Good morning, everyone and welcome to BBVA's second quarter 2019 results presentation. I'm Gloria Couceiro, Head of Investor Relations. Here with me today is Onur Genç, Chief Executive Officer of the Group, and Jaime Sáenz de Tejada, BBVA Group's CFO.

As in previous quarters, Onur will begin with a presentation of Group's results and then Jaime will review the business areas. We will move straight to the live Q&A session after that. As always, let me remind you that we would appreciate all the participants to try to make their calls from the landlines and avoid using the speakerphone.

Thank you, Gloria. Good morning to everyone and welcome to BBVA's second quarter '19 results audio webcast. As Gloria mentioned, I'm going to talk about the group, the group's evolution, and Jaime will focus on the respective business areas. So, let's jump into it, page number three.

Starting with slide number three, we are reporting a very good second quarter in terms of results, value creation, and capital generation. This is the same page that you have been seeing in the past few quarters and very good progress on all the key metrics that we see on this page. So, our net attributable profit on the left-hand side of the page is 1.278 million euros.

This represents an increase of 2.6% versus the second quarter of last year, but as you all know, given the sale of BBVA Chile in July 2018, if we exclude BBVA Chile recurrent operations from the base from the second quarter of 2018, the true comparable apples to apples increase is 5.7%. Comparing to the previous quarter, the first quarter of the year, net attributable profit grew at the strong rate of 9.8%.

There are two other very important key messages on this page. In the middle of the page, you see that we continue to deliver outstanding value for our shareholders. In the first half of the year, we have increased our tangible book value per share plus dividends by 6.9%. We haven't seen this level since 2014, basically. So, very strong. The evolution on a year over year basis is also worth the mention with a double-digit growth rate of 12.6% versus June 2018.

And second, on the right-hand side of the page, what you see we would like to highlight on the right-hand side is despite absorbing 24 bps from two regulatory impacts, IFRS 16, and TRIM-related regulatory impacts, our capital position increased 18 bps versus December 2018 and [inaudible] stand within our target range. As you all know, we have communicated a target range of 11.50% to 12% and earlier than expected. We were expecting to be in that range by the end of the year, but earlier than expected, we are now within our capital target range.

Slide No. 4, the key highlights of the quarter -- we would like to highlight the excellent evolution, again, on some of our core performance metrics. As in the first quarter, the year over year variations exclude BBVA Chile, recurrent operations, just to be comparable, in this slide and also, in the consecutive slides. In the rest of the presentation, we wanted to make it more comparable.

With that footnote, the main highlights of the quarter are first, No. 1, we would like to highlight the robust growth in core revenues, so, net interest income plus fees growing 8.7% year over year in constant euros, as always, and net interest income growing at double-digit, 10.4% at constant euro terms, again.

Second, the good performance at the top part of the P&L coupled with our constant focus on efficiency, it helped us show a reduction in the cost to income ratio of more than 40 bps. Now, our cost to income ratio stands at 49%, continuing the trend of positive operating jaws, which we care about a lot, as you all know.

Risk indicators, No. 3 -- risk indicators were one of the bright spots of this quarter, excellent trend in the year with NPL ratio down 57 bps versus one year ago, and our NPL ratio now stands at 3.84%. And then improvement of 330 bps in the coverage ratio. So, the coverage ratio now stands at 75%. Also, we have seen an improvement in our year to date cost of risk. It now stands at 0.91%, 91 bps in year to date accumulated terms -- again, much better than our expectations.

No. 4, capital -- I partially mentioned it, but our strong capital position is obvious in the numbers, 11.52%, increasing 17 bps in the quarter, and in this quarter, we absorbed 13 bps from TRIM-related impacts. So, again, as I mentioned in slide No. 3, we have already achieved our target earlier than expected.

No. 5, we continue creating value for our shareholders in terms of profitability metrics. BBVA is at the forefront of the European banking industry. Return on tangible equity, which is a number that we care about a lot, it remains strong at 12.4%. Another outstanding figure on this page, obviously, is the tangible book value per share plus dividends. As I mentioned in the previous page, it grew 12.6% versus June 2018.

Finally, we are progressing ahead of the expectations in digital transformation. Digital sales increased to 58% of the total units sold in the year. I remind you, this number was 30% two years ago. Digital customers, they're up by 17% to 29.7 million customers. Similarly, the number of mobile customers, it reached 26.1 million. It's a yearly growth rate of 25% and this represents a 48% penetration. As I mentioned in the previous quarters, our goal is get to 50% by the end of this year and we are well on track to get to that goal as well.

Slide No. 5, this is about the second quarter profit and loss, simplified P&L statement. You can identify the positive evolution on the core business drivers on this page. As mentioned, net interest income is up 10.4%, gross income is up 5.1%, and operating income is up 6.1% at constant euro terms. Also, as I mentioned, very positive news regarding impairments with an improved figure in the second quarter versus the first one.

The soft spots of the quarter -- again, they're obvious on the page, but there are three soft spots that we would like to highlight. The first one is NTI. The NTI contribution was lower given the market situation due to the muted markets activity, basically, and lower portfolio sales that we did in the second quarter.

Other income and expenses negatively impacted by the hyper inflation adjustment of Argentina -- it was higher inflation adjustment for Argentina in this quarter. Plus, this line includes a higher contribution than last year to the single resolution fund in Spain. And also, the last -- I would pick the soft spot as the provisions line here, provisions and other gains and losses line. Note that in the second quarter '18, we recorded in this lien some capital gains from the sale of a building in Mexico.

So, the base is not fully comparable, but as compared to that base in this quarter, we have had higher early retirement costs in Spain and higher contingency risks we potentially accounted in Turkey, leading to a negative year over year comparison. But again, in our view in this page, the highlight is the core income, core operating income, and core business drivers, which are showing very positive signals.

Slide No. 6 -- these are the half-year numbers, again, in a summarized P&L format. The topline, similarly, shows a very strong evolution versus the six-month '18. Gross income is up 6% and operating income is up 8.2% at constant euro terms. Looking at the bottom line, though, we improved a lot in terms of year over year comparisons in the second quarter, but these are the half-year numbers. We remained flat versus six-month '18, driven mainly by the impairments line.

As you can see, the impairments line has grown 15.7% versus the six-month '18. Multiple things, but due to the negative impact of the macro update, higher provisioning in the commercial and unsecured consumer lending portfolios in USA in the first quarter, as you would see in a few pages now, there's a very meaningful improvement in those numbers in the US in the second quarter.

In the low base of the US, actually, in the six-months of '18 because there were some provision releases in that period in the US, mostly due to Hurricane Harvey releases and there was a positive macro impact. That was basically the key changes versus the base. Also, in Turkey, as you know, we have had higher requirements in the retail portfolios in the first half of this year. So, impairments line was the key difference, but on the core topline drivers, as you can see, we are, again, registering a very robust growth.

Slide No. 7 -- we talked about the revenue, maybe a bit more details on the revenue. As I mentioned, net interest income, growing double-digits, 10.4% versus a year ago. This year's trend is very positive compared to the first quarter. So, the second quarter is doing much better at 4% growth.

Very important to note that -- you will see when Jaime talks about the countries -- most geographies are performing very well on this line item. It's a critical dimension of our business, so, we welcome this opportunity, this development. The positive evolution in net fees and commissions, as you can see, 3% versus the same quarter last year, and 4.2% increase versus the first quarter of this year. This is, by the way, the highest figure in the last ten quarters at constant euro terms, so, very well under net fees and commissions.

Net trading income, as I mentioned, is down 58%, highly impacted by the muted global markets activity and the lower portfolio sales, as I mentioned, that we did in the second quarter. All in all, total revenues are up 5.1% versus the second quarter of last year, 1.9% down versus the first quarter, but as I mentioned, in the second quarters of every year or this year, in the second quarter, we registered our annual single resolution fund as a comparison between the first quarter and the second quarter is not apples to apples. But overall, 5.1% growth in gross income.

Moving on to slide No. 8 -- one more quarter, we continue to show positive operating jaws. It is once again very satisfying to see our expenses growing at 3.9%, well below the growth rate in core revenues, which is 8.3%, as you see on the left-hand side of the page. It is doing this for so many quarters now and it is, despite the high inflation in some countries of our footprint.

In the middle of the page, we show the strong evolution at high-single-digit growth, 8.2% growth in the operating income. And on the right-hand side of the slide, as you can see, the efficiency ratio keeps improving, showing a 41-bp decrease to now standing at 49% overall cost to income ratio, significantly better than the European peer group and if you calculate cost to income at the core revenue level without the NTI, the improvement is actually more than 70 bps.

I keep reiterating this every quarterly call, our commitment to improve efficiency is clearly top-notch in the context of our transformation. We are highly prioritizing this topic and I believe our track record shows how high it stands as a priority for us as the management in the group.

Moving on to slide No. 9, asset quality and risk indicators -- very good news, as I said here on the slide in the impairments line, we see an improved trigger versus the first quarter of this year. So, the provision impairments line, 25.6% down versus the previous quarter. It's flat versus the second of last year.

So, the quarter over quarter decline improvement is driven by Spain, thanks to the sale this past June 21st of another mortgage portfolio, over 1.2 billion euros over gross book value. But beyond Spain, by Turkey, due to lower requirements in Turkey, especially on the wholesale side by the US, driven by the lower requirements in the US as compared to the first quarter.

On other risk metrics, NPLs were significantly reduced by 2.6 billion euros on the top right versus last year, 2.6 billion-euro reduction versus last year and 0.6 billion reduction versus the first quarter of this year. Cost of risk at the bottom keeps improving versus the first quarter. It stands now at 91 bps year to date, an increase of 9 bps versus last year and at 77 bps on a quarterly annualized basis for the quarter, it was 77 bps, a very strong figure, declining 27 bps compared to the previous quarter.

The NPL ratio keeps decreasing this quarter, a 57-bps reduction to 3.8%, and coverage ratio, again, improving 330 bp improvement to 75%. So, overall, we maintain an excellent risk profile and better than our expectations.

Capital, slide No. 10 -- regarding the quarterly capital evolution, the CET1 fully loaded ratio, as you can see, it has increased 17 bps, even after absorbing the 13 bps of TRIM-related impacts in the quarter. The good evolution was helped by the regulatory equivalence in Argentina, as you can see on the waterfall chart and the good performance of the held to collect and sale portfolios. But beyond that and overall, these numbers underscore once again our very strong organic capital generation capacity.

I would also like to highlight the quality of our capital on the bottom left side of the slides. We think it's an important metric to look into. You can see that we continue to lead the ranking of our European peer group in terms of the leverage ratio, which stands at 6.6% versus the European peer average of 4.9%. Regarding the AT1 and the Tier 2 buckets, they are already covered and completely endowed.

And lastly, at BBVA, I would like to mention this topic that we keep strengthening our capital position through green, social, and sustainable bonds. Last June, we successfully issued our second 1 billion-euro senior non-preferred green bond. This perfectly illustrates BBVA's vision and strategy toward a more responsible way of doing business, as you can imagine, because our success depends -- and this is a genuine belief culturally shared across the organization -- our success depends ultimately on the prosperity of the communities that we serve and the society in general.

So, you will hear us talk more about this going forward, but in short, we believe business should up its game, addressing the main challenges that society has, both environmental and social. And we intend to be one of the leading actors here.

Moving on to slide 11, outstanding delivery on shareholder value creation -- again, we keep delivering on this. As you can see, I repeated it, so, I'm not going to spend too much time on this -- 12.5% yearly increase in tangible book value per share and the determined tangible equity. We are at the forefront of the European banking industry and 12.4% return on tangible equity.

Slide No. 12 -- as we have commented in the last quarters, underpinning the growth in the digital business is the continued digitization of our customer base. So, on the left-hand side of the page, you see the evolution of digital customers up 17% versus June 2018. It represents a 54% penetration of our customers. The same with a different angle, mobile customers -- the penetration of mobile customers grew more than 5 million in one year, up 25%, and now we are at 48% customer penetration. We had a goal of 50%. We are very close to it. We believe we will achieve it by the end of the year.

Finally, on the right-hand side of the page, as a consequence of the strong base of digital and mobile clients, digital sales continues to grow. Now, 58% in terms of number of units and 44% in terms of value -- in our view, very, very strong numbers.

Moving now to slide No. 13 -- I would like to highlight the impact of our transformation on our business drivers. This is important because we talk a lot about digital transformation. We believe we can create a competitive advantage through our investments in digital and through owning this topic and in every quarterly call, I would like to highlight a few things which do highlight the reasons on why we think this is a competitive advantage.

So, first, the impact of digital transformation on growth -- on the left-hand side of the page, I believe we can further foster growth by leveraging our digital capabilities. We have been doing well in serving our own customers through digital, but now, we can use our digital advantage to grow our customer base, to acquire new customers.

One example of that is Uber. The partnership that we launched in Mexico -- Uber has partnered with BBVA to launch its first financial product outside the US. This is also BBVA's first product created through our open banking capabilities and the API-based infrastructure we have been building all around the world. So, this is an important partnership that we pay attention to.

Second, the customer engagement and advice -- you can see on the right-hand side of the page, technology and data will be key to deliver advice-based value proposition at scale and increase our customer loyalty. One good example of this is this new feature in the BBVA Spain app, which is set up your account.

This is beyond alerts. It aims to help customers manage their everyday finances, automating certain tasks, creating a self-functioning bank for the customer through simple settings. These initiatives, it helps us to be in the daily cash flow of our clients and help them make better financial decisions. So, very important developments, it keeps adding on.

And then finally, I would like to give you an example of an end to end holistic assessment of how digital is helping us in delivering better numbers. The numbers are up obviously at the surface, but there are many things that are being done underneath. So, our transformation in Spain, I think, is a good example of that. We have started our transformation a long time ago to generate growth in our customer base to improve engagement, to improve efficiency, and we are seeing clear results there.

So, on growth, bringing new clients to the bank, even in a very highlight mature market like Spain, increasing cross-sell and transactionality were made possible through digital transformation. As you can see on the left-hand side of the page, customer acquisition by digital channels in Spain, it has grown 33% in the last two years. On engagement, on the middle side of the page, creating a world class customer experience, we are being recognized by Forrester three years in a row now as the best mobile app in Europe and it has helped BBVA to lead Spanish NPS ranking for the last two years among the large banks in Spain.

And also, it has helped us reduce the attrition rate by 18%. Finally, on efficiency, thanks to digital transformation, a convenient relationship model with seamless integration between digital and people, it helped us to lower the cost of doing business. Again, the past two years, the total costs have declined by 8%.

So, I'm now handing it over to Jaime. Jaime, maybe you talk to us about the countries and the business units.

Thank you very much, Onur, and good morning, everybody. Let me begin with Spain. The economy here remains quite strong with GDP expected to grow by 2.3% in 2019, more than 1% above the European average. We expect GDP growth to continue at healthy levels around 2% also in 2020.

Net attributable profit in the half decreased by 1.7% versus last year. The decrease is fully explained by a significant reduction in NTI, down 67% and the release in other provisions. 2018 included significant provision releases from the real estate area. Both impacts are only partially offset by the provision release coming from the sale of the mortgage portfolio that we closed this quarter.

The most relevant P&L drivers are first, a significant NII recovery versus Q1, up over 5%, thanks to good commercial activity and an improvement in the customer spread by 3 basis points, a higher contribution from the ALCO portfolio, and the lower cost of excess liquidity, as we have reinvested part of the excess cash at the ECB in high-quality liquid assets.

As a consequence of this improvement, the evolution of NII on a year on year basis improved significantly to -2.4% in the half, in line to meet our year end guidance of NII decreasing slightly by between 1% and 2%. The second most relevant driver is, again, expenses. They continue to go down 3.5% on a year on year basis, thanks to the success of our transformational efforts.

And finally, in permits that showed a positive figure driven by provision releases, excluding the one-off already mentioned, cost of risk would have been 18 basis points year to date, more in line with our year end guidance of around 20 basis points that excludes this positive one-off.

Let's move now to the US -- we continue to expect a good macro for the Sunbelt region with GDP growing around 2.8% in 2019 and 2.7% next year, outperforming the US average in the period. Revenues in the US are growing by 5% year on year, driven by NII and NTI, mainly due to ALCO portfolio sales. NII is also growing around 5%, supported by loan growth, up 4% year on year and higher customer spread, up 21% basis points versus the first half of 2018, benefiting both from the change in mix toward higher yielding consumer products and to last year's rate increases.

For the whole 2019 and considering the change in interest rate expectations for the US dollar, we now expect NII to grow at the low single-digit level. We continue to enjoy positive operating jaws in the US as expenses remained flat. In terms of asset quality, permits increased versus last year. As Onur has already mentioned, in the first half of 2018, provisions were extremely low, positively impacted by provision releases, both from [inaudible] and some commercial portfolios, and a positive IFRS macro impact.

The increasing provisions is explained as follows -- 50% more or less comes from retail portfolios, mainly consumer loan write-offs, 25% due to negative macro impact, and the remaining 25% due to high provisioning needs from wholesale portfolios. Having said this, permits show a meaningful decrease versus Q1 of this year, down 24%, mainly explained by lower provisioning needs in retail books, driving cost of risk from 106 basis points in Q1 to 82 basis points in Q2. We want to reiterate our 80-90 basis points guidance for the year.

Let me focus now on Mexico. BBVA Research has revised down its GDP growth expectations from Mexico in 2019 to 0.7%. Despite this, BBVA Mexico continues to deliver very strong results. Net attributable profit increases by over 7.5% in current years, 1% in constant. The comparison is impacted by a 40 million capital gain post-tax from the sale of two real estate assets that took place in the first half of 2018. Excluding this, the net attributable profit would have increased by 11%, 4% in constant euros.

NII remains as the main P&L driver in Mexico, growing by 8% in constant euros and supported by activity and a higher contribution from the securities portfolio. Activity growth by 5% year on year, bias toward retail portfolios, particularly consumer loans growing at 12%, where we continue to gain market share. The commercial segment grows slightly, 2.3%, excluding the FX impact. And as you remember, in Q2 of last year, we had a strong lending growth rate as companies covered their funding needs ahead of the presidential election.

All in all, we remain commitment of year end guidance of long growth at the high single-digit level. Positive jaws are maintained with core revenues growing at 6.2% versus 4.7% growth in expenses. Expenses growth continues to be impacted by the additional contribution to the BBVA Foundation, which doubled this year. Excluding this fact, opex would have grown by 3.7%, well below the 12-month average inflation of 4.5%. Impairments are up by 8.4% and above activity growth and explained fully by a negative IFRS 9 macro impact.

Cost of risk stands at 298 basis points year to date, in line with our 300-bps guidance for the year. And as you know, significantly below the historical average of the last nine years, which is 340 basis points. These solid results continue to reflect BBVA's leadership position in Mexico, both in terms of market share and profitability, proving its resiliency even in lower GDP growth scenarios.

Let's move now to Turkey. Despite the domestic and geopolitical tensions, the macro recovery is on track. Positive quarter on quarter growth in Q1 points toward the end of recession. We expect a positive GDP growth rate already in 2019 and to reach 2.5% next year. In this context, guarantee continues to surprise, reporting better than expected results.

Net attributable profit in the half decreased by 24% year on year, mainly explained by the depreciation. In constant euros and despite a much more challenging environment, net attributable profit was down by only minus 2.8% versus the first half of last year, proving guarantees resiliency. Pre-provision profit is up by 12% versus the first half of last year thanks to our robust core revenue growth and expenses growing below inflation.

NII is up by 15% year on year due to a higher contribution from the CPI linkers and also, the foreign currency portfolio, whose spread is up by over 75 basis points in the half, more than offsetting the pressures in TL customer spreads due to the increase in deposit rates. Following the Central Bank July decision to cut rates by 425 basis points, our 2019 guidance of flat NII ex the contribution of the linkers has clear upside potential.

Fees increased by 24% year on year with good performance across the board. This double-digit pre-provision profit growth was offset by the increasing loan non-provisions, up by 37% due to the deterioration in some retail portfolios as a consequence of the worsening economic conditions, partially mitigated, though, by lower provisioning needs for some large tickets.

It is worth mentioning that provisions are down versus Q1 by 26%, driving year to date cost of risk to 157 basis points as of June, down from 182 in March and clearly much better than expected. This leads us to improve our cost of risk guidance for the year. We now think we will probably end the year closer to 250 basis points below the 300 basis points previously guided. Other provisions for contingent liabilities have also increased this year, while in the first half of last year, we had a positive result coming also from the sale of a real estate asset.

And finally, South America -- Colombia and Peru's GDP growth rates remained quite healthy, around 3% for 2019. In 2020, they should continue to behave well. Colombia's net attributable profit in the half is up by 13%, with NII increasing 4% year on year on the back of higher volumes, improving customer spreads and a higher contribution from the securities portfolio. Expenses remain flat, achieving, again, positive jaws, and year to date, cost of risk is significantly down after Q1 one-offs.

Peru's net attributable profit also grows in the half around 13% year on year, with NII up 14% and remains as the main P&L driver, growing above activity thanks to lower funding costs. Positive jaws are also maintained in Peru. Argentina reported a net attributable profit of 110 million euros in the half, improving its contribution versus lasts year, thanks both to NII, boosted by the contribution of the securities portfolio as the excess liquidities invested in high-yielding short-term treasury notes. Also, don't forget the positive results from the sale of Prisma that took place in Q1 of this year.

Perfect. Thank you, Jaime. I'm going to finish this presentation highlighting the few key messages that we mentioned. First of all, I would like to reiterate the very strong core business fundamentals -- double-digit growth in net interest income, in our view, is a very good result to be happy about. Then No. 2, I would say best-in-class efficiency, continuous improvement in the jaws, continuous improvement in operating jaws. No. 3, sound risk indicators -- a very positive evolution in the year.

No. 4, our capital position, it's even stronger today with CETI1 full-loaded ratio, we already within the target range earlier than expected. No. 5, we continue delivering on outstanding shareholder value creation, double-digit profitability, return on tangible equity, leading our European peer group. Finally, we continue ahead of the curve in digital transformation, positively impacting key business drivers such as growth, customer engagement, and efficiency as we have explained to you in the first part of the presentation.

All in all, I would say we had excellent results in the second quarter driven by our unique and diversified footprint and our business model and obviously, driven by our talent base and our employee base.

Yes, good morning. Thank you for taking my questions. I will start with NII in Spain. I appreciate you gave the full year guidance at minus 1%, minus 2% despite the lower interest rates. However, the folding in the Euribor will have only happened in June. So, I wonder if you can elaborate what happens after 12 months. You can give some sensitivity on what if the Euribor is 10 bps lower next year on average compared to this year and the main drivers of the NII going forward.

And then the second question is different, Mexico cost of risk -- I see that you have done great at GDP forecasts for Mexico twice this year, but you are still maintaining the 3% cost of risk guidance. I wonder if you can give more guidance on what you're seeing on the ground. Also, on the loss model, how far are we to change if you will revise again the macro sanctions, so, some sensitivity also there. Thank you.

Thank you, Francisco, for the questions. Let's start with the NII in Spain -- so, are we sticking on the guidance on minus 1% to minus 2%? We are sticking with the guidance. What were the key drivers that led to relatively positive results in the second quarter? There were three. I will highlight the three of them.

First of all, activity continues to grow, although 0.7%, you see it in the activity growth that it is there. As you can see, the growth is coming from portfolios that we have prioritized, where we can generate much better returns. So, activity growth, core business, plus if you look into the spreads regarding Spain, in one quarter, we have gone from 196 to 199. It's like 3 bps, very small figures, but it takes a lot of effort to get those 3 bps. That's the first lever, very important, core business related.

No. 2, as we mentioned at the first quarter quarterly call, we were trying to manage our extra liquidity and we were investing in the ALCO portfolios. So, the impact of reduction in extra liquidity and the ALCO portfolio decision is also helping. So, there are impacts or effects there to stay. So, we expect those positive effects to continue in the second half of the year. As a result of this, we are sticking with our minus 1% to minus 2% guidance that we have given in the first quarter quarterly call.

Regarding the future years and the Euribor impact and everything, we are publishing this, as you know, so, minus 9% is the 100-bps parallel decline in Euribor curve impact that we have on net interest income. So, if the curves go down by 100 bps on a parallel fashion, the impact on our net interest income is minus 9%. That's the impact that we highlight. But we have multiple management levers to compensate for this and in a lower interest rate environment, activity turns out to be better, cost of risk turns out to be better. So, as you know, we don't provide guidance beyond the existing year for 2020. I'm not going to provide any guidance yet, but the net interest income sensitivity, we publish it. It's, again, 9%, but we will try to manage through it.

Then Mexico, cost of risk -- are we sticking with our guidance? If that's the question, we are sticking with our guidance of 300 basis points. You are right. We have revised down our growth estimates for Mexico. As you all know, it used to be 2% at the beginning of the year. Then we came down to 1.4% and now, the latest forecast that BBVA research has published is 0.7%.

There's that impact, but we still stick with the 300-basis point guidance. This is a very good number to note. As you might know if you take -- I think it was the past eight-year average was 340 bps for Mexico. That 340 bps is now hovering around 300, which is, again, very good news for Mexico.

Good morning. My two questions are both on Spain. You've given the NII sensitivity, thank you very much for that. But you didn't mention the management levers or among the levers, I don't think you mentioned cost. Conceptually, how much room do you have to cut costs in the event the rate cuts turn out to be worse than expected? How much room is there to cut costs even further?

Related to that, if I take a step back, my impression for BBVA's model in Spain is a low-risk, low-margin business in Spain, and hopefully low-cost. In a world of increasingly more negative rates, that seems more challenged than in the past. To what extent do you think M&A is necessary in Spain in the sector and under what circumstances, would you contemplate that given the outlook looks worse than we expected at the beginning of the year? Is that not a resource of cost-cutting M&A in Spain as a whole and for BBVA in particular? Thank you.

Thank you, Alvaro. How much room is there to cut costs? I think we have proven one quarter after another -- and if you compare ourselves with the Spanish-only banks, you would see that good performance. Again, it's obvious in the numbers if you look into the second quarter costs versus second quarter of last year, we have reduced our opex by 3.5%, which is, in our view, a good-performing figure. So, we have proven and we will continue on that trend. So, 3.5% might not be as much going forward, but we are very disciplined on costs and we will try to create value to compensate for some of the macro and interest rate dynamics that we are facing.

On the low-risk, low-margin business, I would beg to differ on that one. Again, if you look into the Spain numbers, the growth for Spain is coming from high-margin portfolios, again, based on pure numbers. If you look into consumer, consumer year over year growth for us is 18.2%. Very small businesses, as you call it, the growth year over year is 4.3%. And the commercial business, middle market business, our growth in lending for that book is 7.5%.

So, we are growing in areas where we see margin and we are doing this by gaining market share. If you look into also -- the stock market shares are not published, but you can do the production flow market shares. We are gaining market share in those portfolios. So, we are changing the portfolio.

That's why in the context of Euribor, I think Francisco asked it and I missed it -- the resetting of the mortgage portfolio based on Euribor, it takes a while, yes. But even in that context, some restting has already happened and is happening. Despite that, we have increased our spread by 3 bps. Again, 3 bps margin gain in Spain is not easy and it all goes back to that mxi adjustment. We growing in those.

Then your last question about M&A, I'd hate to give the same answer that I do, but M&A is a separate topic. We focus on our daily business and organic growth and we need to perform every single day to get better figures than what we have. Then M&A, we always look into it as well. It's a value lever. It only happens when we see there's a clear opportunity out there for value creation.

Good morning. Thank you for taking my questions. The first question is a follow-up on the NII comment that you made -- 9% negative sensitivity to 100 bps declining rate, given the guidance you have given for Spain, this is a decline of roughly 35 million euros for NII for 10 basis points, but you have a mortgage book of over 70 billion euros. So, please, could you help us understand why it is only 9%? Then another question is could you please tell us the percentage of fixed rate mortgages in your back book? Thank you.

Let me do the second one right away. The back book is 7% to 8% in the stock and it's 50% in the flow in the new originations, roughly. Regarding the 9% outcome, because there are other dynamics that kick in, this is a modeling based on the full macro-related drivers. So, when the rates come down, our cost of funding, wholesale cost of funding directly, it comes down as well when you bundle everything, then also the volume impacts are considered in that modeling as well.

We are quite confident in that because we have tested that modeling in the past. So, I'm giving you the final output rather than a direct impact on one piece of the balance sheet. Thank you, Mario.

So, continuing on the NII line, can you also remind us what your NII sensitivity is to 100-basis point move in interest rates in other geographies. So, for example, in Turkey, we saw quite big cuts, also, in Mexico, where expectations are that they are going to cut rates. That would be my first question.

My second question is on your capital. You have 11.5% core equity, which is what you basically target. Could you just remind us what additional impacts you expect from TRIM, Basel IV, and other regulatory measures and how we should think about that? Also, on the capital, what will you do with any capital that is above 11.5%? How should we think about excess capital, how it will be deployed? Is it M&A or will you redirect to shareholders? Thank you.

Thank you, Sofie, very clear questions. NII sensitivity, let me immediately respond to that one first. Again, 9% for the euro balance sheet, it's around 9% for USA as well. This is net interest income sensitivity to 100 bps parallel decline for the consecutive 12 months. Mexico is 3.4%, around 3%. South America is a blended geography. It's around 2.7%, 3% again, and Turkey has the least sensitivity for multiple reasons that we will take on another call. It's around 1.4%. So, the least is in Turkey. That's the NII sensitivity by country.

Regarding capital and what additional impacts are we expecting -- as I mentioned, this quarter, we have done 13 bps from TRIM. In the first quarter, we did 11 bps for IFRS 16 if you remember. For the rest of the year, we are expecting around 10 bps from TRIM on the mortgage portfolios, basically, another 10 to be there.

Then there is one final TRIM remaining. The field work is still continuing. As you all know, the TRIM was an exercise where the field work was going to be done between 2017 to end of 2019. The only remaining field work is on the low default portfolios, as we call them, low default portfolios, corporate FIs, and so on. That low default portfolio will be done, it seems, by the end of this year, as originally planned. But the letter and the process will be in 2020. We don't have that visibility on that book let.

So, that impact is going to come in 2020, though. So, this year, if you remember, we guided the market at 20 to 30 bps impact in 2019 from TRIM. If we get that additional 10 bps that we are expecting in the third or fourth quarter, the total for this year would be 13 of this year and then 10 that would be coming the rest of the year, 23 in total. So, it's within the range we have guided you in the beginning of the year. For 2020, for the low default portfolios, again, we don't have any visibility now.

Then the last question -- what do we do with the excess capital? Again, we always look for opportunities. If the opportunity, the value creation opportunity is there, we will leverage it. Other levers could be also leveraged, but at the moment, we are not there yet. Let's get there and then we'll discuss then.

The next question comes from Marta Romero from Bank of America Merrill Lynch. Please go ahead, Marta.

Thank you. I've got a couple of follow-ups on capital and the NII in Spain. On capital, the 13 bps, where is it coming from? I was surprised to see the weighted average in Spain flat with flat activity. I would have thought we would see some inflation there.

On NII in Spain, how much of the growth, the 5% quarter on quarter growth we've seen is coming from managing your liquidity, increasing your ALCO portfolio? Can you give us a sense of your risk appetite going forward? What is the total volume between ALCO and liquidity in Spain and if you expect to grow that book?

And quickly on Turkey, what is driving your reduction of cost of risk? The environment remains quite challenging. Your statutory loans probably need higher coverage. You've mentioned that you're starting to see quality deterioration in retail, what is driving that reduction in guidance and what do you see for next year? Thank you.

Great. Thank you, Marta. I partially responded to the first two, but maybe we can have Jaime add another perspective to it. So, Jaime, on capital overall and then the NII in Spain and then I'll take the Turkey question.

Okay. Yeah, Marta, maybe the surprise on RWA growth in Spain comes because of the fact that the only impact coming from TRIM, that it's already in Spain's RWA numbers is part of the add-on from the TRIM market risk review. The 10 basis points that we have prudentially recognized in this second quarter have been assigned to the corporate center. That's maybe the reason why you don't see that RWA inflation.

The second question is regarding NII contribution from the excess liquidity and the high liquid asset portfolio -- NII contributions coming from the ALCO book is up roughly 9 million to 10 million euros in the quarter versus Q1, having more or less the same amount in the ALCO portfolio, roughly 23 billion euros. So, we've done some net acquisitions, but a fairly limited amount. We've tried to share with the market a little bit more clarity on the ALCO portfolio. So, you have in the annex further info that I think you can take advantage of.

The yield of the euro ALCO book is 1.2% and the average duration, it's more or less five years, very similar to what we had last quarter. In terms of held to collect and held to collect and sale mix, it hasn't changed much from the previous quarter. Out of the 23 billion, roughly 12.5 billion are in the held to collect portfolio and roughly 10.5 billion are counted in the held to collect and sale part.

Then the last part of the question is the excess liquidity. What we've done with excess liquidity, remember that we're holding roughly 25 billion euros in excess liquidity at the ECB at the end of last year. We've been progressively reducing this amount to roughly 14 billion to 15 billion at the end of the first quarter and 5 billion at the end of the second. We've been reinvesting those amounts into high quality liquid assets, reducing the negative carry of 40 basis points that we were holding. The size of that high-quality liquid asset is roughly 50 billion euros or so. I hope this answers the question.

And Marta, regarding Turkey, as you know, if you break it down into different components, the retail portfolios are very clear, the rules are very clear, what you take as a provision is very clear. IFRS 9 and forecasting for the future is very clear. So, the gap that you mentioned, which is why is it turning out to be better than otherwise, it's mainly because of wholesale clients and they're all individual one-by-one client assessments.

So far, we are not seeing what we were expecting at the beginning of the year in those respective clients, one by one. Then you refer to stage two and given our provisioning levels in stage two, basically, I guess you're asking whether we're feeling comfortable with that and we are. Again, it's a client-by-client perspective on all of them. Let me give you a few numbers, for example. Roughly 30% of stage two is not delinquent at all. They're not even showing signals of any problematic situation. We still, just because we want to be prudent, have taken them into stage two and we are provisioning for them.

Close to 26% of that stage two is restructured loans and we see complete alignment with the restructuring plans. And then the 32%, some of them are not to delinquent, we kind of put them into this category of watchlist -- again, client by client assessment is showing us what we need to provision for. Overall, in the stage two IFRS 9 reporting, you will see that we are 10% provisioning for stage two, but looking into the portfolio and looking into the client by client situation, we feel comfortable with where we are.

Hey, guys. Good morning. Two questions from my side -- on Mexico, just looking at the fee evolution year on year and quarter on quarter, it looks to be the weakest performance in at least five years. Trying to not put it together with the doubling of the foundation contribution, but should we be combining those? Have you basically committed to contribute more in the social causes? How should we think in terms of fee evolution going forward? What's the political impact on you for the next 12 to 24 months?

The second question is on the US -- I did hear your explanation about the 3 basis points, Q on Q increase in spreads in Spain, but then when I look at the US spreads, they're basically flat and you guys are increasing. You are basically going down the credit risk curve in terms of previous emphasis on C&I lending and now, it's a lot more credit card, consumer lending, etc. How should we think about the change in your loan mix split going forward? You are obviously not increasing your spreads, but your credit costs should be going up going forward. Any color on that would be great.

Stefan, very good questions. Mexico, the fee decline, you're 100% right, as the numbers also show. It's mainly related to CIB, the corporate and investment banking, and the lack of deals and lack of activity in CIB given the market context. We are seeing in the pipeline some pickup in those deals in the third and fourth quarter. So, the pipeline is relatively strong, but there was nothing structural in that decline.

Now, you asked about the BBVA Foundation and the social causes -- yes, we do prioritize and care a lot about it. We have this balanced approach toward our business. We have to be caring for all the stakeholders of the bank. One of the stakeholders of the bank, it's the communities that we serve. It's the countries that we are in. Given the excellent performance of Mexico, we have decided that we should be increasing our foundation contribution there as well. That's part of it.

Then you asked a question of what the political impact is to our business -- we don't comment on politics, as you know. The country is the country. Mexico, I was just there last week. It's a wonderful market to be in. We have a wonderful franchise in Mexico, independent of the political developments and macro developments, I think we will do well in Mexico.

I always care about the track record. So, what happened in the past is always a great signal. It's not the only signal, but a great signal of the future. If you look into Mexico, the macro growth of Mexico in the past ten years is about 2.2%, which is much lower than other Latin American countries, other emerging economies.

In that context, BBVA has grown close to double digits every year because of the bankeriztion level in the country is very low and again, we have a wonderful franchise in Mexico. So, I'm not going to comment on the political dimension of this, but we are confident on our value creation capability in Mexico.

The second question is also very well-established US. The cost of risk is going up, but the margins are not going up. So, what's going on? First of all, I would like to once again clarify this notion on how we approach our business. We approach our business as optimizing the scarce resources that we have. Beyond liquidity and other things, capital is one of our scarce resources. So, we have to optimize the capital allocation. So, we look into our business at that level with that lens. Are we deploying capital to the places that we are making good returns out of?

In that context, some of those portfolios that you mentioned, it might be increasing the cost of risk, but through the cycle under a long-term perspective, if we are creating very good returns from those books, we will invest on those books. So, just picking the cost of risk is not telling us the full story. The implication of that book is in fees, is in net interest income, and so on. So, are you optimizing the capital is the critical question.

But then I haven't answered your question on why the net interest income is not going up. It's, again, obvious in the page -- the volumes have not been that good in the first half of the year in the US and the volumes are going to be, again, the pipelines are relatively better for the second half. So, the C&I business, the commercial business that we have in the US is a wonderful business. So, we will keep growing in C&I. So, we are not changing our mix at all.

What we are doing is if we can find portfolios and capabilities that we have that we can deploy in creating better returns for our capital, we will do that. In the case of the US, it implies that we will grow maybe in SMEs, in consumer EBIT, but the bulk of our portfolio will still be commercial and we will be growing in commercial in the second half of the year.

Thank you very much for the presentation. I think most of my questions have been answered already. Only one follow-up on capital -- the previous question was asking how you plan to allocate any capital beyond the current levels of 11.5%. You said that you are always looking for the opportunity. So, I just wanted to clarify. Do you consider any capital accumulated beyond 11.5% as excess capital or you plan to keep capital or get closer or even above the upper bound of your target rates, which is actually 12%?

A sub-question if you want is this target is a pre-Basel IV target. So, I think someone asked this, but maybe if you could actually give us some color on how you are thinking about Basel IV and operational risk going forward so we can actually estimate a proper Basel IV target. Thank you very much.

Thank you, Jose, for the questions. The first one is do we consider above 11.50% excess capital? No, we don't. We guided the market on this one as well. We have a range, 11.50% to 12%. As we have stated before, we expect to be toward the upper end of that range by the end of 2020. So, 11.50% is not the goal. It's the range. We want to be toward the upper end of that range, as we mentioned before.

Then the Basel IV and the impact of that -- it's too early to calculate the full impact, Jose. The only thing I can say is it's our hypothesis, let's say it that way, the impact on BBVA would be probably less than others, given our use of modeling and given our footprint and how we approach. You can also see it in the density of our bank. We would expect lower than the peers, than the European banks, but it's too early to put a number to it yet. We would hopefully guide you on that one next year and so on. It's too early at the moment.

Thank you for taking my questions. I'm going to go back to fees in Mexico. I'm not sure I fully understood the answer or your expectation for the year. If I go to commerce release from Q1, it clearly states that you are revising the charges made to customers looking for changes into digital channels. So, are you revising your commissions in Mexico and what should we expect for the year? Is it a stable fee line that we should look at? Thank you.

Andrea, as I mentioned, the key difference, the minus 3% quarter over quarter this quarter versus last quarter of 2018, the minus 3% is primarily driven by CIB, corporate and investment banking. As you all know, when you do deals, you get some upfront fees in those deals and if you look into the sub-drivers of our fee line, it's that line, which is showing a decline. Why? Because the market activity in Mexico in the second quarter was muted. Are we revising our fees in general? We are revising our fees in general everywhere as part of regular business. Are we doing something beyond normal, beyond business as usual? Obviously not.

The key difference, again, is the CIB. So, what is the expectation for the third and fourth quarter? You're asking, I guess, very specifically about the remainder of the year. Given the pipeline that I'm seeing, I would expect that we would be better than the minus 3%, but again, it's dependent of the conditions of those deals happening in the CIB book. So, we would probably be better, but it's not structurally a negative topic that you should be alarmed about, is what I'm trying to say.

Good morning. Could you please elaborate on the drivers of the other income line in Spain, Turkey, and Mexico in the quarter as they look particularly good versus expectations? Also, in TLTRO III, from your moves on excess liquidity, can we assume, therefore, that you will not be taking TLTRO III and are you expecting other Spanish banks to do the same and if so, has this expectation already factored into your NII guidance?

Finally, on US NII, your funding costs are going up. Is this the driver behind the lower NII guidance or is it the lower rates going forward? Can you update us on the specific consumer issue and how you're solving it? Thank you.

Sure. On the other income line, I think I said something on the speech, but I'll try to expand a little bit the answer. One of the line items that have changed the most versus the first half of last year, I'm going to try to compare the numbers between the first half of 2019 and the first half of 2018.

Okay. Versus Q2, the reasons are pretty much the same, but the numbers are slightly difference. The difference between Q2 is 47 million euros and it's mainly explained by both Spain in the US. In the case of Spain, it's up 58 million euros. As in Q1 of '19, we included higher restructuring charges that took place in the second quarter. In the case of the US, in Q2 we included some provision releases for contingency risks while in Q2, we've had some provision charges. Those are the most important changes.

On TLTRO III, we clearly think that it's an interesting funding source for the bank, as we feel conditions are quite favorable, although at this point, it's not easy to precise when and how we will participate. We will try to take into account what are the actual terms. Those terms will change depending on what happens in the interest rate environment after the summer and how our liquidity generation capacity evolves in the next six months. We would probably not draw during 2019, although that decision is not taken and probably, the first drawing, if at all, will take place in 2020.

And Andrea, regarding the third question about the US, there are two sub-questions, I understand. The first one is the net interest income. Is the net interest income slowing down because of the cost of funding and going forward, is the cost of funding the key reason? No, it's both. As you might know, in the US, the impact on the books come in different sequence. So, for the loans, when the rates go up, for example, it's immediate impact on the commercial book, it's immediately repriced, but then the reflection of the increase in the rates to deposits comes with time with then customers renew their CDs, certificates of deposit, and so on.

So, what we are seeing now is the impact that is coming after their successive rate rises that we have seen in the US in the past two or three years. So, we are seeing it partially over time. That's why the cost of funding is going up. It's not unique to BBVA. If you take any other US bank, you would see the cost funding gradually goes up since the past two years. That is one impact, but going forward, if you are asking is this going to be the key, the negative impact on the NII line? Obviously not.

As I mentioned at the beginning of the call, we are asset sensitive, which means -- and I did give you the numbers -- the NII would come down by 9% if we see 100 bps decline in the rates for the successive 12 months. So, a step function change in the curve impact is around 9%. So, that is going to also obviously depending on the rate situation in the US going to affect us.

It has already started affecting us because our book, commercial book, is mainly driven by Libor one-month and Libor one-month, independent of the Fed decision obviously has been coming down since February/March and that is immediately affecting the yields that we have in the book. What we you see today is already reflecting those changes. So, both of those will affect NII. That's the answer to the question.

Then about the cost of risk -- I partially mentioned it, but let me give you better figures. As you see in the presentation, our first quarter asset quality cost of risk is 106 bps. As you can see in the second quarter year to date, that number has come down to 94 bps. If you take only the second quarter and annualize the second quarter, the second quarter's only cost of risk was 82 bps. If you remember in the first quarterly call, we guided all of you that we would be between 80 to 90.

So, 82 was the second quarter figure. We feel comfortable with that guidance for the remainder of the year. Again, as long as we create returns in portfolios, we will invest in those portfolios, that perspective is not a very short-term sporadic perspective, it's through the cycle, meaning putting some buffers, taking into account that the economy might slow down and so on. So, a through the cycle return is good for our portfolio, we do invest in those portfolios. That's what we will continue to do in the US. The bulk of our portfolio, as you can see also in the presentation, it's going to be the commercial book.

Andrea, I think you asked about the other income line. I answer the difference in the other provision line. Let me answer the question on other income. The other income at a group level is in the second quarter minus 18 million, which compares to Q1 at class 8. We need to take into account that, as Onur said during the speech, in Q2, we include in Spain the contribution to the single resolution fund, which is 144 million euros. This negative number was offset by 53 million of dividends coming from Telefonica that, as you know, they normally come in Q2 and Q4, which they normally come in Q2 and Q4, which is accounted in the corporate center.

This line also includes quite a good number in Mexico in insurance results, which behaved quite well in the quarter, overall 62 million euros in the quarter versus 40 in Q1. And then lastly, in the case of Turkey, we also had quite a positive number in this line, 24 million euros versus 6 in Q1. And this is partly explained by the reversal of a tax fine that we did in Q2. I hope this explains better the situation.

Good morning. I've got two questions, please. Thank you for providing the net interest income sensitivity. Maybe you can formula it slightly differently. What would be the NII sensitivity for a 10-basis point reduction in Spain over two years? I'm asking because I assume that it's probably more than one-tenth of the 9% that you've provided due to loans, for example, hitting the floors.

Then my second question would be on loan growth in Mexico. Are you still guiding to high single digits? Year on year, I think this quarter was a bit lower due to the strong Q2 last year, but there are several other banks that have cut their other loan growth output for Mexico quite recently. What gives you the confidence that you will still achieve the high single-digit growth and which segments do you intend to focus on?

I'll take the Mexico one. On the first one, if I start, it's going to take ten minutes. So, I'm going to give it to you.

You're right, Britta. You cannot divide simply the sensitivities. The sensitivity into your balance sheet to a 10-basis point decline on a 12-month forward looking basis, again, parallel decrease is 52 million euros. We never disclose impacts beyond the 12 months.

Regarding Mexico, we still stick to our guidance, high single-digit loan growth. You do see that there are certain portfolios which are not growing as much, but there are certain portfolios that we are growing and growing healthily and also return-wise, very good returns. So, consumer book, as you can see, it has increased 12.4% year to date, which is very strong. The same for other books as well. So, we stick with our guidance, basically. Let me be more open. We stick with our guidance by the end of the year.

Thank you for taking my questions. Most of my questions have been answered, but just a quick question on deposit pricing in Spain. How do you feel about corporate deposits? What is your mix? And if you plan to translate further cuts or negative rates to the rest of the clients, that would be my question. Thank you very much.

Thank you, Fernando. Yes, we are managing that extra liquidity, as I mentioned at the beginning of the call. If you look into the breakdown of our deposits in Spain, demand deposits is like 82% and time deposits is like 18%, but you are asking specifically for the commercial or corporate enterprise deposits. We do have this policy that depending on the relationship with the customer, depending on the book that we have with the customer, we differentiate pricing. There are cases that we are charging on deposits. Depending on the evolution of the curve, we will continue with the same practice, basically.

Good morning. Most of my questions have been answered already. I have a bit of a follow-up. In Turkey, you're guiding toward the cost of risk below 150 basis points. The first Q was 180, the second Q was 160, so, 170 for the first half as a whole. My question here is are you expecting some increases on cost of risk because of asset quality? I know the NPL ratio went up quarter on quarter. Are you just being cautious and playing it safe, but you do see it well below 200? I'm just trying to understand here what the move is there in Turkey.

Then on NII in Turkey as well, do you still maintain the guidance of a flat NII or could we see a better performance for the rest of the year given the devaluation that we saw in the first half? Thank you very much.

Very good questions, Carlos. First of all, let me clarify one thing. In the documentation that we provide on cost of risk, the numbers are year to date. So, the second quarter number that you see for Turkey, the cost of risk of 157 bps, that is a year to date number, which implies that the second quarter was actually better than that one. The second quarter number is actually 129 bps. So, the blended is the 157 bps, those are year to date figures.

What do we expect for the rest of the year? If you remember at the first quarterly call, we guided less than 300 for Turkey. Obviously, there's some upside to that one. We want to still be prudent for sure. So, given that, we are going to be at the end of the year around 250 as the latest that we are foreseeing, again, just to be on the prudent side.

Regarding net interest income, excluding CPI linkers, our guidance, as you said, was flat. Given the latest decision of CBRT, the central bank of Turkey, to cut the rates by 425 bps in July, we do think there's an upside potential there. So, probably it's going to be better than flat, but again, we'll see. In terms of guidance, there's an upside in both metrics for Turkey.

Hi, thanks for taking all these questions. One question just on Mexico net interest income, I'm not clear if you were maintaining the guidance there as well of high single digit growth, particularly given the outlook for rates and slower GDP rate cuts, if you could just clarify that. Then a follow-up on Basel IV, I appreciate you're not able yet to give guidance, but maybe you could point us in the right direction in terms of magnitude, particularly from operational risk. Is it a zero to 20 bps number, 30 to 50 bps or 50 to 100. I don't know if there's any additional color you could provide there.

Maybe just one final question moving away from results and thinking about your digital strategy and the strong and continued progress you're making there in terms of digital sales, as that penetration level increases, I don't know whether it's 60%, 70%, 80%, but how do you see over the medium term both the size of the branch network and number of employees evolving as that digital distribution increases? Thank you.

Very good questions, Daragh. Thank you so much. The first one, Mexico, let me be very straight to the point. Are we retaining the guidance? Yes, we are keeping the guidance. We are keeping the guidance as what it was, high single digits. On the Basel IV, I understand you want to get the range, but we don't have an estimate yet. If I was younger, I could have given you a range, but I cannot there.

On the third one, digital strategy, what is the implication on the rest of the cost structure and the branches and so on, we are measuring it very, very clearly in every single market and the situation of every single market is very different. I will give you two examples. In the case of Mexico, for example, we are not reusing our branches in deposit three to five years, if you look into the numbers.

But in Mexico, what we call target customers, which are really active customers, active customers beyond a certain threshold, it has grown 50%, 50% growth in number of customers in the past three years. They are wonderful numbers. We don't need to reduce the rest of the cost structure because for that additional customer base, we still need to serve them through these channels because some of them, at least, they still demand those channels.

In the case of Spain, the situation is different. It's a very mature market, obviously, the growth and number of customers is much less. By the way, in target customers, we are growing even in Spain. We are growing even in Spain because of that digital strategy. In Spain, given the fact that the growth is not going to be as high because the bankerization is much higher, than those levers, those levers around cost reduction becomes more relevant. That's what we are doing. You can see from the numbers.

What we care about is this notion of the jaw. Again, the growth in revenues should be higher than the growth in costs. If you can create growth in revenues, then the cost structure is there to serve that revenue base because there would be more customers to serve. So, it's a balance, but what I can tell you is on an apples to apples basis, meaning for the same number of customers, for the same set of services, digitalization is definitely -- underlining definitely -- going to help us on efficiency. That's what we are seeing in the numbers.

Thank you, Daragh. There are still five people on the line. Let me ask you to try to be short in the answers. Next question, please.

Good morning. Can I go back to the first question around NPLs in Mexico? If you can explain the pickups we are seeing in that line, segment by segment, and what are the chances of a pickup of cost of risk in the second half due to recalibration of models or IFRS 9? The second question on capital -- I know you cannot give a number in terms of Basel IV, but do you expect to cover whichever headwind you have within the next two years or do you think you can phase it out from 22 to 27?

Well, Mexico, the pickup in NPLs or the cost of risk, it's not a major pickup, I would say. The cost of risk of 293 of 298 in cost of risk, for example, but that was what we call a pulling effect. Also, there was this macro adjustment. As you know, we have reduced our macro -- I mentioned at the beginning of the call, from 2% at the beginning of the year, to 1.4% first, and then to 0.7% as of last month.

So, the impact of that is being reflected into the figures and the cost of risk figure. So, we don't -- if the question is, again, are we sticking with the guidance? We are sticking with the guidance. We don't see any major negative effect that would be coming along as we see the business drivers. Jaime, you want to add something?

Yeah. Actually, on the recalibration, the recalibration would probably be positive this year. It won't take place in the fourth quarter of the year. It will take place in the third quarter of the year.

I care a lot about vintages, vintages of the portfolios of retail. In the vintages, which is the new production that you do in the same period, the harvests, we don't see any negativity at all, on the contrary, to be fair. That was it, only Mexico, no? I was looking to something else. Is there another question? Okay.

Thank you for the presentation. Everything has been discussed already. A quick on one ALCO -- if you could provide some more detail, the same as you've done with Spain, the ALCO portfolio in Mexico, size, duration, and sensitivity to 100-basis point change in rates, that would be very much helpful.

The rate sensitivity, as we mentioned at the beginning of the call, it's minus 3%, minus 3.4%, 200 bps parallel decline. So, a step function change in the curve for the consecutive 12 months, the impact would be 3.4% in net interest income. On the ALCO portfolio, Jaime?

The ALCO portfolio size went down in Mexico in the quarter by almost 1.5 billion euros, from 6.5 billion euros to 5 billion euros. The split between held to collect and held to collect and sell, pretty much everything is in held to collect and sell, 4.2 billion euros and 0.8 billion euros, not even 1 billion, is in held to collect. The duration is much shorter than in Spain. It's 1.7 years. The contribution to the NII is actually negative. The cost of this book is negative. So, the reduction in rates will definitely help on this.

No. I don't have that in front of me, so, it should be roughly 8%, 7%-9%, but please take this in quotation, it's from memory.

Good morning. You reinvested extra cash that appears [inaudible] ECB. What assets have you invested in? It looks like it might be predominately Italian bonds. Is that correct? Secondly, do you expect any material impact from the switching of the US Libor to SOFR? Thank you.

On the first one, I'll take it. The extra liquidity, what did we do with the extra liquidity? No, we did not invest it in bonds, it's basically all of it, actually, that extra liquidity switch is to high-quality liquid assets. They're all high-quality liquid assets. In terms of the switch, Benjamin, I missed the question. What was the question again?

Libor to SOFR -- OK, so, it's a process that's ongoing. It's actually a major project. It takes a lot of time of management of everyone else. It's in process, but as you know, it's going to be a while. It's not immediate yet. The key one we are preparing for is the year on year change and again, it's a major project that we are dealing with a lot these days. Thanks, Benjamin.

Good morning. Thanks for taking time to answer all of our questions. I've got some follow-up questions on Mexico regarding of cost of risk and recalibration of models. I'm surprised to hear that the impact is going to be positive or should be positive by the recalibration in the third quarter because I would say the macro parameters would be against the increased [inaudible] provisions. What would be the sensitivity of those models to a case of a deterioration in the macro parameters, let's say, with a recession in GDP growth?

And then the next question on capital allocation -- congratulations on your results in South America. Being around 8% of your total assets is yielding you around a 16% and 15% contribution to your growth margin. Would that mean you would allocate more capital to that region? And then last one, if I may -- do you have any news on what kind of measures the ECB could take going forward in order to alleviate the penalty on your NII in the sense of measures like a tier deposit rate or expanding the APP program by buying financial credit or even, let's say, equity? Do you have any views on that case? Thank you.

Yalan, thank you so much for the questions. Let me do the second and the first. I'll give the cost of risk to you, Jaime. On the capital, are we going to divert more capital to South America? We are putting capital where the return is. If there's a return, you highlighted that. It's not done at the country level. It's done at the micro level. Wherever the capital return is, we put capital right there.

In that context, the answer is yes. If we get returns, we put it in those areas and portfolios. The expectations on the tiered deposit scheme and so on, obviously, it's ECB's decision. We are waiting for the decision. There's the expectation that there would be some sort of that scheme getting in place, but we are preparing our plans to mitigate the impact of interest rates through many other measures. If tiered interest scheme comes along, we welcome it. If it doesn't, we move along. On the first one, Jaime, then we wrap up.

We need to distinguish between a recalibration of parameters, which we do once a year, and the macro adjustment that we do every quarter. If you remember last year at the end of the year in the fourth quarter, we recalibrated including all the info from 2017. What we're doing as we speak and will be accounted for in the third quarter is to input in the models all the data from 2018 and this will, of course, affect the PDs and LGTs because of the inclusion of these new vintages.

That is what we call recalibration. 2018 vintages were probably the best vintages in the last ten years. So, when we share with you guys the negative impact last year, we also said that this was going to be probably a positive recalibration as we are expecting to have. And as Onur has already said, the negative macro that we are having in Mexico is already affecting a little bit the numbers quarter on quarter and it fully explains the increase in cost of risk in second quarter versus the first because the negative macro affected us by 26 million euros quarter on quarter.

Yalan, for macro, we might still register a negative. We might still register a negative from a macro modeling perspective in the numbers. But recalibration, which is based on the portfolios, based on the credit quality we are seeing versus what we were expecting, that's the impact we were referring to when we said recalibration. That's one that's going to be a positive effect, it seems. That's what we were trying to explain.

No, just to thank you for participating and to remind you that the entire IR team will remain available in case you have further questions.

Well, thank you so much again for attending the conference call and hopefully if you haven't done so, have a great vacation period. Thank you so much.

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