Bankinter SA

MAD:BKT

Earnings Call Transcript 2023-Q1

[David Lopez, executive]

Good morning, everyone, and welcome to Bankinter First Quarter 2023 Earnings Presentation. As usual, our CFO, Jacobo Diaz, will start reviewing our figures in detail, and we will follow up with a 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 2023. The related financial statements were posted on the website of the CNMV a few minutes ago before market opens, as usual. All related documents can also be found at this time on the Bankinter corporate website.

First, I want to highlight that we have started another complex year, 2023. From our view, a remarkable performance considering the special circumstances of the year, with interest rates and inflation on a clear upward trend, together with liquidity reduction by central banks and among all banking crisis in U.S. and Switzerland that has impacted equity markets and bank shares.

Now, a brief comparison of first quarter year-on-year key financial indicators. Group total loan book grew by 5% to reach EUR 73 billion, thanks to a recovered corporate and consumer finance demand, despite a flattish mortgage production, as predicted.

Also in this quarter, all the subsidiaries and geographies maintain the positive trends shown in 2022. Group customer deposits stands at EUR 74 billion, were less than EUR 1 billion lower than in December '22 and EUR 1.9 billion lower than in March '22.

Group of balance sheet managed funds reached EUR 40 billion and are up by 2% from a year ago and by 7% from December '22. Gross operating income at EUR 616 million grew by 23% with respect to last March, showing the continued positive repricing of our loan book and widening of our customer margin from the business.

After a seasonal cost reduction from December, operating expenses remain under control. Those are pre-provisioning profit post an improved growth rate of 37% -- sorry, 36% from 11% a year ago, and that is including the banking tax.

Profit before taxes went up by a strong 37% over last year or 72%, excluding the banking tax, and net profit stands at EUR 185 million, a 20% increase from 1 year ago, and more important, enabled to offset the full EUR 77 million extraordinary tax contribution of 2023.

NPL ratio shows a small growth in line with maintained asset quality indicators and selective loan growth at 2.18%. It dropped 2 basis points from 1 year ago. Coverage ratio keeps growing. Now it stands at 67%, 2 percentage points increase over the previous year. And CET1 fully loaded capital ratio came to 12.2%. This quarter improvement is due to the strong return earnings despite the negative impact of the new tax.

On liquidity, LCR and [ LDD ] ratios stands at the very comfortable levels, close to 200% and 97% respectively, after repaying EUR 5.1 billion in TLTROs, almost 50% of our take. And finally, our return on equity reflects this improved performance, with 13.7%, including the impact of the banking tax in the quarter, and reaching a level clearly ahead of the cost of capital for the sector.

So moving on to our income statement. Here's a Group P&L account for the first quarter of 2023 compared with first and fourth quarters of 2022. Our income statement shows positive trends in the main lines of revenue, net interest income and fee income. Other operating income and expenses include the EUR 77 million full contribution of the [ extraordinary ] and special tax contribution established by the Government for 2023 and 2024.

Group's net interest income maintains a very positive trend, despite the negative seasonality and a lower number of days of the quarter, thanks to the continued repricing of our loan book both in mortgages and corporates, and still a very low beta on deposits. It is important to remember that year-on-year growth also reflects increased lending, 5% growth and client margin expansion. It is up by 63% from March '22 and by 11% over the previous quarter in '22.

An increased commercial activity supports our fee income. It grew in line with the guidance by 4% with respect to the previous year and other operating income and expenses at minus EUR 59 million was strongly impacted by the recording of the full banking tax, as I said, EUR 77 million.

Total gross operating income reached EUR 616 and went up by 23% from 2022. Like-for-like, the growth is 39% year-on-year and 22% quarter-on-quarter, a remarkable performance. At the same time, the quality of our sources of income remains very high, thanks to diversification, with an increased contribution from Portugal of EUR 32 million or 79% growth rate; then the Avant Money contribution to increase of EUR 23 million, or growth of 35%; and lastly the increased contribution of EVO Banco EUR 15 million or 73% growth over last year.

Group operating costs remain under our plans, with growth in Spain by EUR 8 million, which is 4.9%. In Portugal by EUR 1.7 million or 8%, and in EVO and Avant Money costs were up by EUR 0.6 million -- in Ireland -- sorry, in Ireland -- and by EUR 1.6 million in EVO. With all this, and the strong income evolution, the group continued to improve its efficiency ratio.

All in all, group's total cost grew by less than 6% in the quarter, mainly in personal expenses that went up by 5.7% due to the salaries review that we already mentioned last quarter. General expenses went up only by 5.3% over the previous year, showing a good control in this hyperinflationary environment for all expenses.

This positive income and cost performance allowed pre-provisioning profit to increase by 36% from March '22 and by 31% from last quarter. It is to be highlighted that the rate of growth of PBT as of March '22 and including the banking tax was 36%, clearly higher than 11% posted in the first quarter of '22.

Loan loss and other provisions are up 31% from '22 and down by 15% from last quarter. Cost of risk allowance of EUR 75 million are up from 1 year ago, but writing our guidance of cost of risk in this year at 40 basis points. And other provisions of EUR 23 million in the quarter are flat from last year and 28% down from last quarter.

After provision, profit before taxes stands at EUR 294 million or 37% above that of 2022. Like-for-like, this shows a 74% over last year and more than 2x of the last quarter of '22, after taxes at 37% rate in the quarter due to the impact of the extraordinary bank tax. The group posted a net profit on EUR 185 million, an increase of 20% from a year ago and 42% from the fourth quarter of '22.

Moving into the balance sheet. The group's loan books stand at EUR 73 billion, up 5% from 1 year ago and EUR 1.1 billion down from December '22. This is particularly relevant in Spain, where loan book in the first quarter always bears negative seasonality and this year, together with increased early amortization of some mortgage and corporate loans, the growth mainly comes from our mortgage business in Portugal, Ireland and EVO Banco in Spain, and also from our consumer finance business in the 3 countries.

In Spain, loan book has been reduced by EUR 1.5 billion, or 2.3% from last quarter and grew by 5.8% year-on-year, well over the reduction of 0.8 from the sector as on February '23, bringing 1 quarter again market share increases in both household and corporate loans. Reductions of loan book in the quarter has been in household mortgages and in large corporates. At the same time, the overall credit rating of the portfolio continues to improve in all the segments.

On balance sheet, retail deposits remain resilient in the group despite the overall reduction in liquidity in the system. They are down 2.6% year-on-year, or EUR 2 billion, and down just 1% from December to EUR 74.3 billion. They are down by 1% in Spain year-to-date, while the market decreased by more than 3% with the last available data as of February 23 in a clear slowdown trend from the sector. In Portugal, deposits grew by 3% in the quarter, also grew by 5% year-on-year.

The EUR 900 million of deposit outflows year-to-date, it is more than 4x compensated by the inflows in investment funds, EUR 1.5 billion, and in fixed income products managed and deposit with us by EUR 3.1 billion, mainly in government debt. All-in-all, the new money that our customers have brought to the bank in the first quarter amount to EUR 3.6 billion. Since liquidity and retail deposit had become a trending topic, especially in this year, here we can see our retail deposit evolution over the last 10 years, almost multiply by 2% or a 6% cumulative growth.

We also include the distribution of our retail deposit by business segment in Spain, where 67% are with key individuals and 33% with corporates, and we have distinguished this specific segment to try to give some light of the stickiness of the deposit. We consider retail and SMEs deposit [ to -- first, ] to be very low rate sensitive, and wealth banking and large corporates to be more rate sensitive, and the 50% of them, that are not operational, only 21% of customer deposits. Also the distribution by product where 83% is [ spent ] at site accounts and only 17% between corporate treasury accounts and term deposits, although, this percentage changes quite fast in previous cycles.

Moving into net interest income. NII continue to perform strongly. It grew by 63% over 1 year ago and by 11% over the previous quarter. This is thanks to a strong increase in interest earnings due to the continued interest rate repricing of the loan book, while still keeping very low the cost of deposits. It is -- also has small negative contribution coming from loan book volume and the remaining TLTROs.

In Portugal, NII also grew strongly more than 2x with respect to the same quarter in '22 and by 25% in respect to the previous quarter, thanks to the repricing of the mortgage and corporate loan books. The contribution of Avant Money and EVO to our net interest income continued to improve EUR 22 million and EUR 14 million in the quarter, growing at 38% and 93% respectively. The customer margin improved 42 basis points from last quarter, thanks to 62 basis points increase in credit yields and only 20 basis points in the cost of deposits, marking the customer margin to reach record levels close to 3%.

The graph shows clearly that the year-on- year increase on customer margin of more than 114 basis point is driven by the repricing of our loan book, mostly from the mortgage and corporate book, while the cost of deposit has remained at low levels. For future quarters, we will continue seeing a positive repricing of yields on the mortgage back book and presumably lower impact from the corporate and consumer lending already at higher rates. On deposit beta will continue to increase in line with our guidance to reach an average 20% to 25% in 2023.

Moving into the ALCO portfolio. The Group's ALCO portfolio showed some EUR 0.9 billion reduction in the quarter to EUR 11 billion. Today over 85% of the portfolio remains under amortized costs with no impact in capital ratio and the rest in fair value. After a more benign bond markets, unrealized gains before taxes now amount to EUR 101 million in the fair value portfolio with a small few basis points impact on our CET1 capital ratio.

The portfolio's characteristics improved in the quarter with an average maturity of 8.2 years, average duration of 4.9 and average yield at 1.9%. ALCO portfolio remains at comfortable levels around 10% of the total group assets and 2.3x the equity of the group.

Spanish bonds represent 52% of total, together with 24% of other sovereign bonds, mainly Italy and Portugal. The remaining part is high rate in corporates debt with no shorter duration mostly included in the fair value portfolio. Over the next years, majority of the portfolio are well spread out with no relevant impact in any particular year.

Fees. Fee income perform in line with our guidance and show a growth of 4% over the same quarter last year. Fees from asset management despite the growth in AUMs went down in the quarter by EUR 8 million from last year due to the reduction of the average fees explained by the switch in asset mix to more conservative money market funds. Other fees more related to activity continued to grow strongly, reflected the solid 22% improvement in fees from payments and collection from corporates and individuals.

The new interest rate curve and a better market environment made the fees from clients trading in bond and equity markets to grow at 23% to EUR 33 million in the quarter. Other relevant fees are risk-related transactions, be it enough -- on performance bond, financial guarantees, et cetera, related to corporate activity, are up by 14%.

Moving to the other operating income and expenses. The main components are EUR 25 million of trading income and dividends, this year below due to a lower linear deductible dividend and EUR 10 million in the equity method. The increase in regulatory charges includes the new banking tax for 2023 of EUR 77 million, plus other deposit taxes. All these weighted on the other expenses to bring the total at minus EUR 59 million, or EUR 92 million more than a year ago.

Gross operating income for the quarter stood at EUR 616 million, an increase of 23% from a year ago. Quarterly comparison also grew by 9% of our last quarter, and this includes the banking tax. The chart on the right shows the breakdown of the contribution to income where net interest income represents 79% fees now at '22.

Moving into cost. Group operating costs in the quarter total EUR 220 million. They are up 5.7% from the previous year, but down by EUR 43 million, or 17% from last quarter. Personnel expenses are up 6% due to the announced 2023 salary increase, plus the increase in Social Security charges.

General and administrative expenses, plus amortization, despite inflation are under control, growing by 5%. Our efficiency continues to improve. The Group's cost to income year-on-year as of March '23 dropped 310 basis points from March '22 to 42.3%. Our Spanish stand-alone reached a new record in its improved efficiency to 33.8% in the quarter.

With all these, the provision in profit continued to post quarterly records at EUR 396 million, 36% up, and it's strongly improving the rate of PPP growth for us, the most relevant indicator of commercial activity and business evolution.

Now let's look at the cost of risk in the quarter. It finished at 39 basis point of total credit exposure, with a decrease of 3 basis points from December and an increase by 9% by -- sorry, by 9 basis points from the first quarter last year. We hope this contained behavior during the first quarter to be extended to the rest of the year.

Considering the uncertainties remaining in the economic and geopolitical environment, we prefer to keep unchanged our 40 basis points cost of risk guidance for the year for 1 more quarter. Probably after Q2, we can provide more visibility on potential impacts from other items. As of today, we have no evidence of any negative impact.

On provisions for litigations, they continue to fall from last quarter and showed the reduction of EUR 9 million from last quarter. We think that for a full 2023, they will keep a similar downward trend.

Quarterly group profit before taxes reaches EUR 294 million and like-for-like, that is without the banking tax a 74% increase, and group net income stand at EUR 185 million, 20% up and 42% up from the one that we share in the last quarter. Excluding the EUR 77 million tax contribution, the growth would be 70% from March '22 and 2x the net income of the previous quarter.

At the end of the quarter, the Group's return on equity stands almost at 14%, adjusted by the new tax contribution for the Guarantee Fund and Resolution Fund contribution of the year. The Group's ROTE is even higher at 14.5%. Finally, our book value per share stands at EUR 5.54 per share and has been increased close to 3% and should we include the EUR 0.09 of the dividends paid in that period.

We will now go into the management of credit risk liquidity and solvency. Non-performing loans, as anticipated, showed a very small increase related mostly to consumer finance and SMEs. Total NPLs went up by [ 4.4% ] from March '22 and by [ 2.8% ] or EUR 50 million, exactly EUR 49 million, from December '22. With these small additional -- additions, total NPLs remained almost flat at EUR 1.78 million.

Group NPL in the quarter grew only in consumer finance business in Spain, almost EUR 30 million and in the small and medium sized business in Spain, the remaining EUR 20 million. The other businesses segment remained flat or slightly down large corporates, mortgage and wealth banking in the period. The Group's NPL ratio stands at 2.18% and 8 basis points above the lowest point at the end of 2022 and 2 basis points below last year in March.

In Spain, NPLs stand at 2.45%, 11 basis points from a year ago and 13 basis points from December. This ratio continues to be weighed down from the sector average of 3.56%. It is to be mentioned that there's more growth in SMEs NPLs outstanding. It is well covered by the government support program in addition to real estate guarantees.

As shown in this chart on the right, the NPL ratio in Spain went down to 1.9% from households and a lower level that -- last year and increased 2.9% for corporates from March '22 with a small 10 basis point increase from March. This evolution clearly shows the resilience and the high quality of our loan book, probably best-in-class in our sector in Spain.

The total provision for non-performing assets keeps increasing to EUR 1.187 million, or 3.1% increase from last year. All this had a relevant impact on our provision coverage with now stand at 67% from 65% a year ago. And the coverage for foreclosed assets were also improved to 56% and 4% increase clearly above the average discount of our sold assets.

Now, let's talk about capital. Our fully loaded ratio finished in the quarter slightly up at 12.2% from last quarter. Since December '22, our retained earnings bring an increase of 34 basis points taking into consideration the accrual of dividends at 50% of earnings. Risk-weighted assets and other small items has been 1 basis point due to the reduction in the loan book. Valuation adjustments brings a negative 4 basis points due to markets volatility, mainly in the Línea Directa participation. Additional, we have the 11 basis points negative impact from the banking tax in the quarter.

All this makes our CET1 ratio to stand at 12.21%, well ahead the 7.7% minimum requirements set for the group by the regulator for 2023, 1 of the 5 lowest in Europe. Total capital ratio went up 16.31%, a very comfortable level over the minimum regulatory requirement, as well as a leverage ratio up 4.8%. This improvement brings to 22.3% ratio, the MREL as of March '23, well ahead of the 20.53% requirement for January '24 and also ahead of the new subordinated requirement of 19.58% for June '24.

Moving to the next slide. With a small reduction in deposit and a sluggish loan growth, our commercial gap remained almost stable and in negative territory since the end of 2020. The negative gap in Spain more than offset the gaps coming from Portugal and Ireland, both having higher lending than deposits. As a result, the loan-to-deposit ratio moved from record levels of 90% in March '22 to a comfortable 97.4% as of March '23. We consider 100% comfortable and balanced level for this liquidity ratio, or even a little bit higher. It is relevant to consider that we have been able to keep the risk ratio close or below 100% with a consistent and differential loan growth in our balance sheet year-after-year.

Our wholesale debt below EUR 6 billion is at the lowest level of many, many years and the maturity profile has no relevant issues in the year to come. Other liquidity ratio that have included in the presentation are very explicit about the liquidity situation of the group, high quality liquid assets at EUR 19.3 billion, LCR at 198% as an average and loan-to-deposit at 97.4%.

As the TLTROs, the total stake now is EUR 9 billion after the last EUR 2.5 billion amortized in March, and they will follow the calendar shown in the chart till the final amortization in '24. Let me remind you that after the change in conditions introduced by the ECB last year, the impact of TLTROs in our NII has been reduced accordingly to only EUR 10 million approximate in 2023.

Now let's review the performance of the main business line and their contribution to the group's P&L. I will then move a little bit faster in this section. The corporate loan book in Spain and Portugal grew by 2.9% year-on-year. It increased by 2.4% in Spain, while the sector contracts by 0.8% last data available. Those we have again increased our market share in corporate lending to 5.9% from 5.4% in February.

Total ICO loans with the state guarantee as of March '23 were at EUR 5.8 billion. All these loans have been granted mainly in medium and small corporates. As of March, from the total ICO portfolio, only 4% -- 4.2% became NPLs and 8.6% stands in Stage 2, quite below the average in the industry.

On activity indicators for the Corporate segment, in this quarter, we can highlight International Banking loan book by 11% growth to EUR 7.6 billion, with the supply chain finance loan book growing by 90%, doubling the number of clients in this period. This international activity, together with a pickup in financing through next-generation EU fund has become the most relevant sources of growth in our corporate banking. Next generation EU funds account now for over EUR 265 million, growing at 20% from December, and what is more important, with a pipeline of EUR 1 billion, 33% over the same in December.

In wealth management, customer assets increased both from last year and from last quarter due to the continued strong commercial activity in our recovered market behavior. Adding both businesses, wealth and retail banking, AUMs increased by almost EUR 3.7 billion impacting money under management in the year-to-date, split between EUR 2.8 billion in wealth and EUR 0.9 billion in retail banking.

Total assets from customers in both segments reached EUR 96.2 billion, up from EUR 91.1 billion a year ago. The strong commercial activity merger by net new money in the quarter shows a total EUR 2.1 million increase, split between EUR 1.7 million in private banking and EUR 0.4 million in personal banking. Market effect has been positive, bringing an additional EUR 1.5 billion.

Our off-balance sheet control funds increase its growth trend since December '22 in all categories. Mutual funds -- mutual owned funds and third-parties funds, pension funds and assets managed and other vehicles, all of them show some growth. And this is thanks to a strong commercial activity in a better market environment and the continued promotion of this type of products into our affluent clientele, particularly in money market funds and fixed income intermediation and custody.

In the quarter, AUMs grew by EUR 2.6 billion from December to reach almost EUR 40 billion at the end of March. In this case of owned managed mutual funds and third-party commercialized funds, growth in the quarter has been 8%, bringing the total mutual funds managed and distributed over 31 million -- EUR 31 billion -- sorry.

Activity in retail banking during the quarter has been slowing down in both large salary accounts where balances decreased by 4% and that are still up 13% from a year ago, totaling over EUR 15.3 billion. Since December, they have moved some of them to other interest-bearing instruments such as money markets or public debt remaining under control within the bank.

Mortgage origination in the quarter has maintained a good path of EUR 1.7 million outperforming the last year and 30% more of the first quarter of 2021. With this growth in a shrinking market, Bankinter continues to grow its market share in mortgage market with a better quality of loan books. Now only 42% of mortgages were fixed rate and their average loan-to-value continues below 60%.

In Spain, our market share in new mortgages is at 6.6% as of February. As a result, the total mortgage back book keeps growing and reach over EUR 34 billion, an increase of 7%. In Spain still growing at 1.9%, while the rest of the market now decreased at 1.1%. Fixed rate mortgages accounts for 30% of the back book with loan-to-values in the low 50s. And moving into Portugal, their loan book grew by 17% to EUR 8.4 billion and retail funds at EUR 6.6 billion. Growth in loan book was in both corporates, up 20% as in retail lending 16% of balance sheet at EUR 3.9 billion at the end of March.

As of the income statement, operating income from the business grew by an outstanding 79% and costs showed an 8% increase. All made possible PPP to grow 2.6x the March -- the figure of March '22.

Now on the seventh year since the acquisition, Bankinter Portugal shows an efficiency ratio well below 40% and has become the third geographic region in operating income contribution to the Group. On consumer finance at the end of the quarter totaled a loan book of EUR 5.7 billion, 50% up from a year ago and with a new production of EUR 0.6 billion in the quarter.

Geographically, the total loan books includes EUR 2.3 billion from Ireland Avant Money, growing by EUR 40 million in the quarter, and EUR 416 million from Bankinter Portugal, growing by EUR 24 million in the quarter and the rest EUR 3 billion in Spain, where the loan book grew by EUR 156 million in the quarter.

In the breakdown by type of financing, personal loans represent almost 50%, growing by 37%. Transactor credit cards outstanding represent 16% of total, with 22% growth and revolving credit cards only 7% of a total of EUR 400 million.

Household mortgages in Ireland now represent a little bit more than 25%, exactly it's 28% of the loan book, and more than 69% of total loan book in that country. NPL stands at 4.6% from 5.2% in the first quarter, provision coverage at 90s and cost of risk at 2.5%.

Regarding Ireland Avant Money, it's remarkable that since September 2020 when mortgage lending started, this has become close to 70% of its current loan book that more than doubled from March '22. Last year, mortgage production was over EUR 1.6 billion and for this year, we expect a slowdown coming from lower demand and increased competition. We also expect for 2023 recovery of the consumer finance activity where personal loans and cards outstanding have grown by 25%. NPLs 0.4%, cost of risk 0.7%.

And at EVO, during the first quarter, the business plan contemplated an increase in the credit card and personal lending and at the same time a continued increase in mortgage origination, mainly in mixed fixed rate that is now part of the normal commercial activity. All this together with the back book repricing has made possible an increase in income from the business by 78%, while cost increased by only 13%. New mortgage granted has been EUR 299 million, a new record in quarterly origination.

As for management ratio, NPL ratio stands at 0.47% and only EUR 14 million in NPL cost of risk at only 5 basis points. And in P&L for the first time, the EUR 15 million operating income has been enough to cover the EUR 14.8 million of operating expenses in this period, with a positive pre-provision profits.

Now a brief recap of our main achievements in the quarter. A strong and improved set of management ratios with return on equity at 14%, efficiency at 35.7%, NPLs at 2%, 2.18%, LCR at 198% and loan to deposit at 97%. Very strong commercial activity once again, despite the complex market and economic scenario, with increasing loans and deposit growth over previous year, an improved and comfortable solvency level, keeping a strong buffer from regulatory requirements, and great quarterly performance more than compensated the new banking tax for the year, increasing net profit by 20% to EUR 185 million.

At an end, I will share with you some guidance for the full year. We expect for this year growth in all geographies, Portugal in both commercial and corporate banking. Ireland slowed down in mortgage production, but with improved personal and consumer finance lending, EVO Banco maintaining a strong mortgage production and improved personal and credit card financing together with deposit gathering.

We also expect for 2023 that corporate loan demand and consumer finance will maintain growth with some slowdown from strong 2022. On the other hand, mortgage lending will continue to slow down. We expect balance sheet growth in the year to be balanced between loans and deposits to maintain an adequate loan-to-deposit ratio at 100% level or a little bit above.

This -- with all this, the net interest income from the group will improve the 20% guidance that I shared last results presentation, and after closing the first quarter with continued loan book repricing and with a beta deposit better than expected, we now see net interest margin growing closer to 25% NII in the year.

All-in-all, we expect gross operating income to clearly outgrow the one in 2022. Group cost growth will reach mid to single-digit growth, but improving efficiency in the group. Pre-provisioning profit should reflect this and improve growth trends. And finally, cost of risk, like I did mention, we -- it is showing a very strong resilience in the absence of additional provision of micro scenarios and we will keep 1 more quarter in the 40 basis points guidance.

And now I will be happy to take your questions.

[David Lopez, executive]

Thank you very much, Jacobo. Thank you for that detailed explanation. We will probably start talking about the dynamics of our loan book and what you are seeing on its segment.

[Jacobo Díaz, executive]

So the dynamics -- sorry, the dynamics of the loan group -- the loan book is pretty similar to our previous guidance. So we expect growth in the mid-single digit by the end of the year. We still think that businesses in different geographies like Ireland, we will show a good growth in the loan book this year. Portugal as well is behaving extremely well. And as I've shared, EVO Banco also is growing.

And in Spain, as I mentioned, the consumer finance and the corporate loan book, we still think that they will show a good growth across the year. And the mortgage lending in Spain will sort of stabilize. Our new production will be lower -- definitely lower than the previous year, not too lower, but at least we do expect probably 20% lower new production than the previous year and probably stable or slight decline in the overall portfolio. The average guidance in the loan book still at mid-single digit for the year.

[David Lopez, executive]

That was my next question, whether we maintain the target, given the more challenging macro?

[Jacobo Díaz, executive]

Yes. We do.

[David Lopez, executive]

Moving on to -- again in the loan portfolio, how did you see the performance of the ICO portfolio, and whether you have any comments from the recent changes introduced by the government?

[Jacobo Díaz, executive]

The ICO portfolio, it stands at EUR 5.8 billion, as I did mention, the NPL ratio is at 4%. Of course, ICO portfolio -- the original ICO portfolio are redeeming slowly year-after-year. We have new lines of ICO, which are called ICO Ukraine, and we're granting new i.e. ICO Ukraine. And for the time being, the behavior is good and is quite below average. As I mentioned, the Stage 2 is around -- is a little bit above 8%, and Stage 3 levels at 4%. We haven't seen any clear damage in the behavior of the ICO portfolio for the time being.

[David Lopez, executive]

Moving on to the NII, obviously one of the hottest topic today. Could you refresh our NII guidance for this year? And we had some questions whether we are maintaining or improving our guidance there?

[Jacobo Díaz, executive]

Yes, we are increasing our guidance in the January session. For the 4Q results, our guidance was to repeat the same growth of 2022 in NII, which was 20% to 21%. And in this case, we are upgrading a little bit our guidance and probably close to 25%. That should be our new guidance for this year.

[David Lopez, executive]

Moving now into more detail, how much of the floating loan book has already repriced at current Euribor 12 months?

[Jacobo Díaz, executive]

The book of mortgages started to reprice at relevant prices since October, but they have re-priced at levels above 3% just in January, February. So I would say that, not yet half of the book of the mortgages have repriced with new rates. But also it's important to mention that even in the following 12 months, the mortgage will reprice again at a higher rate that they have done in October, November, December, January, et cetera. So even if they have already repriced at, I don't know, better levels than previous year, probably [ EUR 512 million ] of the portfolio, there is again a lot to come in the first half of next year.

[David Lopez, executive]

Moving on to customer margin, what sort of through the cycle customer margin do you expect?

[Jacobo Díaz, executive]

We definitely expect to keep levels above 2% of client margin. Somewhere between -- it is unclear yet, but hopefully between 2% and 2.50%. I know this is a wide range, but probably we stay in the average 2.25%. That should be the sustainable client margin level in a rate environment like the one that we're living today. So that should be our expectations in the long term.

[David Lopez, executive]

Regarding the quarterly trends on our NII, how do you see that evolving from Q1 for the rest of the year?

[Jacobo Díaz, executive]

So the trends are quick repricing of the corporate loan book that -- as we've seen that the Euribor has continued to increase a little bit during the past weeks, we will -- do expect some more repricing on the corporate loan book in the second quarter. We do expect this continued increase in the repricing of the mortgage book, obviously during this second quarter. And we do expect that the deposit beta continue to increase over next quarters. So the increase in the credit yield might be reducing the level of growth and the deposit beta will slowly continue to grow.

[David Lopez, executive]

More specifically, obviously, on deposit costs and betas, what is our deposit cost as of March?

[Jacobo Díaz, executive]

So as we share in the slide, the average cost in our client deposits for the quarter was 30 basis points. That was the average of the quarter. And specifically in March it was 40 basis points.

[David Lopez, executive]

Are we seeing any pressures to increase remunerations there, or what is your expectation for the full year?

[Jacobo Díaz, executive]

We don't change our guidance in the beta. As you know, it's around [ 20% ] to [ 25% ]. There is the pressure from the more sensitive type of client, but again, there is no incentives to increase sharply the payments of these -- cost of these deposits.

[David Lopez, executive]

Almost last one on deposits. Can you explain the adjustment made to the deposit cost that we did in Q4 on the quarterly series, on the cost of deposits that we produce?

[Jacobo Díaz, executive]

Yes, we just make a differentiation between the real remuneration of our clients and the difference between taking into account wholesale funding within the cost of the deposits. That's the difference. I think it's much clearer for all of you to isolate the beta of deposit clients instead of mixing it with wholesale funding. That has nothing to do with it.

[David Lopez, executive]

Moving on to the cost of deposit insurance, the charges contribution that we made there, what did you view on that topic, given the current events? Whether you expect that to fall going forward or to maintain contribution?

[Jacobo Díaz, executive]

The contributions to the Resolution Fund and to the Guarantee Fund, we have a clear view that in '24 we will have a sharp decline in both of them unless there is news that as -- for the time being, there is no news. So we do expect a sharp decline in '24 and over and '25. I think we have already reached the maximum level that they were agreed in both funds. And for this year, we do expect probably similar or slightly lower levels of Resolution Fund compared to the previous year.

[David Lopez, executive]

Moving now on to liquidity. We had some questions regarding our current LCR ratio at the end of the quarter, and also what is your LCR performance excluding the TLTRO maturities?

[Jacobo Díaz, executive]

So we share with you the LCR, the average of the last 12 months that stands at 198%. The exact figure in March has been 199%. So that means that even in March our figure has been above the average. And I want to highlight that the data that we have regarding the average in the industry was -- the last figure was around 160%. So we are quite above this average, and I think these are very good levels of LCR ratios.

And regarding the question at what LCR level are we expecting, once the full TLTRO program is ended, we are expecting to be at least above that average in the industry of 166% or 165%. So that will be our expected level of LCR once all the TLTRO program is redeemed, that is again above 160%, 165%, 170%, that range.

[David Lopez, executive]

And can you give us some color on your expected funding plans funding mix for the remaining of this year?

[Jacobo Díaz, executive]

Yes. Our funding plans includes wholesale funding, mostly to meet MREL requirements and MREL management and then potential -- positive commercial gap. That means that we will increase the level of client deposit more than the level of growth of our activity in loan growth. This is how we are planning to fund this group.

[David Lopez, executive]

Moving now on fee income, whether you can just comment on the guidance that you are seeing for the remainder of the year, and also if you see or have any thoughts on the possible changes to the investment fund fees?

[Jacobo Díaz, executive]

We are not changing our guidance in fees for the time being. It is still at mid-single digit. We have delivered 4% and we think that we will achieve the overall challenge for the year. As you know, the current composition of the fee growth is different. The majority of the sources of fee income are in positive except the asset under management. The reason as I mentioned is the average fee or commission of the AUM activity.

Even if we are at record high levels of AUMs, the reduction in average fee makes the comparison negative. We do expect in the following quarters to make this comparison positive as the level of AUMs last year was declining and this year is increasing. And regarding the impact of whatever changes happened in the investment funds activity, I think we are more than capable to compensate it with much higher volumes and better mix.

[David Lopez, executive]

Moving on to the next question on expenses, whether you can repeat the guidance for the year?

[Jacobo Díaz, executive]

Yes, for the guidance, we provide high mid-single digit, and I think that we will be closer to the mid-single digit than to the high mid single-digit. I think that, the reference that we've providing this quarter should be more or less that -- the figure that we will expect at the end of the year.

[David Lopez, executive]

Regarding cost of risk, there were some questions on your guidance, whether we maintain the guidance for the years, whether you can repeat that, and also whether you have any comments on what is driving the small increase in our NPLs?

[Jacobo Díaz, executive]

Yes, the guidance for the year is still at 40 basis points. We have ended the first quarter at 39. You know that in the past 2 years, we have always beaten the guidance that we provide at the beginning of the year. Once again, we are moving in a very complex environment with plenty of uncertainties. Interest rates are increasing fast.

So for the time being, we prefer to keep it 1 more quarter at the 40s guidance -- 40 basis point guidance. And just we will see in this second quarter what things happen, and if we need to change it, hopefully, it will be downwards. But for the time being, let's keep it that way.

And the thing that is driving the NPLs growth is basically, as we mentioned, consumer finance. There's nothing extraordinary in this side. It's just we have a larger -- let's say a larger book in consumer finance. And also we are updating our internal rating based models with new macro variables. And those macro variables in average need to make a small effort in this first quarter. While last year in the first quarter, there was not even an effort, it was even a release. So this is the only changes in that figure. But nothing -- no specific message regarding consumer lending for the time being.

[David Lopez, executive]

We had a couple of questions also on your views on our commercial real estate exposure. Do you want to comment there?

[Jacobo Díaz, executive]

Yes, our commercial real estate exposure is still very low. It has always been very low. And even if there are some figures that seems to have a higher exposure, it is just basically due to the definition of a regulatory wording of the credit risk exposure. But we have, as of today, less than EUR 1 billion, which are dedicated to income producing real estate, which are dedicated to retail, to offices or industrial spaces. So this is our reality. It's much lower than EUR 1 billion.

[David Lopez, executive]

We had a late comer question on NII again, sorry. What is your Euribor 12 months assumption for NII this year?

[Jacobo Díaz, executive]

We are expecting in average -- of course, there might be some bumps, but in average it should be around 3.6%. This is what the forward curves tell us, that -- as you can imagine, they change every week.

[David Lopez, executive]

Now, moving on to capital. Given our strong capital position and tepid loan demand, would you consider stepping up dividend payouts or even share buybacks?

[Jacobo Díaz, executive]

For the time being, there are no changes in our 50% payout policy, so no changes from that perspective, and neither we are expecting any buybacks from the time being. We think that, as you know, our excess of capital is dedicated to growth. And at the same time, and as mentioned, with the cost of risk, I think the uncertainty on the environment make us to be a little bit more prudent on that second question that you referred to regarding buyback. So for the time being, no changes in our dividend policy, 50%. Let's be cautious at the same time, and let's look for that mid-single-digit growth in our loan book.

[David Lopez, executive]

What are your expectations in terms of CET1 ratio and risk WAs inflation -- RWA inflation going forward for the year? Well, the growth on risk weight assets and CET1 ratio?

[Jacobo Díaz, executive]

So our expectation for CET1 ratio, it should be around this 12th and probably a little bit higher in this period, just trying to fund our growth. In risk weight assets, again, very limited growth, mid-single digit, I would say. That will be a maximum figure. No major changes. But again, I think we need to find a comfortable level of CET1 ratio in these times.

[David Lopez, executive]

Moving on to other topics, how -- would you receive any applications for the new mortgage borrower scheme?

[Jacobo Díaz, executive]

As you know, the profile of our clients tends to be of medium to high net income, and therefore, the number of candidates that we receive honestly is very, very limited.

[David Lopez, executive]

Any comments on the recently announced JV with Sonae in Portugal?

[Jacobo Díaz, executive]

Yes -- no major comments. I think basically is a great new -- I think it give us an opportunity to grow in the consumer finance business in Portugal. We will be able to reach probably 1 million of new clients. So for us, we are very excited about JV with such a great partner as Sonae.

[David Lopez, executive]

Thank you. Thank you so much. Thank you, everyone, for joining us today. The Investor Relations team as usual is now at your disposal for any further information. Goodbye.

[Jacobo Díaz, executive]

Thank you very much, and goodbye.