Bankinter SA

MAD:BKT

Earnings Call Transcript 2022-Q1

[David Lopez, executive]

Good morning, everyone, and welcome to Bankinter's First Quarter 2022 Results Presentation. Our CFO, Jacobo Diaz will guide you through the presentation and we will follow up with the usual Q&A session afterwards. Thank you.

[Jacobo Díaz, executive]

Hello. Good morning, everybody, and welcome to this presentation of Bankinter's earnings for the first quarter of 2022.

As usual, the related financial statements were posted on the website of the CNMV a few minutes ago before market opens. All related document can also be found at this time on the Bankinter corporate website. By the way, it's a new corporate website.

First, I want to highlight that we have started the complex 2022 with a better-than-expected commercial performance. This is reflected in balance sheet volumes growth and subsequent in strong income and pre-provisioning profit growth. From our view, a remarkable performance considering the special circumstances of the year with skyrocketing inflation and supply chain disruption created, among other things, by the Ukrainian Russia conflict.

Some of our achievements in this good quarter have been the group's net profit stand at EUR 154 million. This is a 4% increase from a year ago, more than offsetting the full EUR 32 million contribution of Línea Directa Aseguradora around last year first quarter.

Second, record figures, thanks to a strong income growth supported by strong customer activity that resulted in operating income of EUR 500 million, up by 7%. Efficiency under control allowing pre-provisioning profit to grow by 11%.

And last, we continue to show solid asset quality and solvency indicators, with almost flat NPLs from December '21, increased coverage of provisions and our CET1 fully loaded ratio at very comfortable levels, close to 12%.

Now a brief comparison of first quarter year-on-year key financial indicators. The group's total loan book grew by 8% to reach EUR 70 billion, thanks to a recovered corporate demand from 2021 loans and a continued mortgage new production. Also in this quarter, Consumer Finance maintained the reaction shown in the fourth quarter 2021.

Second, gross operating income at EUR 499 million, grew by 7% with respect to last March, showing the strong resilience in income coming from the business, net interest income and fees and particularly in this quarter, a positive financial transaction income. After keeping operating expenses under control, PPP posted an improved growth rate of 11%. NPL ratio shows some improvement in line with all our asset quality indicators and loan growth, despite the complex economic situation at 2020. It dropped by 17 basis points from a year ago.

Coverage ratio keeps growing. Now it stands at 65%, a 3 percentage point increase over the previous year. Profit before taxes activity -- sorry, profit before taxes before discontinued operation in 2021 went up by stunning 33% off of last year.

Finally, as I did mention before, group's net profit stand at EUR 154 million, 4% increase from a year ago and more important, being able to offset the full EUR 32 million contribution of Línea Directa on the last year first quarter.

CET1 fully loaded ratio came slightly down at 11.9% and stands very comfortably above our long-term guidance of 11.5%. This quarter reduction is due to the risk-weighted growth of the first quarter and the negative impact of market valuation of ALCO portfolio and the Línea Directa investment. Return on equity reflects this improved performance and shows 11.7%, clearly ahead of that of last year and the cost of capital for the sector.

Okay. Now we will follow the usual agenda for the quarterly presentations. So moving into our income statement. Here is the P&L of the group for the first quarter compared to 2021. And remember that in 2021, Línea Directa was still part of the group until April and that their contribution to the P&L was accounted under discontinued operations. For 2022 onwards, since Línea Directa is an independent company, we will only get dividends from our 17.4% participation.

Our income statement shows positive trend in all lines of revenue, net interest income, fee income and other operating income. Group's net interest income maintains a positive trend. Year-on-year growth reflects increasing lending growth and client margin resilience. It is up by 2.6% from 2021.

A somehow recovered market behavior and an increase in commercial activity supports our fee income. It grew strongly by 12.9% with respect to the previous year. Other operating income and expenses at EUR 33 million were higher than a year ago due to a better income from financial transactions in this quarter. Total gross operating income at EUR 499 million went up 7.4%. The quality of incomes remain very high and an increased contribution from Portugal with EUR 41 million or growing 11% and the EVO and Avant Money contribution, EUR 8.8 million and EUR 16.8 million, or a growth of 40% and 23%, respectively, from last year.

Group operating costs remain under control growth in Spain and elsewhere. In Portugal, they grew by EUR 1.2 million and costs from the EVO and Avant Money operations remain almost offset one to the other. They grew EUR 1 million in Avant and were reduced by almost EUR 2 million in EVO. Thus, the total group continued to improve its efficiency ratio. All in all, group's total costs grew by less than 3% in the quarter, mainly from personnel expenses that went up by 3.8% due to salaries regularization in 2022 but general expenses went up only 0.5% over the previous year, showing a very good control in overall expenses.

This positive income and cost performance allowed PPP to increase the rate of growth to 11% from a year ago when first quarter increased at 6.4%.

Loan loss and other provisions are down 24% from 2021. Cost of risk allowances of EUR 51 million are down 13%, below our guidance of cost of risk of the year and other provision of EUR 23 million in the quarter are 40% below of last year's same quarter but within our downward trend guidance.

After the reduction in provisions, profit before tax stands at EUR 214 million or 33% above that of 2021. The EUR 54 million increase in our PBT was more than enough to offset last year pretax profits come from Línea Directa of EUR 39 million in the quarter. This shows a clear performance toward our objective of achieving by 2023 pre pandemia net income level of EUR 550 million, compensating the insurance income from Línea Directa.

After taxes, the group posted, as we mentioned, net profit of EUR 154 million, 4% more than a year ago when the profit included the Línea Directa contribution. However, the necessary caution of future evolution of credit risk under this complex recovery scenario, coupled with immediate redemption of extensions of the ICO facility forces us to maintain our guidance of 40 basis points and provide you a more accurate guidance in June.

On a quarterly comparison between first quarter 2022 and last quarter of 2021, we can see a very positive operating income growth pattern of 15% up, while operating cost decreased by 9.3% in the same period. This results in a pre-provisioning profit increase of 43.5%. After much lower credit risk provision, profit before taxes of banking activity has been up by 128% respect to the last quarter of '21. And finally, the group's net profit came at EUR 154 million, 87% over EUR 82 million in fourth quarter 2021.

Moving on. The group's loan book grew by 7.8% from a year bringing EUR 5 billion in net loan growth. Now we are reaching EUR 69.7 billion. Growth in the quarter of EUR 1.6 billion comes well balanced between our mortgage business, including EVO Banco in Spain, Portugal and Ireland, our consumer business and our corporate banking business. Although first quarters always show a drop in lending on this very stable from the high activity in the last quarter of every year, this year, mortgage lending to individuals continue to be strong. The consumer loan book is picking up in all geography and the recovered corporate loan demand have been able to post the first quarter loan book by EUR 0.8 billion in this last business. In Spain, lending growth maintained a pattern from last quarter when it started to pick up, it grew by 5.8% on year, well over the 0.3% of the sector as of February 22, bringing market share increases in both household and corporate loans. In

Portugal, lending is up by 8% from a year ago with an additional EUR 260 million, up 3% from last December, slightly ahead of our business plan for the year.

Retail deposits continued to perform strongly in all geographies, at 15.6% year-on-year or over EUR 10 billion, reaching EUR 76.2 billion. They were up by 15.4% in Spain from a year ago, while the market grew by 5.6%, bringing Bankinter market share on domestic deposits to 3.6%, with the last available data of February. In Portugal, deposits grew by 6% and it grew 25% year-on-year to reach EUR 6.2 billion.

Moving into NII. Net interest income continued to show good resilience. It grew by 2.6% over the same quarter a year ago. This is mainly due to increase in interest earnings by 5% in the quarter while keeping very low the cost of deposits. In Portugal, NII also grew by 8% with respect to the same quarter in 2021 and by 1.6% in respect to the previous quarter.

The contribution of Avant Money and EVO to our net interest income continued to grow. The additional contribution of EUR 23.5 million to the group's NII this quarter versus EUR 18.5 million the same quarter of last year. The [ cost ] resilience of our net interest income is mainly driven by loan book growth, together with keeping stable the customer margin.

Talking about customer margin. It improved by 3 basis points from last quarter, thanks to a 2 basis points increase in credit yields and 1 basis point reduction in the cost of deposits, marking the third quarter of 2021 as a turning point in customer margin compression. The small 2 basis points decrease year-on-year has to do with negative repricing impact from Euribor and LIBOR in our mortgage and FX book and the reduction in Consumer Finance weight with more personal loans than credit card outstanding.

Cost of deposits also helped the customer margin with an additional 2 bps reduction in the yield. For future quarters, we should start to see a positive repricing of yields on the mortgage back book and also some asset mix improvement with increased corporate and consumer lending at higher rates than the back book. It is clear to us the positive impact of the 12-month Euribor in the repricing of our back book of mortgages that already has started, and we will see the positive impact over the next quarters.

Group's ALCO portfolio size showed some increase in the quarter by EUR 0.8 billion to EUR 9.4 billion, over 77% of the portfolio remains under amortized cost with no impact in capital ratio and the rest in fair value. After a very volatile bond markets, unrealized gains now amount to approximately EUR 50 million, down from year-end. In this quarter, the fair value performance -- sorry, the first value portfolio has negatively impacted our CET1 ratio by around 13 basis points due to lower market valuation.

Spanish government bonds represent 50% of total, together with 25% of other sovereigns, mainly Italy and Portugal. The portfolio's characteristics remained similar in the quarter with an average maturity of 8.7 years, average duration of 4.5 years and average yield at 1.4. Over the next few years, maturities of the portfolio are well spread out with no relevant impact in any particular year.

Fee income performed in line with our guidance during the first quarter despite the usual lower seasonality. First quarterly fee income was $14 million below the previous quarter and it continued to show growth of 13% over the same quarter last year. Fee income main contributors continues to be assets under management, payments and collection and equities. The largest contributor to our fees -- the asset management fees represents 28% of total fees charged, and they are up by 22%.

A strong commercial activity helped to almost offset increased market volatility, keeping our assets under management slightly below those at year-end but clearly up from 1 year ago. The second largest contributor to fees, payment and collections from corporates and individuals, performance has been strong. They have been growing by 30%, improving from last year growth rate. A continued positive trend in fees from client trading in our brokerage line makes them grow at 11% to EUR 27 million in the quarter.

Stable life insurance and pension fund sales brings fees up 14%, and we expect this line to improve in light of our new bancassurance agreement with Liberty's insurance recently signed. In other operating and income expenses, the main components are EUR 37 million of trading income and dividends. And this year, the increase by EUR 7 million is mainly due to the new Línea Directa dividend and other minor financial transactions results. The 19% increase in regulatory charges weighted on the other expenses, totaling EUR 15.5 million or EUR 2.5 million more than a year ago.

Talking about the overall gross operating income in the quarter stood almost at EUR 500 million, an increase of 7% -- 7.4% from a year ago. And quarterly comparison also grew by close to 16%.

Portugal, gross operating income grew by 11% and the quarter by 9%. The chart on the right shows the breakdown of the contribution to income where net interest income represents 64% and fees, 29%.

Moving into costs. The group operating cost in the quarter totaled EUR 208 million, up 2.8% from the previous year, but down by EUR 21 million or 9% from last quarter. Operating costs from EVO were down 13% and Avant Money up by 13%, or growing only by EUR 1 million from a year ago.

In Portugal, costs are up 6% over last year, while revenues grew by 11%, also improving their efficiency. Personnel expenses are up 3.8% to the lower first quarter of 2021 that I want to remember, there was no salary increase for the overall headcount of the group. General and administrative expenses plus amortizations are under control, only growing by 1.5% over the year.

Our efficiency continues to improve in the quarter and in the year. The group's cost-to-income year-on-year as of March '22 dropped 300 basis points from March '21 to EUR 45.4 million. We are strict in our plan to maintain the long-term group cost-to-income below 45%, always trying to improve efficiency in all our businesses and geographies. We continue to do so in Portugal now with efficiency at 53% and going downwards. And in Avant Money at 56% and going downwards. EVO is still a negative efficiency, although improving very much and very quick. At the same time, our Spanish business stand-alone keeps improving efficiency to 41.8% in the last 12 months. With all this, the PPP showed a quarterly record of EUR 292 million, 11% up from a year ago and 43% ahead of the one that we saw in the previous quarter.

Next, let's move into the cost of risk. The cost of risk in the quarter, it finished at 30 basis points, with a decrease of 14 basis points from the highs of December '21 and by 5 basis points from the first quarter of last year. It remained almost flat year-on-year due to the NPL stabilization. The small increase in NPLs in 12 months came only from our corporate loan book, EUR 29 billion basically, and the rest came slightly down, including consumer lending, mortgages and large and mid corporates.

The small growth in SMEs is still not significant, and it is well covered by the government support program. We hope this good behavior continued during the first quarter to be extended to the rest of the year. However, I'm trying to anticipate some credit deterioration coming from the delayed recovery. We have been performing a Stage 2 migration in the last 2 quarters in the small, medium sized enterprises with a small impact in provisions, thanks to the provided government facilities in most of the cases.

Considering the uncertain geopolitical environment, we prefer to keep unchanged our 40 basis points cost of risk guidance for the time being, hoping that in the following quarter, we can provide more visibility on potential impacts from the ICO maturities of the extension and payment holidays and the macro environment. As of today, we have no evidence of any negative impact. However, we prefer to be prudent in this specific topic.

On provisions for litigations and other, the ones from FX mortgages portfolio continued to fall. We think that for the full 2020 -- sorry, full 2022, there will be -- they will keep similar downward trend to be maintained at somewhere between 10 and 15 basis points of total risk.

Moving ahead, our quarter group profit before taxes reached EUR 214 million, a new record and growing 33% over a year ago, being able to offset the full Línea Directa contribution in profits. Group net income stands at EUR 154 million, as we did mention before. Excluding last year contribution of Línea Directa in brown in the graph, the growth will be 33% full recovery of the Línea Directa quarterly contribution.

As our CEO made public recently in our Annual General Meeting, we expect the group in 2023 full year net profits to match those at 2019, a record year and with the full contribution of Línea Directa. Therefore, at the end of the quarter, the group's return on equity stands at 11.7%, outperforming that on March '21 and 2020, both includes contribution of Línea Directa. Also, the trend is towards the achievement of matching 2019 return on equity very soon. Group's return on tangible equity stands at 12.4%.

Let's move into our management of credit risk, equity and solvency. Nonperforming loans, as you can see in the chart, continued their flattish trend. Total NPLs went up by only EUR 16 million from March '21. This includes the EUR 19 million approx annual last quarter NPL sale in consumer finance, the normal sale that we performed in the last quarter of every year. With this, year-on-year NPLs remain almost flat at EUR 1.71 billion. Total group's NPLs in the quarter grew by EUR 15 million, in line with last year's quarterly rate of growth. And this growth, EUR 20 million came from our consumer finance business in Spain, EUR 14 million from the small business and EUR 9 million from the mid-corporate. These were mainly offset by a reduction in the rest of the business segments, large corporates, mortgage and affluent banking in the period.

Portugal NPLs came down EUR 3 million in the quarter. Avant Money brings only EUR 0.7 million, and EVO only -- down 0.3% -- EUR 3 million in the quarter. NPL ratio in the group reduced again to EUR 220 million, the lowest point since 2008 and 17 basis points from a year ago -- lower than a year ago. And this is, again, mainly due to stable NPLs, while increasing the loan book and the EUR 90 million approx of sale of NPLs in consumer finance of fourth quarter of last year.

In Spain, as you could see, NPLs stands at 2.34%, 10 basis points below a year ago and 2% from December. The ratio continues to be weighed down the sector average, which is at 4.32% from the last data available. In Portugal, NPL declined to 1.6% and only EUR 128 million of total NPLs.

As shown in the chart on the right, the NPL ratio in Spain went down to 2% for household, lower level than a year ago and remain at 2.8% from corporates from March '21 with a small 1 basis point decrease from the total NPLs in Spain at 2.4%.

Total provision for nonperforming assets, keep increasing for 2021 to EUR 1.192 billion, a 3.2% increase from last year. And this had a relevant impact on our provisions coverage, which now stands at a new record of 65%. Coverage for foreclosed assets were also improved to 54%.

Moving to the foreclosed asset portfolio. This is 25% smaller than a year ago. It decreased by EUR 53 million from the previous year. This small portfolio now amounts to EUR 166 million coming from EUR 171 million a year ago.

Let's move into CET1 ratio. Our fully loaded CET1 ratio finished the quarter slightly down from the previous one at 11.9%. This is a small decrease from last quarter and 38 basis points from a year ago when the ECB dividend ban was enforced. Since December '21, our return on earnings bring an increase of 19 basis points, taking to consideration the accrual of dividends at 50% of payout.

Capital consumption of risk-weighted assets has been 12 basis points to the strong growth in the loan book in this quarter. But the most relevant is the valuation adjustments that brings a negative 26 basis points due to market volatility in our ALCO portfolio and the impact in the insurance portfolio of 11 basis points from our remaining Línea Directa participation. Also, other small items bring a negative 4 basis points in the quarter. This makes our CET1 ratio stand at 11.9%, well ahead our minimum 7.726% minimum requirement set for the group, one of the lowest in Europe.

Capital ratio stands at 15.2%, very comfortable level. And leverage ratio at 4.9%. Finally, 21.4% ratio for MREL remained well ahead of the requirement of 18.7%.

Moving on. Recurring increase in our customer deposits keeps our funding gap in negative territory since the end of 2020. Thus from minus EUR 2.4 billion a year ago, we are now in minus EUR 7.8 million ago. As a result, loan-to-deposit ratio reached record levels of 90% from the 96% a year ago. As of the TLTROs, they still remain at EUR 14.2 billion. And just as a reminder, we account the interest earned at a 3-year average of 85 basis points, thus avoiding any step-down in this year.

Now let's review the performance of our main business lines. The corporate loan book in Spain and Portugal grew by 5.4% year-on-year. This is EUR 1.5 billion in the period. It increased 5% -- 5.2%, while the sector contracts by 0.4%. All this growth is starting during the second half of '21, mainly in the last quarter pickup and has been followed by a particularly good start of this year.

In Spain, somehow different seasonality from every year. Loan book increased by EUR 0.2 billion. This growth has made us to increase our market share to 5.5% from 5.4%. In Portugal, we have been growing our market share in corporate lending every year since 2016. Now it stands at 2.1%. In the back book -- in the front book, the market share is 4.8%.

Total ICO loans with a state guarantee of March were at EUR 6.4 billion. All These loans have been granted mainly in medium and small corporates. Only 3% of the extended maturity or grace period have come to an end in the last days of March. So from a total ICO portfolio, only 1.7% became NPLs and 6.9% became Stage 2.

One of the most relevant sources of income for the corporate segment is international banking, with trade and supply chain finance loan book continue to grow by 19% to EUR 6.8 billion. This activity, together with international payments and collection growing by 50% has become one of the most relevant sources of income in this business.

Moving into the Wealth Management. Customer assets increased again from last year due to the strong commercial activity. Adding both businesses, private and personal banking, assets under management increased by circa EUR 11 billion in patrimony under management in the year, split between EUR 5.5 billion in private banking and EUR 5.7 billion in personal banking. Total assets from customers in both segments reached EUR 83.6 billion. This is 15% more. The strong commercial activity measured by net new money in the quarter shows a total EUR 2.6 billion increase, split it in EUR 1.7 billion in Private Banking and EUR 0.9 billion in personal banking. Market effect has been negative year-to-date, and this impact has been EUR 1.7 million.

Moving ahead, activity in retail banking during the quarter has been very strong. Salary account balances continued to grow. They are up 18% from a year ago, totaling EUR 15.9 billion. Since December, they grew by EUR 1 million. Mortgage origination in the quarter of EUR 1.6 million outperformed that of last year and represents 25% more than the first quarter of '21 and almost doubling the 2020 production. Bankinter still grows its market share in the mortgage front book. And with a better quality of loans, 80% of mortgages were fixed at a higher rate. And the average loan-to-value continues to be in the lows 60s.

In Spain, our market share in new mortgages is 8.4% as of January. As a result, the total mortgage back book keep growing and reach almost EUR 32 billion, an increase of 5.7%, while the rest of the market now grows at 1.4%.

Despite the difficult year, moving on, the next slide, assets under management grew by 15% or EUR 5 million ((sic)) [ billion ] from a year ago to reach EUR 39.2 billion. In the case of own managed mutual funds, net new money in the first quarter has grown by 1.1%, being able to offset the negative market effect and bring total mutual funds managed to EUR 11.1 billion, a new record.

Moving into Portugal. The loan book, as we did mention before, grew by 8% to EUR 7.2 billion and retail funds at EUR 6.2 billion, up 25% from a year ago. Growth in the loan book was involved corporates, up 80% as well as in retail lending as well 8%. Our balance sheet reached EUR 4.2 billion, showing an 11% increase.

Operating income from the business grew 11%. And cost shows a 6% increase in line with our plans. And that means that there is an improving efficiency and increase of the pre-provisioning profit with a very strong data of 16% up.

Finally, after EUR 4 million of normalized loan losses provisions with a very small impact of EUR 1 million of extraordinary recoveries, Portugal profit before taxes post EUR 16 million, which is 13% more. So we can say that in Portugal after more than 5 years since the acquisition, Portugal shows now an efficiency of 53% and has become the third region in quarterly operating income contribution to the group.

Moving into the consumer finance business. [indiscernible], at the end of the quarter totaled a total loan book of EUR 3.8 billion, 31% up from a year ago with a new production of EUR 0.6 billion in the quarter and clearly recovering from last year stable situation. Geographically, the total loan book includes EUR 1.1 billion from Ireland Avant Money, growing by EUR 167 million in the quarter and EUR 311 million from Bankinter Portugal growing by 21% in the quarter. And the rest is EUR 2.3 billion in Spain, where the loan book grew by EUR 93 million in the quarter.

You can see the breakdown on your right, by type of financing. Personal loans represent 53%, growing 21%. Transactor credit cards outstanding represent 18% of total with the growth of 17%. I remember that transactor credit cards are the ones that pay at the end of the month. And revolving credit cards only 14% and went down by 11%.

New mortgages production in Ireland with EUR 141 million since December now represents almost 50% of total loan book in that country and a market share of close to 5%. NPL ratio as of March '22 stands at 5.2% from 7% in the first quarter of '21. Provision coverage at 93.5% and cost of risk at 1.8%, very much below March '21. And finally, the risk-adjusted return close to 7%.

Moving to Avant Money in Ireland. This is remarkable figures when mortgage lending started, this has become 50% of its current loan book and activity. In '21, full production was over 400. And during this quarter, it came at EUR 147 million. So this new activity, together with the recovery of the consumer finance activity, where personal loans and cards outstandings have grown by EUR 125 million in the year, has made the loan book to increase by almost 2.2x. And at the same time to improve their very good asset quality.

In EVO. In EVO, the new mortgages granted from December were EUR 182 million, which is 2% more than a year ago. Subsequently, net interest income or net interest margin from customer jumps by 22%. So consumer and personal loans came slightly up to EUR 68 million from EUR 54 million a year ago.

As of liabilities, EVO has EUR 3.8 billion in retail deposits, up 7%. And we do have EUR 276 million in off-balance sheet funds.

NPLs in EVO stands at EUR 0.882 million, only EUR 17 million in NPLs with a coverage of EUR 64 million and cost of risk stands at 13 basis points.

So let me just go and do a brief recap of what we consider our main achievements in this quarter. I think we have a strong set of management ratio with a return on equity, 11.7%, efficiency, 41.6% and NPLs at 2.2%.

I think we had a very strong commercial activity despite the difficult economic scenario with increase in loans and deposits growth over previous quarter. I think we have a maintained and comfortable solvency level and we keep a very strong buffer from regulatory requirements. And I think that we had a great financial performance, more than compensating Línea Directa income and increasing the proximity to our EUR 550 million target in 2023.

So after closing, a very good first quarter in terms of commercial activity, income performance and asset quality. And in a view, a more complex scenario going forward. With good prospects of market share gains in all business, we now want to provide our best guidance for the full year. We expect for this year growth, again, in all geographies. So we expect growth in Portugal, both in commercial and corporate banking. We expect growth in Ireland, again in mortgage and in consumer finance. We expect growth in EVO, mainly in mortgage production. And we expect also for 2022 that corporate loan demand and consumer finance will recover from '21 lower activity in Spain. Mortgage lending and other non-mortgage retail lending should continue to grow organically.

With all these, net interest income for the group should move positively. We expect upside risk in net interest income and maintaining our low single-digit guidance. The increase in activity and more stable market should provide fee income to support to our mid-single-digit guidance with some downside risk related to market behavior. So basically, we maintain our guidance, but there is some downside risk.

All in all, we expect the group's operating income to grow by mid-single digit, similar to 2021. Group costs, we expect to keep under control. And PPP should remain resilient and with a good growth. And in terms of cost of risk, as I did mention before, we understand the uncertainties in the current scenario, and we prefer to maintain for the time being, our 40 basis points cost of risk until June, and then we would see.

And this is it. This is the summary that I will not go through it because I prefer to take your questions. So thank you very much.

[David Lopez, executive]

Thank you, Jacobo, very clear, and thanks for that quick rephrasing of the guidance, pretty useful. Let's just start, for example, with the very generic questions on the current uncertain context. We have a question about how comfortable do we feel about accelerating loan growth given the recent uncertainty in the market.

[Jacobo Díaz, executive]

We had, I would say, a very strong first quarter. We think that we should see figures in 2022 similar to 2021 in terms of growth, that is mid-single-digit growth. And for the time being, we're not changing that expectations.

As I did mention, we do expect growth in geographies like in Portugal, which is behaving very well. We expect similar growth in Ireland, both in the consumer finance business and the mortgage business. And in EVO Banco, we perceive that the expected growth will be similar to what we have seen. And in Spain, we're still maintaining our initial expectations for the year of mid-single-digit growth. Mortgage still a very strong business, and we still see a growth in this business. And Corporate Banking, as we've seen in the first quarter, there is a recovery of the demand, which is basically linked to the economic activity in the country. And this is something that we do expect to continue in the following quarters.

As you can imagine, there is still a very huge uncertainty about geopolitical issues. But for the time being, we do not have any single indicators that tell us that there should be reduction in those levels of growth.

[David Lopez, executive]

As you would expect, plenty of questions on NII and rate sensitivity. Let's just start, for example, given the recent moves on the Euribor 12 months, what is your view on the NII growth?

[Jacobo Díaz, executive]

Thank you. The Euribor 12 months is almost close to 0. And this has a very positive effect on the repricing of our mortgage portfolio, indeed on our variable rate mortgage portfolio. It will also have an impact if this increase continues in our corporate banking portfolio. So definitely, there will be a positive effect.

However, I must say that this positive effect takes some time because the mortgage portfolio reprice very slowly. And the full effect might be something that we will see in the period of 18 months, probably 24 months probably. So this impact is very positive, but it will take time. I prefer to remind you that a 100 basis points parallel increase in the curve should bring our net interest income somewhere up between 10% and 20% in the following 12 months. That is, I think, the best specific figure or guidance that I can provide you. Definitely, it's a normalization of interest rates. It's something which is extremely positive, but it takes some time. And we don't know exactly how far this increase in Euribor 12 months will go.

[David Lopez, executive]

Thank you. Very clear. Given the growth in the quarter on the customer margin, would you say that this is related to loan yields or to the interest rate hikes?

[Jacobo Díaz, executive]

The interest rate hikes that we've seen in the recent weeks has not -- relevant impact in the first quarter because as you know, our variable rate mortgages reprices with the Euribor of the previous month. That is that the impact that we've seen probably in those mortgages that reprice in -- that did reprice in March is still very, very limited.

Therefore, there has been a better management of yields in this quarter compared to the fourth quarter where we've seen improvement in yields in working capital facilities, in personal loans, credit and of course, in mortgages. Because as we did mention, 80% of the new production is in fixed rate. So the front book has a better yield than the back book. But this is due to the increase in yield and the weight of fixed rate mortgages, not because the repricing of Euribor, which is very, very limited impact in March.

[David Lopez, executive]

Thank you. Regarding the ALCO portfolio. What do you expect from the ALCO portfolio this year? Do you expect it to be larger? And how would you explain the movements in the quarter? And also the last one, the -- what are the yields on the EUR 1 billion that is maturing in '23?

[Jacobo Díaz, executive]

So the size of the ALCO portfolio, the size is still probably a little bit under our expectations. However, the level of this portfolio shouldn't increase much.

We know that during the past year, as there were not market opportunities, the ALCO portfolio kept size quite stable. And now it has increased a little bit. But as I did mention in other occasions, this -- the size of this ALCO portfolio will not grow much. It's very, very stable. This is not our core business, and it's just for asset and liability management purposes. So we do not expect increase in the -- in this portfolio.

[David Lopez, executive]

The yields on the EUR 1 billion that matures next year?

[Jacobo Díaz, executive]

I will need to come back to you. The book now is at 1.4% yield. And we do not expect any major changes in this yield for the entire ALCO portfolio.

[David Lopez, executive]

Thank you. Regarding the trading gains in the quarter, we had a question whether there were any one-offs.

[Jacobo Díaz, executive]

Okay. So regarding the trading gains, the way we share this information to you is basically we are putting dividends together and other topics. So I just remind you that this year, we have received from Línea Directa Aseguradora a dividend that 1 year ago we did not have. So that means that we have around EUR 4 million of additional income that were not in the previous year.

In the previous year also, we have a strong trading income. And this year, we had again a strong trade income that compared very, very similar. So not really extraordinary. It's just basically more activity in the first part of the year, but there is no one-off.

The other topic that is included in this type of income is the revenues from the equity method participation that we do have basically from the insurance business of Bankinter Vida and other companies. And they had a very strong performance compared to the previous year. And that means that we have another EUR 3 million, EUR 4 million of additional income from this business participations, which is recorded as equity method in our P&L. So there is no extraordinary items apart from the dividend from Línea Directa, which is not comparing with the previous year to last year. And the other is just a better performance in the equity method and barely similar trading -- strictly trading income.

[David Lopez, executive]

Thank you. Regarding our fee income, we have some questions about your outlook for '22 about how sustainable is Q1 performance in the next few quarters? And also how do you see client activity?

[Jacobo Díaz, executive]

Okay. Fees are driven mostly by market volatility or market performance and with client activity. I prefer to start with the second one. The client activity still is very strong. And in comparison to last year, as you see, payments and collection is quite strong. Anything related to brokerage activity is strong. International banking, as we did mention is strong. Insurance is strong. So in terms of client activity, we are not, for the time being, seeing anything that make us change our view of a good incoming fees.

Regarding the other part, they are ones related to market environments and performance. Of course, we have strong revenues coming from the assets under management. In comparison to the previous -- to last year, we still are quite above the amounts that we had 1 year ago. And therefore, there is a very positive comparison in assets under management fees. And this is something that it will extend in the coming quarters. However, it -- as you can imagine, it will depend on the market trend. If the market is stable, I think we -- there is no way why we should change the mid-single-digit guidance for the year.

If we see an improvement, probably we will see an upside risk. If we see a deterioration of markets, probably, as I did mention, there will be a downside risk.

[David Lopez, executive]

Thank you. Moving now on to the operating expenses. Well, a few questions about your outlook there. And also what is the cost inflation that you expect for this year, '22 and next, '23? And also, what are your plans to mitigate it?

[Jacobo Díaz, executive]

Okay. So the outlook for the year is similar to what we've seen in the first quarter. As you know, we have a very clear statement or mandate that cost increase always below the level of increase of income. So we should stay and maintain this mantra of increase of costs are always or is always below the increase of income. So there is no major changes in the outlook for the cost this year.

Related to the question on cost inflation. I think in 2022, it's not going to be the year where we see the impact of inflation because most of our contracts are already closed for the year. And of course, they always could be or can happen a potential increase in some specific topics. But for the time being, we are not changing our plans related to cost inflation.

You mentioned tools of mitigation. You know that we tend to be quite flexible and -- in cost. So we have discretionary costs that we can manage if the situation changes. But for the time being, and looking at the extremely good performance of the commercial activity and the overall size of the bank and the business, there is no intention of changing our decide any plan to reduce costs.

[David Lopez, executive]

Thank you. Moving to the asset quality, cost of risk chapter. How much could the recent cuts on GDP expectations impact our cost of risk or sensitivity? How much can we be impacted by the cost?

[Jacobo Díaz, executive]

Sorry?

[David Lopez, executive]

Yes, the recent cuts on the GDP growth expectations by the several internationals, the Bank of Spain and so on. How much of that could be impacting our cost of risk?

[Jacobo Díaz, executive]

Yes. Sorry, David, I didn't get your questions first. Now for the time being, as I did mention, we do not have perceived any negative reaction to this reduction in the macro scenario. I think we are in a very comfortable situation in terms of solvency, in terms of NPLs.

We are comfortable with the level of Stage 2 volumes that we do have. And there is -- we are very well covered with the government facilities. So for the time being, the decrease in the macro scenario that we know that means that the recovery would be slower than expected, for the time being, there is no any single indication. And that's why we do not want to change anything in the cost of risk until June. We prefer to be prudent.

[David Lopez, executive]

Thank you. Regarding asset quality, how is the experience with the already maturing ICO loans?

[Jacobo Díaz, executive]

So as I did said, only 1% of the portfolio has redeemed in the last days of March. So it's very early to provide you some feedback. But what can I say is that the behavior is pretty similar to your overall book of ICO portfolio. So nothing really changes compared to what we already saw in the overall behavior of the ICO portfolio.

[David Lopez, executive]

Thank you. And again on asset quality, how much of the corporate book represent the SME segment? And also what is the weight of energy-intensive industries in the -- in our loan book?

[Jacobo Díaz, executive]

The SMEs accounts more or less 1/3. I think more or less, there is very stable 40 -- 25% -- yes, instead of 130, it's 25% is the SMEs represent of the overall corporate portfolio. It's very well diversified. And I would say it's not relevant the level of contribution of the sector that you've mentioned.

[David Lopez, executive]

Thank you. Regarding other provisions, can you explain how much is the split between the cost of FX mortgages versus the rest for the provisions?

[Jacobo Díaz, executive]

So this depends on demands, but as the overall amount is largely more in the FX business than the revolving business. But in comparison, the decline is more or less half. That means that the bulk of the reduction, the reduction comes from both the FX business and the revolving card business. But the overall amounts are basically the FX business. The contribution of the revolving business now to the other provisions is really very low.

[David Lopez, executive]

Okay. Regarding the Stage 2, what kind of movements can you expect there for this year?

[Jacobo Díaz, executive]

So you have seen we have increased the Stage 2 levels year after -- 1 year ago in EUR 292 million. And in this quarter by EUR 182 million. I think I mean it's very, very stable. I mean, we have no really concerns about our book, and we do not expect major changes on the Stage 2 positioning as this is basically the main message. I mean this is -- the volumes that we are in Stage 2 are lower than probably expected and we feel very comfortable with these levels. I don't think that will change much in the future.

[David Lopez, executive]

Thank you. Moving into the capital. Given the volatility in the quarter in the capital ratio, what are your thoughts regarding the Línea Directa stake?

[Jacobo Díaz, executive]

Línea Directa is a long-term investment. So this is -- I mean, there is no change in the way we think about this 17.4% stake. So this is a permanent investment, and that's it. And regarding the volatility, I mean, there's nothing I can say. We recorded the volatility in capital, and that's something that will not change in the coming quarters.

[David Lopez, executive]

Okay. And regarding the 26 basis point negative adjustment on the capital ratio coming from the valuation. Can you give us the breakdown of those 26 basis points?

[Jacobo Díaz, executive]

Yes. Basically, more or less 11 basis points come from Línea Directa and 15 come from the ALCO portfolio.

[David Lopez, executive]

And the final one on the capital. What are your expectations for risk-weighted assets and CET1 this year?

[Jacobo Díaz, executive]

Excluding these movements of volatility in the market expectations or market impact in the ALCO portfolio of -- and the Línea Directa, I think there is a -- as we've seen in this first quarter, there is a positive capital organic generation. So this is something that we do expect in the coming quarters excluding those bookings. So the level of activity in the loan book, in risk-weighted assets should be similar to the retained earnings. We will not change our 50% dividend policy across the years. And therefore, we are very comfortable.

So levels should be very similar to what we've seen in this quarter. Of course, excluding potential impacts on market conditions that could impact those books in the ALCO portfolio and Línea Directa.

[David Lopez, executive]

Thank you, Jacobo. And the last one, sorry.

[Jacobo Díaz, executive]

Yes, I just wanted to add that we do not expect any regulatory impact across the year in the coming quarters related to the CET1 capital. I think that was important to highlight.

[David Lopez, executive]

Thank you. And the last one on the -- whether you can confirm the -- that we maintain the guidance of net income for '23.

[Jacobo Díaz, executive]

For '23, we maintain our target of EUR 550 million of net income. Of course, we do and we know that efficiency ratio should still go down. We know that the geographies, Portugal or Ireland or EVO will keep improving their efficiency ratio, and this will have a great contribution apart from the level of growth of their businesses, which is something that will drive the overall success of the 2023.

[David Lopez, executive]

Great. Thank you. That was all from us today. Obviously, the Investor Relations team remain at your disposal for any further information you may request. Thank you, everyone, and goodbye.

[Jacobo Díaz, executive]

Thank you very much all, and hope to see you soon. Bye-bye.