
Yes. I would add that in Mexico, we maintain NII sensitivity of approximately 2.5% to a 100 basis point movement. This sensitivity is about 1.9% for the Mexican peso. As you're aware, rates in Mexico have decreased significantly from the peak of 11.25%. We anticipate rates will drop to 7% this year and move towards what we expect to be terminal rates of 6.5% next year, with potential downward adjustments depending on the strength of the peso and macroeconomic policies. Overall, we believe these rates will stabilize. The encouraging news is that this notable decline in rates, combined with the 1.9% sensitivity to 100 basis points, has been effectively managed on the NII side through excellent price management and resilient deposit costs.
Onur Genç, CEO
And maybe on Mexico, one final thing to remind, we mentioned it, I think in the past. In the 2020-2021 period, the interest rates in Mexico were around 4.25%, if I don't remember incorrectly. 4.25% was the Central Bank rate. Even in that environment, we had basically 10% margin. Since then, we have improved the mix of the loan book in such a way that you would see these double-digit more than 10% margins are quite resilient and quite expected in Mexico going forward.
Operator, Operator
Thank you very much, Paco. Next question, please.
Operator, Operator
The next question comes from Benjamin Toms of RBC.
Benjamin Toms, Analyst
The first one is on group costs, which are running up about 11% year-over-year. That's broadly in line with your inflation footprint. But do you have any additional levers you can pull going into 2026? I appreciate your footprint is different, but your largest peer is guiding to flat to slightly down costs that just seems quite a large step in aspirations here, but maybe you feel the cost growth is a natural consequence of higher balance sheet growth. And then secondly, you've broken out today some more details on the rest of the business division. Can you remind us what your ambitions are for your global CIB business? How fast do you think that business can grow by over the next 3 years?
Onur Genç, CEO
Maybe you do costs, Luisa, and I do CIB.
Luisa Gomez Bravo, CFO
Yes. Well, I think the group costs were also affected quarter-on-quarter by the impact that we had of the one-offs in the second quarter. What I think is very important with regards to the cost is that we are containing the cost increase in the different geographies. I think it's important to highlight the Mexican efficiency plans that were carried out at the beginning of the year in terms of headcount reviews and revisions. Also in Colombia. Spain is containing costs, I think, very well with that 1.9% increase year-on-year. I think what we need to really look at is with our strategic business plan going forward is that cost-to-income level. We are very much focusing on cost-to-income ensuring that we have the right operational level leverage, sorry, as long as we continue to invest in the franchises, which I think is very important for us. In this regard, we do think that the cost to income target of 35% at the end of our period, the 2028 number is very much our focus. We have, as you know, the low 30s in Spain, low 30s in Mexico, low 30s in Turkey, cost-to-income ratios, and that's the way we are managing our cost side investing, but at the same time, being disciplined and ensuring that those investments generate revenues and allow us to achieve best-in-class efficiency ratios.
Onur Genç, CEO
On costs, I want to emphasize two key principles that are crucial for BBVA management. First, our cost growth should not exceed revenue growth. Second, we aim to grow at a rate that is lower than inflation, driven by efficiencies we implement daily. When considering the numbers you mentioned in comparison to competitors, it’s important to analyze the context, especially in hyperinflationary countries. We remain committed to our two core principles: maintaining positive jaws and keeping growth below inflation. Regarding the Corporate and Investment Banking (CIB) business, we already outlined our strategy during the second-quarter call, where we established goals including a revenue growth target of around 20%. Over a four-year period, we aspire to double the size of this division. We also aim to improve our return on risk-weighted assets (RoRWA) to over 2%, which should support strong return on capital figures. We plan to achieve this through two strategic initiatives. First, we will focus on cross-border trade finance and plain vanilla corporate banking, specifically serving our clients in international markets where they operate. Many of our clients in Mexico, Spain, South America, and Turkey do business outside their home countries, and we recognize that we must enhance our support in these areas. The second initiative involves targeting institutional clients such as funds and asset managers who would benefit from our global presence. For instance, we are a key market maker for Mexican peso securities, and we've noticed that many institutional investors currently turn to our competitors. By leveraging our position and broad footprint, we believe we can enhance our performance in the CIB sector, with the goal of doubling our business in four years.
Operator, Operator
Thank you very much, Benjamin. Next question, please.
Operator, Operator
The next question comes from Sofie Peterzens from Goldman Sachs.
Sofie Caroline Peterzens, Analyst
This is Sofie from Goldman Sachs. So my first question would be going back to Mexico. We have seen some press headlines that Revolut wants to be quite aggressive in Mexico. Nubank is already quite aggressive in terms of competition. How do you think about the competitive landscape? And do you feel competition has increased? And if you could just remind us BBVA's competitive strengths in Mexico? And then the second question is on inorganic growth opportunities and maybe also organic growth opportunities. Given that your capital position is quite solid and you have 40 to 50 basis points of capital tailwinds coming in the fourth quarter, do you think it would make sense to consider growing or looking at something outside of Spain? And how do you think about kind of inorganic growth opportunities across Europe? Would you consider that? And also, if you could remind us how the Italian and German kind of digital banks are going?
Onur Genç, CEO
Thank you, Sofie. I'll begin with the second part of your question. Our focus moving forward is entirely on organic growth. I understand your concerns, but given our past experiences, it's clear that we will prioritize organic growth exclusively. While we will continue to explore opportunities, our plans, projections, and commitments outlined in the second quarter and today are strictly based on organic growth. Regarding our operations in Germany and Italy, our strategy is centered on expanding through our digital banks. For the first time, we are providing numerical data for that business, as shown in the disclosure Luisa presented, which mainly covers our corporate and investment banking. In that segment, you can see a breakdown indicating our digital banks. By the end of September, we had EUR 10 billion in deposits from that unit, encompassing both Italy and Germany, and we are set to grow in those regions. Our performance is exceeding our original business plan, with progress in both countries happening faster than anticipated. Germany is actually outperforming Italy. While our experience in Italy has been fantastic, Germany is exceeding expectations. We will continue to expand using a pure digital banking model, utilizing our infrastructure and technology from Spain to grow in Italy and Germany. That's our strategy moving forward. Regarding Mexico, I want to emphasize that we have an outstanding bank there. If you haven't visited Mexico, I encourage you to do so and meet our management team. We hold a 44% market share in payroll and cash flow-related products, which are central to our business. Our positioning in the market is strong, with top talent, a powerful brand, and a solid client base. It's an impressive bank for many reasons and difficult to replicate due to our unique assets and infrastructure. We take the neobanks in Mexico seriously; they are strong competitors. However, we plan to engage in tough competition. These neobanks are primarily focusing on two markets: credit cards and deposits. For credit cards, our brand strength and scale give us a significant competitive edge, allowing us to offer rewards and promotions that are hard for smaller firms to match. We've been gaining market share even in the face of competition from neobanks. In the deposit market, while these neobanks initially offered very high rates, they have since had to lower them. Presently, they are offering rates around 7%-8%, which allows us to compete more effectively. One third of our deposits are under EUR 30,000, with an average deposit size of EUR 790, primarily driven by transactionality and payroll accounts. We intend to maintain our competitive strengths in this area. Would you like to add anything about Mexico?
Luisa Gomez Bravo, CFO
No, I would just end up saying that, as you know, the profitability of our Mexican franchise is well beyond the peers. We have a 28% ROE in Mexico versus the peers at 15%, and it's highlighting those strengths that Onur was mentioning. It's a universal bank with a #1 NPS score of 70, above also all their competitors, including the neobanks. And I think it's a very focused bank and doing exceptionally well. So nothing else to add.
Onur Genç, CEO
Very good. We are going to pick up some speed. Otherwise, you're not going to be done.
Operator, Operator
Yes, next question, please.
Operator, Operator
The next question comes from Alvaro Serrano from Morgan Stanley.
Alvaro de Tejada, Analyst
Good to be back. Regarding Mexico, I completely agree that you have the best franchise there, which is very hard to duplicate globally. My question focuses on the medium term. Is there a certain level of market share where some of the challengers might begin to pose a more significant threat? I'm thinking of competitors like Santander and others that may intensify the competition. What market share level should we keep an eye on? I'm also noticing that while you've effectively lowered the deposit yield, the mix seems to be shifting more towards savings and time deposits. Is this indicative of increased competition? Another question I have is about delinquencies in Turkey and Argentina, particularly Turkey, where they're rising as anticipated. Should we expect this trend to continue for a few more quarters? Any insights on how long you foresee the non-performing loans rising there?
Onur Genç, CEO
Very good. There was some background noise, so if we missed any of your questions, Alvaro, please let us know. Regarding our strengths, we've talked about Mexico, but you're wondering if new competitors will emerge. I want to emphasize that our strength in Mexico is truly unmatched, thanks to our scale and our client base. While we anticipate that others will enter the market, we believe we will maintain our position. Over the past five years, and particularly in the last three years, we've been gaining market share. In the last year alone, we've increased our lending market share by 49 basis points, alongside the profitability Luisa just mentioned. We see this as a unique franchise that we will continue to develop. As for neobanks, Nubank, which originated in Brazil and is a competitor in Mexico, has a 3.5% share in credit cards. They've performed well but their market share growth is now declining relative to Brazil. Where they will end up is uncertain. We will actively compete but we're confident we won't lose market share. You inquired about deposit savings and time, which have slightly increased this quarter. I've addressed this in previous calls, as Nacho has repeatedly asked about it. When rates were high at 11.25%, we opted out of the deposit market, choosing to fund ourselves through wholesale methods as competition at high rates was not favorable for us. Now that the central bank rate is at 7.5%, we are re-entering the deposit market, particularly in the corporate and wholesale segments. Consequently, we've acquired more deposits, which is why time deposits have increased. Our loan-to-deposit ratio has adjusted compared to last year and we expect to see further growth in deposits in this lower interest rate environment. This approach was intentional and part of our strategy. Now we are starting to return to the deposit market. As for asset quality in Turkey and Argentina, Luisa?
Luisa Gomez Bravo, CFO
Yes. Well, in Turkey, I think that the numbers that we're seeing are very much within the guidance that we've given to the market at the beginning of the year, the 180 basis points. It's true that quarter-on-quarter, the comparisons are affected obviously by macro adjustments, but also by big ticket releases, especially that we had in the second quarter. What I would say with regards to underlying asset quality is that we are seeing the NPL ratios and the asset quality of the retail portfolio stabilizing at the current levels. So I think that, that is good news in the sense that we had an increase in rates at the beginning of the year and rates now should be coming down going forward into the next year. Having said that, I think 180 basis points is a cost of risk that is not a normalized cost of risk within a country like Turkey. We've had higher cost of risk in the past. So I think that the positive news is that those retail portfolios are stabilizing in terms of cost of risk. And going forward, I think that the numbers we will see what they look like. But in general, when we guided, I think we guided for around 200 basis points to our midterm, long-term plan. And in Turkey, or should we move to Argentina? Argentina.
Onur Genç, CEO
Yes, Argentina.
Luisa Gomez Bravo, CFO
So Argentina is a little bit of a different story. So Argentina, we had been seeing already in the second quarter, I would say, a sharp increase in Stage 3 and defaults in especially the retail portfolios. This is obviously due to inflation coming down quickly, but also very high real interest rates, which moved sharply in the third quarter, as you all know, we had rates touching the 60% in October versus inflation of around 31%. This has created a significant increase in deterioration in the asset quality, again, especially in the retail portfolios. We are already deciding and taking decisions regarding the origination. You've seen in the third quarter that the quarter-on-quarter growth in Argentina slowed down significantly. We grew 10% versus the 21% in the second quarter. And specifically, we are curtailing our growth in credit cards and consumers, where loan production in the quarter fell 9%, focusing our growth towards more of the commercial segment, which we feel is better. But we'll see how the macro develops. We think that the continued focus on the macro policies and decreasing inflation and decreasing rates should be supportive for a better environment. But we still need to see, I think, there quarter-on-quarter, how things develop, again, especially on the retail portfolios.
Onur Genç, CEO
On asset quality, I would conclude by saying that compared to our initial expectations at the beginning of the year, we have performed much better in Spain, Mexico, Colombia, and Peru. Turkey's performance is in line with our expectations. However, Argentina has underperformed due to the high real interest rates, which are putting pressure on the lending market there. Overall, I view this as a positive development for the year, and we remain optimistic looking ahead.
Operator, Operator
Very good. Thank you, Alvaro. Next question please.
Operator, Operator
The next question comes from Ignacio Ulargui from BNP Paribas Exane.
Ignacio Ulargui, Analyst
So I just have one question. When I just look to the capital, you have covered organic and inorganic growth, I just wanted to ask on the cost side, I mean, could be any chance that you do or launch another restructuring plan in any of your geographies, thinking probably about Spain or Mexico in terms of trying to control further cost growth or that will be ruled out at this stage?
Onur Genç, CEO
Very good. Again, let's pick up some pace, Nacho. The plan we have presented and are implementing does not include any restructuring plan as it is referred to in Spain. However, we are always seeking improvements in productivity. Luisa mentioned this in the second quarter call and also partially today. We consistently look for ways to enhance productivity. You might recall that in the first quarter of this year, we informally reduced our employee base in Mexico, for example. We will always pursue productivity enhancement initiatives. While I wouldn't label them as a program, the restructuring plan as you mean it is not part of the plan.
Operator, Operator
Thank you, Nacho. Next question, please.
Operator, Operator
The next question comes from Carlos Peixoto from Caixa Bank.
Carlos Peixoto, Analyst
The first one would actually be on the 20% ROE target that you had announced previously for 2025. Do you see that as still achievable? I reckon that the capital base is quite wide, given the current capital excess. But should we still see that as something doable? Or should we focus more on the actual bottom line number around EUR 12 billion? Then on the second question regarding Turkey. In light of the ongoing evolution, I mean the previous target or the previous quarters, you had guided towards slightly below EUR 1 billion net profit target for Turkey. And do you see that still achievable? Or should we be thinking more of something below EUR 900 million as the 9-month annualized figure seem to suggest?
Onur Genç, CEO
Very good. Thank you, Carlos. As always, 20% for the year. As you said, the excess capital has built up in the denominator of the ratio. Now that we are starting the share buybacks tomorrow morning, it will help as well, but we are still committing to that number, yes. About Turkey, we are not giving guidance for the coming year yet. The only thing I would tell you is that for this year, we said first EUR 1 billion, but it was very clear. I remember it very, very clearly because there was even a footnote in that presentation in the first quarter presentation saying that, that EUR 1 billion was under the scenario, so I don't remember it incorrectly, but 26.5% inflation and 31% interest rate. And there was also an FX depreciation assumption. Under this scenario, it will be EUR 1 billion. And then once we realize in the second quarter that those assumptions would be very tough to achieve for the macro, we said somewhat below EUR 1 billion. And this year, we still stick with it. For next year, we will do it in the next quarterly call.
Operator, Operator
Very good. Thank you, Carlos. Next question, please.
Operator, Operator
The next question comes from Ignacio Cerezo from UBS.
Ignacio Cerezo Olmos, Analyst
There's 2 quick ones, hopefully. First one is on the approval of the buyback process by the ECB. If you can give us some indication about the timing? And if it can be announced actually in the middle of the quarter when the approval is given or we need to wait for the full year results? And then the second one on Turkey. If you can give us a bit of a sense actually of how far are we from the customer spread you think you can achieve and the rates actually in the 20%, 25% region you're targeting? I mean, how quickly actually can we get there? And how far are we from the normalized customer spread in Turkey?
Onur Genç, CEO
Very good. Regarding the share buyback approval, we cannot disclose the specific amount we are seeking approval for due to clear regulations from the ECB. Until the approval is finalized, we cannot announce the amount. However, we initiated the process last week, and it is currently underway. The maximum duration for this approval process is four months, but given our excess capital and ongoing discussions, we expect it to be completed much sooner. We are waiting for the ECB's approval, which could happen anytime from tomorrow to the next couple of months. Once we receive it, we will make an announcement. As for the customer spread in Turkey, it largely depends on how quickly interest rates will decrease. The latest Central Bank rate is 39.5%, which is significantly slower than our initial expectation of 31% at the beginning of the year, primarily due to persistent inflation. Nevertheless, we believe Turkey is on a positive trajectory towards normalization, with a clear goal of reducing inflation and subsequently interest rates. Once rates decrease, we anticipate that the spread will normalize as well; however, until that occurs, it remains challenging. It's important to note that the customer spread and net interest margin (NIM) differ more in Turkey than in other markets because of the repo facility, which is currently at 39.5%. While we can utilize this facility and swaps, our funding cost is higher because of specific regulatory ratios we need to meet monthly, which require higher-priced deposits compared to other funding options. As a result, NIM is expected to improve more than the customer spread in the future, as optimizing funding costs through the repo facility benefits the whole bank. In the recent quarter, although the customer spread in Turkey hasn't improved significantly, the NIM has increased by approximately 65 basis points, primarily due to access to cheaper funding from the repo market, despite regulatory constraints. This has positively impacted our net interest income.
Operator, Operator
Thank you, Britta. Next question, please.
Operator, Operator
Next question comes from Marina Correa from Jefferies.
Unknown Analyst, Analyst
I just had a question about your return on tangible equity guidance. Hello?
Onur Genç, CEO
Yes, we can hear you, Marina, go ahead.
Unknown Analyst, Analyst
My question was about your 20% return on tangible equity guidance for this year. That suggests a strong performance in Q4 compared to Q3. Could you please explain the factors contributing to the expected increase in return on tangible equity quarter-on-quarter in Q4 that will help meet the guidance?
Onur Genç, CEO
I partially mentioned it in one of the previous questions, but you should also look into the denominator because we would be doing share buybacks. So the equity base would be coming down. So it's not just the numerator, which is the profit, but also the denominator that would be affected in the quarter. And then that number is for the full year. When we look into the numbers, we are at those levels basically.
Operator, Operator
Thank you, Marina. Next question, please.
Operator, Operator
The next question comes from Fernando Gil de Santivaes from Intesa Sanpaolo.
Fernando Gil de Santivañes d'Ornellas, Analyst
Two quick ones. One, regarding Spain, I see loan growth in the quarter being flat, mainly explained by public sector. Can you comment on these trends on the public sector, if there's anything I should be looking at? Second, regarding Spain and the litigation and the appeal that you guys presented against the Supreme Court and against the government measures due to the merger. Is the bank going to proceed with that? And finally, a short one, have you done any update on the hedging strategy regarding Argentina and the latest events after the elections and the intervention in FX markets?
Onur Genç, CEO
Very good. Let me do it very quickly, if that's okay, Luisa. On the public sector, there are some one-offs in there. So you cannot expect 20% growth year-over-year every quarter. But you should see that the public sector is going to be quite positively reflected in the growth rate of the Spain lending book going forward for one reason. The local governments in Spain for many years did not use bank financing because there was a central scheme that they could have been financing themselves from the central government. Now the bank financing is coming into play. So you would see decent growth going forward, not maybe at these levels because there were some one-offs here, but you would see good decent growth. Then the Supreme Court, we don't comment on the legal proceedings of the bank. Then the hedging strategy of Argentina, given the costs of hedging in Argentina, we have not been hedging and we will continue to be not hedging Argentina. It's so small also for the whole account that we can live with it without hedging.
Operator, Operator
Thank you very much, Fernando. Next question please.
Operator, Operator
We have no further questions at this time. So I'll hand the call back to you.
Operator, Operator
Okay. Thank you very much, everyone, for joining this call, and thank you for participating with your questions. So if you have any further questions or clarifications, please reach out to the IR team. Thank you very much.