Earnings Call Transcript
BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (BBVA)
Earnings Call Transcript - BBVA Q1 2021
Patricia Bueno, Head of Investor Relations
Good morning, everyone, and welcome to BBVA First Quarter 2021 Results Presentation. I am Patricia Bueno, Head of Investor Relations. It's my pleasure taking on this new responsibility within the group, and I'm looking forward to getting to know you soon. Here with me today is Onur Genc, Chief Executive Officer of the group, and Jaime Saenz de Tejada, BBVA Group Chief Financial Officer. As in previous quarters, Onur will begin with a presentation of the group's results, and then Jaime will review the business areas. We will move straight to the live Q&A session after that.
Onur Genc, CEO
Patricia, thank you very much. I'm glad to have you here today in your first earnings presentation as the new Head of Investor Relations. I'm sure the audience will treat us really well because it's your first. Good morning, everyone and welcome, and thank you for joining our call today. I'd been saying it for more than a year now, but I really hope that you and your families and friends are all healthy and safe in this continued pandemic. Let me start at slide number three, by presenting the positive evolution of our results in the first quarter of this year. On the left-hand side of the page, you can see our net attributable profit, which continues its upward trend, obviously, because we have taken all these provisions last year quarterly. But this quarter, 1.210 billion Euros, up from obviously a year ago, the year ago was 292 million, as you all know, because we have done this again front-loading in the provisions as compared to the last quarter of 2020. It also grew 19%. Even more remarkable in our view, we have already reached pre-COVID profit levels. So if you compare to the first quarter of '19, it's up 2.4%. Our earnings per share closed at 0.17, 17 cents, euro cents, one of the highest first-quarter figures that we had in the past few years. I need to emphasize the fact that these numbers are achieved without any release in the extraordinary COVID provisioning of 2020. So no release is factored in here, although we clearly see improvement in the underlying perspective, which we will discuss in a second. Although there has been that improvement, we have not released from the provisions of last year. The graph on the right-hand side of the slide shows the capital generation in the quarter, 15 BPs, even absorbing some regulatory impacts, which we'll discuss. If we include the impact from the sale of BBVA USA, the CET1 pro forma stands at 14.58, and after the targeted 10% share buyback, it will still remain at a very high level of 13.55, well above our target range and minimum requirements. Moving to slide number four, we keep advancing in our commitment to value creation for our shareholders, and that's why we put this page right up front all the time. Our tangible book value per share closed at 6.15, a 6.5% increase year-over-year. Regarding profitability, on the right-hand side, we have gained double digits in our profitability metrics, regaining our position, 10% in ROE, and 11% in return on tangible equity.
Jaime Saenz de Tejada, CFO
Thank you. Thank you very much, Onur. Good morning, everybody. And of course, Patricia, welcome to your first results presentation. Let me begin with the Spain BBVA research, maintaining its GDP growth forecast for Spain. GDP is expected to grow by 5.5% in 2021 and by 7% in '22, supported by the next generation European recovery fund. Having said so, we have a very good rating today, better than expected on Q1, probably means that these numbers, especially for '21, have an upward bias. Loans have slightly decreased 1.4% year-on-year in Q1, as you see in the presentation, impacted mainly by the deleveraging in the mortgage portfolio, although at a lower level than before, thanks to the very strong new production that we're seeing, especially in the last six months, and also the public sector portfolio. However, it's worth highlighting the strong performance of very small businesses and SMEs supported by state guarantees. For '21, we expect the positive dynamics in new retail lending to continue, and all in all, their portfolio is expected to remain broadly flat, but dependent on demand from commercial segments. Moving through the P&L, the operating income increased by 22% versus a year ago, mainly driven by higher core revenues up 2%, supported by the very strong fee performance thanks to credit cards, banking services, but also insurance. A significant increase in net trading income, thanks to strong global market results but also higher fixed-income portfolio sales, and also our continued cost control efforts with operating expenses improving by 3.5%. Net attributable profit was further supported in the quarter by the significant reductions of impairments, as explained, mainly by the front-loading of COVID-related provisions in Q1 of last year. So cost of risk stands at 45 basis points in the quarter. For the full year, we now think that our cost of risk guidance of around 50 basis points has a positive bias. All in all, I think good results with net attributable profit reaching pre-COVID levels at 380 million Euros.
Onur Genc, CEO
Thank you. Thank you, Jaime. In conclusion, so the last page, slide number 22. First, we believe we have reported excellent results, reaching pre-COVID levels, and our CET1 fully loaded has also increased by 15 BPs in the quarter, which is a good achievement in such a quarter. Second, we continue to deliver on our clear commitment to shareholder value creation. We are at the forefront of European banks' profitability in terms of return on equity and return on tangible equity. Third, it is important to note our ample strategic optionality –our CET1 fully loaded ratio pro forma after the sale and after the target of a 10% buyback represents an ample buffer of 155 BPs above the upper part of our target range. Fourth, we are leveraging our leading digital capabilities to better serve our customers and acquire new clients. In the first quarter, we reported an all-time record in digital customer acquisition, increasing 64% versus a year ago. Lastly, we are strengthening our commitment to sustainability, helping our clients transition towards a more sustainable future, using this also as a business opportunity, and we have taken a step forward with our commitment to net-zero emissions by 2050. Now I turn it back to Patricia to coordinate the Q&A.
Patricia Bueno, Head of Investor Relations
Okay. Thank you, Onur. We are now ready to move into the live Q&A session. So first question, please.
Operator, Operator
The first question today comes from Benjamin Toms from RBC Capital. Benjamin, please go ahead.
Benjamin Toms, Analyst
Good morning and thank you for taking my questions. The first is on Turkish politics. Can you just confirm and potentially discuss the key points here, as BBVA has a relatively small book value exposure, a large portion of its P&L and excess capital is hedged. There's no intergroup funding, and there's a significant reduction in foreign currency loans over the last couple of years. Perhaps you could also just discuss what you're seeing operationally on the ground in the country. And then secondly, on cost of risk, I think you said last quarter you expect cost of risk to be lower year-over-year, but I think in the Q&A, you also said 10 to 20 BPs lower in all geographies. Does that guidance still stand versus the 117 BP print today? And is the positive bias commentary discussed on the call the same kind of magnitudes as 10, 20 BPs lower or is it perhaps a little bit better? Thank you.
Onur Genc, CEO
Thanks, Benjamin. On the Turkish politics, we don't comment on politics but let me talk to you a little bit about our strategies regarding Turkey. So in terms of the hedging, as you all know, we do have this hedging policy for the P&L and also for the excess capital, as we call it. For the excess capital, it's only looking into the surplus capital that you have because there is some natural hedging in the capital ratio. We always do that hedging. In the P&L, we typically have 30% to 50% of the year P&L hedged against currency deviations. But given the situation in Turkey, it is higher for the Turkish case. It is at the moment 60% P&L hedged. So the hedging side is already protecting us against some negative deviations. You asked about intergroup funding; that's one of the best things about BBVA. We do have zero intergroup funding, not withholding in the countries but also between countries there is no intergroup holding. As you all know, we are a multiple point of entry bank, which means every entity, every subsidiary, every country has to stand on its own. As a result, there is no intergroup funding. Now, you asked about what we see on the operationally on the ground and so on. What we see is basically some stabilization. As we mentioned, there has been a major significant rate rise, starting lately now; it was 10.25, now it's 19%, so an 875 BPs increase in the interest rates in a short amount of time. Obviously, that was required to tame inflation and protect the macro fundamentals of the country, but that has hurt us, as I mentioned, in the very short term because of the margin impact. As I mentioned again, in Turkey, we are very not asset sensitive or negatively correlated. NII is negatively correlated to the interest rate, and the 875 BPs increase in the rates has a direct negative implication on the NII because deposits re-priced right away—the average deposit is 35 days, immediately pricing in deposits—but it takes time for the loans to re-price. So that's the key impact on the P&L. But as you all know, we are long-term investors; we trust the fundamentals of the country. We do stick to our guidance on NII for the whole year, because we see that it is picking up, and we do see that in these type of periods, it comes back up very quickly. For the 12 months, by the way, NII sensitivity for the 12 months is basically zero. In 12 months, it recovers but in the first three months, in the first six months, there is a negative impact of interest rate rises. The year-over-year guidance on the risk, 117 is the first quarter number. We have not upgraded our guidance but we wanted to clearly say that there is a clear positive bias as Jaime was mentioning in most of the geographies, particularly in Spain, in Mexico, in Turkey. For South America, we have to see because the health situation is still not going in the right direction. The numbers are quite high in Colombia, Peru, and so on. So we have to see a bit more. But in general, there is a positive bias in our core geographies. As such, our guidance, as you remember, was that it's going to be much better, better than 2020. We stick with that guidance, and we do think it's going to be positively changed maybe in the second quarter, but we wanted to be a bit prudent on this.
Patricia Bueno, Head of Investor Relations
Thank you, Benjamin. Next question, please.
Operator, Operator
The next question comes from Francisco Riquel of Alantra Equities. Francisco, please go ahead.
Francisco, Analyst
Yes, thank you. I would like to ask about Mexico, in particular NII. There is a slight decline in the first quarter, which is less than what we've seen in sector data or other local peers reporting today. You have also maintained the mid-single-digit growth guidance for the full year, which is reassuring. I wonder what is different about BBVA Mexico relative to the local peers and how do you plan to get to the full year growth. I see that you are gaining market share, but are you improving the lending mix for your risk appetite? If you can comment, I have also seen that you are increasing the loan portfolio. So can you please comment on all in NII dynamics? And the second question, Mexico is about the cost of risk; 3.5% is more or less the historical average. There is limited local support for the economy. I was expecting a longer timeframe to normalize. But I see that the NPLs are quarter-on-quarter, and the moratorium has already expired. So if you can comment on what you are seeing on the ground in terms of asset quality in Mexico. And as a side question, there are meaningful elections in both Mexico and Peru this quarter; if you can comment—if you have any view on these elections and do you see any impact on the business operating environment in the coming months in these two countries? Thank you.
Onur Genc, CEO
Thank you, Francisco. Mexico, the first one around NII. Why are we doing better than the local peers? Multiple reasons, but two things. Number one, we are growing in higher yield products lately. We were quite cautious in Mexico if you remember, in the third quarter last year, even in the starting part of the fourth quarter last year, because we wanted to see how the economy responds to COVID. There was limited support from the government to the economy, so we wanted to be a bit cautious. But as you all know, we do have very high market shares in high margin products in credit cards and consumer; we have close to 29%, relatively speaking, very high compared to our 23% overall lending market share. So as those products pick up, and I did show you in the presentation how it's picking up very nicely in Mexico, we do expect that the lending mix is going to help on the lending side. Then on the funding side, you see for Mexico, 1% cost of funding at 102; on the page for Mexico, that 102 is 1.7%, so 70 BPs higher for the industry. We are by far the lowest funding bank in the country, by far. Why? Because we are BBVA in Mexico. I keep talking about this, but our customer franchise, our talent is wonderful. It's a unique bank that we have. We have 40% market share in payrolls, for example, which creates transactionality, which creates that low-cost funding base. So we have reduced our cost of funding better than competitors, and at a level that is now 70 BPs better than the competition. When you combine them all, looking forward, I'm very positive in the context of the lending mix improving towards higher margin products, which we are really good at. NII perspectives are quite positive, I would say. Regarding the second point on the cost of risk, you said 350; the 10-year average is like if you exclude last year, the COVID years, the 340 is the average of the cost of risk. But you might remember in 2019 and 2018, we did even better than 340, it was around 300, 310. That was the cost of risk that we were looking into. We guided for 380 BPs at the beginning of the year. Today, what we are telling you is we are seeing a better trend. So we are having a positive bias on that figure. We haven't upgraded it, but probably the momentum is positive. So we will see it in the next quarter. We wanted to be a bit prudent, but there's a clear positive bias on this one. And why is this happening? I say two things. The economy, despite all the implications of COVID, is not doing bad. We recently upgraded our Mexican growth figure from 3% to 4.7%. One of the good things about Mexico is it's right next to the US. There are a lot of benefits that will be coming from the pickup in the economic activity in the US; it's going to be trickling down to Mexico, for sure. The remittances is an important figure. It has broken a record last year, and in the first two months of this year, January and February, it's up 17%. So we're expecting 43 billion of remittances from the US to Mexico this year; it's breaking records again basically in 2021 as well. All of that tail impact from the US, the fundamentals of the country, very low age, the demographic dividend, I mean the age of Mexico is 30, the age of Europe is 46. The leverage situation, we talk about them all the time, but the fact that the banking debt over GDP is 29% as compared to 65 in Brazil or 45 in Peru. So there is room for leverage, the demographic dividend is there, the tail impact from the US is there, it's going to help Mexico for sure. We do have a very good quality portfolio. If you are in the cash flow of the customer, which has been proven last year, your risk profile is better. So if you have a good economy and a good quality portfolio, we do think that there is a positive upside in the risk for Mexico. Elections, we don't comment on politics, obviously. Let's see how it goes in Mexico and in Peru. But our perspective is that independent of what happens, we are very sizable long-term investors in those respective countries, and we will do well. If you do your job well, you'll get the benefit. So we don't comment on what might happen, but we are not expecting any major deviation from our path.
Patricia Bueno, Head of Investor Relations
Okay, thank you, Francisco. Next question, please.
Operator, Operator
The next question comes from Adrian Cighi of Credit Suisse. Adrian, please go ahead.
Adrian Cighi, Analyst
Hi there. Thank you very much. Two questions from my side, one on cost in Spain and one on the provision from the group level. Last quarter, you mentioned a potential cost plan in Spain. And over the last few weeks, we've seen Spanish press discuss various figures. Could you give us a contour or maybe a timeline for when you plan to outline this? And in terms of provisions, you've mentioned that you have not released any provisions. But can you give us any indication of the quantum of unutilized provisions from the overlays you've taken last year? Thank you.
Onur Genc, CEO
On the first one, regarding the cost restructuring in Spain, Adrian, thank you for the questions. As you know, it's in the negotiation phase. There is a very legally defined process on this topic. We are in the negotiation process with the unions. So we have to see the process come to fruition before we can comment more on this one. What we mentioned in the last quarterly presentation is that we will define this plan, discuss it with the unions, and start executing, start taking actions in the first half of the year. That's still our base case, but we will see. On the provisions, we have not released, as I mentioned, regarding the extraordinary provisioning that we did last year. You might look into the last year's numbers, but more or less, the first quarter and the second quarter of last year, due to COVID, the extraordinary provisioning that we did was 2.2 billion Euros, 2.2 billion Euros. That's the macro and management adjustment combined impact due to COVID, and that's the number that is still there because we want to see, again, how the situation goes. I'm going to pick up my speed, apologies. So Jaime, do you want to?
Jaime Saenz de Tejada, CFO
Let me jump in. Yes, let me jump in. Yes, the post model adjustments that have not been used yet, is still at 223 million in Spain in Q4. And now they have become 316 million Euros, so actually they've gone up slightly in Q1.
Patricia Bueno, Head of Investor Relations
Okay. Thank you, Adrian. Next question, please.
Operator, Operator
The next question comes from Ignacio Ulargui from Exane BNP. Ignacio, please go ahead.
Ignacio Ulargui, Analyst
Hi. Good morning. Thanks for taking the questions. I have two questions. One is if you could just give a bit of color on what should we expect from the JV with Allianz on insurance revenues both in Mexico and in Spain, which I think is a bit of an area of strong potential for the bank that should grow in the future. And the other one, it's on the buyback. And if you could update us a bit on what would be the timeline that you are thinking, so how should we expect your approach once the removal of the ban is in place from ECB? Thank you.
Onur Genc, CEO
Thank you, Ignacio. Jaime is not with me today due to COVID protocols. We are in different rooms. So Jaime, why don't you take the first one, the alliance in Mexico and Spain, the JV with Allianz? I'll take the buyback right away. The buyback, the process is, as you all know, there are ongoing restrictions on shareholder distributions by the ECB that is expected to end at the end of September. We have said that our expectation for the closure of the BBVA USA deal is midyear. Both expectations still stand. So when those two events happen, depending again on the share price evolution and everything else, our base case expectation is that we will start the buyback in the fourth quarter of this year. Given the restrictions because you can buy up to a maximum of 25% over a certain periods trading volume, average trading volume, given those restrictions, it might take six to slightly more than six - six months, let's say, on average on the base case, to complete that process. So hopefully, we will start it in the fourth quarter of this year and we will finish it mid-next year, the full process of 10% buyback. On the JV with Allianz, Jaime?
Jaime Saenz de Tejada, CFO
Yes. As you know, the JV gave us a capital gain of a little over 200 million last year. The impact this year is going to be slightly negative. It's going to differ slightly in its recognition between other income and net fee and commission income versus other years. But the reality is that overall, the joint venture will penalize us by roughly 40 million Euros. The idea is that this will recover very, very fast in the next, I would say, two years. In terms of, in general, the evolution of the insurance business, as activities are recovering, and this is particularly relevant in retail portfolios, both in Spain and Mexico, very rapidly insurance sales and insurance premiums started to go up. And as I explained during my review of the business area, this has been one of the reasons why our revenue behaved well. You also need to take into account that during 2020, and also we are seeing some impact during the beginning of 2021, we've had to pay for more claims. I forgot the word in English. So that is something that is affecting slightly the contribution of the insurance business.
Patricia Bueno, Head of Investor Relations
Okay. Thank you, Ignacio. Next question, please.
Operator, Operator
The next question comes from Stefan Nedialkov of Citigroup. Stefan, please go ahead.
Stefan Nedialkov, Analyst
Thank you. Thank you. Good morning, guys. Thanks for the call to questions. Two questions, if I may. On Spain, you point to ALCO sales having an impact on NII. At the same time, when I look at your euro ALCO portfolio, it has actually gone up Q-on-Q, mostly on non-Spanish debt, Italy and other countries. Can you just explain a little bit of the dynamics of the ALCO portfolio going forward? Should that be a positive net contributor to NII from 2Q onwards? And related to that, you did take higher provision top-ups on non-loan related provisions. Compared to the past few quarters, it's around 80 to 100 million more. What were those provisions due to? So that's one Spain. My second question is on your interest rate sensitivity that you disclosed in your presentation. It looks quite asymmetric. In euro terms, for example, you have around 20% increase for 100 BPs of rate raises compared to 10% decline for the same change on the way down. But in Mexico, it's a lot more muted, it's only 3% to 5% in either direction. I'm a little bit surprised here because the US rates should be doing better over the medium to long term. Your sensitivity in Mexico is a lot lower. And obviously, US rates are quite a big determinant of Mexican rates. And if I may put in a bonus, a quick bonus question here. How much of a gain are you expecting from the Coinbase IPO in 2Q? Thank you.
Onur Genc, CEO
Very good. On the Spain NII, the impact of ALCO, yes, as you have said, there has been a slight increase, but it's a slight increase, so it will not be changing the NII contribution in a major way. So I wouldn't expect the ALCO portfolio to be creating a massive impact in the NII in the coming quarters because the slight increase in the volumes is going to be offset by the lower yields in general that we are seeing in the sovereign yields, especially. Regarding the non-loan related provisions, it is mainly related to restructuring and branch closures a bit and so on. We are typically doing that in a business-as-usual scenario, in every year in the first quarter. Last year was a bit different because of COVID. In March, the COVID came in, and so that's mainly because of that restructuring related to early retirements and all of that typically comes frontloaded in the year. That's the reason why you're seeing that increase. NII sensitivity, why is it that? It's a 100 BPs increase in Spain is much higher than it is in Mexico because most of our loan portfolio, if you look into the loan portfolio of Mexico, you will see that a good chunk is in consumer in mortgages, credit cards, and so on. Mortgages, for example, in Mexico, our consumers, they had fixed rates, so the fixed rate component of the balance sheet is much higher in Mexico. As a result, the implication of the rate rises, or the other way around, is less pronounced in the P&L, but still, it's 2%. 2% NII for the 100 BPs increase is a nice figure, if you look into the Mexican figures. So that's the reason; it's because of the structure of the balance sheet. Coinbase, the last one, we have not commented too much about this in the past calls, but I do think that it's a very positive thing that is happening out there. We do have this, what we call a venture capital fund, Propel; we have invested 250 million Euros equity into that vehicle, and we just announced another 150 million to be done in stages, but another 150 million commitment equity to that vehicle. The one that, the 250, that has already been mostly invested. We invested—or the vehicle invested—into 40 or so fintechs in the US. With the latest count, around eight of them are already unicorns, so beyond Coinbase, there are some other very good names. I mean all of those companies have unicorn status. Eight out of 40 is a very good hit rate. As a result of Coinbase, and as a result of these other investments as well, which are really good investments, we are expecting in the second quarter to register 200 to 250 million gross margin in the net trading income and in the other income lines; it's going to come in different line items, but 200 to 250 million Euros of trading income and other income gains in the second quarter P&L this year. So going very well, I mean, we are very pleased with the performance of that fund. After the Coinbase revaluation, 30% IRR, very positive developments, and we are glad that we are one of the ones who have been investing in this vehicle and into these great companies, which is also a signal that the industry is restructuring and changing, and we have to be at the forefront of that change.
Patricia Bueno, Head of Investor Relations
Thank you, Stefan. Next question, please.
Operator, Operator
The next question comes from Andrea Filtri of Mediobanca. Andrea, please go ahead.
Andrea Filtri, Analyst
Yes, good morning. I want to ask if you could reconcile how much of the government-guaranteed loans overlap with the riskier exposure or default breakdown that you provide at slide 39, please. Second question, you are guiding for flat loan evolution in Spain; how comfortable are you that you will make the TLTRO benchmark to get the bonus on the TLTRO 3? And just finally, we see deposits continue to grow very, very strongly across the board. Should we factor in an increase in deposit guarantee fund contributions and resolution fund contributions for next year? Thank you.
Onur Genc, CEO
I'll take the second and third one. Jaime, as always you got the tough ones, so you get the first one, the overlap question on page 39. On how confident are we with loan growth to be able to meet the TLTRO conditions? We are quite confident, so we don't see any risk there. The deposits—are we expecting an increase in the deposit guarantee fund? There is a Spanish version one, and there is also the European one, as you all know. We don't expect an increase in our contribution this year because, as you know very well, last March, April timeframe, there was a big spike in deposits because lots of corporate deposits and lots of other deposits were flowing into the system. Given the fact that the averages did not change too much, we don't expect a major—we don't expect actually an increase in the contributions in a significant way. On the first one, Jaime?
Jaime Saenz de Tejada, CFO
I do not know the answer. I do not know the overlap between the guaranteed funds and the high-risk sectors, so we will find that info and we will provide it to Andrea.
Onur Genc, CEO
But Andrea—yeah—okay, let's provide the precise answer. That's better.
Patricia Bueno, Head of Investor Relations
Okay. Thank you, Andrea. Next question, please.
Operator, Operator
The next question comes from Carlos Acevedo of Deutsche Bank. Carlos, please go ahead.
Carlos Acevedo, Analyst
Hi. Good morning. Thank you for taking my calls—my question, sorry. So the first question would actually be on capital, basically, whether there will be any earnings regulatory impacts for 2021, given that you already did the three models on the loan default ratio and low-default portfolio. If I remember correctly last year, you had anticipated some regulatory impacts as well. Basically, is there anything pending throughout the year? And then secondly, more of a nearly theoretical question, but basically, looking at the behavior we're seeing now, so basically, we're experiencing - we're witnessing some increases in NPL across some of the banks' geographies, which I believe was already expected, post the COVID pandemic, and at the same time, given the provisioning outlet - overlay that was done last year, you have cost of risk going down. Here the question is basically up to what level of NPL do you think that the current level of provisions or the guidance improving in cost of risk that you're giving for the full year would be sustainable? So basically, what were the thresholds from where we could start - we could become more concerned regarding the evolution of cost of risk and up to when—and up to which level it is already included in your guidance and in the provisions that were ready? Thank you.
Onur Genc, CEO
Okay, Carlos, we had some hard time hearing you out. But if we are missing your questions, please raise your voice once again. But on the capital, you asked about the regulatory impacts, if I'm not mistaken. On regulatory impacts we guided you in the first quarterly—in the February call or the January call that there are three major regulatory topics that will be hitting us this year. The first one was the TRIM on the low-default portfolio, which we already factored in, in this quarter. Then there are two others that will be coming in the coming quarters or two others or two buckets of other things. The new definition of default and PD LGD—the new guidance on the PD LGD—we expect a 10 to 15 BPs as we also told you last time, 10 to 15 BPs impact on this one. The third one that we also mentioned last time is SA-CCR; it is the counterparty credit risk for the markets and for derivative transactions, we expect another 10 to 15 BPs on that one. So the total of those two is 20 to 30 BPs in total that would be coming in, in the second and third quarter. The SA-CCR—we will see, but to be on the prudent side, in the second and third quarters, we will be realizing those two further impacts. And that's the final; we hope that we would see on this chapter. The second question on the NPLs and the cost of risk. As you all know, the NPL bucket is an in and out bucket. So there are a lot of entries, but there are also outs from that bucket as we do the write-offs that number changes a lot. The cost of risk that we have done since last year, this 2.2 billion that I mentioned to you due to COVID, the extraordinary provisioning that we were doing, the main macro adjustments and also some management adjustments has nothing to do with that NPL forecast because NPLs are not going to go up too much. That's not our expectation at all. The slight increase that you have seen this quarter in the NPL ratio is because of Spain and Turkey. For Spain, just to be again, on the prudent side, if there's one thing that defines our risk approach, it's quite prudent. We wanted to be prudent, although we don't see any deterioration, any deterioration in their portfolio. We wanted to stage some of the different mortgages in Spain to stage three, although, as I mentioned, again, because they are in deferrals, we don't see any deterioration. We want to be prudent. Same for Turkey. For some large ticket wholesale clients, we wanted to move them to stage three, but no impact or no deterioration in the payment behavior out of those. That's the slight pickup in NPLs, and beyond that, we don't see - we don't expect a major increase in the NPL ratio, because again, there are in and out. The cost of risk is for seeing a much larger figure and a much larger deterioration than we have taken already in 2020. Again, because we wanted to be prudent and we wanted to see the impact of the COVID on the economy and on our portfolio—that's the reason that there is very little connection between the two of them. We are frontloading the potential risks, but the NPL would not show that at all.
Patricia Bueno, Head of Investor Relations
Okay, thank you, Carlos. Next question, please.
Operator, Operator
The next question comes from Sofie Peterzen of JP Morgan. Sofie, please go ahead.
Sofie Peterzen, Analyst
Yeah. Hi. Thanks a lot for taking my questions. Sofie Pete from JPMorgan. I was wondering, fees in Spain are up 12% quarter-on-quarter, which looks very, very strong. Could you just kind of comment if there are any one-off items in the fee line that kind of drive this 12% quarter-on-quarter improvement or should we expect this to be a run rate going forward? And then my second question would be just, Genc, you commented that you want to do the 10% share buyback, but you still have plans for your excess capital. How should we think about excess capital and how that will be deployed? What's your view on net M&A, if you could just remind us again what your criteria are for any potential M&A target? Thank you.
Onur Genc, CEO
Thank you, Sofie. On the fees, 10% actually year-over-year growth is across the board. One of the best things about that number, it's double-digit; we haven't seen that double-digit for a while, and it's across the board across all the countries and different fee income categories. It's asset management; its payments, it was a bit CIB as well. I mean, in general banking services, as we call them. In different countries, there are different nuances, but in general, across the board, very decentralized or dispersed increase, which is very good. I would say that if there's one thing that if I want to pick one thing that is common across all the countries, it's the payment topic. Especially in Mexico, we have a very nice market share. In Turkey, we have a very nice market share; Spain, as well. So we are pushing a lot on the payments topic, and in every single country, we are registering good increases. In that, also the economy picking up in especially in March is helping but payment systems is one thing that's common across the board, but in different countries there are different pockets, and you should see it in every single country's P&L. In every country, we are seeing very nice growth in fee income. Excess capital, how should we think about that? As we talked about in the last call as well, our perspective is very clear. There are multiple options, multiple alternatives for the deployment of capital, each one of them has to compete with each other, and the one which delivers the best return should win. Obviously, there are strategic considerations; obviously, there are process-related considerations because some of the things that you might want to do might take much longer and so on, but that's the whole concept. The return has to be coming for that capital, and different alternatives have to compete. Regarding M&A, also we discussed it last time. But our perspective is very clear; we don't see M&A as we have capital, so let's do M&A. No—not at all. The M&A has to justify itself in terms of numbers. You have to come up with a value creation opportunity. The numbers have to say that this is a great opportunity, independent of whether you have excess capital or not. That's our perspective. If you have a great project, you can always ask for capital if you need to. Again, we are not naïve. There are some processes, things if you have capital, it might be easier and so on but the concept is that M&A has to make sense by itself independent of whether you have excess capital or not. And then you ask about our M&A criteria, very straightforward. The strategic fit has to be there. Obviously, in terms of the market, the market has to make sense. The returns, the IRR, tangible book value, and EPS accretion has to make sense. And for that to make sense, you have to create value. So scale has to be coming in. That's why we kept saying last time that it seems there's better value in our existing markets to create value. But the numbers, the strategic fit has to be there, and independent of whether we have excess capital or not, the numbers should justify that there is a clear value creation opportunity for the shareholders.
Patricia Bueno, Head of Investor Relations
Thank you, Sofie. Next question, please.
Operator, Operator
The next question comes from Carlos Cobo of Societe Generale. Carlos, please go ahead.
Carlos Cobo, Analyst
Good morning. Thank you all for the presentation. Just a couple of things on—one on calendar, the other is a very simple one. You pushed back the investor day because of the pandemic, which was obviously understandable. I was wondering if you are thinking about committing to on strategic plan in front of the market and if you're already having enough confidence in the businesses, which assumes you have because everything points in a good direction in terms of cost of risk, which was the main uncertainty. And the second one is on capital. So, kind of a theoretical question, but I would like to understand how big is the, let's say, embedded capital support in the capital ratio from the state guarantees? If you were to unwind that, theoretically, and also factoring some break in migrations, what would be their proforma capital ratio? Is that something you are capable of discussing? And more specifically, this quarter, you've said that the impact is around 9 basis points in the capital ratio, right, out of the plus two positive impact in the capital ratio, so the net positive impact from this asset is plus 11 if I did the math right, correct? So if the loan book was flat in Euros, what drives the positive contribution from risk-weighted assets? Sorry, I can repeat if it wasn't clear enough. Thank you.
Onur Genc, CEO
It was very clear. It was very clear. So, on Investor Day, maybe Jaime, the state guarantees, if you know the answer, maybe you can take the second one. But the Investor Day, we are committed to it; we told you before. Call us old-fashioned, but we think it might be nice because we have never done one. We thought it might be nice if you do it on-site, so we can host you in this wonderful building, and we can also show you the culture of this bank, which in my view is amazing. Our people and our culture make the difference. We wanted to display that and show that to you all. So our expectation is to do it by the end of the year, hopefully, if the pandemic allows it to be on-site; that's our base case. We will have it by the end of the year, and you will experience it. On the state guarantees, anything Jaime?
Jaime Saenz de Tejada, CFO
Well, one very important thing, Carlos, it is very important to realize that the rating of the client does not depend on the existence or not of any state guarantee. You need to classify the client based on the characteristic of the client and the client's business profile, okay? Of course, we have in states a loan with the guarantee of the state. What will be different, of course, is the PD and because of the payment schedule that these state support loans have—and of course, the LGD. From that point of view is where you have—and from that angle is where you have the biggest positive impact in terms of capital. We disclosed, I think, at one point in time during last year that cost of risk would have been 70 million Euros lower in Spain thanks to the state guarantees, for example, so not much more than that. So up to now, I don't think it's material, it will mean a material impact on the capital race. That would be my answer.
Onur Genc, CEO
And Carlos, on the last one, the question was very clear. So the 2 BPs is actually two things, as you said for the benefit of the rest of the audience. So the 11 BPs positive is coming from RWA evolution in constant terms, and minus 9 is coming from the TRIM impact, the low-default portfolio. So you're asking why positive 11 in the context of the loan portfolio is not changing too much. It is basically two things. First of all, the mix of the—it's not because of the guarantees, if that's the question that you are trying to go after, because the new production that we have done in the guaranteed loans in this quarter is very little. So it's not at all regarding the guarantees. It is because of the mix of the growth, and it's also because of the dollar, because in some of our geographies, the dollar impact is affecting it. It's in the constant number, this 11 BPs. That's why the portfolio's adjusted with the USD evolution in the case of Turkey, in the case of Peru, Mexico. We have some USD portfolio, and that has been affected into those figures.
Patricia Bueno, Head of Investor Relations
Thank you, Carlos. Next question, please.
Operator, Operator
The next question comes from Benjie Creelan-Sandford of Jefferies. Benjie, please go ahead.
Benjie Creelan-Sandford, Analyst
Yes. Good morning, perhaps just one follow-up from me on the redeployment of excess capital and thinking about cost reduction. I realize you can't comment on Spain, given the negotiations are ongoing. But are there any material efficiency plans under consideration elsewhere in the group outside of Spain, and perhaps more broadly, if you could just give us a sense of your expectations around cost and cost growth in the group going forward? Thank you.
Onur Genc, CEO
Again, if you're asking for the size and the number of details of the restructuring plan, Benjie, unfortunately, we are in the negotiation process. So given the process sanity, we cannot share anything at the moment. We are negotiating with the unions. But on this topic, I would like to highlight one thing that we have seen in the document already. Why is this critical and why are we doing this? It's not an easy process. It's a complicated and painful process on certain dimensions. But we are looking at a business where the transactions done in the branch network, in the physical channels, is down by 50% in two years. Mainly because of COVID, the trend has accelerated in the last part of these two years, so mainly last year, but two years, some parts of your business are down by 50%; you have to react to this. That's the reason why we are doing it. I mean, the business is changing; the business is transforming. If you have a certain part of your business, which is shrinking by half in two years, you have to react, and that's what we are doing in the process. I would assume that hopefully in the second quarter call, we would be able to share more details on the figures that you are after. And outside Spain, I mean, our guidance was very clear on this topic in general. In all the geographies, our goal is to make sure that in general for the group, let me talk about for the group overall, we are going to definitely grow less than—in constant Euros, obviously, less than the inflation blended inflation rate of our footprint. So we are going to be in real terms actually reducing our costs going forward.
Patricia Bueno, Head of Investor Relations
Thank you, Benjie. Next question, please.
Operator, Operator
The next question comes from Marta Romero of Bank of America. Marta, please go ahead.
Marta Romero, Analyst
Thank you very much. The first question is on Turkey. The market over-penalizes the group for your exposure to the country, which you must find very frustrating. So if you've received an attractive offer for your 50% guarantee, would you take it? My second question is a follow-up on Mexico NII. Could you please elaborate a bit more on the expected recovery in loan growth by segments because consumer and credit card volumes remain weak, and the credit demand from corporate is muted, so that would be helpful. Finally, on Mexico fees, I believe you have not provided guidance yet, but after the strong recovery in Q1, do you have more visibility around where you could finish the year? Thank you.
Onur Genc, CEO
Thank you, Marta. As always for the questions. Let's start with Turkey. I will repeat the two messages that we keep repeating in every call. But the two messages are, number one, we are long-term investors in the countries that we are in. We still believe in the long-term potential of the country for sure. Similar dynamics but very low leverage in the household segment, especially in Turkey as compared to other emerging economies as well. Household debt or GDP, if you look into the figures, it is much less. So there's more leverage. There's the demographic dividend point as well, and the average age or Turkey is 31. More importantly, as importantly, similar to Mexico, Mexico is benefiting from being at the tail in terms of a manufacturing hub for the US. In the case of Turkey, Turkey is also a manufacturing hub for Europe, which helps a lot. So the fundamentals—the long-term fundamentals of the country, in our view, are still positive. We were saying, I am in these calls for, what, nine quarters now? In every call, quarterly, I said that if there’s one risk that we have to be careful about in Turkey, it's the currency risk. And on that one, as you might know, we have reduced our FX book in four years by 40%, more than 40% actually. We are very prudent in the hedging, as I mentioned at the beginning of this call. So we did know when we did realize the risk, and I think we are prepared as much as we can for that risk as well. In that context, regarding the strategic discussion that you just asked, we are comfortable with our share, as we say. My team always tells me that this is what you should say, and that's what I would say; we are very comfortable with our share. Our 49.85% is where we are, and we will continue. Then regarding Mexico, obviously, given the high velocity of those products, you don't see it in the figures, because when you look into the page in Jaime’s presentation, for example, that consumer book is coming down in stock, but you should know that in the first quarter of this year, quarter-over-quarter, so first quarter of this year versus the fourth quarter of last year, there's a 22% increase in new production in consumer, which is a number that we like. I did show it to you in the analyst presentation, showing how the consumer production is going up very nicely in Mexico. To cut the long story short, we are expecting growth still in those portfolios. We are guiding, you know, mid-single-digit growth, and we are still sticking with that. If there is anything, there is a positive bias in my view on that figure, given what we have been seeing. Credit cards, the production was slightly lower than the fourth quarter, which is another important segment for us, but we are seeing very positive signals in March and April in production there as well. To cut the long story short, the production numbers, underlying production numbers are actually quite robust. What you also should know is we are gaining market share on those products; we are gaining market share, which again implies that our NII performance in the coming quarters, in my view, will be quite strong, and that's why we are sticking with our guidance for the full year. We actually have a positive bias on those figures. What was the third question, Marta? I missed it. There was a third question.
Jaime Saenz de Tejada, CFO
Fee guidance for Mexico.
Onur Genc, CEO
Do you want to take it, Jaime?
Jaime Saenz de Tejada, CFO
Yes, it's very simple. We don't provide guidance on fees for Mexico. But what I would say is what Onur said before — the fee income has been widespread, because we've had very good behavior in investment funds, in CIB, in banking services, credit cards as well. I think all this gives us confidence that fee income revenue, not only in Mexico, but I would say overall in the group is going to be one of the most important drivers in 2021.
Patricia Bueno, Head of Investor Relations
Okay, thank you, Marta. Next question, please.
Operator, Operator
The next question comes from Britta Schmidt of Autonomous Research. Britta, please go ahead.
Britta Schmidt, Analyst
Yeah, hi there. Good morning. I've got two quick questions. The first one would be, could you provide us a little bit of commentary around the provisioning in Spain? The Bank of Spain has come out in its financial stability review encouraging banks to continue to book high loan loss provisions, yet most of the banks are guiding to provisions for 2021 to be below 2020, and your tone has been more optimistic there as well. Maybe you can tell us a little bit how we can square that. And then secondly, regarding the TLTRO 3, could you comment on what the actual benchmark lending has been so far? What sort of percentage growth are we looking at, or is it flat? Thank you.
Onur Genc, CEO
Okay. I only have the numbers for the second, but why don't you take the second, Jaime, if that's possible, if that's okay? On the first one, on the provisioning, actually, in all the countries that we are looking into, the deferrals, the moratoriums are done, and it has been done for a while. In Mexico, you might remember this. We were discussing it in last year, in the third quarter call. Most of the deferrals, moratoriums, they ended in April—August and September timeframe. It has been more than six months that they have all expired, and they are in the business-as-usual portfolios; same in other countries, in Turkey, in South America, and so on. So whatever you see in the figures, in all the other countries, they are the business. You would see them, because we don't have this carved-out portfolio, which might be masking some of the underlying deterioration and so on. They're all in the figures. The only country that we still have a remaining deferrals or currency—as we call them, which is a non-payment period—is Spain. So, in Spain, there is this moratorium of 4 billion still in our portfolio. As you know, it's mainly mortgages; close to 60% is mortgages. So we feel very comfortable with that portfolio, but it is still out there. So it's in the deferral period. And in the government-guaranteed programs, there is a period of non-payment as well. That is why, although we see very positive signals underneath, because we know those clients, especially on the wholesale side, although there are very positive signals in general, as Jaime mentioned, we have increased, actually, our management adjustment in Spain by 100 million Euros this quarter, just to be on the prudential side. So regarding provisioning, are we conservative? I do think we are prudent. But I do think that given the fact that some of those deferrals are still live, it is better to be prudent, which is our culture in the bank; it is better to be prudent than otherwise. I do feel that in the future, we would see better figures clearly, but we wanted to be prudent—that's why you see the NPL going up a little bit in Spain and you see cost of risk, some additional management adjustments coming into the cost of risk and so on. So for the second question, Jaime.
Jaime Saenz de Tejada, CFO
Yeah. First of all, we reached the benchmark that we had to comply with as of March 21 in order to benefit from the extra remuneration up to June 2021. Just to give you some sense of the numbers, the target was slightly below 71 billion, and our portfolio was slightly below 80, so over 9 billion buffer versus the benchmark as of March. The benchmark as of December, which will allow us to benefit for an extra year between June '21 and June '22, it's slightly below 77 billion. So as we stand at 80 billion, we are quite confident that that should not be an issue.
Patricia Bueno, Head of Investor Relations
Okay. Thank you very much. And I am afraid we are running out of time, so just two last questions, please.
Operator, Operator
So the next question comes from Ignacio Cerezo of UBS. Ignacio, please go ahead.
Ignacio Cerezo, Analyst
Hello, good morning. Thank you for the presentation, two very quick follow-ups. The first one is if you can give us the breakdown of the Spanish fee in the quarter between transactional risk markets. And the second one is; I don't know if it has been mentioned in the presentation, but can you remind us the CPI or inflation number you're going to be using for the CPI linker contribution from now on? Thank you.
Onur Genc, CEO
The CPI question was for Turkey, I guess. Okay. So for CPI, in the quarter, the underlying CPI that we have used for the NII was 13%. It seems like BBVA research just upgraded its inflation expectation for the year to 15%. So, for the coming quarter and quarters, we will increase the contribution from CPIs. On the—first one was on Spain's fee because there was a noise in the line, I guess. On the growth, it's across the board. Most of the growth was actually coming from insurance; in insurance, we did really well, some on asset management. The bulk is—insurance is number one in terms of the—if you look into the delta and the breakdown of the delta. Close to 50% of delta is insurance, then there's like 10% or so in asset management. There is another 30%, 40% is what we call banking services, which is basically two things, banking services, which is accounts and credit cards. Credit cards, as I said, payments in general have done really well across the board in all the countries, and Spain has also benefited from that. So banking services, the other 30% to 40%. The market was also good in terms of—but fee income generation was—it wasn't that differential from year-over-year.
Patricia Bueno, Head of Investor Relations
Thank you very much. So last one—last question, please.
Operator, Operator
The last question comes from Mario Ropero of Bestinver. Mario, please go ahead.
Mario Ropero, Analyst
Hi, just a follow-up question on the fee one. I mean, from what you mentioned, there is no particularly no extraordinary on the fee income in Spain. But if we were to analyze that figure into the rest of the year, you would clearly beat the guidance that you have provided of high single-digit. So, would you say that you have a positive bias here? And if not, why? Thank you.
Onur Genc, CEO
Mario, very simple, there can be—there is a positive bias. We'll see in the coming quarters, but there's a positive bias, I would say with regards to the guidance. We don't provide the fee income specific guidance, but there's a positive guidance—positive development versus our own expectations. Let's see in the coming quarters.
Patricia Bueno, Head of Investor Relations
Thank you very much for participating in this call, and let me remind you that the entire IR team will be available to answer any questions you may have. So Onur, if you want to close?
Onur Genc, CEO
Well, thank you to everyone. Patricia, this was your first. I hope many calls in the coming quarters. Thank you to everyone for joining in. Thanks for the attendance. Bye, bye.