Executives: Edward O'Loghlen - Head of IR Gonzalo Gortazar - CEO Javier Pano -

CFO
Analysts: Alvaro Serrano - Morgan Stanley Andrea Unzueta - Credit Suisse Carlos Cobo - Societe Generale Mario Ropero Garcia - Fidentiis Jose Abad - Goldman Sachs Marta Sanchez Romero - Bank of America Merrill Lynch Andrea Filtri - Mediobanca Daragh Quinn - KBW Javier Echanove - Santander GCB Britta Schmidt - Autonomous Research Benjamin Toms - RBC Capital

Markets
Operator: Welcome to the Caixabank financial results presentation for the full 2016 fiscal year. Presenting today is our CEO, Mr. Gonzalo Gortazar; and the CFO, Mr. Javier Pano. We usually take about one hour of your time; but please note that this time around we might take around 20 minutes longer, as we're also presenting a strategic update.

Let me reiterate that after the call my team and I remain at your full disposal. And with that, let me hand it over to our CEO.

Gonzalo Gortazar: Thank you, Eddie. Good morning or good afternoon, those of you - good morning to everyone. The quarter of the year confirmed, in our view, what has been an inflexion point; the operating performance accelerates in this quarter.

Core revenues, where we include the NII fees and insurance revenues, grows by 2.6% on the quarter, to the slight level zero for the full year, despite the pressure that we have had in NII and fees from the beginning of the year. It's good outcome, indeed. NII is up 3.5% on the quarter. That makes us meet the upper bound of the guidance, meet our target. It's minus 4.5% for the year, a year in which we have suffered from lower rates; lower volumes; and also, in particular, the removal of the mortgage floors in the middle of 2015.

Fees are up in the quarter, 1.6%. Costs are down for the year, 1.7%, slightly up on the quarter 0.2%; in any case, below the €1 million a quarter guidance that we gave. Cost of risk, excluding the exceptional items from the fourth quarter, is at 46 basis points, so below the guidance. Including the exceptional, is well below that. But I think the comparison has to be made consistent.

And the return on tangible equity for the bank assurance business continues to be at the top of the levels; slightly above last year. So I think a good quarter and a year in which, again, progression has been marked from a weaker first quarter, a stronger third and fourth quarter. As you can see, margins increase. We have combined good volume levels with pricing discipline and this is quite satisfactory and rewarding for us. We've grown client funds.

But we've also grown performing loans slightly. But at least it's positive. And this, obviously, a milestone in recovery process of profitability. Insurance and AuM have done very well, particularly in the quarter, just up 5.1%; and over the year, 12%. Most important, what we've done is do much better than our competitors and, therefore, gained market share across the board.

You will see that later on. But this is, I think, critical. We continue to gain market share in these circumstances. Consumer lending has been one of the successful areas this year, as well, with 41% growth year on year. And the reality is a contribution from consumer lending and the discipline that we have had in the business side in particular, as well as the mortgages, has implied that our customer spread is up, both in the quarter and year on year, 10 basis points.

On the non-performing asset side, we have had a reduction of almost 14% year to date; 3% in the quarter. We've crossed that 7% line for the NPL ratio which is now at 6.9%. Very relevantly, this is the first time we had a very significant fall in foreclosed assets, minus 13.8% year to date. Obviously, there is a significant impact here from the internal models and the implementation of internal models, consistent with Bank of Spain new regulation. But there is also a good evolution in terms of more sales than assets have enter into the OREO portfolio.

We have actually made profits at double-digit in this fourth quarter, 11% over sale price. Obviously, this reflects both the strength of the real estate market; but also, in particular, the fact that we have marked down our foreclosed assets. And hence, going forward, we're going to have a higher level of sales and, obviously, a lower level of provisions, if any. Impairments, on the other hand, we have seen, include €110 million from the floors situation; €149 million from the tax reform; plus, the impact of internal models which we'll discuss later. So below the line there's a number of negative extraordinary items that have affected bottom line, but I think above the line you can see the strength of most of the recurrent income items.

Solvency continues to be comfortable, we're at 12.4%, well above our MDA and, sorry, our SREP requirement; and, obviously, with enough room to accommodate the consolidation of BPI which should take place after the offer concludes next week and assuming that we finally gain control which is the assumptions we're making at this stage. Depending on the level of acceptance, our core equity Tier 1 pro forma will be between 11% and 11.6%. This is the summary for the year. A lot of information, but I think it's quite significant what we have achieved in 2016. The guidance we gave at the beginning of the year have been generally met.

NII, as I said, we're slightly better than the 5%; that was the mid-point of our estimate of mid single-digits. On fees, after a poor first quarter, we reviewed our guidance to keep stable the second quarter levels that we have achieved as well. Regarding expenses, we've reduced by 1.7%, a little above what was our target. As I said before, cost of risk is also at 46 basis points. It would be even lower if we take into account the changes in internal models.

But, in any case, to be comparable, 46 basis points. So, a good year in delivering on the guidance that we gave at the beginning of 2016. Getting into the detail, I discuss what was the market share gains across the board. Here, you can see, a, what has been the long term track record of market leadership. In terms of the number of clients in Spain that consider Caixabank as their primary bank, we're now above 25.7% which basically equals the two nearest competitor combined together.

We have increased clients, clients per branch, client per employee, in terms of productivity. And when you look at some of the main products and segments in which we're emphasizing you can see how the two-year perspective, because we added here last year, 2016, with 2015, i.e., the two years in which our strategic plan has been live, we have very significant market share gains across the board, including in lending. Obviously, you have seen our outperformance in long term savings and generally, but lending, particularly this year, has been quite satisfactory. On the non-life insurance, we've gained another 86 basis points. This makes now second-largest insurance company in terms of non-life, second-largest insurance operation.

On the life, both savings and risk, we're by far the largest in Spain, but gaining market share across the board; also on payroll deposits which we have, for many, many years, prioritized. When you look at the numbers for the year - for the quarter in terms of customer funds, the trends are those that we have been seeing during the year. I don't think we need to explain much more. We continue to grow in the sight deposits and in insurance and assets under management. The quarter has been particularly satisfactory.

You can see that in just one quarter insurance is up 5%; mutual funds up 5.9%; pensions plans, 3.3% which has made a year that was good into a very good one on this area. The shifts between time deposits towards sight and particularly towards insurance and AuM, is a long term trend that you can see and we would expect to continue, certainly, during 2017. More detail on this front. Life insurance premiums, €9.4 billion. AuM here have grown 15%, while the sector is growing at 6%.

Mutual funds are at €4.2 billion. Net inflows compared, when we look at the balance of the AuM, we're growing at 11%, versus 8% for the sector. Pension plans is the same story, €2.2 billion of net inflows; very significant. You can see also how, as I was saying, the year has gone from a weak start into a very robust ending, also, in particular, in this area. Our market share, if we combine both the mutual fund business with the life savings business and pensions, we're now at 21.5% market share.

And the trend, quarter on quarter, building up this market share, speaks by itself. We feel we have room to continue outperforming on this front. Non-life is also, once again, growing well above the market, 4.5% in terms of premium for the market; SegurCaixa Adeslas has grown almost at twice that level, 8.6%. And new production continues to develop very nicely. The main commercial weapon of SegurCaixa Adeslas is CaixaBank network which accounts for 70%, almost, of the new production.

This is one example of a very good integrated JV in non-life that is working and producing very fruitful results; not just this year, but, actually, for the last five years and, I hope, for the years to come. On the loan side, it's good news in terms of positive growth in the performing loans portfolio. You can see that, finally, it's 0.4% plus, compared to de-leveraging in previous years. We've done better than the market. The market is down approximately 2.9% in Spain in terms of overall loan portfolio, including, in this case, non-performing loans.

But, in any case, the difference is quite significant. If we include the non-performing loans, the evolution of the lending portfolio is slightly negative, is minus 0.8%. That's the figure to be compared with that 2.9% in the system. Means we're doing well and means, as you can see, that the fourth quarter has helped, particularly on the business side. We also had some reduction in lending to Criteria Caixa which we have been able to offset through other means.

Consumer lending continues to grow very, very nicely, although, in terms of volumes, stock is less significant. It is quite significant in terms of contribution to NII. Consumer and business lending account now for 46%, compared to 42% two years ago; in line with the strategy we that have been pursuing in a successful manner. On the business side, we have significant growth, 11% of new lending. You can see that we have a very significant opportunity.

We account for - or we bank with more than one quarter of the population in Spain that consider us their primary bank. That means that we have room to continue occupying what's a natural space for us also on the business side. This is a process that has been going on for a number of years. But this year both the specialization of our business, what we call Caixa business, let's say, the SME business, with over 1,300 expert managers and over 100 branches, it continues to do very well with clients. The launch of our corporate and institutional banking which we did in the fourth quarter of 2015, the reality is bearing fruits, even faster than what we expected.

Given what we have as a penetration in Spain, our ability to focus and provide the right services to corporate clients is yielding very good results and you can see that in our lending trajectory during the year. Quite important, as you can see on the bottom, margins continue to grow. Fourth quarter has been quite good on that front. But year on year, we also see margins growing. So we're being able to combine through better service, more focus, specialization, we're gaining market share.

But we're also defending margin; in fact, increasing our margin. With that, in terms of the consolidated income statement, you have all the figures. I am not going to elaborate too much. But again, quarter-on quarter, growth in NII; growth in fees; growth very strong in insurance which is slightly different year on year because we come from a very weak beginning of the year, but the trend is quite clear in the quarter. Below pre-impairment income, where we have grown 15%, we have the various changes.

The more relevant is as we have developed internal models that are consistent with the new circular from Bank of Spain we have released €676 million from the loan book, from loan book provisions; and we have actually provided for an extra €656 million in our OREO portfolio. Again, that markdown is the one I mentioned earlier, is facilitating future sales at very attractive gains. We have provided for the floors and took that hit from the fiscal reform. This is associated to losses in investments that were actually tax deductable at the time that we valued those losses and we've provided and created DTA. After this change in the tax law they become non-deductable, so, unfortunately, the DTAs associated from these losses are lost.

And the impact is fully reflected in this quarter; there's no further impact expected from that tax reform. In terms of profits breakdown, the bancassurance business has had a good year. Obviously, the almost €2 billion of profits includes the benefit of that release of provisions. Most of that is released in the bancassurance business. While the provision for OREO is reflected in the non-core real estate and, therefore, both the gains from bancassurance business and the losses on the real estate business side have been exaggerated.

And we have provided the figures also below that red line without that impact. Equity investments make, I would say, modest contribution to the overall profits of €1 billion. Important, we continue to make our profit on the banking side from the combination of the business, banking business with insurance payments and asset management and customer finance. They, together, account for more than half of our 10.8% return on tangible equity. This is a business model that is proving very resilient and has actually done quite well, despite a year in which we have had negative rates.

And obviously we expect to continue benefiting from this business model which is proving a success. On the non-core real estate, after the provisions we have made this year the outlook is much more positive, indeed. With that, I would like to pass on the floor to Javier, our CFO. Thank you.

Javier Pano: Thank you, Gonzalo.

And good morning, you all. I will summarize the main aspects affecting the P&L account; and also, later on, some key metrics on our balance sheet. Starting with net interest income, you can see that the headwinds continued to lose steam. In fact, during this last fourth quarter of last year only we have had a slower contribution coming from the ALCO book as main headwind. Quarter on quarter, net interest income has gone up by 3.5%.

We have had some positive one-offs during the last fourth quarter; but even without those, net interest income would have gone up by more than 2.5% during the quarter. You know that late last year we had the removal of mortgage floors, so during summer of 2015. As a consequence, net interest income, during year on year, comes down by 4.5%; at the upper band of our guidance. Remember that we were guiding for a minus mid single-digit overall. Positive trends and positive dynamics on our net interest income evolution continue, thanks to loan volumes that are clearly recovering; and also, thanks to the mix of the new production; and also, thanks to lower retail and wholesale funding and costs.

Later on, we'll update you with our guidance for 2017. Focusing more on the asset side, you can see that the ALCO book this last quarter has been increased. It has been a conservative increase of the size of the portfolio, so the drag in coming quarters from that portfolio will be lowered; the size of the portfolio now standing at €20.8 billion, up from €16.2 billion. New purchases have been partially swapped into floating rates. So we have been doing internal rate hedges on the new purchases in this higher-yield environment; as a result, the yield of the portfolio falls to 2%, from 2.5%.

Also, we have had some high-yielding maturities during the quarter. And the average life of the portfolio goes up to 4 years, from 3.1 years. But with the effect of those hedges, the sensitivity of the portfolio stands at 2.4 years on a duration basis. We continue to have a small size of the portfolio relative to peers, 6% of our total assets, compared to higher than 11% our peer average. You know that we have been commenting recently that we're envisaging a size for that portfolio of around €25 billion.

We'll decide if and when, depending on market conditions, we'll reach those levels. Continuing with the loan book, clearly, destabilization on recent quarters, that also supporting net interest income evolution for next year. You can see that the new production on loans this quarter has been made at 313 basis points, in line with the last couple of quarters; this quarter down by 7 basis points, in this case, due to a larger contribution from corporates and SMEs. That, in any case, is good news. And that compares very well with the levels we had during the fourth quarter of 2015.

We're up 70 basis points during the year, thanks to that mix of the new production. The back-book yield also is up by 3 basis points to 227. In this case, also helped by those one-offs I mentioned you on net interest income. But anyhow, the impact of or the drag from, €IBOR resets is fading, 4 basis points during the third quarter, only 3 basis points this quarter. And according to market estimates or what the market is discounting, our forward rates affect that good rate during the next year.

We expect that level of around 220 basis points can be maintained for our back-book yield during next year. Shifting to the liability side, you can see that we're pricing our new time deposits now close to zero, just 3 basis points. As a consequence, the back-book yield falls this fourth quarter to 35 basis points and trending lower, clearly lower, as with those such low levels of new production; and also, as soon as this first quarter, because we have expensive maturities during the first quarter of 2017. On wholesale funding costs, we have also reduced the average cost of our funding, 152 basis points last year, now standing at 135 basis points. We have expensive maturities during this year, close to €6 billion, at 185 basis points; next year, close to or slightly above €5 billion at 171 basis points.

We have to consider, having said that, that incoming funding costs will be affected by MREL issuance over the coming years; but anyhow, something that has already been considered while making our projections. We have also added €2.5 billion more of TLTRO-II funding during this quarter, thus providing additional support to net interest income. Looking to spreads, on our customer spreads you can see that it goes up to 214 basis points from 204 basis points; up 10 basis points during the quarter, mainly helped by lower funding costs and also that shift into current account from time deposits. This is also a level that we think that we will be able to sustain in coming quarters. On net interest margin, also an improvement; up by 5 basis points to 127 basis points.

In this case, also helped by a decline in non-interest bearing assets. Now, we shift to - or we continue with fees, where the positive dynamics we're seeing since the setback we had during the first quarter. We had a poor result during the first quarter due to market turbulences, but since then the improvement has been clear. This fourth quarter of last year fees up by 1.6%. The improvement, if we looked by segments, is across the board, except on banking fees.

In this case, quarter on quarter we have had a reduction of 2.8%. In this case, perhaps, we have had the slower wholesale funding revenues. But that compares with an extremely good third quarter on that front. On mutual funds, on the contrary, this quarter we're up 10.4%. In this case helped by steady inflows, €2.5 billion of inflows, into mutual funds last quarter.

On pension plans, steady growth, 2.4% up quarter on quarter, 12.7% year on year. And on insurance, mainly in non-life insurance products, also a very good performance, 14.6% up quarter on quarter, 32.6% year on year. Well, there is some pressure, underlying pressure, on banking fees that are down year on year by 5%. But this is more than compensated, thanks to our unique business model, by revenues coming from our insurance and assets under management activities that, as you see, are growing 14% year on year, for an overall positive result of 4% year on year. We continue focusing, as in recent quarters, on our performance on insurance and pension businesses.

Revenues are up 22% year on year, €1.1 billion. Now the contribution to total revenues of those businesses stands at 16%, up 3 percentage points during last year. You see that the improvement is across the board; on net interest income, year on year up 4%; on fees, mainly pension plans and non-life insurance products, up by 22%; on income from associates, here SegurCaixa Adeslas, the JV with Mutua, up by 25% during the year; and also, on our life premia we have had an improvement of 45% year on year. In this case also helped by the recovery of the value in-force reinsurance flows; that is adding slightly more than €10 million per month, since last November. Continuing with our cost P&L line, we have exceeded our targets.

We have been able to reduce our operating cost base by 1.7% during the year. We were envisaging 1.5%. Continuously, we're taking different initiatives to reduce our operating cost base. A few weeks ago, we launched an early retirement scheme, affecting 350 employees, with an upfront restructuring cost of €150 million for annual cost savings of around €40 million. Those €40 million add to previous initiatives, starting with Barclays Spain synergies that are the biggest ones, €189 million, for cumulative annual cost savings since then of €437 million; less than €20 million to reach our strategic plan cost savings targets, remember, set at €450 million.

With our operating cost base almost flat and a steady improvement on net interest income, on fees and on other insurance revenues, our revenues continue to improve. As a result, our core operating income this fourth quarter has been €746 million; the third quarter in a row of improvement. Once we compared that with fourth quarter last year we see that - we can see that the improvement is also across the board, on net interest income, on fees and also on other revenues from our insurance business and with flat costs, for a total improvement close to 17%. Okay, now - I think there is something missing here. Sorry for that.

Well, I continue with the key metrics of the balance sheet. There is a slide missing on loan loss provisions, if I remember well. Anyhow, as we will later comment, I can update you on that. On our key metrics on the balance sheet, let's start with our asset quality metrics. We can see that our non-performing loans continue to decline, now standing at €14.8 billion, down by close to 3% from last quarter; down by €2.3 billion from one year ago.

As a result, our non-performing loan ratio falls to 6.9%, from 7.1%. What I was trying to mention on that slide that is missing is that with that shift of provisions from our loan book to our OREO portfolio the size of that portfolio has been reduced to €6.3 billion. And that, together with other reductions on our real estate exposure, our total net number from real estate exposure has come down by 18% during the quarter. Let me explain into further detail those impacts we have had due to the development of internal models to comply with the new Bank of Spain regulations. The first - the key important message is that our total non-performing asset coverage remains pretty stable at 53%.

We have released €676 million of provisions from our loan book. As a result of that, the coverage ratio of that non-performing loan book falls to 47%, from 52%. That 47% is still a sound and solid coverage ratio. Let me highlight some key aspects of our non-performing loan book. There is a steady improvement on the quality of that non-performing loan book.

The percentage of non-performing loans that are passed due more than 90 days has come down by - from 75% to 58% during the last two years. Clearly, that means that there is a large part of the portfolio that, in fact, is technically performing, what we call subjective non-performings, as we're a large mortgage - we have a large mortgage portfolio. 70% of our non-performings are collateralized. And when including the regularly appraised collateral, the coverage ratio would be over 100%, 107%. And for the rest of the non-performings that are uncollateralized, our coverage ratio is 68%.

Those ratios compare extremely well not only domestically, but also at a European level, even if you exclude Spain and Italy on those figures. After the release of those provisions, we have further provided our OREO portfolio by €656 million. As a result of that, the coverage ratio goes up from 55% to 60%. Even without considering those write-offs while repossessing the assets, the coverage ratio would have gone up from 45% to 50%. Well, at current coverage levels, we don't expect further OREO impairments, since the former calendar provisioning regime will no longer apply.

With the current level of profits and that I now will comment on our real estate disposals, is expected to increase clearly in the future. And precisely commenting on our OREO portfolio, we see that the base of inflows continues to be reduced by 50% during this year, €1.2 billion. Pace of sales continues at a good pace. In fact, during the fourth quarter of the year the pace of sales has still increased, after having the portfolio much better provided. And, as you can see, profits during this fourth quarter have clearly picked up to 11%.

So, clearly, better real estate fundamentals and with an increased coverage ratio that will support future profitability on that front. Before ending with balance sheet metrics, a few words on liquidity. A strong and comfortable liquidity position, €50 billion of liquid assets; high-quality liquid assets standing at €37 billion; €13 billion more of other assets eligible as ECB collateral; an LCR ratio 160%; and a total now outstanding TLTRO-II facility at €27 billion; and a loan-to-deposit ratio slightly below 111%. And finally on solvency, after the reinforcement of our capital metrics with the placement of tertiary shares on September, this fourth quarter of the year the running capital generation has been 5 basis points. We have had other one-off impacts this fourth quarter, 25 basis points, mainly related to higher reductions on our CET1 ratios, due to the new provisioning rules.

You know that by the end of the quarter our CET1 ratio stands at 12.4%. You know that we're in the middle of the tender offer for BPI. Whichever is the final result, our CET1 ratio will be within our target, between 11% and 12%. With a 100% stake the CET1 ratio will be 11%; with a 51% stake, 11.6%; for a total capital ratio on fully loaded basis around - or, really, higher than 14%. Also, we disclosed our SREP requirements.

For CET1, our CET1 ratio on a fully loaded basis stands at 8.75%. We think that, that - those ratios or those requirements, reaffirm our solvency strength. And we continue to hold a very comfortable management buffer over those requirements. And before taking questions, I give the floor to our CEO. Thank you very much.

Gonzalo Gortazar: Thank you, Javier. Sorry for that slide. I hope - there's normally another one. But anyhow, I understand the audience has the slides, so they can have all the information. Just to finalize and update on the strategy, this is the end of the second year after we launched our strategic plan, from 2014 to 2018.

As expected at that point, we're making an update of the plan and an update on the targets that we set. Obviously, targets are what is most visible to you and to the financial community, but it is important also to consider the strategic lines that are moving the organization and that are leading to results. As an introduction, just something you know well, we've been surprised by the strength of the economy. Compared to our expectations, we were thinking that economy will do well. You see the gray line, that was our expectation or projected growth when we launched the plan, two lines, the actual and current projections for 2017 and 2018.

You can see that rather than 2% we have more than 3% GDP growth. That has a very positive impact on reduction on unemployment in 2016; we're 2 points below what we had expected and hopefully, that will continue. Housing prices are doing more or less in line with what we had projected; in any case, an improvement. So the environment for the economy is being good, certainly better than expected. That has had an impact on credit quality, a positive one.

However, on the right hand side, you know what [indiscernible] volumes have been lower; de-leveraging has been much more pronounced. We were not being too optimistic at the time, but the reality is we were still wide of the reality. And for this year, second year of 3% plus economic growth, we were thinking that the GDP will grow 1% and actually it has come down almost 3%. Hence, that is affecting, certainly, our targets, our financial targets, as you know well, because this is not new. Rates, we were expecting them to be low, but not that low and not negative; and, unfortunately, that has had an impact as well on NII.

What was the plan? The plan had five lines, client focus, profitability, capital allocation, digitalization and talent. We will continue with these five lines as the driver for the next two years. We think that we're actually working in the right plan and we're moving in the right direction. And maybe the most obvious proof that, that is right is the first one, is our market share. You have seen what we have gained in the last couple years in the previous slide, I am here summarizing market penetration of clients that consider us their primary bank, has moved up from 23.5% to 25.7%; in two years, is quite good.

And behind that there are all these market share gains that you have seen. So we think our strategy is working, that we have more clients, that we will have more business from clients and we have more market share. Second, profitability, we've made progress. Obviously, we would have like to make more progress. But, in any case, it's a good step, moving from the 3.4% to 5.6%.

Capital allocation, we've over delivered here in terms of timing. We were expecting to be below 10% of capital allocated to non-controlled stakes by the end of 2016 and we have actually done more and are below 7%. So, quite satisfied about that. Obviously is Bank of East Asia, Inbursa, Busarama and will soon become also, as BPI we expect to gain control, will also be removed from that figure. Digitalization is obviously something that we need to keep working.

Over these two years what we have seen is that our client are more digital and we're facilitating a digital life more. It's a significant increase in the percentage of digital clients. And, quite importantly, we're more digital. Our internal processes are digitalized, 90% of them. The smart PCs that our employees have, over 22,000 at this stage, more than 14 million digital signatures last year, a good indicator that we're changing the way things are done.

And we will continue to change, that figure will be 100% very soon. And finally, on the talent side, obviously, this is something we have worked and will continue to work. One of the dimensions here is to make sure that our people are in a position to deliver advice and value-add to clients; and for that, education and training is critical. We have now over 7,000 of our employees with a post-graduate degree in financial advisories, an example of what we're doing. So we're satisfied, on a qualitative basis, of what we have done.

The expectation for 2017, the guidance that we tend to give at the beginning of the year, ex-BPI, because at this stage is quite complex to include BPI, given that we do not control the bank at this stage, but ex-BPI, CaixaBank standalone, NII, we expect it to grow low single-digit. Obviously, we expect the funding costs to continue to trend lower, continue to maintain the discipline on the loan side. Volumes expected, as this year, to be stable; hopefully, with some growth, but particularly with growth on the consumer lending business. And as the €IBOR troughs during 2017, that will also be a positive. On the fee side, we also expect low single-digit.

And I gave you the main driver is the insurance business and the managed funds business. Expenses, we have had two years of over 1.5% reduction; unfortunately, for 2017, we're not able to keep that trend. One of the key reasons is wage inflation. We have had two years in a collective agreement where wages were frozen at zero. The new agreement sets for increases that will be around 1.5% on average, depending on some indicators, so it's maybe slightly different from that figure.

But now we have stronger headwinds. Still, we will try to maintain the discipline. Inflation is growing in Spain, so being minus 1% growth is certainly below inflation. We need to continue to invest in the business, to continue to invest in the business for growth, particularly in technology, also in some other areas and, hence, this is the target we're making, that containing the cost inertia to 1% or less. Cost of risk at minus 40 basis points, given the macro outlook, is something we feel.

Despite the cost of risk being always volatile, we feel confident that we can deliver, also given our level of provision; and the level of recognition of problematic loans that we have. As Javier, our CFO, was saying, almost half of our NPL book is actually performing. The targets for 2018, hence, a return on tangible equity 9% to 11%. Again, this is the result of the different environment. I remind you that we had our target for 12% to 14% by 2018; we're updating that to 9% to 11%, as we're expecting to meet our cost of capital next year.

Moving from the 5.6% now is an ambitious, but we think achievable, challenge for us. Cost-to-income at around 55%. Core revenues, grow 4% per annum this year and next year. And this is, again, driven by, on the liabilities side, insurance AuM; and on the assets side, particularly consumer lending. We discussed the operating expenses.

You saw that slide where we have almost delivered our commitment at the time of the strategic plan to be flat for 2014. But we're going to continue to look at any possible measure and way to, on a sustainable basis and on a reasonable basis, reduce costs. Solvency, we keep our target, 11% to 12% on core equity Tier 1. We're adjusting our total capital fully loaded, 14.5%, given the more clarity - higher degree of clarity we have now about the likely composition of capital and mainly level liabilities. And on the dividend front, we continue to maintain that 50%-plus payout ratio; and our intention to distribute excess capital, one way or the other, if core equity Tier 1 moves above 12% in 2018.

We're transitioning to full-cash dividend. Hopefully, the scrip we paid in the last quarter is the last scrip we will pay. From now on, for the rest of the dividends for 2016 and the future, those will be paid in cash. This is all. We're now, obviously, open for questions.

Thank you. Edward O'Loghlen: Thank you, Gonzalo and Javier. Operator, can we now move to the Q&A part? Let's have the first question with the name and company of the caller, please.

Operator: [Operator Instructions]. The first question comes from Alvaro Serrano.

Please ask your question.

Alvaro Serrano: First of all, I want to ask an update on BPI. Maybe, if you can give us a bit of color of the recent trends; what do you think of the results they published and also the next steps from here in regards to Angola? How are you going to dispose of it? What's the impact as we get nationalized? Just a bit of commentary around BPI, please. The second question is around activity levels. You've obviously gained market share, especially the late part of the year, in corporate loans, growing 8% a year is quite impressive.

But to what extent that momentum in gaining market share you can keep it up in 2017, just a general comment.

Gonzalo Gortazar: Maybe you can speak closer to the phone or -

Alvaro Serrano: Sorry. In terms of the market share momentum, you've obviously gained a lot of market share in the second half, growing corporate book at 8%. To what extent can you maintain that growth and that market share wins in 2017? Because I realize there were some lumpy deals there, so just a bit of color around that and then, a very quick clarification. Did you - did you say that you expect no more real estate provisions going forward? Is that correct? Thank you.

Gonzalo Gortazar: Alvaro, let me take this question and I'm sure there will be many others that Javier and I will take. On BPI, the offer closes next week. This is a live transaction. There's a prospectus with all the relevant information for the offer. At this stage, I would not like to add commentary on different possibilities going forward, for legal reasons.

What the prospectus says clearly, with respect to Angola, is that we have a recommendation, a non-binding recommendation, from the ECB to progressively reduce our stake in the bank, that is all, without any given term. And it's, again, a non-binding recommendation. At this stage, I would not like to elaborate much on that, for the reason related to the offer. Corporate loans is, obviously, a highlight, as you will see, for the year. I think we will maintain the gains in market share on the corporate and particularly on the business, side.

The level of outperformance this year has been significant and it may be difficult to repeat that kind of outperformance. And we will see. A year is long. We will continue to do our best to serve our clients and serve our clients well and give them the service that allows us to occupy more and more space in the corporate and business world, but it may be very difficult to reach that difference of growth that we have had in 2016. Let's hope I'm wrong and we do as well or even better.

But I think as a base case you should assume that we're going to do slightly better than the market, but not at that kind of gap. Finally, with respect to real estate, yes, these estates, what we're saying is that, following the provisions that we have made with that 60% level of coverage, we're now selling at 11% profit for a quarter. And we expect that to be maintained. At the same time, given that the rule is different and now we have internal models, we're not expecting that provisions for real estate will exceed the gains that we will be making on capital gain. So we have, from that point of view, going on, a net positive contribution, not just from sales but from sales less provisions.

Operator: Your next question comes from the line of Andrea Unzueta from Credit Suisse. Please ask your question

Andrea Unzueta: Two questions from me. The first one is on insurance. Given the positive trends that you are seeing, what are your expectations in terms of that contribution going forward? The second one is I wanted to better understand what sort of impact you were incorporating in your forecasts to come from MREL in your funding cost. Thank you.

Gonzalo Gortazar: Andrea, on the tax side, this is a one-off impact and we expect back to normality, if you wish, where we pay - or we register the corresponding tax rate, knowing that some of our revenues are tax-free coming from our equity investments and, therefore, those are not taxable. But the impact of the tax reform is a one-off. Javier, you should comment on impact on MREL, no?

Javier Pano: Yes. On MREL, you know that we're waiting for the final requirements coming from the SRV. It's something that at some point we'll know during the year.

Probably, those requirements will be based mainly on risk-weighted assets, based on risk-weighted assets, should be around 20% of our risk-weighted assets or slightly above 20%. That means that with a total capital ratio, even with - after the tender offer or the impacts of the tender offer of BPI, around 14% that would be a gap to be filled over the coming two, three years, because the phase-in period has not finally been decided, of around €10 billion. We'll decide, in due time which are the instruments that we'd use. We welcome the recent European Union draft of - proposal for the creation of a new asset class which is the senior non-preferred; something that, for sure, we'll consider while filling our MREL requirements. And those are the figures.

So it's something that you can do your own numbers, no? So if you have - we have to add around €10 billion of MREL visible securities, be it Tier 2 or senior non-preferred, there are market prices and you can do your own numbers on which may be the impact. But anyhow, as I say, it's something that has already been considered while making our projection for net interest income and for return on equity.

Gonzalo Gortazar: Andrea, I have to apologize because I didn't hear the question properly. I thought you were asking about the tax and I've been told that actually you were looking at the outlook of the insurance. Can you repeat your question? Sorry.

Andrea Unzueta: Yes. I was just asking what your expectations are on the contribution from insurance, given that it has been showing such positive trends.

Gonzalo Gortazar: Okay, Javier, you want to comment on that?

Javier Pano: Yes. Well, the outlook will continue to be positive. And to that, we have to remember that we have removed the negative drag on our insurance revenues of the value in-force with Berkshire Hathaway which was having an impact of slightly above €10 million per month.

So you have to add to those revenue lines, compare year on year, close to €100 million. So it's positive. Commercially, it's doing well. It's the focus of the Company, as our CEO was commenting. Our focus on the liability side is on advice.

On advice, that means a steady improvement on assets under management, mutual funds, pension funds and life savings products. So we think that the trend will continue to be positive. Precisely, we wanted to be more specific on that as we have guided for - on our target for 2018. You can see that we have included a new target precisely on core revenues, that is revenues coming from net interest income, fees and precisely our insurance business, for an annual growth rate around 4% per year, so clearly trying to give you more insight into our guidance on that front.

Gonzalo Gortazar: We feel that the opportunity to gain market share is still there.

So by no means we think that this is exhausted. I expect the trends that we have seen in the past, that are very positive, to continue in life risk, non-life, life savings, pensions, I think more across the board. We continue to have a real opportunity in the market and we expect to exploit it.

Operator: [Operator Instructions]. Your next question comes from the line of Carlos Cobo from SocGen.

Please ask your question

Carlos Cobo: A couple of comments from my side. First, on equity participation and Repsol, you've reduced recently, with a convertible, your holding of Repsol and the share price has recovered, so any update on your approach to Repsol and whether you could be considering any further divestments or changing the consolidation method? Secondly, you've already explained that you cannot discuss a lot about Angola. But could you explain whether you could extend any liquidity lines to BFA in case of that's necessary or not and whether you have already any sort of exposure to the Angolan Government, if that can be disclosed? And finally, sorry, a quick one. Could you add a little bit more color on the impact on capital this quarter? You've said it's related to the new rules from the Bank of Spain, but other than the impact on the P&L what is specifically the impact on capital? Could you explain it a little bit, please?

Gonzalo Gortazar: Thank you, Carlos. On Repsol, you have to expect no changes in consolidation method.

We have a high degree of confidence of what Repsol is doing and we think it has significant upside and, therefore, we're happy holders of the stock. On second question about BFA, with respect to the exposure to Angola, we don't have exposure to Angola. This is disclosed in the prospectus and, anyhow, you will see that. But the short answer, for you and everybody, is we do not have credit exposure to Angola. The investment in BFA for now, for us, will be financial investment and, therefore, we're not expecting to extend any liquidity line.

We will have just two Board members out of 15 and, hence, is a financial investment. Is a great bank in Angola, but it's not part of the CaixaBank Group. And it will not be part of the CaixaBank Group post-BPI or the BPI Group because we have lost control and we have a very small involvement, two Board members out of 15. With respect to the impact on capital, Javier, I'm sure you will explain it better than I.

Javier Pano: Yes, well, first, let me clarify that there is no P&L impact on that.

After we apply or we develop the internal models to become compliant with the new Bank of Spain regulations there is a shift or there is a release of loan loss provisions that are mainly applied, €676 million on one side and €656 million to the OREO portfolio, as I say. But there is an impact on our capital ratios and this is due to the fact that, that shift or that release of provisions arises a deficit of provisions on our IRB portfolio expected losses of around €300 million. As a result of this, that deficit of provision has to be deducted from our regulatory capital ratio, from the CET1 ratio. The good news on that front is that this is like frontloading part of the impact of IFRS 9. Because when IFRS 9 comes whichever is the final impact, those provisions will be reset again, but the impact on our CET1 ratio will have already been felt.

So that means that, that reduces the impact on the CET1 ratio of the introduction of IFRS 9. So this is the main impact and is an impact close to 25 basis points. I would say that on other fair value adjustments compensate each other, just a couple of basis points from Telefonica, as a couple of basis points from our fixed income portfolio and other positives that I would say that compensate each other. But the main impact is this one-off effect that, as I say, has the positive; that is, that means it's a frontloading of IFRS 9 impacts on CET1 ratios.

Operator: Your next question comes from the line of Mario Ropero from Fidentiis.

Please ask your question
Mario

Ropero Garcia: My first question is on NII. I may have missed this, but Javier said that there was a one-off in the fourth quarter. Please could you clarify? And then, the second question is on your guidance for next year. If we take NII ex this one-off, we already get plus 2.5% on NII. And as you have been showing in the presentation, now tailwinds are bigger than headwinds; you have huge amount of wholesale debt maturities, very expensive; retail funding costs going down.

On loan growth, I don't know what you are assuming, but I would imagine something at least flat with a positive mix component. I'm curious to see what the main negatives are in 2017. I know that you have a bit of €IBOR, but maybe you could give more color on the level of maturities that you expect from the ALCO and average yield of these ALCO maturities. Thank you.

Javier Pano: Mario, well, the one-off impact is the early termination of an asset-backed security.

It's an asset-backed security that was self-retained coming from the intervention of Banco de Valencia. And after that early termination that was allowed by the term sheet of the transaction we had an [indiscernible] profit of €10 million; that has been registered in the net interest income P&L line. So this is the main - the one-off I was mentioning. As, as you see, it's more or less a 1% quarter on quarter, as I was commenting. On guidance, on net interest income, let me comment on the different moving parts.

First, there is still some negative impact on €IBOR repricing, so this is a negative. And I was commenting that this fourth quarter of the year has been 3 bps on our back-book yield. This is something that is expected to fade. But for that, market expectations have to be fulfilled, so this is something that we need to consider. On loan growth, well, our CEO has already been commenting.

But it's clear that our prospects are positive, mainly on those segments more accretive to our loan book, mainly consumer loans, etc.; but also, on the side of the mortgage loan book, will still continue to be a drag. So I would say that it will take some time before we start our mortgage loan book stabilizing. That means that - I would say that, putting everything together, we should consider an overall flattish to slightly positive volumes on our loan book. We're considering also, as I mentioned, new funding, due to MREL requirements. This is - it's true, that I mentioned it, when you saw that our wholesale funding costs have come down.

But it's true that the new funding for non-pure funding purposes perhaps will go up. For example, the latest senior non-preferred, printed by Santander a few weeks ago, was at a yield, if I remember well, around 1.5%. So you see that is not so cheap. We have already considered that. And on top of that we have, as you mention wisely, some maturities, high-yielding maturities, on our ALCO portfolio.

This year, we have around €3 billion of maturities; and that is clear that will not be substituted by maturities at this level. And also I would say, the main moving parts, when you put everything together, you reach those figures in the mid single-digit area which is the best guess we can give you today.

Operator: Your next question comes from the line of Jose Abad from Goldman Sachs. Please ask your question

Jose Abad: Two questions from my side. First question is a follow-up question on cost of risk.

You are guiding for somewhere below 40 bps in 2017; at the same time, you are telling us that you plan to no longer actually provision your real estate portfolio. Therefore, why aren't you guiding for an even lower cost of risk? And maybe you could actually give us the breakdown of this 40 bps guidance and explain a bit why we shouldn't expect actually a negative cost? Or, to put it differently, why, in an environment of house prices going up by 4% to 6% and land prices going up by two-digit growth rates, you prefer to accrue these gains via capital gains, rather than through mark-to-market your estate portfolio and, therefore, having more provision releases going forward. The second question is on NII. Maybe, I would appreciate it if you could actually update us on your sensitivity to higher rates. Thank you very much.

Gonzalo Gortazar: Thank you, Jose. There's a number of questions, Javier, maybe you want to start.

Javier Pano: Okay, I start. I start with the last one which is a precise view around our sensitivity; I mean the sensitivity of the - of our net interest income to our - to increase on rates. So this is what you are asking, Jose.

Well, I will give you a couple of figures and then explain that, because I understand that there is a lot of focus on that. If rates were to go up by 100 basis points today, so that means that this is a theoretical scenario, because we don't think that this will happen, during the first year, our net interest income during the following year could go up between 6.5% and 3.5%. Why I give you a range, I will tell you just in a moment. But during the second year the impact, as we re-price all the portfolio, because you know that we have many mortgages that are linked to 12-month €IBOR and other loans to six months or three months, there is a re-pricing process and then that means that during the second year the impact, on top of the previous one, would be between 20% and 15% up for our re-pricing of the portfolio, 100 basis points higher. This range I give you is because here you have to modelize different assumptions on the behavior of our current accounts.

You know that we, in this extremely low rate environment, have seen a wide shift from time deposits to current accounts. So depending if that reverts or not then the impact can be higher or lower. So this is why I give you a range. We can presume that at least during the first part of this transition to higher rate our balances into current account could not move very much. So this is our best assumption.

On cost of risk, well, on cost of risk let me clarify that the provision regime that applied before for real estate that was a calendar regime, that will no longer apply. This is not included in the figure for cost of risk because the figure of 40 basis points is for loan loss provisions, not for provisions for real estate. So what we talk about, 40 basis points, we're talking just about provisions for our loan book. As our CEO was commenting, we don't expect that we will need to provide for our real portfolio. The improvement for that will be seen not on the provisions P&L line, but on other gains and losses.

We have provided, other than our provision we have made on top of our regular provisions, those €656 million, more than €400 million during the year. You can infer that from our disclosure, from - on different businesses. If you look at our non-core business, you will see that provisions on that line are on the around €1 billion. So this is what we've changed. So what we have to expect, it's a much lower negative impact on that front, on that line.

And on cost of risk, I would say that the guidance we're giving is below the cost of risk on our loan loss book, below the one that we have had this year. Within that is proven, is a year where IFRS 9 will be introduced. And also, we have to remember that also the portfolio mix of the new production, although conservative, is mainly on consumer loans, SMEs, corporates, not on mortgages that may have a slightly higher probability of default on this new production. I don't know if you want to add something?

Gonzalo Gortazar: No, that's fine.

Operator: Your next question comes from the line of Marta Sanchez Romero from Bank of America Merrill Lynch.

Please ask your question
Marta

Sanchez Romero: I have a follow-up question on real estate. I'm a bit confused with guidance, particularly after getting a more cautious feedback from one of your peers with similar coverage levels yesterday. You have €6.3 billion of net carrying value in your real estate portfolio. Losses this year were €1 billion; last year, on other gains and losses were €700 million. Are you saying that you don't expect any further losses in this real estate portfolio? And what's your time horizon for unwinding it? And I have a second question on your strategic plan targets.

Thank you very much; it's all very clear, but I have a follow up. On your 9% to 11% ROTE target which is quite wide, am I mistaken to assume it would be equivalent to €1.8 billion to €2.2 billion? What would explain that wide range between the lower end and the upper end? And are you including Repsol and Angola in your target? And sorry, again, on your cost-to-income target of 55%, would that include the contribution from your dividends and equity portfolio? Thank you. Edward O'Loghlen: Sure. Marta, no there's two ways to look at the real estate losses. What we're referring to is the provisioning charges to the real estate stock which are offset by profits made on the sales.

Now, that figure should be zero or higher going forward because of the provisioning we made and also because real-estate prices are supported. So that refers to that part of the P&L of the business. Of course, there's other parts of the business that don't have to do with capital gains or losses which are the carrying costs and the administrative costs of running that portfolio or the property taxes, etc. and that's a different issue. So one is, if you will, the capital gain/capital losses debate which we think is now over.

And the other is for how long will we be having administrative costs? And that is a function of the rundown of the real-estate portfolio which, if you look at what we've sold this year, you would project it's going to be a multi-year process of gradual reduction in the region of around €1.8 billion per annum on a portfolio which is now below €7 billion. So that will kind of give you an idea as to how those administrative costs should run down. I hope that's answered your question. Has it? Okay, well, we'll move on to the other ones on strategy then.

Gonzalo Gortazar: I'm sure, if they are further questions we'll be able to take if offline on that front.

I think when you look at the Group P&L and you look at the losses on real-estate that we have been booking in the past below the line and that were not excluding cost of risk, but obviously other provisions meant lower profits, that is what is now going to be offset, any provision. Because we do this not on a portfolio basis, but by as any provision if needed is likely to be offset and more than offset, by gains on the portfolio. With respect to the 9% to 11%, you are right, is a wide range. The numbers are, I think, broadly right, Javier will correct me, in terms of the bottom line of equivalents. The reality is we're giving ourselves some headroom for a period of almost two years in which things may be a bit better or a bit worse than expected; and second, also, for management actions.

You mentioned whether investments in our equity portfolio are included in the cost-to-income. Certainly, in the cost-to-income ratio, in that 55% it will be included. In the form that the investments will have as of that year, whether there are changes or not, it will depend on management decisions, market conditions, etc., etc. Those are things that we will decide. At this stage, given that we're talking about sensitive topics, we'd rather keep for ourselves.

But clearly, the result of what is difficult to project and what management actions we may take one way or the other, is what gives us some reason to maintain a range of 9% to 11% that we're certainly expecting that we will meet.

Operator: Your next question comes from the line of Andrea Filtri from Mediobanca. Please ask your question

Andrea Filtri: A couple of questions from me, one on capital and one on insurance. On capital, can you please elaborate on the 25 basis points erosion? How much of IFRS 9 impact do you think you have anticipated? And the 9% to 11% ROTE target, is it based upon 11% or 12% CET1 target? On insurance, can you please share with us your view on the future treatment of consolidation of insurance operations, specifically regarding the Danish compromise? What are you assuming in your plan? And what's the worst-case scenario, in your view, on this strategic asset? Thank you.

Gonzalo Gortazar: A few questions, let me - maybe, Javier, it's better you start because there are more questions--

Javier Pano: Okay.

Well, on the impact of 25 bps, as I said, is a deficit of around €300 million that now has to be deducted from our CET1 ratio. So this is the impact, €300 million, of our risk-weighted assets are around 25 basis points. This is the front-loading impact that we consider while talking about the incoming impacts of IFRS 9. If you ask about if all those projections are made with a capital of 12%, etc., well, I would say that you should consider that we're in the middle of the range or at the high end of the range. Because we think that over time we will accommodate capital to close to our - that upper band of 12%.

I don't know if you want to add on that front.

Gonzalo Gortazar: No. Just, obviously, we're expecting to be there. Capital may be higher or lower. It looks like we will be continuing to build capital.

That's where we were saying actually we may exceed 12% in 2018. And in that case, we intend to do something, returning that excess capital, assuming there is no change in circumstances. Therefore, the range is valid for any capital position that we will have in 2018. We're expecting to build capital, clearly, towards the upper end of that range. Danish compromise, we don't expect any change.

Javier Pano: We don't expect any changes here and we're not considering any change on our forecasts.

Operator: Your next question comes from the line of Daragh Quinn from KBW. Please ask your question

Daragh Quinn: I wanted to ask about the cost-to-income ratio target of 55% and just taking a step back and thinking about ideally where would you like the cost-to-income ratio to be? And do you think that, that ratio could improve as interest rates rise? Or is there room for more structural cost cutting? And could that be a way to deploy capital rather than dividends or extra dividends? Thank you.

Gonzalo Gortazar: Well, obviously, 55% is not an ideal number. We had initially said 45% as an indication of where we would like to be.

At this stage, I have to say that is aspirational. And it means that, certainly, we'll continue to look beyond 2018 for ways to improve our efficiency. One you said; a change in interest rate levels will certainly contribute and contribute positively, to revenues enhanced efficiency. We have been assuming a level of rates consistent with the market rates at the end of the year. So you know what market rates were at the end of 2016.

Things developed better than that and, obviously, that is what we all hope and expect. But we wanted to be, I think, neutral on that when setting our budget and our expectations. But this is going to be potentially, over time, a significant boost to revenues, a significant improve of efficiency ratio. The other important point here is efficiency is a ratio which everyone follows, cost-to-income, but it has some quite volatile income lines. And we come from two years of very significant weight of trading income which we're not projecting going forward.

And, hence, the number does not represent everything. I think the quality of the revenues, the composition of the revenues, is going to improve significantly in 2017 and 2018. We will not see that in the number because it would be largely offset by things that we have actually disposed of, like Bank of East Asia, Inbursa; things that we have not disposed but now consolidated and they're now included, like BPI, because Telefonica has reduced its dividend, because we will have certainly less trading gains. Although, if we manage to have extraordinary we will obviously be quite happy about it, but we're not expecting that as a base case. So that 55% includes a significant change in terms of the quality of revenues that we're expecting a couple of years from now.

From then on, because, actually, we would expect that as quality will be very high at that point further improvements will actually be flowing to the cost-to-income ratio and reducing that. And it will be higher interest rates. But also, just even, if rates stay like they are, we're expecting to continue to gain market share, continue to do well in terms of volumes and prioritized business segments where margins are higher, like consumer funding, consumer finance and some of the longer term savings, etcetera. So that is the context, if I may, of the cost-to-income that we expect. I don't know, Javier--

Javier Pano: No, I think that's it, no?

Operator: Your next question comes from the line of Javier Echanove from Santander.

Please ask your question

Javier Echanove: In the last meeting that we had just before Christmas, the Christmas lunch with analysts, I got the feeling that you had become a little more cautious on the outlook for the disposal of real estate assets during 2017. I was wondering whether that is still the case, whether you have still a cautious view about the pace of disposal or that has improved given increased coverage. Thank you.

Javier Pano: That's for me. I don't remember being more cautious, but I think that I was realistic, no, saying that we should not expect, I would say, a stellar improvement of the base of sales.

In fact, you see that this year we have disposed a slightly higher figure and that base of sales is expected to gradually improve. But what is clear is that will not go up by 50% in one year. That's clear. And also, after finally knowing the final impacts of provisions on our real portfolio, this is clearly something that would support the process. So if you felt me cautious last Christmas, I would say that today I am less cautious; that's for sure.

And we have been witnessing that this fourth quarter that we have made a profit of around 11% on our disposal. So, looking to those numbers, we can only be slightly more optimistic than what we were just a couple of, three month ago. So, moderately optimistic, but not over bullish, I would say.

Gonzalo Gortazar: I would like have a CFO that is always cautious. Edward O'Loghlen: Okay.

We're actually almost running out of time. Let's have a couple more, please.

Operator: Your next question comes from the line of Britta Schmidt from Autonomous Research. Please ask your question

Britta Schmidt: I've got two questions, if I may; one is just going back to the real estate guidance of other gains and losses. You say that it's going to be a net zero, where some sales gains are going to offset other charges.

These other charges, are these do you expect also some sales at losses; or are these perhaps due to perhaps a change in appraisal value that you might expect for next year; or are there still charges for closures that might be coming in next year? And the second one would be on fees. Can you give us a bit of a breakdown of the fee guidance into the banking fee growth or decline and the contribution of other items, such as insurance? And maybe comment also a little bit on your views around some of the legal issues that have been running in the press. Mortgage arrangement fees are under pressure, default fees, what's your outlook there? Do you think that this is a big risk for the industry or you fairly relaxed on this?

Gonzalo Gortazar: Well, if I may start, Britta, thank you very much. May I start with the last part of the question. Obviously, this is a source of concern, others significant noise in the press about, let's say, selling practices.

The floors are the most visible and that's had an impact both last year and this year. There's a number of other initiatives. We do not think that any of them has the same scope or the same volume or potential than what we have seen with the floors. To be honest, we remain vigilant. We're obviously dealing proactively with clients when they have complaints, trying to be commercial.

And maybe we think we're right, but we need to always think of what's best for the business. But this is something, I would say, to watch. I think it's a very fair question. And we will continue to be watching. It, obviously, will have an impact.

At this stage, we do not feel that this is going to have an impact that is material and certainly nothing likely to be of the size what we have seen with the floors. However, as I said, it is something to watch. Maybe, Javier, you will answer--

Javier Pano: Yes. Britta, to give you more color on fees going forward, well, I would say that overall growth on fee revenue will be based on market share gains and growth of the industry itself. We think that there a secular trend towards assets under management, insurance products, etc.

This is the main part of our businesses that will support fee growth. On, I would say, banking fees, you know that there is some pressure on some key revenue lines, like current account fees, fees for checks, for overdraft, etc., so this is - has some pressure. But we think that we will be able to overcome those pressures with improvement on credit card fees that are doing well recently and also on other lines, mainly, as we mentioned, initiatives, for example, our wholesale banking, CIB, etc., that are also starting to produce recurring fees that will more than compensate pressure on other banking fees. So guidance is for fees to be supported mainly due to our advisory businesses, assets under management and insurance. You had the first question, Britta, on real estate and I see that there are many questions on that.

Let me clarify. Because you have your - on our financial information you have disclosure of our results, our P&L account by divisions. If you look at our non-core division, you will see the different lines that is affecting it. First, net interest income has a negative impact, because there is recurring cost of the balance sheet, of our non-core balance sheet, that stands around €13 billion. Remember that, that includes also loans to real estate developers.

The size of that portfolio will gradually reduce, but not by that much, to prevent this to have a negative impact on net interest income. On other revenues and expenses there is a negative impact, mainly coming from the impact of local taxes. So this has a negative impact. Then, you have the positive impact of rent. You have, as you know, parts of the portfolio that is rented, so this is having a positive.

But there is an important figure on real estate expenses. So that means, as Eddie was commenting, the maintenance of our real estate portfolio. So, overall, on other revenues and expenses we should continue to expect a negative impact on our non-core P&L account. Then we have provisions, loan loss provisions. Because, as I say, we have exposure to - still exposure to real estate developers, so we still have to expect here a negative number.

But the number - the line that we've changed the most is, as we were saying, what we call other gains and losses, where here we have the profit we have - we're making on the disposal process. That differs. In the case during 2016 we have made a profit, on average, of around 5%; the last quarter, 11%. And we have also had the impact of formal regular calendar provisions and the one-off impact of €656 million. What we're saying is that overall in that line profits on disposals should more than compensate any impacts on further provisions.

So this is the key line that should clearly improve during next year, during 2017. I hope with that to - having been able to clarify that. Edward O'Loghlen: Okay, we're running out of time. We'll just take one more. I realize there's some people on the queue, but we're - we don't want to be running too far over.

So let's have one more and we'll take the other questions offline.

Operator: Your next question comes from the line of Benjamin Toms from RBC. Please ask your question

Benjamin Toms: A question on capital, you have a SREP of 8.75%, do you need a CET1 ratio target of between 11% and 12%? What are potential headwinds here? And related to that, do you expect to see any impact from this targeted review of internal models, TRIM which is due to start this year? Thank you.

Gonzalo Gortazar: Our decision has to be strongly capitalized, to have a significant headroom. We actually set this minimum 11% a couple of years ago; and, to be honest, today, we have had confirmation that our business model and our capitals required by the business is actually well below that level.

We still feel that it's better for us, for a financial institution, to be strongly capitalized at all times. I know that has a cost. But overall, in the long term, I think this is one of the positive differentiators of a successful financial institution. And hence, even though we have very ample room, we're not planning to reduce our capital levels. This is our decision, the decision of the Board and the management; it's not the decision of - that has been imposed on us.

But it is something that we're not expecting to change. And on the review you mentioned, well, this is one of the many ongoing reviews that we regularly have for the industry. It's going on. And we don't expect any specific impact coming from that. That is an ongoing process, but not a specific one, so we have many; many, many.

Edward O'Loghlen: Okay, well, thank you very much, Ben. We'll take the other questions offline and reconvene for the next quarter.

Gonzalo Gortazar: Thank you very much.