Angel Cano Fernandez - President, Chief Operating Officer, Director, Member of Executive Committee and Member of Global Asset Allocation Committee Tomas Blasco Sánchez Manuel González Cid - Chief Financial Officer and Head of Finance Division

Okay. Good morning to everyone. Welcome to this webcast presenting the results of the BBVA Group for the second quarter of 2013. The presentation will be given, as always, by Ángel Cano, the President and COO of the Group. And then we'll have a Q&A immediately after the presentation. And then we'll be with Manuel González Cid as well, our CFO. Any questions that are not answered during the webcast for lack of time will be answered during the rest of the day by the Investor Relations team. Ángel?

Good morning, everyone. Welcome to this presentation of the results for the second quarter of 2013 for the BBVA Group. The main characteristics of these earnings is that they're very resilient. And above all, they're in line with the messages that we've been putting out to you over the last few quarters. We can still see that the world is growing at two quite different speeds. First of all, we've got the emerging economies and then the developed economies. In the developed economies, we are seeing that there is still a complex environment with, above all, a difficult situation in Europe. The objective is very clear: to achieve some kind of economic, monetary and banking union. So we have seen some advance being made towards those objectives with the bank recovery and resolution directive. Looking at the emerging markets, we see that they are very buoyant, albeit there has been a slightly lower growth rate in some of the emerging economies. But there is still going to be sustaining world GDP growth for the next few years, as we see it. So it's still very important to have a business portfolio which is well-balanced and, above all, diversified, exactly what we have in BBVA. If we now look at the highlights of this quarter, the first thing that we'd like to point out is that we have some recurrent revenues, which are very sound this quarter, growing even faster than they did in the first quarter of this year. We've got high earnings coming in as well from one-off transactions, some of them, I think, all of you know, the sale of a pension business in Mexico, in Peru and Colombia. These last 2 have been booked to the second quarter. And we still have to book the capital gains…

Well, Manolo, as always, you can add to anything I say. But first of all, there has been no surprise as we saw what happened to risk-weighted assets. They performed in a manner that you'd expect. We have internal models in certain places where we can use less capital based on the past record and all the information we have on the main risks besetting any of our entities. At times of crisis, what tends to happen when you incorporate another year of crisis, as 2012 has been, you have to calibrate your internal models. And we have to grow a certain number of basis points, as you've seen, about 28 basis points. We're talking about for this half year, which means that we have used capital -- well, we haven't. This capital is still there. It's on the balance sheet. So when we calculate the group's capital, it's there. The only thing is that the way that we calculate the RWAs is more demanding, more stringent than if we did it in another way. So when we come to better times, then the bad deals will come off the track record that we have to use for the internal models. And we'll therefore be able to calibrate the models more favorably in the future. So the capital is there. And it will be recovered as soon as the economy recovers as well. So that fully loaded Basel III ratio there, obviously, we are above any of the requirements for the phase in, for the fully loaded, whatever. I think what's important is we've got 9%, 9.3%, 9.9%. But those figures aren't so important. The main thing is that we're above that 9%, which was the target that we established. In terms of core capital, we haven't included any impact…

[Spanish] Manolo, I think these 3 are for you. I'll give you a hand with some of them, if you like. No, you get on with it. Manuel González Cid: The ALCO portfolio, our exposure and our interest in our exposure, with regard to Spanish sovereign debt, in a 6-month period, there has been a slight increase of EUR 1.2 billion. So we're talking about EUR 32.5 billion of exposure. Most of this increase, EUR 600 million, EUR 700 million, is because of our negotiation with the markets with our portfolio. So this could be a purely ALCO portfolio. Held to maturity is stable over the 6-month period without any major change in the ALCO portfolio and the euro balance in the 6-month period. With -- if we look at the ALCO portfolios in other units, there hasn't been any great variation that we have EUR 6.6 billion in the United States. And we have a portfolio of EUR 7.6 billion in Mexico. And in Mexico, because of the increase in duties in Mexico, because of the increase in the American curve and rates, because of the change of monetary policy in the United States -- so with this increase in rates, we've added EUR 1.5 billion extra to the Mexican portfolio at the end of June. Once -- after this movement, at the moment, we have low durations in our portfolios in the 3 countries of around 3 or just over 3 or just under 3, depending on the country. And in some way, the portfolios are performing very, very well. And we can see that despite this increase in interest rates, there hasn't been any kind of problem anywhere with regard to net trading income or mark-to-market on the contrary. LTRO now, during this quarter, we've amortized some…

Well, the sale of non-core assets, have we finished our plan? Well, when we decided to sell off the pension business, it wasn't what we had as our objective, initially. We just wanted to look at the multiples that we were getting from the sale of this business there because of the excess liquidity. It's a very profitable business. But the multiples paid, taking into account that it's not a business that gives us synergies, bringing in additional revenues because of synergies with the banking business. That's why we decided to sell. Well, Panama, I've already explained the reasons behind that sale. If there hadn't been, as I've said before, offers with the multiples that we could get, we are obviously getting good earnings and not very high earnings because of the market share that we have there. But since that we did have those offers, we thought that they were just too good to refuse. So apart from that, apart from maybe some small minor transaction, we haven't got any assets that we're thinking of selling off that we consider non-core. Catalunya, Caixa Catalunya, NovaCaixaGalicia, well, obviously, we have to analyze them on a case-by-case basis. We'll have to look at the books that are open to us, and we'll do what we always do. We will always see how much value we can generate for our shareholders and we'll be highly objective in the way we approach these transactions. And then guarantee, there, obviously, we can't say anything apart from that we're seeing excellent performance in Turkey, as we've seen this quarter yet again. The earnings coming in from Turkey are excellent, and we are seeing that over the first few quarters in which we have been booking the earnings from Turkey. The integration in corporate terms has…

Is that it? Tomas Blasco Sánchez: Yes.

Okay, then. First of all, net interest income. During the presentation, I was explaining the impact of these floor clauses being taken out of our contracts because of the ruling handed down. EUR 93 million in the first quarter was the impact, but it was mainly in the second quarter that we got that impact actually. But the first complete months has been due [ph] where it's had an impact of EUR 56 million before tax. And that gives us our performance, which was growth, positive growth speeding up over the year, and then we have this sudden drop, which will continue. The way we see it, well, with the impact of the change in the floor players, we could extrapolate from that 1 month that we've got so far, but it will depend on the euro board [ph] rates any time. But with the extrapolation in the next few months, where we've got some visibility with not much change in euro board, we could extrapolate that level, make EUR 56 million, EUR 57 million. And then the second question, about the cost of deposits. What we're expecting in the final quarter, above all, is to see an additional reduction in the cost of deposits because of the renewal of term deposit, which is the most expensive ones we have in our stock of deposits, which we'll have to repriced to the much lower rates that we now have compared to 1 year ago. So we'll see an improvement in customer spread, above all, in the last quarter. And we could talk about a slight upward rise in customer spread in the final quarter, above all, because of the repricing to prices, which was significantly lower than what we had 1 year ago in the term deposits that were taken…

And Manolo, just to add to what you said, all the projects we studied in great depth. We looked at them in terms of their economic rationale, and we knew the possibility of some changes and we've classified them on the basis of very prudent, very conservative criteria. So we feel very comfortable with our exposure to renewable energy. Tomas Blasco Sánchez: Let's now move on to Mexico. There are several questions about Mexico. From Antonio Ramirez, from Benjie Creelan, from Alvaro Serrano from Morgan Stanley, Jaime Becerril, Jaime Rigel, Carlos Peixoto, Ignacio Cerezo, Antonio Ramirez again, and Benjie Creelan, and Arturo de Frias who've asked the question about Mexico. So what the questions are is basically, first of all, NPAs in the second quarter have gone up 30 basis points after 2 quarters in which it was improving, 2 quarters running. Could you explain what happened in this quarter? And what's your outlook for the next few quarters to the year-end? Second question about Mexico would be, what's the impact we expect to see from the banking reform being enacted in Mexico, how would it impact our outlook there? Third question would be, what do we expect the cost of risk to be in Mexico? How will it be in 2013 and do we have any visibility for 2014? Fourth question has to do with what might happen to our loan book and how we expect it to grow in Mexico? We've seen in second quarter that it's below double-digit growth, but what's the outlook for the growth of our loan book towards the end of 2013, this -- will it be higher? And then finally, I think I've given the summary of all the questions. But finally, we've got the question: What do we expect to see in 2013 in Mexico with respect to net attributable profit, 2%, 3%, 4%, 5% growth in our bottom line there?

First of all, NPAs. Basically, I mentioned this pickup of 3/10 in the quarter, and here I said that, basically, this was due to the fact that the 3 major developers in Mexico have been reclassified to NPAs. It's true that with these developers, since the end of 2010, we have reduced our exposure to them by 60%, and this is an important figure. And the remaining figure in all 3 classes has been reclassified as NPA at the close of this second quarter. So going forward, I think what we can expect is another few tenths of a fall in the second half of the year. And this is the only one-off that we've had in classifications in this second quarter that has had a slight effect on the risk premium in the second quarter. The risk premium for 2013 as a whole, I think is going to be around what we saw at the end of last year and the beginning of this year. So the risk premium is going to be slightly lower than what we're seeing at the moment. Reforms, now I think it's too early to say anything about -- to talk about it really, because what they are trying to do basically, above all, is to reactivate the growth in lending especially to companies. Don't forget that in Mexico, bank penetration is still below 30% or low 30s, so the emerging markets, the best emerging markets probably has the lowest ratio. And the reason for this -- and that's why we're working on this in order to reactivate lending, to bring it up in line with other emerging economies. But it's still too early, really, to see the results. Maybe in the third quarter results or fourth quarter results we can maybe give you…

Let's start with the business volumes we've got. We see some buoyant growth in several countries, the most stable countries, Peru, Chile, and Colombia whose economies are performing in a very stable way. And even in Venezuela, we're seeing growth in business volumes. Maybe the most significant impact is hyperinflation, which impacts accounts for the whole region and mean that costs are growing very fast, although revenues grow, too. Nonetheless, they are offset. And you have to go on from operating income where we have to book all the impacts of the hyperinflation. And there, you'd have the weigh that revenues and costs offset one another. What we're expecting for the second half of the year? Well, it's difficult to see ahead, but we think there should be changes in the inflation rates in Venezuela, which should go down quite significantly, which will mean that it will offset that impact that we've seen in the second quarter. Although it would probably remain quite high in the third quarter, but it should go down in the fourth quarter. So that is the outlook we have for the rest of the year. And then business volumes. Well, there, because we look at Columbia, Peru and Chile, and see their economies working well. We want to invest in Columbia and Peru as well. And last year, we made quite significant investments in Chile already. And because of their sound economies, we think it's worthwhile growing. We want to grow organically, increasing our market share in those countries. And in Peru and Colombia, we already have reported some growth, organic growth, so looking at double-digit growth even after the accounting adjustments over the next few quarters. Manuel González Cid: And when we look at the increase in business volumes in Latin America and how they're going to be recorded, we have to take into account that we've seen double-digit, high double-digit growth throughout the region for the last 2 years now. So it's not easy to go on growing 30% for the fourth year running, and it wouldn't be good if it did. So a slight slowdown in the region is a good thing. And we are seeing that base affect us well with comparison year-on-year. And so we are seeing growth, okay, 17% compared to 20-something percent last year, isn't a bad thing at all.

And with what you said, Manolo, when we look at the business world there, earlier on, we were talking about the liquidity we have in the region and that everyone has, that means there's some pressure on the different lines of income for businesses. And obviously, there is more activity with individuals, and that's growing faster than what we're doing with corporates and business, and that has an impact. It's -- but there's also that's shift from bank borrowing to market issuance amongst the corporates, which is a phenomenon we'll see over the next few quarters as well. Tomas Blasco Sánchez: Okay. We can now move on to dividends. There are several questions from Rohith Chandra, Mario Lodos from [indiscernible], Luis Peña from JB Capital, Carlos Peixoto from BPI. They mainly have to do with the potential impact of the 25% cap on dividends in cash. How will that impact our dividend policy, our payout policy? Are we going to continue in 2013 and 2014 paying out dividends in script? Is there any possibility of cutting back total dividends because that's the recommendation emanating from the Bank of Spain? So that's the block on dividends. And then capital. There, there were 2 further questions. One from Javier Ruiz from Interdin. He asks, at the end because of the DTAs, will we have a capital ratio under fully loaded Basel III of over 10%? Will policy change with respect to lending or dividends because of the DTAs? Carlos Garcia from Société Générale asks about our vision of leveraged operations and how that will affect us.

The impact of the recommendation that we've received and the combination from the IMF and the Bank of Spain, we're talking about a recommendation that would only cover the dividend for the earnings for 2013, that and that alone. A lot has been talked about 25%, but nobody's mentioned the time periods. It's only for 2013. We have already distributed the first dividend in July, which has been in cash, then there's the October dividend with a policy that we've established, which will be in shares. And from there on, we'll have to see the behavior of our earnings from now till the end of 2013 to see the impact this recommendation would have. But we are continuing on an ongoing policy. And from here to the end of the year, there might. We will let you know if there's going to be any change in our dividend policy. With regard to your question on capital. What is true is that we are already over any capital -- regulatory capital requirements, whether we're over 10% or not doesn't affect lending and doesn't affect dividends. It's necessary but it's sufficient -- but it's not sufficient. Lending will continue to perform in line with demand, and depending on the economic situation of the countries and also the asset allocation we have in each country, which has nothing to do with capital, but rather, to the generation of return to the group. So we're not -- this is not going to change. Lending is not falling off to protect capital. It's falling off because -- basically because demand has fallen significantly, basically in Spain. And in each area that we operate in, in the United States, it's growing 20% or it continues to grow at around 16% in South America or only 7%…

Okay. Manolo, maybe you'd like to start? Manuel González Cid: Okay, then. We haven't got a loan-to-deposits target in Spain. We feel very comfortable with the situation we've got. Our loan-to-deposit ratio, when we adjust it for total assets and temporary retail lending, at the moment, it would be 128. If we include the mortgage warrants issued onto the market, then we'd be talking of about 100 or even less than 100. So we're talking about a situation in which we feel relatively comfortable. So we think it's a prudent funding for medium- to long-term books with those kinds of loans. So with the provisioning we have, it's suitable for Spanish economy. Deposits are growing quite fast, and we are benefiting from people preferring us for their deposits. We're gaining market share with organic growth, as well as the incorporation of Unnim, going up over 120 basis points in the year. So we've gone up 4% in market share deposits within the system just through organic growth. And if you look at lending, there is some deleverage there, and it's quite positive to get that kind of deleveraging. And so we think there should be a substantial improvement on our loan-to-deposit ratio on our balance sheet here in Spain. But we feel very comfortable with the current situation. As we said at the end of the year, we think the situation will be of an even higher loan-to-deposit ratio than what we're currently reporting.

And then the regulations funds that you are talking about, and Manolo will probably have more to say about this, and symmetries as well. Well, there will always be asymmetries until we have a single supervisor, a real banking union. And that's one of the objectives of the banking union for Europe. And we can't expect to see that until at least the end of next year. Along the way, before we get that, there are various exercises being carried out with security review stress tests, or whatever you want to call them. So the European Central Bank will know exactly what the accounts are and how things are being reported in different ways. But there will continue to be asymmetries. We're seeing them, above all, in the reporting of capital ratios, also DTAs as well, the deferred tax assets, because there's different kinds of regulations in different countries. So it's not just capital when we're talking about the DTAs, although in part that does have an impact on capital, but there isn't a level playing field with respect to regulation on DTAs. And then the resolution funds, what's really important with the new directive is the regulation on bail-ins. So it's really important to separate out what's happening in the financial industry from what's happening in terms of sovereign risk. And so I think the initial approach has been quite positive before going to resolution funds, there will be bail in on the balance sheets of the different financial entities. So that the taxpayer bill will be kept as low as possible unlike what happened to date. Manuel González Cid: I totally agree with what Angel said, but I would like to add something that I do think is relevant. If we look at 1 year back what was…

Tomas, I wanted to say, I wanted to wish everybody happy holidays. But it's important, I think, you've all deserved the rest. We've had difficult times. We've had to get through them, that's pretty stressful sometimes. And so it will be great if people can go on holiday and really charge their batteries. So enjoy your holidays.