Good morning, everyone. Welcome to the BBVA Third Quarter ’21 Results presentation. Here with me today is Onur Genc, Chief Executive Officer of the group; and Rafael Salinas BBVA’s Chief Financial Officer. As in previous quarters, Onur will start with the presentation of group results, and then Rafa will review the business areas. Then we will move straightforward to the live Q&A session. And now I will turn it over to Onur to begin with the presentation.

Good morning, everyone. Welcome, and thank you for joining BBVA's third quarter results audio webcast. As Patricia said, I'm also very glad to have Rafa Salinas here today in his first earnings presentation. So please be gentle today. It's his first as the group's new CFO. As you know, Rafa was formerly our Chief Risk Officer, with more than 30 years experience in the group. So welcome Rafa to these meetings. Let me jump into it. Let me start with Slide number 3. On the left-hand side of the slide, you can see the performance of our net attributable profit. It continues its upward trend. I like the curve here, up to EUR 1.4 billion now in the third quarter. This figure implies a 31% increase versus the same period last year. As compared to the second quarter of this year, net attributable profit also grows 8.2%. These numbers, they represent one of the highest quarterly results ever reported by BBVA, bringing also our earnings per share to EUR 0.20. Let me note here on this page that for comparison purposes, all these figures exclude nonrecurring impacts as the sale of the U.S. business or the PNC or the restructuring program in Spain, impacts, which affect the baseline, which affect previous quarters, obviously, no impact in this quarter. The graph on the right-hand side of the slide shows our capital strength reinforced by the strong capital generation of 31 basis points in the quarter, bringing the CET1 to 14.48%, again, a very powerful figure. Lastly, at the bottom of the page, I'm very happy to report that European Central Bank has authorized our share buyback plan with a maximum size of EUR 3.5 billion, up to 10% of our shares. This is clearly one of the largest share buyback plans…

Thank you very much, Onur. Good morning, everyone. Starting with Spain on Slide 17. Loans has increased by 1.1% year-on-year, driven by the strong growth in the most profitable segments. A strong performance on consumer, 8.9%, where we continue gaining market share as well on SMEs 8.5%, while mortgages devaluated at a lower rate, thanks to a strong new loan production, offsetting a bit of the leverage that we are seeing in the corporate and CIB portfolios. Moving to P&L in the first 9 months in Spain delivered an outstanding pre-provision profit of EUR 2.3 billion, growing at 9.2% versus last year, mainly driven by a strong core revenue growth, 4.7%, supported by the strong fee performance, up 18%, led by the recovery of activity and the robust growth in banking services, credit cards, asset management and insurance fees and a significant increase in net trading income, thanks to the group performance of the global market unit in 2021. And expenses decreasing by 1.7% year-on-year, back on our continued cost control efforts and despite comparing with an exceptional low 2020 figures significantly impacted by COVID, resulting in a significant improvement in our efficiency ratio to 49.3% in the first 9 months of '21 versus the 54.6% of December '20. For the whole 2021, we foresee expenses to decrease at the same rate that we have seen in the first 9 months of the year. Additionally, net attributable to profit is also positively impacted by the significant reduction of impairments, mainly explained by the good performance of the portfolio and the front-loading of COVID-related provision that we did in 2020. This group underlying trends lead to a better-than-expected cost of risk that stand at 32 basis points for the first 9 months of the year, and make us to believe that…

Thank you, Rafa. So in conclusion, let's jump into the questions, but very quick, in conclusion excellent results in our view, all-time high quarterly results, driven by strong core revenues and solid underlying risk performance. The second point, we continue to advance in our strategy. We are levering on our leading digital capabilities to better serve our customers, but also acquire new clients. In this quarter, we have reported one more time and an all-time record in digital customer acquisition, increasing 48% year-over-year ago. Third, we continue with our commitment to sustainability, helping our clients transition towards a more sustainable future. We have channeled EUR 75 billion already outpacing our recently doubled 2025 pledge on the topic. And finally, we have seen a very solid capital generation in the quarter, if you remember, 31 basis points, reaching a new level of capital strength that allows us to grow profitably and to increase the shareholder distributions, including the launch of one of the largest share buyback programs in Europe. Finally, I would also remind you the Investor Day on November 18, we are expecting all of you to join us. We are planning to share more details about our strategy, about our future goals. In the day, if you need any help on this, please reach out to Patricia and the Investor Relations. But going back to Patricia for moderating the Q&A. Patricia?

Yes. Thank you, Onur. So we are now ready to move into the live Q&A session. So first question, please.

Our first question comes from Francisco Riquel from Alantra.

Let me start with Mexico, 5% quarter-on-quarter growth in NII, with a flattish loan book. So I wonder what is driving this NII growth. if it is freight hikes and the loan mix, the ALCO portfolio, if you can please elaborate on all these trends, and update the mid-single-digit growth guidance for the year. Also, second question on Turkey, which is the focus of the markets today. And these days, there is -- I still see fast loan growth in the country a few provisions despite the macro and the currency problems, if you can please comment on your risk appetite and the loan growth and the cost of risk going forward. And also on the currency sensitivity, I see that the impact on the CET1 is negligible. So it seems that you're fully hedged, if you can please elaborate on the currency risk.

Thank you, Francisco. In Mexico, very quickly. It's both activity growth and also margin improvement. We have shown it to you on the page. But in terms of quarter-over-quarter growth in loan balances, our retail segments have grown 2.9% quarter-over-quarter. And you see all the year-over-year figures here that the consumer is catching up. If you look into the last quarter's quarterly presentation, you would see that, that number was much negative. Now we are coming back because during COVID, we stopped producing. Now that we started producing, it immediately gets back into the production and into the stock balances, and you see credit cards growing 7%. Overall quarter-over-quarter growth in retail loan activity, retail loan balances, stock is 2.9%. And as a result, we have shown you the customer spread going up. The second quarter was 9 99%. Now the spread is , improving in Mexican peso, and that obviously helps. So both the activity growth and the spread improvement. Regarding Turkey, loan growth is fast, yes. But as you all know, we are very conservative in growing our book in general, especially we have actually planning -- we have said it before. We are planning to reduce our balances in the FX book. We do think that the risks are more concentrated on the FX side. So we have been continuously -- this is a trend over the last 5 years, actually, but this year continued. The FX loan book continues to come down. You see it in the documentation as well. Our FX book year-over-year, September year-over-year decline is 11% on FX. So we are going to be very conservative on FX, but on portfolios of TL, as we see good client behavior, as we see the cost of risk behaving normally, that's the trend that we are observing. We will grow in the TL book also. On the hedging question sensitivity. We were always prudent on that one, and it turned out to be the right decision. 75% of our P&L is hedged in Turkey, and 100% of our capital is hedged. That's why you see 0% sensitivity to the devaluation -- further devaluation of the Turkish lira. So we were prudent and we turned out to be proper on that decision.

Our next question comes from Benjamin Toms from RBC.

The first one on cost of risk, please. It's another quarter of a lower-than-expected cost of risk. Can you just remind us how much of your impairment overlay remains in place? I think previously, you said it was something like EUR 1.4 billion to EUR 1.6 billion. And I know that you say that cost of risk will be below 100 bps this year, but presumably next year could also be significantly below through the cycle. And secondly, can you just give us some color on what your longer-term aspirations in Italy are? And you like to be market leader in the geographies you operate in. So how does this fit with your existing strategy in general? Is the concept to be that you own to be a market leader in terms of digital banks in Italy? Or do you have aspirations to potentially acquire in the country?

Okay. Thank you, Benjamin. On the first topic of -- because we talked about in the previous calls about this kind of provision buffer that we built since the beginning of COVID, T.he numbers that you are seeing today are not touching that buffer because a good part of that buffer is reserved for Spain, and we want to see 2022 before we release any of those or a big part of those. Our cost of risk guidance is less than 100 now. The reason for that is the underlying risk profile that we see is quite robust. And the 92 basis points that I shared with you, which is the third quarter year-to-date annualized, obviously, cost of risk. If you look into the underlying parameters, it's even better than that. So that's why we are upgrading our guidance to less than 100, given all the underlying positions that we see. But I would underline once again, we are not releasing from the provision buffers that we built during COVID that it's mostly reserved for Spain, and we would like to see the evolution in Spain. We had -- as you know, in risk management, we are quite conservative and prudent bank. We want to maintain that position. Regarding Italy, you are saying that we are typically market leaders, and we like that. What is our position? We are market leaders in the traditional banking business that we do. We do think that scale is very important in our core business, in the traditional business that we do. That's why being large, having a leading position, having a good market share is important. But this one is a different cost structure. It's a pure digital model, different cost structure. You're asking our goals on that one. We don't have a…

Our next question comes from Sofie Peterzens from JPMorgan.

Sofie from JPMorgan. So my first question would be related to the previous one. So can you just discuss why you chose Italy for expanding your digital bank and why not another European country? What were the kind of key considerations in choosing Italy? And how should we think about further kind of penetration elsewhere in Europe on the digital side? And if that's the case, which countries would you potentially consider? And then my second question would be on excess capital. Your capital position is extremely strong. Even after the 10% share buyback, you have a 13.2% core equity Tier 1, which is well above your target of 12%. How should we think about kind of the deployment of excess capital once the 10% share is fully utilized? Will it be more share buybacks than my favorite question, more M&A, organic growth? How should we think about it? And then just a final follow-up question on a previous question as well. How much do you spend annually on FX hedging? And when do the Turkey FX hedges roll off?

So take a large European country, and Italy is clearly one of them, but our key selection criteria was basically on this notion of how quickly did the acceleration of the growth rate of digitalization in the country. We looked into several parameters, but the 3 top ones are the mobile banking transactions; number two, e-commerce transaction growth; and number three, card electronic payment transaction growth. In all these 3 metrics, Italy is clearly showing a double-digit growth, in all the metrics. Plus, there's a clear momentum from the Italian government and policymakers on reducing cash in the economy, which gave us even further conviction that these numbers are going to continue growing double digit or even more, double digit -- high double digits that we see it that way. So that was the key criteria. What about next? Other countries and so on? Possible but we are not in a rush. We need to and clearly show that we create value in Italy before we can consider other countries. So we are focused on Italy. The whole team, the only focus is making sure that in the first year, we are the best digital bank in Italy for the Italian consumers. If we can achieve that, then we will consider. But it's not a test for Italy. When we are in a country, we are in a country. So we are clearly committed and we are going to be there for the long term. But the next one will be done based on the results that we get from the Italian experience. On the excess capital, we will discuss more on this in the Investor Day. So let's reserve the discussion to the Investor Day, but nothing new, to be fair. I mean, we said we are going to invest the excess capital on a few things, profitable growth and more shareholder distributions, which is what we are doing. On M&A, as I mentioned multiple times before, we don't correlate. We don't link M&A to excess capital. We are not in this mindset that we have excess capital so we have to do an M&A. That's not how we think about it. M&A is a project. It has to make sense. If it makes a lot of sense, I can assure you that you can even get capital from the market if the project is a great one. So we are not feel pressured or squeezed into doing something just because we have excess capital. We continue to look into opportunities, obviously, but it has to make sense. The project has to come out as a clear value-creating project. On the FX hedges, Rafa, do you want to comment on that one?

On the FX hedges, in terms of the policy, just to remind is we have 2 -- in terms of the net attributable profit, we tend to hedge between 30% and 50%. And in terms of the excess capital on the different currency, we tend to hedge 70% of that excess capital position. And in terms of the cost of those hedging, clearly, depends on the year and the market situation on the evolution of different currencies. In the first 9 months of this year, for example, in terms of the FX hedging for the P&L, I mean the cost was EUR 28 million. And maybe the only rule I point is at the end of the day, we are using the forward curve for the FX as at the reference point for the hedging. So at the end of the day, the effective percentage depends on both the cost of the hedging and the view that we have on the evolution of currency.

And the EUR 28 million is obviously the result of that hedging program. If you're asking the cost, it's the cost of carrying, nothing more than that. So if the currency behaves better than what the forward curve tells us, we make money on the hedge; if not, but that's the whole purpose of the hedge. The pure cost of the hedging is obviously minimal.

Our next question comes from Fernando Gil from Barclays.

Welcome, Rafa, to this set of meetings. Just 2 questions, please. I think you mentioned that from a regulatory point of view, you don't expect anything for Q4. Can you please guide us on 2022, what to expect? This is the first question. Second question would be on Spain. If you can comment on costs, how is -- and if you can remind me on how the cancellation policies of the Merlin agreement are there or if there's anything that can make you cancel these branches with them out of one go?

Fernando, I missed the second one, cancellation process or what you said? Sorry about that.

Yes. Sorry, yes. Sorry, the margin agreement that you have on the branches, what are the terms for, I mean, canceling faster or reducing this amount of branches that you have with them?

Okay. So on the first one, capital expectations. As I mentioned, for the fourth quarter, we don't expect anything from the regulatory side. For 2022, we discussed it in the previous call, we are expecting the PD-LGD is now fully accounted except the LGD part. So that's going to be done in 2022. It's going to be around 15 basis points, and that's the only thing remaining among many of the things that we have been facing in the past few years. The reason that it's going to be on 2022 is also the fact that the Basel is coming. So I guess there's that side we have to be thinking about on the Basel, as I again mentioned multiple times before. BBVA is going to be one of the least affected from that massive transition and transformation. But for 2022, your specific question, around 15 basis points because of LGD. Regarding costs, I understand that it's about the merger of the branches and the sale and lease buyback process. The sale and leaseback process is not a constraint to us in making those decisions because we do have the option, enough flexibility in those contracts. We can swap talking with the counterparty, obviously, but we can swap locations. But more importantly, we can still -- even if it's a sale and leaseback branch, we can close the branch and we can try to sublease that branch as well. So that flexibility is basically giving us the possibility of optimizing it however we like. And so that's not the constraint here. We had announced, if you remember, 480 branch closures in Spain, in the area process. We have closed already 260 at the end of September. There are more closures happening in October. So most of the closures will be done without any consideration of the process that you were mentioning. Most of the closures will be done by the end of the year.

Our next question comes from Ignacio Cerezo from UBS.

I've got 2 questions. The first one, in Spain, around the TLTRO. If you can give us a little bit of color on the maths on the eligible book? How is it performing versus the third quarter of last year? And how comfortable are you basically of meeting the benchmark? And the second one is in Mexico, also in the lending book. If you can split a little bit the progression of the retail portfolio and the corporate lending portfolio from here. In retail, do you expect a step-up and a further acceleration basically of the growth we're starting to see and incorporates actually when can we see some degree of momentum being built up there?

Very good. On the first one, very straightforward. We are very comfortable with meeting the benchmark. So we don't see any issues. On Mexico, it's accelerating. I'm looking into the productions, which is again, the indication of the stock evolution in the coming quarters. In retail, you should expect better growth, more growth in the stock, especially in the consumer book, which is very again high-margin portfolio for us in the coming quarter and going forward. So very positive dynamics in retail. You asked about wholesale. The wholesale numbers in terms of production are also not so bad. But we are seeing, obviously, in the COVID period, many of the enterprises, they -- like in other geographies, actually, they leveraged to be able to confront the crisis with more cash and more liquidity than otherwise. There is that deleveraging that has been happening, and that deleveraging has led the stock to decline a little bit. But in the coming year, for sure, the corporate growth is also -- and enterprise growth is going to be there as well, so quite positive. And I do think that one of the clear highlights of this quarter is, again, the core revenue growth, and within that, the growth in the production and in the stock evolution of the Mexican portfolio is clearly a positive highlight.

Our next question comes from Carlos Cobo from Societe Generale.

Most of them have been answered, but maybe a couple of follow-ups on Spain. Loan demand is weakening across the board with complete kind of consumer liquidity buffers. Going forward, how do you expect that to evolve? What's the underlying growth in lending that you expect? Or should we go back to sort of a deleveraging mode that we have before the pandemic? And that linking with -- sorry, with TLT3. What's your base case that, that will be rolled over or replaced with alternative compensation measures for the low rate environment? Or you're assuming in the budget that from mid-2022 to ? Some banks are actually putting that in the base case. And also on costs that is consensus, I was wondering what is driving the quarterly growth in terms of factors. Is there any viable compensation catch-up? Could you please elaborate a little bit more on the growth of 4% in total costs? Because the consensus was expecting something like a flattish cost base, and the bank has delivered on cost discipline very well historically. So if you could touch a little bit on that would be helpful.

Okay. On the growth for Spain, our research team and clearly, our operational team, the Spanish team, we do expect a growth still in 2022. We are not providing any guidance for '22 yet. But we do think that, especially in certain portfolios, the growth will continue. You see it in the figures on the pages we shared with you, the consumer portfolio has grown 8.9% in Spain year-over-year. The portfolio, in our view, will continue to grow. Again, very good risk metrics in that portfolio as well. It's mainly our salary customers, so we feel very comfortable with the risk profile. We feel very comfortable with the growth coming in there. Mortgages, it's -- I mean if you look into the third quarter of this year versus the third quarter of 2019, to have a better reference because 2020 was obviously very much suppressed. The '21 -- '19 mortgage production growth in the third quarter, it's like 75% higher in terms of production, new production. So some of those dynamics are still going to be there. And we see the total homes sold in Spain, as compared to 2019 again, is double-digit growth, 13%, if I'm not mistaken. So the mortgage portfolio, obviously, we do see some deleveraging in our portfolio because it's a very long-dated portfolio and all. But in terms of production dynamics in the mortgage portfolio, we see very positive dynamics. Production dynamics in consumer, we see very positive dynamics. In enterprises, the stock decline that you might have seen in some of the portfolios is because of the deleveraging, as you just said, because of the liquidity that they accumulated during COVID, and now they are releasing that liquidity. But we do expect even that portfolio to perform relatively well in 2022, also with the…

Our next question comes from Ignacio Ulargui from Exane BNP Paribas.

I just have 2 questions, one coming back a bit on costs. I mean if I just look to the cost, you're running slightly above inflation. In this year, you have given a very good insight about the 2-year view. I mean going forward, I mean, is there something that you can do in emerging economies just to contain a bit more inflation based on the experience that you have out of Turkey, just to contain cost growth below inflation so that we get a bit of comfort regarding cost outlook? And if not, whether there could be additional things to be done in developed economies in Spain, particularly? And the second question is regarding Mexico. I mean it looks to me like activity has normalized a lot already in there and what we will get from there is additional lending growth. I mean your segment on consumer credit focus has been paying off. Do you see competition heating up in that segment? Or do you see any risk that could challenge a bit, consumer lending growth out of Mexico? And a very quick question on the sensitivity rates at rates in Mexico, if you're going to update the sensitivity to interest rates.

Perfect. On the cost growth and containment of the cost versus inflation, even this year, we do think that the original guidance that we provided to you, which is we are going to be growing less than the blended inflation. So real growth in costs will be negative. We are sticking with that before the end of the year. For the coming years, that's still the plan. We are investing a lot in the transformation of our business. We have been pioneers in this. We spent so much effort in this digitalization journey, and it is helping us to transform our business. I mean, our target customers, as we call them, which is the most engaged customers that we have. In Mexico, it has grown 70% in the last 5 years, while the number of branches has declined by 6% in the same period. We are serving a lot more customers with less infrastructure, infrastructure costs. So the cost growth, I can clearly tell you that we will always try to be less than the inflation. And I can tell you that we will keep improving on our cost to income. We are the best bank in Europe in terms of cost income, and we will keep improving on that because of the transformation process that we have been executing. And we will either serve more customers with the same infrastructure or with a smaller infrastructure or we will optimize the infrastructure. On the consumer portfolio in Mexico, an important portfolio for us. Of course, there is competition, Ignacio, everywhere. But on that one, if you look into the breakdown of that, you would see that a big chunk of our consumer book is what we call payroll loans, directly deducted from payroll and so on. In payroll loans, which…

Our next question comes from Benjie Creelan-Sandford from Jefferies.

Yes. I think most of my questions have been answered. Perhaps just a quick follow-up on the interest rate sensitivity that you mentioned in Mexico. You did say that you're making continued efforts to reduce funding costs in Mexico. Can you perhaps just discuss that a little bit more in the context of the rising rate environment and whether that might add to the interest rate gearing? And the second quick follow-up is just on asset quality. I mean the trends in Spain continue to look fairly benign, but I do notice that the Stage 2 balances ticked up slightly quarter-on-quarter. I was just wondering if there's anything specific to comment there or if you're seeing anything that would lead you to believe that provisions might start to go up in Spain going forward.

So Rafa, maybe you take the cost of risk for Spain. On the first one -- the first question was around -- sorry?

The first question was sensitivity and funding costs in Mexico.

In Mexico, you see it in the page actually, Benjie. If you look into the Mexican page, it shows you that the demand deposits year-over-year is growing by 9.8%, and time deposits is growing -- is reduced by minus 12.7%. So we are trying to optimize the funding cost by changing the mix of the funding profile, which is going into the transactional cash flow of the customer, which is much cheaper than otherwise. I mean August numbers are out, if I'm not mistaken. The latest numbers that I have seen is our cost of funding in Mexico. In Mexico, in total number is 0.9 when the average of the industry is 1.8. So we are half the funding cost of the industry because of that figure. I mean our demand deposit percentage mix is much higher because of the things that I mentioned in the previous question. We have 40% market share in payroll. All of that is -- again, we have a wonderful franchise in Mexico. The effort is making sure that we grow in the transactionality of the client. As such, we reduced the blended cost of funding. Regarding the cost of risk in Spain, Rafa, do you want to take it?

I mean the guidance that we have seen have been improved to the 30 basis points overall. And in terms of the increase of the Stage 2 exposure that you mentioned is just, in fact, for the good reason is just because some of the exposure to Stage 3 become a Stage 2, is just on the wholesale portfolio. So on singular names that clearly improve -- and in fact, are also related to the good recoveries that we have had in that geography.

On Spain, cost of risk, I will add one point. The summer period was a good asset test for us because you might notice, there was the possibility granted by the government to what we call eco holders to basically ask for a participative loan or a , as we call it in Spanish, which is a reduction in principle of the loan. So we were wondering whether there will be a lot of interest from the customer side because it's the best asset test or whether they're really going through problems. They can apply depending on the problems that they are facing these facilities. And we basically received no -- I mean around 100 in the context of we have more than 100,000 on these. We have received nothing on that applications. It was a good asset test, which was a good reflection on the fact that the companies that we have on that eco portfolio is actually doing and does not feel the squeeze at all on their financials.

Our next question comes from Marta Romero from Bank of America.

I've got a couple of follow-ups on Mexico. You are running Mexico with negative (inaudible) this year. When do you expect this trend to reverse? Could you be a little bit more specific on your outlook for costs in Mexico and whether you are targeting a specific cost-to-income ratio? You're running now at 35%. Related to costs. Are you transferring costs from the corporate center into Mexico, Turkey and LatAm and if you are, is this going to do more? And just a follow-up on Mexico commercial loans, so the book wasn't really growing before the pandemic. So what do you think is driving that? Do you think policy risk is still an impact on corporate risk appetite in Mexico?

Marta, I didn't get the third question. Can you please repeat the third question? There's some problem with the...

Yes, sorry. Yes, sorry. It's on commercial loans in Mexico. They weren't growing before the pandemic. Do you think policy risk still has an impact on risk appetite for corporates or not? We've moved on after the elections in the summer, and you expect commercial loan demand to pick up nicely next year.

Perfect. On the outlook for the C&I, you are asking for the coming years and so on, please allow us to share all these with you on the Investor Day because the future perspectives and plans, we will be sharing them. But I do expect the cost income to improve, yes, very simple on that one. Are you -- on -- let me go to the third one. The corporate commercial loans. The best metric for this, Marta, is the private investments. One of the endemic problems in Mexico, we have seen in the past few years even before COVID, was the lack of private investments. Lately, we are seeing very good numbers on that one, very good numbers for the overall economy. Given also the fact that, again, we are kind of -- we are going to be catching up, the baseline was a different baseline this year because everyone was releasing the leverage they built up during COVID, i.e., I'm positive. I'm quite positive on the enterprise growth next year. This thing about supply chain shortening, there are new investments happening in Mexico. We see it in the numbers. We see it in the numbers in the private investment figures, and I do think that it will help on the enterprise side in Mexico. And again, we will share more on the broader situation. on the growth on the commercial side. On the second question, I couldn't get -- because I was having trouble in hearing. What was the second one?

So if you're transferring cost from the corporate center into the division.

No. I mean that's not at all kind of the driving force here. We are transferring the pieces that are developed for a specific country. Obviously, it's the intergroup billing happens. But the increase or the changes in those is not at all is not all reflected. It's not the driver of the changes or the numbers in different countries. The things that you see in terms of corporate center expenses decline that you have seen in the last 2 years, which is a quite significant number in my view. If you remember, 2 years ago, we were discussing that the corporate center is going to become smaller. That is happening because we are reducing the profile. We are reducing the number of FTEs in the corporate center. It's not because we are charging more and so on. We are charging a bit more, but that's not the core driver.

Our next question comes from Stefan Nedialkov from Citi.

Welcome, Rafa. I have a couple of questions. On Italy, just to follow up here. As you guys know, a big Dutch bank has been in Italy in a pretty much digital-only fashion, with a couple of branches here and there. The success has been somewhat mixed. My questions for you are, what makes you think you could do better? And did you study that case study? And what conclusions did you draw before you entered into it? And I guess related to that, how long did it take you to deploy in Italy from start to finish? The second questions are more on the ESG side of things. I saw with the interest that you guys are now offering this carbonization calculator. That sounds really interesting. But a question for you as a management team, on the Scope 3 emissions that you disclosed, you are not disclosing your loan book emissions within that Scope 3. When can we expect to that number? And related to that, do you expect to be increasing focus on green and brown assets over time could penalize you more given your geographic exposure and a high tilt towards emerging markets? I know it's a little bit early to talk about that, but just big picture in terms of geographical mix, do you see that becoming potentially a challenge for you down the road?

Perfect. Stefan, great questions. On the first one on Italy. What makes you think that you will be successful or more successful than others. I'm not going to comment on others, obviously. But what I do think is that we do have a sweet spot there in the context of when we looked into some of the markets, Italy clearly being one of them, we see the digital players, pure digital players, including pure digital players or others or other big banks. They do have this free value proposition, great experience, obviously, a much different cost structure and everything reflected to the customer as free value proposition, but that was it. When you look into the product depth of the digital players, we didn't see as much product that we have in our Spanish app as in these digital players offerings. So there was this digital players free, incumbent players having everything, having the trust and also having all the products and -- but not having the free value proposition. So we think we can sit right in between. We can replicate the free value proposition of the digital players because we come with a very different cost structure, but with the product depth and with the trust that are given to the incumbent banks. So we are sitting right in there. And the thing that we are being different than others, especially as compared to the digital players, is the product portfolio. Even at the launch, which is very important, we are going with some credit products, which are the products that make money in Europe these days. So we do have what we call pay and plan. You can use your debit card to buy something and then you can pay that in installments, which implies that you…

Our next question comes from Mario Ropero from Bestinver Securities.

I have a couple of quick follow-ups. The first one is on the fee income in Spain in the third quarter, just to make sure whether or not there was any one-off in there, positive one-off, obviously. And then on the eco loan. I would like to ask you how much of eco loans in Spain are paying principal now? And is the end of the grace periods of eco loans is a key milestone for you to consider releasing the overlay provisions in Spain.

Rafa, maybe you can talk about the second one, the eco loans in Spain. On the fees in Spain, actually, not at all. There is no one-off in the numbers, very simple to your answer. In the third quarter, yes, we see a slight decline versus the second quarter because of the success fees in the asset management side, but it has been like this all throughout the year in the first quarter, in the second quarter, in the third quarter. So it's a clear consistency in terms of the growth rate year-over-year, very positive figures. On the eco loans, Rafa, do you want to?

On the eco loans, I think the majority of the loans are still on the federal period. So at the end of the day of the current period, so they are not still paying principal. That will start at the middle of the next year. So as of today, during the process of '21, 34% of the eco asked for extensions. So most of them are going to be moving to '22 when we will see the situation of the thing.

And the total eco program was EUR 20 billion for us, EUR 20 billion, including lines and loans. EUR 13 billion was the loan piece of it. The piece, which is under what we call extension, is only EUR 5 billion, the EUR 5 billion, and we are on top of that portfolio very clearly. And you see very high percentages. 45% of that portfolio is Stage 2, although we see no signs of deterioration. We are provisioning very prudently on the figures. So we are quite prudent, but before we release -- because you asked about the release as well, before we release anything, we want to see the 2022.

Our next question comes from Britta Schmidt from Autonomous Research.

I've got 3 questions, please. Could you tell us what the outlook is in Turkey regarding the impact of the rate move, and also where your CPI linker portfolio stands, and what inflation you expect? And the broader question on this, what sort of confidence can you give us that you can outpace the FX devaluation in earnings growth? My second question is on the cost, just a confirmation. Just variable compensation included in Q3 include some sort of catch-up for the first half or is this a recurring number? And then thirdly, could you just comment on whether you've used the option regarding your real estate business to sell 20% of the joint venture with servers? And can you confirm the impact there, if so?

Britta, we had problems actually. There's a problem with the voice line today. Apologies. We got your first question very clearly. The second and the third question, can I please ask you to repeat those two2?

Sure. The second question was whether the cost increase Q-on-Q due to variable compensation included a catch-up for the first half or whether this is a recurring number. And the third question was just on there was some news about having potentially use the put option of the 20% stake in the real estate joint venture. Could you confirm that this has been sold and what the potential impact of this is?

Perfect. Let's start from the last 2 because they are easier to say. On the put option of the real estate subsidiary, yes, we can confirm. It's actually public -- it was a public announcement we sold. There is not a P&L impact, but we expect around 7 bps of capital impact in the fourth quarter. The sale was done in October. So we exercised the put option. On the cost increase, does it include a catch-up for the first half? The answer is yes. On the first question, outlook of the rate move -- but maybe on the second question, if you are asking, given this, what is the expectation for the end of the year and so on? Our expectation for the end of the year is that we will stay, as we said, below inflation for the overall cost increase for the year. On the first one, outlook of the rate move and our position in the CPI linkers portfolio in Turkey. The numbers that you see today, they include a CPI rate of 18%. We do expect our resource team, they expect actually the country to close the year with 19.5. So there's some upside in terms of the CPI accrual and revenue. There is some upside there but we currently have done the accrual at 18%. So the other kind of structural question that you were asking, would your earnings growth be good enough to compensate for the FX devaluation? It depends on the FX devaluation, Britta, very good question. But as you know, we do have -- clearly, we have a better numbers-oriented guy on these type of comments, but we are clearly the best bank in the country. We do think that in the long term, the question that you are asking, if you're asking for a reasonable time frame, if you have the best bank in a country in terms of the return on equity, customer franchise, people franchise and so on, I do think that the banking sector in general would make money. And I do think that the best bank in the country would deliver good returns. In that context, if you take a reasonable enough time frame, I'm very confident that the earnings growth or the tangible book value, that's the number -- growth is a variable compensation parameter for the holding in Turkey. And my clear conviction in that is that in the long term, we will deliver tangible book value growth in Turkey as well, which obviously incorporates the FX figures into the figures.

Our next question comes from Carlos Peixoto from Caixa Bank.

So first, I would just apologize that I had some issues with sound earlier, so I may be asking questions that were already answered to. But in any case, I was wondering if you could give us some color on your views for the evolution of fees in Spain, particularly considering the rhythm that we see -- are seeing a growth in the 9 months. Whether you stick to the mid-double-digit guidance for the full year or whether you see it now closer to actually to the 20s level in -- for the full year? Secondly, in terms of your expectations for the evolution of NII in Turkey and also in Spain, if possible.

Thank you for the questions, Carlos. On the fee growth, the percent-wise increase in terms of percentage-wise year-over-year that the underlying categories of fee is coming from insurance. So we are doing an amazing job, in my view, in insurance. The absolute euro-wise, the highest growth that we see is coming from asset management and which I, again, think that we are doing a very good job on. So the key drivers of the fee growth is there are many categories there, obviously, banking services, the payments and everything, they're all growing and they're all growing in general with double digit. But asset management and insurance, they're actually doing really well. The 18% growth that you have seen 9 months over 9 months, we guided the market as mid-teens. 18% is slightly above mid-teens, and it's going to be around this range. Regarding the NII, you asked in Turkey and Spain, I guess. In Turkey and Spain, I did mention in the presentation in Turkey, the spreads are picking up nicely. They're going to pick up even more. Obviously, the rate decreases that the Central Bank is doing is hurting on many other dimensions, but it's clearly helping on the NII, on the spread. So we do expect the spread to pick up very nicely, to continue improving in the fourth quarter and 2022. So the NII growth in the fourth quarter of this year would be very strong, you would see in Turkey. On Spain, the NII, we guided the market minus 1 to minus 2. We are there. We are exactly within that guidance, and we do -- we maintain that guidance for the coming period, for the coming quarters.

Our final question comes from Andrea Filtri from Mediobanca.

I just wanted to thank you for some clarifications on NII. I wanted to ask you on Turkey for a bit more color on the different moving parts between the impacts we should expect from interest rates. You've given us the clue on linkers and the volumes just to put them all together and have a good picture more for the medium term because the effects changed a lot between the short term and the medium term as the whole impact takes place. Secondly, on insurance, you have flagged this is a high-growth element for you increase. Do you expect any impact from IFRS 17 there? And finally, if you could give us the full visibility on ALCO. There is some details in the presentation, but I just wanted to understand more your view on whether there is room to grow the book more in coming quarters and its contribution.

All right. Let me go very quickly in some of them because some of them are very straightforward. IFRS 17, we don't expect any income -- any material impact. On the ALCO book, it -- obviously, it depends a bit on how the rate situation evolves. We have kept the ALCO book basically flat more or less the same in the past 2 years because we do think that the yields might be going up, but that depends a bit on the macro policies of the ECB and everything else. So we have to see that. On the policy outlook we might do in 2022, I don't see it in the short term. Either NII in Turkey, as I mentioned, all the dynamics are very positive. The spreads -- the customer spreads are going to be picking up very nicely in the fourth quarter. We already see it. The CPI linkers, the impact of CPI will come slightly more. As I said, we are -- we have been accruing at 18%, probably need to do that full -- the number is going to be probably higher than 18. All of that, what we are seeing is that in the fourth quarter, there will be year-over-year quite positive growth in NII, which is a different, obviously, curve than the first and the second quarter of this year. In Turkey, when rates go up, you have this kind of carryover effect for 6 months, then it normalizes. And when rates come down, you see it the other way around. So we are kind of at the back end of that normalization curve. As a result, the fourth quarter NII growth will be quite strong in Turkey.

So thank you very much. There are no further questions. So thank you, everyone, for participating in the call. And let me remind you that the entire IR team will be available to answer any further questions you may have. And now, Onur, if you want to close.

No, there's nothing to close. We are expecting all of you to November 18. Hopefully, we will have a great event talking about the strategy and the goals for the future. So you are all invited. Thank you so much for joining today, this morning.