Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) CEO Onur Genc on Q3 2020 Results – Earnings Call Transcript

Banco Bilbao Vizcaya Argentaria, S.A. (NYSE:BBVA) Q3 2020 Earnings Conference Call October 30, 2020 4:30 AM ET

Company Participants

Gloria Couceiro – Head of Investor Relations

Onur Genc – Chief Executive Officer

Jaime Saenz de Tejada – Chief Financial Officer

Conference Call Participants

Ben Toms – RBC

Andrea Filtri – Mediobanca

Adrian Cighi – Credit Suisse

Mario Ropero – Fidentis

Ignacio Ulargui – Exane BNP

Stefan Nedialkov – Citigroup

Carlos Cobo – Societe Generale

Sofie Peterzen – JP Morgan

Jernej Omahen – Goldman Sach

Benjie Creelan-Sandford – Jefferies

Ignacio Ulargui – UBS

Gloria Couceiro

Good morning, everyone. And welcome to BBVA Third Quarter 2020 results presentation. I’m Gloria Couceiro, Head of Investor Relations. And here with me today is Onur Genc, Chief Executive Officer of the group. And Jaime Saenz de Tejada, BBVA Group CFO. As in previous quarters, Onur will begin with a presentation of the group’s results. And then Jaime, will review the business areas. We will move straight to the live Q&A session after that. And now I’ll turn it over to Onur to start with the presentation.

Onur Genc

Thank you, Gloria. Good morning to everyone. And welcome and thank you for joining our webcast. I really hope that you and your families and friends, they’re all healthy and safe. I wish you the best in this complex environment.

So I go to, immediately to the presentation. Slide number 3, a very positive, in our view, financial results. On the left-hand side of the Slide, you see that net attributable profit, reaching €1.141 million in the third quarter, an increase of 79.5% versus the second quarter. And the 41.1% growth in constant euro versus the same quarter of last year. In our view, very good numbers even when compared to normal times.

This positive performance versus the previous quarter, has been the result of three things; resilient core revenue growth, I’ll talk to you about it in a second; cost control continues to be very, very robust. And a better evolution on impairments.

So the second graph at the middle of the page, it shows the capital generation, very solid capital generation in the quarters. We have improved our position 30bps, leading to a fully loaded CET1 ratio of 11.52 as of September 2020. Already obviously surpassing our capital targets. And last, on the right hand side of the page, it is also important to note that we have maintained our tangible book value per share, practically stable compared to the second quarter despite strong market movements, very strong market movements actually in the third quarter.

Now let’s jump into the Page number 4, Slide number 4. One of the top messages of the quarter, five. First, our robust and resilient pre-provision profit growing at double digits. We keep saying it in every single results presentation, because that’s what the numbers are telling us, very robust and resilient pre-provision profit once again. Second, a very strong cost control and efficiency. Third, significant improvement in our risk indicators, which evolve within our upgraded expectations as we have shared with you a month ago. Fourth, once again, again the strong capital generation. And fifth our lead in digital gives us an edge in this environment. And I will talk to you about this also in this presentation.

Slide number 5. Looking at the summarized P&L, I would like to highlight the evolution of the net interest income increasing 5.5% in constant euros in the quarter. And the good evolution of the net trading income as well. Fees and commissions remain almost stable with a slight decrease of 0.08%. All this when combined explains the increase in gross income of 5%, in constant euros.

This evolution together with the excellent performance of expenses leading to an outstanding increase in our view in operating income, 13.5%. As I already explained this quarter we have seen a more normalized level of impairments versus the first half of the year. And all combined, net attributable profit for the quarter, is as I said, €1.141 billion, 4.1% year-over-year increase in constant euros.

Slide number 6. You see the evolution in the first nine months of the year versus the same period last year. So year to date, as you can see we are registering a good evolution in net interest income gross income expenses and operating income.

So all the core revenue drivers and those expenses and operating income behaving really well. Our operating income, just pick one number, it has increased by 17.3% in constant euros. Again, in our view, they’re very strong reading even in normal times. However, in terms of the nine-month results we are looking for the bottom line.

The first quarter COVID-19 front-loaded provisions of €1.4 billion. You would remember we did an extraordinary provisioning for COVID of €1.4 billion in the first quarter. And then another €0.6 billion in the second quarter. It leads to a negative impact obviously on the bottom line. So net attributable profit, for the first nine months of the year is €2.69 billion, 36% – 36.6% decrease year-over-year.

If we exclude obviously, the non-cash the, BBVA USA goodwill impairment that we recorded in the first quarter. If we include that goodwill impairment. Which was €2.1 billion, if you remember, the final reported net attributable profit is minus €15 million. Moving to slide number 7, to shed more light into the revenues breakdown. And here you can see the quarterly evolution as well, not just the year-over-year, but quarterly evolution.

First thing to note is again the 5.5% growth in net interest income year-over-year. And 4.9% growth in the quarter. This quarterly increase, it’s supported by activity recovery in retail segments the retail segments are coming back up slightly. And customer spread improvement in some countries. As you would seen in some of the countries that we operate, we have improved especially on the cost of funding in a dramatic way.

Net fees and commissions has remained almost flat, with a slight decrease of 0.8% year-over-year. Negatively affected by the pandemic, with the lower economic activity affecting our credit card and payment system revenues basically. And also there was a new regulation in fees capping certain commissions in Turkey that also had played a role. Nevertheless, I mean the good thing to note on the fee curve, is the fact that there is a very robust 12.9% quarter-over-quarter growth in fees, again mainly explained by the retail activity recovering in most of our geographies.

Good performance on net trading income. And all in all, robust revenue growth as I said of 5% versus the third quarter of 2019, mainly driven by the good performance on NII, as I explained. But overall this 5% growth – it was very important to positive growth in revenues in a year like this. So we are very happy with the evolution of that figure.

Slide number 8. There are two pages here, that we have – we are sharing with you, to also maybe indicate the evolution in the coming quarters. But on slide number 8, regarding core revenue evolution and also the impact on some of our other metrics. Let me show you a high-frequency indicator of card spending. These are BBVA figures. And we monitor them very, very closely. So they are the weekly credit and debit card consumption compared to the same week of last year, in the most of our markets basically you see it on the page.

So in March and April timeframe, as you would see the slump was significant. For example, the weekly card spending in Spain, it was falling 60%. Mexico it was falling 35%. Since then, what you see in the curves in the – in the charts is that there has been a gradual – gradual yet consistent recovery everywhere. Obviously, we have to take these numbers in the context of uncertainty that we all live in, and as we all know the second wave of the virus is sweeping through some of our countries.

So we have to see the impact of the new measures taken by the authorities. But these numbers again in all the markets what you will see, is we have caught up. With the level of spending a year ago. As it stands now in all the geographies, as of now from a pure economical point of view at least the spending has come back to its normal levels. And we have started to learn to live with the virus.

Similarly on page number 9. Very quickly, in our own business new loan reduction of the retail segment is also recovering. A similar curve, again, bottoming out in April-May timeframe, and now coming back up in the last few months. And the latest readings is quite robust as you would see in the page. Moving to slide number 10.

Expenses, very good performance in expenses. If you compare the year-on-year evolution expenses dropped by 3.8%. This is something that we have put a lot of attention this year. And we are getting the results, the fruits of that – of that effort. We also maintain positive operating jaws. Our core revenues, they are increasing by 3.4% in the nine-month period, while at the same time the expenses are decreasing by 2.4%. And our – the blended inflation rate in our footprint is 4.4%. So our costs behaving much better, than the inflation and as a result, we maintain this nice jar in our operating performance.

And finally on the right-hand side of the page, as a result of all of this you can see an outstanding efficiency ratio of 45.6%, in the first nine months of the year. And it keeps improving 438 bps improvement versus 2019. Again, this is much better than our European peer group, as you can imagine.

Moving to Slide number 11, risk and provisions. So total law most provisions for the quarter was €1.39 million, clearly lower than the previous quarters. As we already guided, because we also have done a very strong upfront provisioning in the first and second quarters. But in fact, the third-quarter figure is very much aligned with the peak of it the level of impairments, thanks to a better-than-expected performance of the portfolio in all the countries mainly deferrals – deferrals in Mexico. I will go more in-depth in the deferrals topic in the next page.

But overall the numbers are coming to be much better than our original expectations. As a result our cost of risk improved significantly to 1.69 on a year-to-date basis, versus 204 in the previous quarters. Also on the page, you can see the NPL and the coverage ratios. NPL and coverage ratios they remain almost stable versus last quarter at 3.8% and 85% respectively. Which again shows that, we don’t see a deterioration in the underlying risk parameters at the moment. That said, I mean, we remain cautious and credit risk anticipatory management, as we call it continues to be – continues to be one of our key priorities in this environment, for any potential deterioration going forward.

So all in all, good evolution in terms of asset quality indicators during the quarter. And we maintain our recently improved 2020 coastal risk guidance to be in the range of 150 to 260 bps at the end of the year. If you go to Slide number 12, I would like to give you a bit more detail on the evolution of deferrals, which is underlying the numbers in the previous page.

As you can see on the left-hand side of the page, total deferrals granted represent 8.9% of total loans. Out of them, 66% are related to retail, and 34% to the wholesale portfolio. And 70% of that total amount have already expired. So we are seeing clearly the results of that – expired amount. And as I said, a very positive payment performance in our view, better than our original expectations. As you see there at the center of the slide, almost 80% of this deferred portfolio which has expired have already resumed payments.

Again in that same chart, we gave a second deferral for 11% of the loans of which more – more than half are related to high-quality mortgages, mostly in Spain. And as you can see that at the top – at the top of the right-hand side. And at the right bottom part of the page a small graphic but a very important one in my view. You see the resiliency of the delinquency buckets, with past news on that in progress portfolio and so on, they should be flowing through the delinquency buckets.

Then you look into the delinquency buckets, the past dues as a percentage of our portfolio is completely aligned with a year ago, completely aligned with a year ago. So again good – good results overall. We have been able to obtain these results, as we have put a lot of effort into this. We’re applying an early and proactive collection management strategy, as I said properly segmenting all the clients, tailoring the intensity of our collection efforts to every single segment. So again good results so far on the risk side.

Moving to slide number 13. Great news in terms of capital generation, 30 bps improvement in the quarters. You see in this page the breakdown, so following the waterfall main impact of the quarter, result generation net of AT1 coupons contributes 29 bps to the ratio. Second, negative markets rated impact this quarter, detracting 11 bps, mainly due to mark-to-market of our equity portfolio, together with some negative impact from some effects currency depreciation, 11 bps. And then the third, the last bucket it explains plus 12 bps and that’s mostly due to credit RWA. So RWA impact is a positive one.

Overall, 30 bps in the quarter again and very strong reading. So this number are fully loaded CET1 ratio, 1152 is 293 bps, above minimum requirements. We already surpassed our CET1 target range of 225 to 275 bps. Our target range has already passed, and we also obviously expect to continue to being above our target in the fourth quarter. There will be a positive impact from the software any treatment also of 19 bps in the quarter so, things look good. On a phased in basis by the way our CET1 amounts to 11.99% and this is the basis where distance to MDA is calculated, as you know. So the distance to MDA as it stands now is 340 bps.

At the bottom of the page also, you should see the high-quality nature of our capital ratio. We remain among the leaders in terms of the leverage ratio 6.4% on a fully loaded basis. And 81 and Tier 2 buckets, they continue to be fully endowed, on fully loaded and on a phased-in basis. Now last two pages on digital, page number 14, as we have shown in the previous quarters, COVID-19 lockdowns have accelerated, pre-existing trends in digitalization. And the adoption of new technologies, and a good part of this increase Digitalization is here to stay.

So leveraging digital capabilities has proven essential. And I would say differential in serving our clients. So let me some put some figures to this. So regarding the number of interactions with our customers maybe only the middle part of the page, the interactions with our customers through our mobile app, it has gone up five times as compared to a year ago. Also given our differential capabilities to go beyond servicing, which is very important then execute sales through our remote channels, our digital sales have reached 64% in terms of units and 48% in terms of value. On slide number 15, the last page of my section. We keep talking about digital all the time, because we really believe in it, that there is something big is happening in our industry. But do we have a competitive advantage in digital. That is a critical question in our view.

And let me give you some examples. From Spain and Mexico, that show that we do have the financial capabilities in digital. It is highlighted by an over proportional market share on areas that require strong digital capabilities. So on the left-hand side BBVA is the number one in banking app usage market share in Spain 22.2%, or the banking app users in Spain have used BBVA app.

We are also number one, in what we call do-it-yourself availability of functions. So what you want to do, and whether you can do that through the mobile app. It is 90%, this quality score, and it is very far from the 68% peers average. And then on the right-hand side of the page in Mexico we have a leading 39% market share in e-commerce requiring leveraging our digital and payments capabilities. These are just some examples, but they prove in our view that BBVA’s advantage in digital capabilities and solutions is there.

And we believe this is one of the reasons at least that constitute the good performance of this quarter and in the quarters coming along. Now I turn it over to Jaime for the business area. Jaime?

Jaime Saenz de Tejada

Thank you very much, Onur. And good morning, let me begin with Spain. In Spain BBVA research, GDP growth expectations for 2020 remain unchanged at minus 11.5%, but 2021 forecast that was adjusted to a 6% recovery including now the initial positive impact from the European recovery fund. Loans have increased by almost 1% year-on-year, driven by the growth – the strong growth across commercial segments supported by state guarantees. Mainly as you remember in Q2, offsetting the deleverage in the mortgage and public sector portfolios.

In Q3, new lending flows in retail recover versus the previous quarter, especially in consumer loans. In the nine months to September, BBVA Spain delivered strong pre-provisioned profit up over 16% versus last year, thanks to higher core revenues driven by the good performance of fees. And thanks mainly to CIB asset management and banking services. The better than expected performance year-to-date leads us, to improve our guidance. And we now expect fees to increase slightly in 2020. It was also supported by higher net trading income mainly due to higher ALCO portfolio sales, and a remarkable improvement in operating expenses down over 6% above expectations.

We continue to expect the cost to decrease by more than 5% by the end of the year. The mid 13 operating income growth has been more than offset by higher impairments versus last year mainly explained as you know by the significant from loading of COVID-related provisions, in the first half and – but also by a base effect, as last year included provision releases from a mortgage portfolio sale.

Looking at the quarter-on-quarter evolution, impairments continue to improve aligned with our expectations to 80 basis points in the nine months to September, versus a 100 basis points as of June. By year-end, we expect cost of risk to improve even further to around 70 basis points. And even our current macro forecast proves correct 2021cost of risk should be below 2020 levels. Let’s now turn to the U.S. The faster than expected recovery has allowed us to revise the Sunbelt GDP growth forecasts upwards to minus 4% in 2020 and plus 3.4% in 2021.

Loans are growing at a very healthy rate of over 6% year-on-year, driven by commercial segments which were supported by the drawdowns of credit lines in Q1, and the state guarantee loans under the paycheck protection program in Q2. Lending growth slowed down in Q3 given the high amount of liquidity provided during the first half of the year. For 2020 we expect loans to grow in the mid-single-digit range.

Turning now to the P&L, we had a very good performance of core revenues versus the previous quarter. On the one side, NII is up almost 5%, thanks to an excellent deposit cost management and demand deposit increasing. They represent now over 85% of total deposits in the U.S. While deposit costs improved by 18 basis points quarter-on-quarter. NII was also supported by lower wholesale funding costs, and a higher contribution from the ALCO portfolios. We expect NII in 2020 to decrease by low-single-digit, consolidating the improving trend of the previous quarters. On the other side, we also enjoyed a sound fee growth over 11% quarter-on-quarter, thanks to very strong fees in global markets. And a pickup in activity after their Q2 lock down.

Regarding expenses, again very good performance it continues with a year-on-year decrease almost minus 2.5% in Q3. Our behavior, we expect to be able to maintain till the end of the year. Impairments increased by 34% versus the previous quarter, mainly explained by a macro adjustment and the rating migration of some commercial customers. Having said these cost of risk reach 169 basis points year-to-date as of September, in line with expectation, and we expect the improvement to continue reaching around to 135 basis point by year end.

According to our current macro prospects, 2021 cost of risk should be below 2020 levels. Let’s now move to Mexico. We have fine tune, our GDP growth estimates for 2020 improving to minus 9.3% from 10% previously. Thanks to the recovery in the manufacturing sector and they increase mobility after lockdowns. For 2021, we continue to expect GDP to grow by around 3.5%. Loans increased by almost 6% year-on-year mainly driven by corporate clients during Q1. And the good evolution of the markets portfolio supported by good dynamics in the housing markets. For 2020, we expect long growth in the mid-single-digit range.

Moving to the P&L. Q3 shows a significant recovery versus their previous quarter with net attributable profit increasing by 88% in constant euros quarter-over-quarter. Operating income increases 10.5% in constant euros driven by core revenue growth and cost controls. Regarding our revenues, NII growth by 11% quarter-on-quarter, as most deferrals in credit cards and SMEs have already expired in Q3, is starting to accrue interest again. Let me remind you that we lost €104 million, because of the lack of an NII accrual in Q2, and we have recovered roughly €75 million in Q3.

Moreover, wholesale and retail funding costs decreased in the quarter. Thanks to our very successful price management strategy. We continue to expect NII to be flat slightly decrease in – in 2020. This improved 15%, 1-5, quarter-on-quarter, favored by their recovery in economic activity. As we have already anticipated, we expect core revenues in the second half of 2020 to be above the first half figure in constant euros.

Costs remain under control minus 2.3% better than Q3 last year. For the whole year, we continue to expect costs to grow well below inflation. And finally, on impairments, they decrease over 40% versus the previous quarter due to lower macro-related provisions and the good payment performance of expired moratoriums, while Q2 included some provisions related to COVID-19.

Therefore cost of risk improves to 427 basis points from 4.95% as of June. And we expect the cost of risk to be in the low 400s by year end. Considering our current macro estimates we think 2021 cost of risk would be below 2020 levels. Let’s now focus on Turkey. Starting on the macro.

We have improved our GDP growth expectations for 2020. Back again to a flat growth and maintain our protection for 2021 at plus 5.5%. Guarantee BBVA delivered a significant growth in Tier loans almost 35% year-on-year, mainly explained by the commercial segment. Foreign currency loans decline, 1.5% year-on-year, in line with our proactive strategy to reduce FX exposure.

For 2020, we expect that Tier loans, to grow around 25%, and the trend in FX loans to continue. Moving to the P&L, pre-provision profit in the nine months to September grew by 50% year-on-year. In constant euros, supported by the strong revenue generation and focus on efficiency. NII was up significantly, over 30% versus last year mainly explained by the excellent commercial dynamics and a significant improvement in TL customer spreads. In the third quarter, PLS spreads started to decrease versus Q2.

As a consequence of the interest rate hikes that we’re seeing in the country, but NII continue growing, almost 8% quarter-on-quarter. Thanks to lower wholesale funding costs, than a higher contribution from the CPI linkers portfolio. For 2020, we expect NII to grow above 20%. We had a good, actually a very good performance of NTI thanks to FX results, gains from security sales and a higher contribution from the global markets unit. Expenses grew 7% in the first nine months, that significantly better than the 12-month inflation, which is above 11% improving the efficiency ratio to a historic level of 27.6%.This very strong pre-provision profit has enabled us to front-load provisions in this uncertain times.

Given the effort done in the first half, impairments have improved significantly versus previous quarters in Q3, thanks to higher recoveries and the allocation of some of the front-loaded COVID-19 related provisions set aside in the first half, especially to FX loans to commercial clients seen in this quarter. As our result, year-to-date cost of risk has improved sharply, it’s down to 2% in the nine months to September. That’s better than the 2.7% as of June and aligned with our expectations. For 2020, we expect their cost of risk to be around 215 basis points. Actually, we expect the negative recalibration effect in Q4.

For 2021, and based on our current macro prospects, we expect cost of risk to also be below 2020 levels. All in all, as Onur, mentioned the excellent results that continued to prove guarantees BBVA’s earnings resilience with net attributable profit increasing by over 30% incurring euros, in the first nine months of the year. And over 58% year-on-year in constant terms. And finally, South America, BBVA research has improved its macro prospects for the region not only for 2020, but also for 2021. And that’s mainly in the case of Peru. We now expect GDP to contract by minus 13% in Peru, and to recover by 10% in 2021 versus the 8% that we had on our previous estimate. Now some color on the main countries.

In general, Q3 net attributable profit recovers significantly versus the previous quarter in all countries. In Colombia, net attributable profit in Q3 increased 42% versus Q2 in constant euros explained by core revenue growth, strong NTI, and a reduction in impairments favored by lower NPL entries and higher recoveries, reduced in year-to-date cost of risk to 298 basis points and aligned with expectations. Peru also, Q2 net attributable profit recovers to €45 million growing significantly versus Q2, thanks to a very sound growth in total revenues positive jaws and also better provisions. Thanks to a positive macro adjustment this quarter. And finally, Argentina that also increased its contribution this quarter, mainly to provision release in the securities portfolio. And now back to Onur for some final remarks.

Onur Genc

We are just one minute away from, our allocated session for the presentation. So very quickly, I’m not going to go through the details of the last page, but in conclusion strong operating income, once again, core revenue growth, very strong cost control. So, good numbers on those figures in our view, significant improvement in risk indicators in the quarter as guided aligned with our upgraded guidance. Solid capital generation 30 bps in one quarter, we will take that quarter any day. And differential best in class digital capabilities and solutions.

That’s the summary of what we presented to you. Regarding 2021, there are a few things maybe we can guide you or we can help you understand better as we look into our own dynamics. First of all, our core revenue for 2021, our expectation is will continue to grow in constant euros, improving lending mix, retail new loan production recovering and price management will be the key levers to achieve that. Cost control will continue to be a key management priority.

I hope every – in every meeting we keep repeating ourselves. But it is a very important topic in our management discipline. We have proven it in the past, and take Spain. We have decreased our cost base 16% in the past four years. That 16% is 9% for a competition. So we are very much focused on this, and we will continue to be and cost control, you would see also in 2021 to be a key management priority. Some of the learning’s from COVID some of the trends from COVID would obviously help.

And finally, our cost of risk, we expect it to be below the 2020 levels obviously. So good dynamics, but again it’s a very uncertain environment. We have to see how this – how the health situation evolves, how the impact on the economy would be in the coming months. But as it stands we see some positive signals in terms of the underlying drivers of our business. With this, I conclude the presentation back to you, Gloria.

Gloria Couceiro

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

Question-and-Answer Session

Operator

[Operator instructions] The first question today comes from Ben Toms of RBC. Ben, please go ahead.

Ben Toms

Hi. Thank you for taking my questions. Two for me, please. It feels like on a daily basis we see headlines that Turkish lira has hit new lows. A question is quite a big picture really, but what management sees the news about Turkey central bank decisions and currency weakness. How do you think about it? Do you bang your fist in frustration? Do you call up the Treasury team and tell them to increase your hedging, to call Head of Central Bank and have a discussion? Or you sit back quite relaxed because, you’re well hedged and you have a good banking franchise in the country? I guess, what I’m really trying to say is, does Turkey keep your wake at night? Because from an outsider, it’s perpetually frustrating. And then secondly, on costs, in which geographies, do you expect to be the hardest to improve cost efficiencies in 2021? Thank you.

Onur Genc

Thank you, Ben. On the first one on the Turkish lira obviously, it’s an important topic, so we really actively try to manage it. So does that keep you awake? It’s a concern, but it doesn’t keep us awake, because we have been managing it. If you go back to every single quarterly presentation that we have done in the past, I don’t know, two years, then the question on Turkey came and the concerns on Turkey came from all of you.

The thing that we said was the key concern area might be the effects, because of the balance of payments of the country. So we have to be watching the effects. Given that statement that we have been giving to you, we have been preparing for it. I mean, you might have seen it in our numbers, but given that vulnerability, we have reduced our effects lending book from $21 billion dollars. Five years ago, 2015 to $12.6 billion in the last quarter in September 2020.

So we basically cut it by half. We have been reducing the dependency on the effects wholesale funding. If you look into effects wholesale funding in the same period 30% down, If you look into our bond portfolio in Turkey, you would see that, we do have a very sizable share of inflation-linked, because FX over time obviously flows into inflation. You would see that our bond portfolio is mostly consisting of inflation-linked bonds, CPI linkers as we call them.

To cut long story short, is that a concern? Of course, but knowing that, this is the vulnerability we have been taking actions on all dimensions to make sure that we manage it through. And also the hedging you asked obviously, we do hedge of our currencies, our volatile currencies. There is also one of the, delevers that we use. And then the fact of the matter is that independent of the environment we do have truly the best bank in the country in our view.

Again, proven by numbers. It’s not a subjective opinion if you look into ROE or guaranteed BBVA versus the ROE of the rest of the industry, pre-provision profit divided by assets, us versus the rest of the industry, you would see very good numbers. So if we have a good asset, if you have the leading bank in the country. And if you forecast the negative trends and prepare for them, you write it through, that’s where we are. So does it keep us awake? No, it doesn’t keep us awake.

Cost efficiency, I think the question is how are we planning to go further on this in the coming year, as we have done in the past we will try to optimize. We will try to use the chance of digitization and servicing our customers in a digital way. I mean, you have seen it, and the mobile in the presentation, the mobile app transactions in the mobile app in one year it has gone up five times, times.

These transactions in the old days – in the very old days would have been serviced in a much high-cost channel. So we are reflecting that into our cost structure. You might have seen it, in the numbers in the total staff size of BBVA. It has come down this year. So all of that would be reflected in the coming year as well.

So we will continue to employ levers. As we have done in the past, it’s going to be one of our core management levers to create value. Jaime, do you want to add anything on this?

Jaime Saenz de Tejada

Well, maybe the hedging levels that we are currently have in Turkey. We currently have hedge 50% of the excess capital that we have in Turkish lira, which leaves us a sensitivity to a 10% depreciation of the capital of around 3.5 basis points. And we also have hedged roughly 50% of the P&L. And then another data point, maybe of interest, also our wholesale debt in a U.S. dollars in Turkey has gone down over the last four years from $12.5 billion to $8.5 billion. And we currently have an $11.5 billion excess cash in foreign currency. So a very strong buffer to whether any circumstance.

Gloria Couceiro

Thank you. Thank you, Ben, for your questions. Next question, please.

Operator

The next question comes from Andre Filtri of Mediobanca. Andrea, please go ahead.

Andrea Filtri

Hello, good morning. One question on the good detail you provided on moratoria. Can we consider the 20% portion of moratoria expiring not resuming payment, as a proxy for the potential pot where NPL should come from in the future under a severe macro scenario evolution?

And secondly, willingly broad question, to understand your thinking it’s looks like to us, Europe is trying to pull together with the COVID-19 crisis. What are your expectations on dividend ban on an eventual Bad bank project. And on M&A, both domestic and cross-border in Europe. Thank you.

Onur Genc

Okay. On the first one, should we expect – in a stress scenario, should we expect more of the NPLs and the risk cost to be coming from 20%. If that’s the question, if I understand it well, the answer is that most likely that the intensity of NPL in the portfolio would be higher for sure.

Meaning the percentage of that portfolio leading to NPL is higher than the 80% probably, but I wouldn’t categorize that 20% group as the really bad sub-segment, because there are many sub-segments even within that 20%. Let me give you one example, as we have said here the second deferrals, the 11% some of that is basically incentivized by the governments in certain cases by even us because we want the customer, to align the payment behavior with the requirements of the loan. So most of that, for example second deferrals 51%, as you see it in the chart on page number 12, is mortgages, and mostly in Spain. So we don’t expect a major problem on the portfolio at all. Some of that second deferrals is our wholesale clients and we don’t expect any problem in some of those sub-segments at all.

So probably, in that 20% there might be a higher likelihood, but there are many, many subsegments within the 20% and I would say that, we don’t foresee a major problem. The other 8% within that 20% that you are mentioning, Andrea, is as we said in progress. In progress meaning they haven’t resumed full payments in most of the cases, but they expired especially in July and especially in August timeframe. So 60 days have already passed, and we don’t see those customers in the delinquency buckets. That’s why the little chart at the bottom of the page on the right-hand side is very important.

We don’t see that in progress bucket flowing into delinquency they’re paying. They’re paying maybe one payment, or they’re in the process of finalizing a restructuring solution. So my point is that 20% don’t take this as, oh my god, this is a very tainted area that are very bright and good subsegments within. But I would say that the likelihood of that 20% is probably higher than the rest than the 80%. Then on the broader questions that you asked, on Europe, the dividend ban. Obviously, it’s the decision of the supervisors. We are getting some signals that it will probably be lifted for the payments in 2021.But we don’t know. We don’t know it’s their call and they will do the meetings, I guess at the end of the year we will see, my expectation is that, it will be – it will be lifted.

But let’s see. I mean it depends also on the evolution of the COVID crises on the health situation and so on. So we’ll see, but my expectation is that, it will be lifted and my expectation is that if it’s lifted I mean we are one of the ones, we have 340 bps distance to MDA, 340 bps distance to MDA. When it’s lifted, we’re going to start restart our usual shareholder renumeration program.

On the bad bank, we’ll see, obviously we are hearing the plans and the thoughts. At the moment, I don’t think Europe needs one. At the moment the numbers are not justifying, that there will be a big need for a bad bank, in this crisis is a bit different than the many other crises that we have seen. You should know this, I mean you are seeing it in the figures as well. This is a crisis where actually the balance sheet of most of the customers is actually strengthening the deposits in the system is actually going up.

It’s a very heterogeneous crisis. So meaning some sectors are affected much more, but overall, for the economy, you don’t see a depletion of savings and deposits and so on. No, you see an increase in retail deposits in commercial deposits and CIB deposits, because the governments are also helping the overall economy. So I don’t think a bad bank would be needed. But again let’s see – let’s see how it goes along. And on M&A. M&A, I cannot comment on others. The only thing I would say is the cross borders the M&A is done to create value, to create shareholder value.

I don’t see a huge value creation in a cross-border one, because the cost structures would not be overlapping too much except for head offices I guess, because of distribution costs which is still the key cost item for the European banking industry, cannot be optimized in a cross-border merger. So I see less likelihood in cross-border mergers in the short term and for domestic M&A’s again it depends on shareholder value creation.

Gloria Couceiro

Thank you. Andrea. Next question, please.

Operator

The next question comes from Adrian Cighi of Credit Suisse. Adrian, please go ahead.

Adrian Cighi

Hi, there. This is Adrian Cighi from Credit Suisse. Just a few follow-up questions, please. One on the costs, and one on the capital returns. So you mentioned the cost control as a management priority is there any test to be a little bit more specific as to where you see this landing next year? And on the capital return, you mentioned just earlier that you’re thinking or considering the restart of capital return a number of your peers have been more forthcoming with their ambition for next year. How do you think about sort of 2021 returns, and maybe discuss your thoughts on share buybacks versus dividends. Thank you.

Jaime Saenz de Tejada

Thank you, Adrian, for your questions. Let me address the first one. On cost, I’m afraid we’re not going to be more specific in the call today. But I think that what has happened over 2020 and the years before I think, more than it speaks for itself. We are presenting an extremely good behavior in inexpensive in 2020. The acceleration of our transformation cost due to COVID has suddenly improve the performance of our cost-to-income ratio. Both in Spain and the U.S. costs are down on our year-on-year basis. Cost to income overall group the level improved to 45.6%. That’s a really significant improvement overall.

And as I said during my presentation, in a country like Turkey, cost-to-income is 27.6%, reaching an all time low. So I think, as Onur has mentioned before the focus on cost will remained. And it will continue to be one of our most important priorities.

Onur Genc

Adrian, you also see it in the numbers in every single geography despite very high inflation, in every single geography. We have delivered cost growth much lower than inflation this year. We have also in the key geographies like Spain and the USA, we are clearly in the negative territory. In the case of Spain, we are posting 6.5% decline in costs and so on. I hope you do acknowledge the huge effort that we have been putting into this. And when you put a huge effort and discipline. It typically works out, and that’s our intention for 2021. On the capital return, when the restrictions are lifted, our intention given our share price at the level of our share price obviously it might change and so on, but it seems like it would be a high value-added for our shareholders. If you use a hybrid model of dividends and share buybacks.

So our intention is to do both. We are getting messaging from most of the regulator that the shareholder renumeration mechanisms dividends or share buybacks, they are in different to the method. In that context, we do think given our share price levels a hybrid methodology would probably be the right way to go. But we will see it when the time comes. And then obviously our decision-making authority, our boards, and our general assemblies, they will also they will also have to say – they have a say on this obviously. Okay, next one.

Gloria Couceiro

Thank you. Thank you, Adrian. Next question, please.

Operator

The next question comes from Mario Ropero of Fidentis. Mario please go ahead.

Mario Ropero

Hi, good morning. My first question is, if you could explain weak NII of Spain in the quarter and how much TLTRO NII did you accrue? And the second question is broader one. Onur was mentioning before that the utilization of that bank may be conveying some competitive advantages.

My question is in Spain you are perceiving, that this competitive advantage is also giving you a competitive advantage in terms of loan pricing, guess I would be thinking.

Jaime Saenz de Tejada

So loan pricing.

Onur Genc

Okay. On the weak NII in Spain, Mario thanks for the questions for both of them. On NII, it’s lower contribution from the commercial banking activity. The first reason meaning, after this eco loans as, in Spain there was this eco government support program and it was very, very active especially in the second quarter. We have seen some decline in the loan balances so the volumes have come down 0.5% quarter-over-quarter and customers spread has also come down by three bps as you have seen in the presentation mainly again because of the fact that the mix of our portfolio has changed toward more commercial wholesale than retail and also because of EURIBOR. As you know, EURIBOR also affects our NII.

So overall, all these effects have impacted our, what we call commercial banking related topics. Second topic is securities portfolios. It has come down obviously lower given the rates and in the second quarter, you were focusing on the quarter-over-quarter evolution. There was this interest on areas for a tax payment that we have received. So there was this one-off.

But going forward the thing that I would say is what matters is the going forward and the fourth quarter for NII in Spain, we maintain our guidance that NII still to increase slightly in the year. Why? As you have seen in terms of what is changing from the third quarter.

First of all the mix is partially started to change as you have seen again in the presentation. So the retail portfolios mortgages they are coming back up. And also consumer coming back up, credit cards slightly coming back up. So it will be helped by that one the volume so might be also better. And also the spread and the margin would be slightly better.

So we maintain our guidance for the year. Then on digital is, is it helping you? In Spain, is that the question that I got – there’s a problem in the line a little bit. But if that’s the question the answer is obvious, yes. You have seen it in the numbers again, as we are discussing about NII and Spain and so on. If you look into the highest margin product in the Spanish banking industry is consumer, and in consumer, in the past three years we have gained 2.8% market share. In this year, nine months of the year, we have gained 350,000 gross customers, 350,000 gross customers in Spain, in a mature market, in a stable market, in a COVID environment market like Spain gaining that 350,000.

When you go into the underlying drivers of why it’s happening, we are all acquiring them through digital. And the acquiring the customer is the first step to monetize that relationship in the future. So we do hope that in the future we cross-sell to that customer base and we sell new products. So is digital helping us in Spain – in a mature market like Spain? The numbers are telling us that they are, and there to a large extent.

You are also asking about whether it’s helping you on the margin of the loans on the – in the retail and SME space which is most of the regional loans are being dispersed obviously. If you look into what you called one-click loan, it is a higher margin product then the same product that we have in the branch. So the channel also helps us optimize that spread in the loan book.

Gloria Couceiro

Thank you. Thank you, Mario.Next question, please. The next question comes from Ignacio Ulargui of Exane BNP. Ignacio, please go ahead.

Ignacio Ulargui

Hi. Thanks so much for the presentation and for taking the questions. I have two questions. One is on NII performance in Mexico.

We have seen a very strong growth quarter-on-quarter in local currency and in euro terms. Just wanted to understand whether we should expect additional growth quarter-on-quarter in the coming quarter in the 4Q because of the end of the impact in the NII from low deferrals, whether that majorities of those happen in September will be fully captured in the 4Q or that has been already seen in this quarter? And the second point is on the cost front.

You have been sort of like flagging for a long time, the stress of all these digital, but I was just wondering how you see that in Mexico. And what will make or what could you pull to be more efficient in Mexico or in South America? To talk about the impact of digital in Spain. I mean, I was wondering more on EM economies whether you will be able to capture it and if the digitalization is also an advantage in that. Thanks.

Onur Genc

Thank you, Ignacio. On the first one, the Mexican NII, yes we do have some positive trends for the fourth quarter because in the third quarter there were still, as you said, the remnants of the deferrals that we have given. And the net interest income that we have foregone for some of those products like credit cards and semi loans the revolving loans they were registered in the NII account. So yes, one piece is the recovery from the deferrals. The second piece is in the presentation you are seeing it.

We are focusing a lot lately given the lower interest rates in most of the economies, but also in Mexico. We are focusing a lot on cost of funding and deposits in the quarter. You see that in Mexico the cost of funding has come down from 188 to 140 and the trend is a clear one. So we will also get some benefit from that. But obviously again, we have to also see, what the volumes are going to be turning out to be at the moment, it’s very positive. But if the health situation deteriorates it’s only two more months but our expectation is a positive one.

But we have to also put the disclaimer. On the cost for – and the digital. How it is helping in Mexico and so on. Obviously, the way that the digital helps different countries changes in the case of Mexico the situation is that we have increased our number of customers tremendously, tremendously.

Our target customers is now around close to 11 million, actually and it used to be 3 million, 4 million less some years ago. And we are serving 50% more customers, 50% more customers with more or less the same branch network. Actually, if you look in to the sizable branches and so on it’s a lower smaller branch network. So how can you do the same business with 50% more customers with the same distribution network. As compared to before, the key change is digital.

Because we are serving more of our customer base through digital means, which is a lower-cost channel and that helps us again to load more customers into the same cost base. So that’s the way that is changing so that the dynamic of the country is very different from Spain and as a result the use of digital in a way. Again on a customer basis we still have a lower cost, but you don’t see that the broader costs, because we are growing, we are growing very tremendously, very crazy in Mexico. That’s the differentiation. Do you want to add anything, Jaime?

Jaime Saenz de Tejada

Yes. I would say that, if you see the numbers by country, penetration rates of the digital in many Latin American countries are even higher than in the rest of the footprint. In Colombia 73% penetration rate as of September, in Argentina 71%. So as – it’s been the case over the last few years so we’ve been able to increase seen a very significant factor in the number of clients in the whole region without necessarily increasing the physical infrastructure.

That we have in place. So sad to be seen through digital has become extremely efficient and also it’s quite impressive. How we’ve been able to improve our digital sales in the region, both in terms of products and in terms of PRB, much higher in both instances that are done in the North. So even more relevant, I would say in Latin America.

Gloria Couceiro

Thank you, Ignacio. Next question, please.

Operator

The next question comes from Stefan Nedialkov of Citigroup. Stefan, please go ahead.

Stefan Nedialkov

Hi guys. Do you hear me?

Onur Genc

Yes, yes, Stefan. Yes. You are on. Please go ahead.

Stefan Nedialkov

All right. Thank you. Okay. Thank you, Onur. Two questions on my side. After the moratoria when I look at Stage two – at the Stage two ratio of the moratoria, it’s around 24%. So you know kind of close to the ratio of long being structures on not being right now. That 24%, can you give us the sensitivity of some of the cost of risk for 1% going into Stage three? And if that’s too detailed for you, can you just give us some color in terms of how the 24% Stage two ratio informs your cost of risk thinking for next year.

How much of that 24% do you think ends up in Stage three? And how much of that is already incorporated in your guidance for next year? The second question is on dividends. How much are you guys accruing right now? I think a particular, you were doing 49%. Is that still the case? Thank you.

Onur Genc

Stefan, on the first question. We don’t have a guidance for next year. The only guidance is it’s going to be better, which is a very high-level guidance at the moment because we have to see and we have to come to the end of the year. But the crux of your question, I think goes down to read it, what we call the transformation ratios from one Stage from one delinquency bucket to the next bucket is changing in the current environment. And that’s again, that’s the crux of the question. If I – understand well. And on that one what I can tell you is the signals that we are seeing is that the transformation ratios are not changing meaning within that Stage two, what percent goes to Stage three, in our view by different products and by different portfolios is not changing.

So that’s a – that’s a very good signal, so we’re just throwing the buckets and the transformation ratios the remaining stable. On the dividend we are not accruing any dividend in our capital this year. So you don’t see in a number as you also know though we are reversed. We have been one of the very few banks who paid dividends in 2020. If you remember given the fact that we have done our annual general assembly on March 13th we legally had to pay. So after that date the ECB came out with the recommendation but we had to pay because it was legally binding on us today.

So we are one of the very few banks, who have paid dividends in 2020. And given the suggestion and the guidance from the ECB this year, we are not accruing for dividends. And then depending on what comes out next year, how the situation changes for the supervisor, then we can reconsider we can look into it in 2020. But our expectation is we will start payments in 2021. But we are not accruing anything for this year results in our current results. On the first question, Jaime, do you want to add anything?

Jaime Saenz de Tejada

Well, I think in Page 44 of the Annex, we are providing what I think is a very interesting data point to try to weigh the size of this Stage to level. The States too currently represent of this deferred portfolio represents 1.3% of the total loans. So as deferrals mature, this concept of deferrals in practice will almost be disappearing by the end of this year. And if real focus that we need to have is how what’s the size of these Stage two versus the overall portfolio. And so I will definitely take a look at Page 44 to truly weigh the size of the problem going forward.

Onur Genc

And on that same Page 44, Stefan, I would highlight the bottom of the page as well. If we look into our coverage ratios – coverage ratios, it’s very clear on where we stand versus the rest on that same Page of 44.

Gloria Couceiro

Thank you. Thank you, Stefan. Next question, please.

Operator

Next question please the next question comes from Carlos Cobo of Societe Generale. Carlos, please go ahead.

Carlos Cobo

Hello. Good morning. Thank you very much for the presentation. Could you please just to clarify that dividend comments that you make. As you are not accruing, that means that you are not likely to pay dividends against 2020 results.

Is that what you just said? I guess, just to understand you properly. The first question would be NII outlook in Spain and Mexico. Next year, we have RIBOR and TLT three step down in Q3 of 2021. Could you please quantify both things assuming a 25% drop in the travel? What’s the combined impact in NII in next year? And in Mexico, same thing, guidance for NII. This seems to be presenting a slightly more conservative now flat to slightly down NII in 2020. Is that a flat, which is what I had in the previous presentation. Could you please explain the drivers and what is the contribution, the gross contribution from the securities portfolio in Mexico.

That seems to be coming down substantially on the back and lower inflation and lower rates. How much is that he would ask contribution and would do spectrum next year? And lastly, a question about the cost of risk. And this is probably a question that you’ve discussed plenty of times with investors, but this had to do – you are not the only one doing it. But when you presented their guidance in Q1 everything was based on a more benign economic forecast and also a shorter lockdown. Now we’re having longer pandemic, longer mobility restrictions, and weaker GDP prospects and you and other banks are guiding to lower cost of risk.

I mean it’s understandable that the public support has been very, very important, but I don’t think anybody was planning to have mobility restriction for more than six months or so. So how do you really see that not having in impact on cost of risk next year. Thank you very much.

Onur Genc

Very good questions, Carlos. I’ll take one and three. Why don’t you take, Jaime, the second one. On the dividend topic, just to make it very clear.

Our intention is to start the payments in 2021. Obviously because the restriction is that we cannot pay for in 2020. Debt payment, and the basis for that payment, what it would be depends on the new guidance that we would be receiving in January. And also the evolution of the numbers and the situation. So the basis is not defined yet, it’s not finalized yet. Our expectation that I was trying to say is our expectation is to start the payments in 2021. And given the guidance. And given that expectation we are not accruing in the also suggested by the supervisor, we are not accruing in our capital figures. The second one, do you want to take it, Jaime, and I’ll come back.

Jaime Saenz de Tejada

Yes, sure. Carlos I’ll give you the sensitivities that we have to rate movements in the different geographies. The only one that has really changed slightly in Q3 is a Euro balance sheet sensitivity is now minus 8% in a – minus 100 basis points decreasing rates. That’s the 12-month impact of our parallel move.

The reason why it has increased by 2% mainly has to do with the higher volume of sensitive exposures meaning mainly central bank balance sheets and the high quality liquid asset portfolio that we’re building in the ALCO due to the high liquidity generated by the balance sheet in these previous quarters, but also by the maturity of part of the hedges, that we have in the market portfolio.

In the remainder of the footprint, things remain quite stable versus previous quarters. One had a basis point increase decreased hits us by minus 4% in NII in the U.S. minus 1.5% more or less in Mexico, 1.7% down in Turkey. So in the different geographies, things remain quite stable. And then on the contribution of their ALCO portfolio to the NII in Mexico.

Well, actually it has improved in Q3 versus Q2. As you can see we’ve increased the size, actually we’ve been increasing the size of the ALCO portfolio quarter-over-quarter since the end of last year in Mexico in contained levels, but betting on the rate decreases that they actually took place this quarter. The site of the ALCO portfolio increased by 11% in Mexico and the contribution to NII was €30 million, and that is €28 million more than what it contributed in Q2.

Onur Genc

And on the third question which is a very good question again, Carlos is, I would say a few things on this one. The first one is as competitive as you are seeing that as compared to what you were expecting back in March, April it’s actually going coming out to be worse or, it is turning out to be longer and so on. Well, that’s not what we see at the moment in the numbers. First of all on the forecasts, if you look into the forecasts of GDP growth even for this year form for a clear number of geographies we have upgraded positively our GDP forecast not only us I mean the whole market. I mean our expectation for Peru in the first quarter at the end of first quarter was minus 15% GDP contraction and it’s upgraded to minus 13.

That minus two is it important, that is an upgrade in the case of Mexico it was minus 10% at the time. Now it’s minus 9.3% for 2020 but these are forecasts. What I care about is also some real data. That’s why in this presentation we have put that Page number eight. That’s a number that I track very, very closely. Every week this comes up and I see what is happening in the economy in terms of spending.

At the time in the first quarter, we were hoping that a V-shaped recovery would happen in the economies. When you look into Page number eight, what you see again in Spain in April time frame the spending was minus 60% down. Now it is back to where it should be. If you asked me back in March, April would we be back in the month of June at the end of June and then stay there despite the fact that the health numbers are not doing so well. I would have probably said probably not.

But we are seeing it in the numbers. So in terms of spending we are seeing some good signals in the real data rather than the forecasts. If you don’t believe in the forecasts. So that’s one clear thing to put on the table. The second thing that, we would put on the table is the fact that this is a different nature’s crisis of a different nature.

I mean the governments are kicking it in a major way to help the broader economy. And we fully support that by the way, because this is a crisis, that is affecting even the good companies even good establishments in a negative way. It’s not – in other crisis, governments do not typically kick in because they don’t want to save the down-productive companies. But this is a crisis where everyone is affected and the fabric is being pressured. So the governments are kicking in to help the good companies and that is being reflected again in the balance sheets.

The deposits of the system in every single segment in every single country is going up. So retail households they have more money in their pockets as compared to before. The crisis is such that it’s a heterogeneous one. So we are not saying that it’s not a, it’s a big crisis but affecting very differently the broader economy seems to be okay. But certain sectors, certain households are affected much more. Given these dynamics that we have seen in the past few months and so on in the figures. That’s why we are saying that coastal risk is turning out to be better than what we expected.

And again on coastal risk, these portfolios are out of deferrals since August and 80% paying their installments or payment dues and then a good number is in process and these are very good numbers, Carlos, very good numbers. And it goes back to the nature of the crisis and I think the level of support that the governments are giving to the economies.

Gloria Couceiro

Thank you, Carlos. Next question, please.

Operator

The next question comes from Sofie Peterzen of JP Morgan. Sofie, please go ahead.

Sofie Peterzen

Yes. Hi, I’m Sophie Peterzen from JP Morgan. So my first question would be around capital. If you could just give an update on where we stand with Paraguay, the insurance stream, when should expect these headwinds and say they kind of materialize and how we should think about capital as well.

And I recognize that you’re not going to say or give details overall on how much dividends you paid and she would be but given that you haven’t accrued for any dividends how should we think about that the capital headwinds potentially from there as well assuming the ECB allows you to pay dividends. And my second question would be on the gross saves. You have had very strong cost management this year and I recognize that you also mentioned that you will continue to focus on costs next year.

Costs are down almost 4% year-on-year. How much of these costs will basically reverse one stock over it is behind us? So are there some costs that basically come back such as travel entertainment and so on? Thank you.

Onur Genc

You want to take that one, Jaime?

Jaime Saenz de Tejada

Yes, sure. Okay. On capital, we’ve been getting 18 very large levels of capital the quarter-over-quarter. And I think that will continue going forward. Remember that what we’ve said at the end of Q2 on the impact of things that we have pending were, first of all, in Paraguay we expect a positive for capital impact of our on six basis points. It will be materializing between the end of the year or the beginning of the next. So on the safe side let’s put Q1 next year. Their joint venture with Allianz for their non-life products so we spent an additional positive impact capital of roughly seven basis points. I also suspect that for the beginning of next year and what we also needed is to update that we did in there in their Merrill Lynch conference, we updated the positive impact from the intangibles, that we currently now expect a positive impact of 19 basis points that will materialize in Q4.

And then we were expecting 15 basis points of regulatory and supervisory negative impacts in 2020 coming both from TRIMS, mainly on their low-default portfolios and from adjustments to PDs. And so we don’t know when that will materialize that’s our 15 basis points negative impact maybe at the end of this year maybe in 2021. Those are that will be the performer ratio that I think you should calculate.

Onur Genc

On the cost savings on the second question Sofie, some of the cost savings all of this year, is there to stay some is obviously transitionary. One component is variable compensation in one third or the savings that we have done was due to variable compensation so it’s old, it’s completely driven also by the results, if it goes back in terms of costs for next year it means that it’s a great year.

So we will take that in any case. But some of that is going to be linked and if the results don’t turn out to be as usual variable compensation will continue to be at a bit of a lower level there are some other pieces of that cost reduction is on, again, the staff size. As you might see in the detailed numbers that we are publishing you have reduced our number of staff by 2,800. Most of that is there to stay because we are using the trends in such a way that we optimize our cost base especially on distribution and also in head offices in central services. So it’s a mix but today we are not providing any guidance for costs. We will do that in the next quarterly call but what we are saying is it will continue to be one of our bright spots in the coming year.

Gloria Couceiro

Thank you, Sofie.

Operator

Next question please the next question comes from Daragh Quinn of KBW. Daragh, please go ahead.

Daragh Quinn

Hi, thanks for taking my questions. One question just on the capital generation and the kind of disconnect between the city one generation and the slight decline in any V per share, even if we exclude that the risk-weighted asset component of organic capital generation and markets was still around 18 basis points, but that doesn’t seem to flow into to turn TV per share there just if you could comment on that. And on the outlook for it for that metric for 2021.

And then just to revisit the economic outlook you sounded relatively upbeat versus your previous forecast and you highlighted a number of countries where you’ve upgraded estimates plus you’re listening to the ECB yesterday. Yes, they clearly think the AFL has deteriorated and that the outlook for it for Q4 is potentially for weaker economic activity versus Q3.

Just trying to get a sense of you. Do you disagree with that outlook? You take it. Do you have a more positive outlook just to, how your outlook compares to the weakening data and outlook we’re seeing from the central bank? Thanks.

Onur Genc

Okay. I’ll take the first question. On the tangible book on the evolution of the tangible book and tangible value per share. The main reason, why the very strong P&L performance of the quarter doesn’t flow to the tangible book mainly has to do with the FX differences that were generated during Q3 mainly their depreciation of their Turkey’s leader was 16% in the quarter alone.

And also there the depreciation of the U.S. dollar. That also hit us by over €400 million in the quarter and the Mexican peso behaved quite decently.

So those, Turkey and the U.S. where they’re definitely the most important countries. And then the second aspect, evolution of their health to collect and sell portfolios. And particularly on the equity front, particularly Telefonica. Telefonica itself alone drained over through around €350 million in the quarter alone.

Jaime Saenz de Tejada

On the forecast of the economy forecasts, the fact of the matter is I don’t think anyone knows it’s a forecast. And it’s a very uncertain environment. The only thing that we can comment on is what we currently see in the numbers and that’s why we put it in the documentation on what we are seeing in terms of spending in different countries. We have upgraded it’s not us only, by the way, it’s many other agencies and investment banks and so on. Most of us have upgraded some of the growth forecasts.

In our case, we have operated the U.S. Mexico Peru as compared to our second-quarter forecasts. So there is some positivity as it stands. But I do think that there is a big amount of uncertainty. Even our forecasts even someone else’s forecasts. There is a little uncertainty we don’t know how the situation would definitely evolve.

In Europe, there are these new constraints. I don’t see the impact all those things yet. So we have to see the impact. Again, the only thing I would tell you is again, if you go to Page number eight if you’ve got the spending, the health situation was much worse in the last month in Spain as compared to in terms of new cases as compared to even April time frame.

Despite the fact that the health situation was much worse, despite the fact that there was some sort of confinement even in these days in the country. The spending is 100 Index 200 it’s 100 versus 40 and in April. So these are real numbers that are kind of leading us into this positive mood a bit and we are not seeing at all the reflection orders overall situation on coastal risk. As we mentioned, but there is a lot of uncertainty. So we have to see, how the situation evolves.

Gloria Couceiro

Thank you. Daragh. Next question, please.

Operator

The next question comes from Jernej Omahen of Goldman Sachs. Jernej, Please go ahead.

Jernej Omahen

Yes, good morning. Can you hear me well?

Onur Genc

Yes, Jernej. Yes, very well.

Jernej Omahen

Oh wonderful. Okay, I have three questions, please. So I’m sorry to continue with the dividend question I just have one clarification here. So you said that you expect the ban to be lifted but that you are not yet sure what the basis of payment would be. So I’m just wondering, what I mean there isn’t that many options for other bases of payment could be. So it’s out of the 2020 profits so you state distributes 2021 an interim dividend. Is that, what you were trying to say? That you’re not sure that 2020 will be distributed that you might just switch on from profits as they start accruing in 2021. So that’s question number one.

The question number two is, on this Slide 8, which you referred to multiple times and I also think is an excellent slide. Now the last data point here is the 18th of October and you mentioned that these days are on a weekly basis and given the things really started deteriorating sharply on the public health side of the equation post the 18th of October, I was wondering if these charts still look the same way. So, if the latest data that you have continued to be resilient. And my last is– you have an interesting question before on M&A, domestic versus cross-border. Response was logical which is M&A is there to create value.

But what I want to ask you is this question in reverse. I think M&A there to create value but the option of disposing of a geography, of rationalizing if that creates value that should probably be considered as well. And I was wondering when you look at your geographic portfolio and you look at the opportunities set as you currently see it, where the shrinking rather than expanding geographic portfolio is something that you sometimes consider. Thank you very much.

Onur Genc

Very good questions all three of them. Very quickly, on the first one, the dividend, I guess, I’m not that clear because this is the first time, I’m getting the question. The basis of whether it’s going to be 2020 results or whether it’s going to be 2021 results on which we would be paying in 2021 is not clear. Yes, that’s what I’m saying.

We don’t know yet. Because our expectation and our intention is to start the payments, depending on what the guidance would be depending on how the situation evolves, it’s going very positive at the moment, but we don’t know we will see the accumulation of profits and capital in the March time frame and so then we would decide. So it can be a different basis depending on what the situation is.

The expectation you asked me about the expectation, and on that one I wanted to be very clear that the payments. Our expectation is that the payments would start in 2021 on which bases we don’t know. The second one the spending on in Spain, I have the two figures actually, first of all the 25th of October figure it’s 96% as compared to the index of 100.

And if you call me today later, I will give you the last week’s number. But the fundamentals are still the same. So it does that fluctuation from time to time but I would assume that today also would be a good figure. And on the third one, M&A is shrinking an option also in terms of value creation absolutely.

We have done it, I mean, we have sold Chile a few years ago. Chile was a friend an important franchise for BBVA. We sold our pension businesses in every single Latin American country some years ago. We sold by resource, we are selling Paraguay. We sold Puerto Rico.

The key thing is what is the basis on which you take these decisions and the basis is again share holder value creation. It sounds like too fluffy and too high level but that’s how we operate really as management we look into shareholder value creation. If we don’t deliver above our cost of equity in any country if we don’t have any conviction to deliver above our cost of equity in any country. And if we think there is a better natural owner for that asset who is willing to share the additional value creation with us. We are very much open to portfolio optimization on both sides. It can be a plus or negative but it has to be value creation for the shareholder.

Gloria Couceiro

Thank you, Omahen. Next question, please.

Operator

The next question comes from Benjie Creelan-Sandford of Jefferies. Benjie, please go ahead.

Benjie Creelan-Sandford

Yes, good morning. I got three questions, please. The first one was on the U.S. enough the quality and the NPL ratio of the jumped quite sharply quarter-on-quarter. Looking at Slide 40 Stage two balances were also up and so I’m just wondered could give us some more details about the driver of that? And also what you think the appropriate level of Stage three coverage in the U.S. would be.

Because at the moment it looks a little bit light versus the group average. And the second question was just on Mexico. I mean to see income trends were very strong quarter-on-quarter. Can you give any more detail around the drivers of that and how you see that going forward? And also just more broadly in Mexico whether you think the current environment is providing you with a potential competitive advantage versus peers and do you see the prospect of taking more market share again in the current environment in Mexico.

Onur Genc

You want to take the first one?

Jaime Saenz de Tejada

Yes, I’ll take the first question. You’re right. The NPL ratio increased in the quarter in the U.S. by 79 basis points. Two main reasons, the first one is the decreasing their denominator of the ratio. We had a significant deleveraging in the U.S. in the third quarter lending DRAMS are down by 9.3%.

And that affected that significantly then the ratio. On top of these, we did have some additional NPL entries in especially wholesale portfolios, mainly related to the sectors that we think can be most affected by the crisis. Mainly oil and gas and commercial real estate. On the coverage, the current coverage ratio that we currently have is 95%.

It’s not easy to have two to set and a specific coverage ratio for four Stage three especially in a country like the U.S. where it is very much affected by individual names, mainly large corporates. So we need to do an individual analysis on each counter party to really set the right coverage ratio. What I can assure you is that, at every point in time, we will have what we think is the right coverage ratio. We’ve proven in the past that many times we sell. The NPL loans in the U.S. we tend to generate a profit. So coverage levels historically have always been strong.

Onur Genc

On Mexico question, the fee income is progressing very nicely in the third quarter as you said. Because the fee income 60% of that in Mexico is two things, close to 40% slightly higher than actually 40% is payment systems credit cards, and then another 20%, 15%, 20% is on asset management.

In both categories, they are coming back up very strongly. As I did mention, it is tied back to the economic activity than economic activity and spending goes up immediately register more fee income. How do we expecting that trend to continue? Yes, we do because the economic activity hopefully is going to be strong one also going forward. I mean, you are asking me in the previous question the spending index for Spain in the last week that same number for the last week is 105, 104.5 in Mexico. So it is hanging up in there and that probably would feed into the fee income. Are we getting the benefit of the fact that the crisis is happening in Mexico for sure.

I mean, I keep saying it and I’m not saying, it is a subjective opinion it is proven by facts. Are our banks in most of the geographies that we are present. Is either the best bank or one of the best banks in the country. Proven by the return on equity that we post as a bank overtime versus the competition in that same country. In that context, our bank in Mexico in my view is clearly one of the best banks if not the best bank.

I think it’s the best bank, but I don’t want to be too subjective on my own babies, but it is a great bank. And in these types of situations, flight to quality happens. And we are seeing it, in every single product. We are gaining market share.

Gloria Couceiro

Thank you, Benji. I’m afraid, we are running out of time because we have the press conference afterwards so poorly we have time for the very last question. Next question, please.

Operator

Yes so the last question comes from Ignacio Ulargui of UBS. Ignacio, please go ahead.

Ignacio Ulargui

Hello. Good morning. A couple of quick things for me back on the dividend question. If I may, if you can give us any color on the possibility of city imposing a cap on the dividend payout as an approach to separate bonds the company dividend or not.

Or do you just going to be related to the amount of money you make the capital you have? And the second question is on Turkey, if you can give us the sensitivity of the capital or the local unit not the basis in terms of the effects mix from here. How sensitive is the local capital base to really that appreciating additionally from here? Thank you.

Onur Genc

Thank you, Ignacio, on the first one, the possibility of a cap. We don’t know. We don’t we haven’t had that detailed interactions so we don’t know, the only thing I would say is in our case I would look into it in our case. We have 340 bps again distance to MDA. More importantly, we distribute our dividend policy is a very consistent one as you all know.

We distribute 35% to 40% of our profits. Typically in a year, it has been the case for since the time that we establish this policy which is again a long time and that’s 35% to 40% when I compare that to most other banks in Europe, it sits very well. So I would not expect anything. Let’s see what comes out. But our policies are prudent ones I wouldn’t expect negative consequences on the second one, Jaime.

Jaime Saenz de Tejada

Yes, the local CAR ratio, capital adequacy ratio sensitivity to a 10% depreciation of the Turkish lira versus the U.S. dollar is 48 basis points.

Onur Genc

Perfect, Gloria.

Gloria Couceiro

Okay so we need to end it here. Thank you very much for participating in this call. And of course, let me remind you that the whole IR team will remain at your disposal for any questions you might have.

Onur Genc

Thank you, everyone, for joining in and stay safe. Stay healthy. Bye-bye.

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