Bankinter SA

MAD:BKT

Earnings Call Analysis

Bankinter's Q1 2024 Success: Strong Profit Growth and Optimistic Future

Bankinter reported a net profit after tax of EUR 201 million in Q1 2024, up 9% year-on-year. Loans grew by 5% and deposits by 6%, underlining solid volume growth. Net interest income increased by 11%, and the return on equity reached 17.4%. The cost-to-income ratio stood at 35%. Customer assets under management rose EUR 4 billion this quarter to a record EUR 118 billion. Bankinter expects continued loan growth in all geographies and resilience in net interest income, supported by strategies to manage down deposit costs efficiently.

Strong Financial Results and Growth

Bankinter's first quarter of 2024 showed remarkable financial performance, with a net profit after tax of EUR 201 million, representing a 9% increase year-on-year and a substantial 25% increase compared to the fourth quarter of 2023. This growth showcases the bank's consistent delivery on its long-term strategy across various business segments and geographies.

Revenue and Efficiency Metrics

The bank reported an 11% year-on-year increase in Net Interest Income (NII) reaching EUR 578 million, despite the challenging interest rate environment. Net fees also gained, growing by 9% to EUR 166 million, breaking previous records for the bank. Bankinter's cost-to-income ratio, a key efficiency measure, stood impressively at 35%, underscoring its operational efficiency. The return on equity was a robust 17.4%, demonstrating strong shareholder value generation.

Asset and Deposit Growth

Customer assets under management soared by EUR 4 billion in the quarter, a 4% increase since the end of 2023, totaling EUR 118 billion. Customer deposits also grew by 6% year-on-year, showing high customer confidence. Additionally, off-balance sheet funds saw an 18% rise, bolstering income from fees.

Geographical Performance

Bankinter's operations in Portugal exhibited strong growth with a 20% increase in loan book size, while corporate and SME loans surged by 28%. In Ireland, the mortgage book grew by an astounding 53%, further solidifying the bank’s position in the market. These metrics highlight the bank’s balanced geographical diversification and robust operational model.

Optimism in Net Interest Income and Margin Stability

Bankinter remains optimistic about maintaining net interest income and client margins, despite potential interest rate reductions. The bank has strategically managed its balance sheet to prepare for lower interest rates by shortening deposit durations and extending asset durations. This tactical approach is expected to cushion the financial impact of interest rate declines.

Guidance for 2024

Looking forward, Bankinter anticipates continued loan growth across all regions. In Spain, recovery in mortgage lending and increased corporate loan activity is expected, while Portugal will see growth in mortgages, corporate, and consumer loans. The bank forecasts net interest income resilience and stable fee income growth, adhering to its strategic focus on value-add products and corporate activities. Cost control will remain a priority, with expectations of cost growth aligning closely with income growth, maintaining the efficiency trajectory.

Asset Quality and Risk Management

Bankinter's asset quality remains strong, with a non-performing loan (NPL) ratio of 2.2% for the group and 2.6% in Spain, both well below the sector average of 3.6%. The cost of risk is within annual expectations, showing the bank’s prudent risk management and resilience in asset quality across its loan book.

Strategic Investments and Future Outlook

Investment in new businesses continues, particularly in growth regions like Portugal and Ireland, showing promising returns. The bank’s CET1 ratio concluded the quarter at 12.46%, enhancing its capital buffers. Overall, Bankinter’s solid financial fundamentals, efficiency, and strategic growth investments set a strong foundation for sustained performance throughout 2024 and beyond.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to Bankinter's First Quarter 2024 Earnings Call. Please note that related financial statements were posted with market authorities before the market opened, and that this presentation is available on our website as well.

Also, please refer to the disclaimer in the presentation and note that this call is being recorded. On today's call, it is our pleasure to be joined by Bankinter's Chief Executive Officer, Gloria Ortiz; and Chief Financial Officer, Jacobo Diaz. At the end of the presentation, they will respond to questions in a live Q&A.

I will now turn the call over to Ms. Ortiz to review the highlights of the quarter.

[Gloria Portero, executive]

Thank you, [ Laurie ], and good morning, everyone. Just under a month ago, I was appointed CEO, and it is a pleasure to be able to join this call today and to review with you the key highlights of the first quarter. Another strong financial quarter, indeed, providing a solid start to the year with EUR 201 million in net profit after tax, an increase year-on-year of 9% and 25% increase versus 4Q '23.

We have achieved these remarkable results by delivering consistently on our long-term growth strategy accompanied by strong commercial performance across all business segments and geographies. During this presentation, I will start with a short review of the key highlights of the quarter, then hand over to Jacobo to review the financial results and progression of our businesses.

Let me begin on Page 5. Here, I would like to emphasize the 4 key pillars that allow us quarter-on-quarter to deliver and strengthen earnings over time. Firstly, growth, clearly shown by the differential and quite unique performance in volume growth in all categories versus first quarter 2023, we were able to grow loans, 5% deposits by 6%, and we did exceptionally well enough balance sheet products with an outstanding increase of 18%.

Secondly, in our current environment of unpredictable interest rates, we have managed to preserve healthy customer margins at almost 3% and increased net interest income year-on-year by 11%, even above our 4Q 2003 levels. We have also maintained stable asset quality levels as seen in our ratios in line with expectations and in a context of solid volume growth.

And lastly, we are delivering substantial return on equity at 17.4%, and we maintain our market-leading cost-to-income ratio of 35% in the quarter. We are confident that we will continue to deliver value in the long term to Bankinter shareholders by consistently adhering to our growth strategy.

Moving to Slide 6. As you can see, we continue to grow with our customers, both in loans and deposits by adding EUR 4 billion in [indiscernible] since the first quarter of last year. We have maintained 4Q '23 lending book levels, which is outstanding considering the traditional weaker seasonality in the first quarters and we have strongly outperformed the system in our core market, Spain, both in customer loans and deposits as well as in other geographies and businesses.

Additionally, as seen on Slide 7, total customer assets under management increased EUR 4 billion this quarter, an increase of 4% since the end of 2024 and EUR 30 billion year-on-year. This is 12% up. Net new money inflows were EUR 1.3 billion, accompanied by strong market effect to increase the overall assets under management of our customers to a record level of EUR 118 billion in the group.

On Slide 8, again, considerable increase of EUR 7.8 billion, an 18% increase year-on-year in customer off-balance sheet funds. I would like to highlight the solid increases in delegated mandates that include venture capital vehicles and funds that add up to EUR 10.6 billion, growing 23% year-on-year. That's all other categories, as you can see, also grow strong strongly and are the businesses that support our fee income, as you see in next slides. This impressive growth has translated into considerable relevant earnings growth with quarterly net profit after tax of EUR 201 million, up 9% versus first quarter of '23 and 30% from first quarter '22.

We are increasing shareholder value with tangible book value plus dividends also increasing by 9% year-on-year. Our key focus is long-term value creation for our shareholders and delivering this quarter's 17.4% return on equity is a remarkable achievement.

In summary, I am very satisfied with this first quarter results, and I believe that it sets an excellent foundation to build upon for the rest of the year.

And now I would like to hand over to Jacobo who will talk through the financial results and business performance across the different segments and geographies.

[Jacobo Díaz, executive]

Thank you, Gloria. Good morning, everyone. Let's talk through the financial results of this quarter and review some of our achievements in this very strong start of the year.

On Page 11, we have included a P&L summary of the group's earnings in which we will provide a zoom into each of the categories of the following slides. All revenue lines performed particularly well this quarter, and support our positive outlook for the year with current level of Euribor Rates and decrease in deposit costs. I will highlight the exceptional year-on-year 11% increase in NII, a 9% increase in net fees, bringing us to total gross operating income increase of 7%.

Operating expenses have reduced from last year's 8% increase down to 6% this quarter permitting us to continue to improve our operational efficiency with cost of risk under control and stable, our profit before taxes reached EUR 327 million and net profit EUR 201 million.

Now I would like to provide some additional detail into each of the results categories. On Page 12, NII reached a record level of EUR 578 million. We have not only been able to deliver a strong 11% increase year-on-year, but also have grown versus last quarter by 1%. Our customer margin remains resilient at 298 basis points, up 2 basis points versus first quarter, 223.

On the asset side, customer credit yields are now stabilizing. However, we are optimistic that any reduction in rates will impact us more gradually than initially planned. Average deposit costs are up 3 basis points versus the full fourth quarter 2023. However, here it is important to highlight that the cost of deposits in the month of March is down 7 basis points versus the cost of deposits in December '23. Providing us with a clear downward trend in deposit costs on a monthly basis that we aim to continue to manage downwards in the following quarters.

In terms of our net interest margin. We have also been able to maintain stability above the 2% level, consistently one of the highest in the Spanish market when considering our peers over time. Our first quarter net interest margin reached 210 basis points and is mainly attributable to our high percentage of customer balances within our balance sheet where we dedicate close to 70% of our total resources to customer activity, both in client assets and deposits. Our peers in Spain are closer to a level of 50% on a weighted average. In terms of our outlook for the future, we are committed to defending current levels in both customer margin as well as net interest margin.

On Page 13, we can see the results of our strategy to convert customer deposits into higher value products for our customers. And as you can see, we were not only able to deliver a material increase of 9% in net fees, but we also surpassed our fourth quarter results, reaching EUR 166 million in the quarter, all this in spite of the typical negative seasonality of first quarter for the bank in fees. This quarter represents a record quarter in recurring net fees and is a clear tendency of what we can expect to see in the coming months.

Total net fees now represent 22% of the total income in the group. Our strong commercial activity across the group continues to drive our excellent results in assets under management. Fees are up 21% year-on-year. Additionally, our transactional activity continues to drive solid growth in payments and collection fees from both our corporate and retail activities.

Moving on to the other income lines on Page 14, I would only highlight that trading income and dividends remain stable at EUR 24 million. In the banking tax, we accounted for EUR 95 million this quarter, EUR 18 million higher than the previous year. And on Page 15, total operating income, EUR 4 million higher than last quarter and a 7% increase year-on-year. Our strategic focus on diversifying and expanding income sources has resulted in the continued tendency of achieving higher growth rates in income from businesses outside of Spain, while maintaining a similar distribution in terms of income by type.

On Page 16, operating expenses under control and below the growth we experienced last year in costs and also below gross operating income growth allowing us quarter-on-quarter to improve our cost-to-income ratio and maintain leadership across the sector at 37% on a rolling 12-month basis and 35% in the quarter. If we move on the -- if we move to review the asset quality metrics on Page 17, loan loss and other provisions totaled $100 million, down 2% year-on-year and EUR 36 million below last quarter levels.

Cost of risk is within our annual expectation. And we also continue to see a downward trend of other provisions also in line with what we were expecting for the year. We currently have no evidence of any negative impact to consider modifying our expectations.

In summary, on Page 18, these strong financial fundamentals have also allowed us to reach EUR 327 million in profit before taxes, 11% year-on-year and total group net income of EUR 201 million, growing 9%, as mentioned before.

Now moving on to a few pages on credit risk and solvency. On Page 19, the group NPL stands at 2.2% and in Spain at 2.6%. The small increase in NPL ratio is attributable in part to growth in SMEs, which is well covered by the government supporting ICO programs in addition to real guarantees. Notwithstanding, our ratios continue to be considerably lower from the sector average at 3.6%. This evolution clearly shows the resilience and the high quality of our loan book, probably best-in-class in our sector for Spain and a trend that we are also observing in Portugal and Ireland where we compare against the sector.

On Page 20, with a stable loan book and decreasing deposit base in the quarter, our commercial GAAP regain levels similar to the end of December '22. The negative commercial bank in Spain more than offsets the positive gaps coming from Portugal and Ireland. As a result, loan-to-deposit ratio in the quarter was 97%, very similar to levels a year ago. We remain comfortable aiming for loan-to-deposit below 100%, which we consider a balanced level for this liquidity ratio.

This quarter, we repaid our last outstanding delta of EUR 1.3 billion, resulting in total wholesale outstanding funding below EUR 7 billion, the lowest level of many years accompanied by a comfortable maturity schedule. Last slide in this section, details our fully loaded CET1 ratio finishing the quarter up to 12.46%, 16 basis points higher than last quarter given the strong retained earnings generation of 35 basis points in this quarter. We remain well ahead of the minimum requirement set for the group, the fifth lowest across Europe and lowest in Spain, strengthening our capital buffers.

Now let's review the performance of our main geographies and business lines and their contributions to the group. We will start with Bankinter Spain in Spain, excluding the EVO franchise from -- which we have included a separate page in the appendix. We continue to grow our loan growth year-on-year, reaching now EUR 60 billion, supported by strong growth rates in corporate SME loans of plus 5% and outperforming the contracting sector rates in retail banking. Again, healthy retail deposit growth of 5.4% year-on-year and additional extremely strong growth in trajectory migrating customer wealth into off-balance sheet funds increasing by 20% on a year-on-year basis.

As of the income statement, we maintained strong growth in NII and fees to reach EUR 625 million in gross operating income, an increase of 7% year-on-year with operating expenses and loan loss and other provisions under control. In this quarter, we maintained our cost-to-income ratio at an impressive level of 28.5%, which demonstrates the business focus and priority across all areas to maintain positive operating jobs, reinforcing the scalability of our business model. All these factors have led us to increase profit before taxes by 14%, up to EUR 365 million, a new quarterly record for the Spanish business.

Moving into Portugal. The franchise in Portugal on Page 24. We continue to see excellent results across the board. Our loan book grew by 20% to reach a key milestone of EUR 10 billion. Retail Banking increased by 5%, of which consumer finance contributed 25% of that growth. Corporate and SMEs also grew by impressive 28% year-on-year. Retail deposits up to EUR 7 billion, 8% from a year ago and an increasing focus to migrate funds to all balance sheet funds reaching EUR 4 billion and also up 8%. As the income statement, gross operating income grew by 14%, supported by robust increases in both NII and fees. We continue to improve efficiency with cost growing below revenues to reach exceptional levels of cost to income of 30% in the quarter. All of the above made possible pre-provisioning profit to grow by 17% year-on-year. In this quarter, after EUR 11 million of loan provisions, Portugal profit before taxes reached EUR 47 million, 9% more than a year ago.

Moving into Bankinter Ireland. On Page 25, this is the first time we share this information. We continue to see the remarkable loan growth, both in our mortgage book, up 53% as well as in our consumer credit book up 19% year-on-year. Total new loan originations this quarter in Ireland tripled the figures in the same quarter last year, placing us in a solid position to continue to grow between EUR 0.8 billion to EUR 1 billion this year. We are very optimistic that our direct operating model and value propositions in the market will continue to scale with improving efficiency level and outperform competitors.

Asset quality indicators remained low and stable with 0.34% NPL ratio in March '24. In terms of the income statement, this is the first time, as I mentioned, that we shared this complete P&L. Another franchise where we see strong growth in NII and fees and combined with contained expense and loan loss levels led to profit before taxes returns, up 5% versus the first quarter 2023.

Before I pass back to Gloria to close the presentation, I would like to give a quick overview and focus on our two core business lines in the group, which span across our regional franchises. Corporate and SME and the retail banking. The corporate and SME loan book in the group experienced robust growth by 8.5% year-on-year, fueled by growth in Portugal at 28% well above the stable levels in the sector and increasing by 5% in Spain, while the sector contracted by 3.7%. On activity indicators for the corporate segment, in this market, we can highlight the international business segment loan book up 15% to close at EUR 9 billion, with supply chain finance multiplied by 4 its activity year-on-year. These international activity, together with a pickup in funding or financing through next-generation yield funds will continue to provide relevant sources of growth in our corporate banking pipeline.

Turning to Page 27. Now on our key activity in retail banking in the group during this quarter. salary accounts in Bankinter Spain and Portugal, continued to grow at a steady pace of 5% from a year ago, with good levels of new customers acquired and in the pipeline. Quarterly new mortgage production impacted by weaker demand in this quarter, but offset positively with lower levels of anticipated repayments.

Also, important to note, our strong market positions in Spain, Ireland and Portugal, both in terms of market share of new origination as well as a stronger performance in the back book versus the sector. Even with [indiscernible] market dynamics in mortgage origination, our total group mortgage back book keeps growing quarter-on-quarter, reaching over EUR 35 billion.

So in summary and for this year, we want to confirm some expectations. So our target is to increase our net income in 2024 related to loan growth, we expect continued growth in all geographies and businesses, Portugal in all 3 mortgage, corporate and consumer loans, Ireland continued focus on mortgages and growth in personal loans and in credit cards outstanding. In Bankinter Spain, we expect some recovery in mortgage lending. Also, the corporate loan book should do better than in 2023 with increased activity in corporate demand after first half of '24.

We remain optimistic with net interest income with resilience in client margin and loan growth. Fee income is expected to grow at similar levels as we've seen in this first quarter. in part, thanks to the rise in average fees of mutual funds under management seeking for more value-added products, the attractive alternative investment and brokerage activity as rates go down and increase in corporate activity. Group cost will grow again in this persistent inflationary environment, but should be close to the rate of growth of incomes.

And finally, cost of risk after a flattish 2023 in asset quality and with comfortable quality in our loan book and product provision, we expect to finish the year in similar levels that we have seen today.

So Gloria. I would like to hand back to you for any closing remarks.

[Gloria Portero, executive]

Thank you, Jacobo, for the review. I will try not to repeat myself with the highlights that I discussed in my opening, but I do need to emphasize we are very satisfied with the group's ability to continue each quarter to deliver strong commercial activity despite the complex and volatile competitive markets and economic scenario.

We are committed to stick to our strategy to continue growing our businesses with preserving the asset quality of our balance sheet to continue leading the market in operational efficiency in order to preserve and improve our profitability levels. If we move now to Page 30, I will say that we are extremely pleased with all our of our KPIs for the quarter that in no doubt, will build the foundation for a solid year of results as well as in future years. Consistent volume growth across the board, even in a shrinking market, as we can see in the upper left table. Solid recurring income and financial results, and we show in the upper right corner. Strong and improved set of management ratios with comfortable solvency levels and stable NPLs underpinned by our market-leading cost-to-income ratio.

All of which help us report a substance 17.4% return on equity and an increase of 9% in book value year-on-year, delivering to our shareholders a 7% dividend yield.

[Unknown Executive]

Thank you, Gloria, and Jacobo. We can now turn it over to David to manage the live Q&A.

[David Lopez, executive]

Good morning. We will now begin a live Q&A session with Gloria, Jacobo. [Operator Instructions] The first question comes from the line of Maks Mishyn mixing from JB Capital.

[Maksym Mishyn, analyst]

I have two questions. The first one is on outlook for the net interest income. Could you please share your view on how you expect customer spreads to evolve quarterly? And then is there anything we should think of that can prevent you from outperforming your NII guidance for 2024? And the second question is on loan book growth, and particularly on new mortgage production, your new production has declined, while market has been resilient. I was wondering if you have less appetite for new mortgages in Spain? And what's the reason?

[Gloria Portero, executive]

Well, I will answer one of the questions. Regarding NII, I think the first quarter results allow us to be optimistic. And there is more upside risk than otherwise in the sense. One of the advantages of actually having lower and slower reductions in interest rates is that we had time to prepare our balance sheet for lower interest rates. One of the -- of course, what we are doing is shortening the duration of liabilities and on the other side, increasing the duration of assets through hedges and also through the ALCO portfolio that, as you have seen has increased around EUR 700 million and has also widened significantly its spread. So as I say, NII, we are optimistic looking ahead. With regard to mortgages, I'm pleased just if you want to make any other remarks, Jacobo, with respect to NII or?

[Jacobo Díaz, executive]

No, I think we are optimistic, and I think as you mentioned, there is a reduction in the cost of the retail customer deposits, which is already in place. In fact, we have more room for larger customer reduction than other peers, so that provide us much more resilience in the coming quarter in terms of the client margin. .

And also, I would say that reinforcing what you just said about higher rates that might go down -- lower than expected or might stay higher for longer. I think we have still some positive repricing going in the coming months. But definitely, the future reduction will be at a much -- much slower speed than we expected. So I think that is very positive messages. And I would like also to combine this message with a strong focus on fees because we try to see the NII combined with the fees, in part from that strategy that we have mentioned in terms of moving some of the wealth of our clients into some value-added products and as we see in this quarter, we have a very strong result in growth in fees. That's it.

[Gloria Portero, executive]

Do you want me to talk about mortgages? Yes. Okay. So I think this was the second question. And well, we still have appetite, of course, for mortgages in Spain. What has happened? Well, first, I think this first quarter, some of our competition has actually lowered prices, taking into account or going before the decline in interest rates. We didn't want to do that. We want to have decent spreads on our fixed mortgage book. But we are quite optimistic about second semester.

First, because we think that the drop in interest rates will increase will increase the market, the mortgage market and the demand for mortgages by our clients. The other thing is that we will have to do lower production to be able to increase the book in Spain because we are seeing much lower repayments early repayments in the book. And as I've mentioned, we foresee higher production in next quarter's lower anticipated amortizations and therefore, increasing the book. I don't know if you want to make any remarks, Jacobo, about this. No? Okay.

[David Lopez, executive]

The next question comes from the line of Paco [ Riquel ] from [ Alantra ].

[Unknown Analyst]

So I wanted to ask about the cost of deposits, which is down year-to-date as of March, but the stock of deposits is also down circa EUR 3 billion in the quarter and the loan to deposit is rising again. That was the 100% threshold. So I wonder how confident are you that you will not have to pay up for deposits in the second half of this year? Whether you will have to slow down the off-balance sheet migration. So overall, you can comment on the front book, back book dynamics in the cost of deposits, the expectations for EBITDA would be appreciated.

And my second question is a general question for Gloria. I mean, Bankinter is building up capital organically despite the loan growth. And I wonder if you have set an internal limit in terms of capital accumulation and how do you plan to use this excess capital generation?

[Gloria Portero, executive]

I will answer the second question first and then Jacobo, if you can answer the first. Okay. Well, you know back, that our strategy is a strategy of growth and mainly organic growth. And do we have an internal limit. I mean, we've always said that our objective is to have around 12.5% CET1 and maybe depending on the moment with a buffer or not. But that is more or less our target. If we have plans projects ahead, where we think that we can return that we can return that we can give good returns to our shareholders with organic growth, we will retain this capital and invested in our business. So I suppose that you wanted to know whether we are going to do any share buybacks. Now for the moment. We think we have very good projects ahead we are optimistic about business growth. So there is no point in actually returning this capital. We still -- we have this 17.4% ROE, which is well above the return initial can get elsewhere with the same risk. So I pass you through to the next.

[Jacobo Díaz, executive]

Okay. Thank you, Gloria. Definitely, we are very confident that we can maintain quite good levels of liquidity ratio. We do have a client base that bring to the to the bank somewhere between EUR 5 billion to EUR 7 billion every year of new wealth. And definitely, there is room to bring on balance sheet and off-balance sheet new funds. There are still quite some liquidity in the market. So we see that there is no excessive pressure on price of deposits. We do have very good liquidity levels. We do have very good levels in LCR. We do have very good levels in loan to deposit or deposit to loan. So from that perspective, there is no major concern. And regarding our capacity to bring funds on board, we are very, very confident.

And regarding the pricing I must also, I think Gloria mentioned it before, we are shortening the duration of the deposits that we are capturing. So in the corporate banking business, duration is now larger than around 3 months. And in the commercial banking business, duration is around an average at 6 months. So we are quite confident that the reduction of car deposit is something that will happen. Of course, bear in mind that rates expectations start to go down and this will drive some tailwind to this moment. I also mentioned before that we have a position with a cost of deposits higher than others. So we have much more room for improvement and much more room for being resilient in our customer spread.

[David Lopez, executive]

And the next question comes from the line of Alvaro Serrano from Morgan Stanley.

[Alvaro de Tejada, analyst]

Hopefully, you can hear me okay. First of all, congratulations, Gloria, on your new role. And I have two follow-up questions, I guess. One on deposits. The deposit balances, the term deposits. My understanding is that the spike in Q4 was related to inflows in Portugal. And can you maybe discuss where those term deposits have gone to? Is it they've gone sort of out of the bank into sort of off-balance sheet products, just what's going on in terms of the actual balances?

And another question on loan yield. You mentioned that there's more repricing to go, but the loan yield has been flat in the quarter. So I'm just thinking, should we expect that loan repricing to nudge loan yields up? Obviously, adjusted for any rate change -- central bank rate changes. But I'm just curious that we are -- everyone is talking about repricing loans, but the yield doesn't seem to move at all.

[Jacobo Díaz, executive]

Yes, I mean, definitely the increase on deposits on term deposit in Portugal last quarter, as you as you know, was due to seasonality and also because we have a strong growth in that quarter in Portugal. You -- we have switch again into off-balance sheet items. And the growth in Portugal is also very good and the same strategy in Spain, which should bring onboard customer funds and try to transform any value-added products. In addition to that, we manage the cost of deposits. And of course, if there is opportunity to reduce the cost of the positive is something that we also manage on a daily basis.

And regarding the loan yield, I mean, there's still some repricing in the mortgage. In the overall book, probably there is some stabilization. But in the mortgage book, there's still some repricing to come probably in the coming months until the summer. But if Euribor keeps stable or start decreasing, definitely, we have some short-term duration in the corporate banking book and the overall yield may be much more stable in the coming quarters.

[David Lopez, executive]

The next question comes from the line of Ignacio Ulargui from BNP Exane.

[Ignacio Ulargui, analyst]

I just have two questions. One on -- following up on the NII guidance you said before that in 2024, at NII, now you sound more optimistic. What can go wrong not to deliver a growth into 2024 NII? And the second one is on income generation, the high single digits, 9% level should continue to be underpinned by asset management. We have seen a very big decline in other fees in the quarter. Should we expect something like what happened in 2021 with the investment funds with the vehicles calling to support that 9% or the 9% is excluding any kind of one-off into 2024?

[Jacobo Díaz, executive]

No, no. We do not -- I mean, the figures that we are providing and the expectation of growth in fees, this is excluding any extraordinary items like I think -- we couldn't hear you very well, but I think that your question was related that our expectation for fees for this year if it was including any type of operational transaction with these type of vehicles. The answer is no. I mean we do expect this growth in fees to be, let's say, recurrent and due to our performance in anything related to asset under management, through payment and collections and to anything which is driving our business from on balance sheet items to our balance sheet items and anything related to transactional issues and this is for the second question.

The first question. And again, I'm not sure that because we couldn't hear you very well. But I think you mentioned something about the NII guidance? But I'm not sure exactly the point. But I think it's -- I mean, basically, we are more optimistic in terms of what's going to happen across the year in this line of the P&L. We might wait until June to provide an updated guidance, but basically, we definitely are more optimistic after what we saw in this first quarter and after the dynamics that we are seeing in the latest months on this quarter.

[David Lopez, executive]

The next question comes from the line of Britta Smith from Autonomous.

[Unknown Analyst]

I've got two questions, please. One is on the cost of risk it sounds like guiding to a cost of risk close to 40 basis points from 35 to 40 basis points previously. Does that include any overlay usage? And have you deployed any overlays in the quarter? I think at the end of last year, there was still EUR 53 million remaining? And what will be the underlying cost of risk without any overlays if it's different? The second question is on capital. It is fairly likely, I guess that the Bank of Spain is going to introduce the sort of macro prudential buffer, whether it's countercyclical or systemic, what are your thoughts on the introduction of agent? Do you expect that to change how you manage your capital and the target capital that you want to maintain?

[Gloria Portero, executive]

I will answer you with respect to capital. Yes, the Bank of Spain is speaking about introducing a macro prudential or something similar buffer. And this won't change the way we are managing our capital ratio. So we won't expect any difference in our target CET1. With respect to the cost of risk, we didn't deploy any overlay in this quarter. So it is a clean 39 bps cost of risk.

[David Lopez, executive]

And the next question comes from the line of Marta Sanchez from Citi.

[Unknown Analyst]

Just one question on EVO, what is the rationale of keeping it as a separate entity? You're still struggling to make money in that division. Would you be saving costs and gaining efficiency, if you were to consolidate it with the main group?

[Gloria Portero, executive]

I will answer your question. I think when we acquired EVO operations together with money because they came in one. The rationale for EVO was actually having a digital bank where we could learn and innovate and test marketing, digital marketing, different products that would be impossible within Bankinter first because growing this type of business organically within a big bank a big organization. It's like -- I'm going to be very clear here for the traditional operations, this is like a tumor that you have to eat so you have to take away. So we decided do this to make our investments in innovation here in EVO. This is the rationale. What we are doing with it in the future? I don't know. I don't have the this in mind for the moment. So we will give you more information in the future if there are any changes in the strategy.

[David Lopez, executive]

The next question comes from the line of Carlos Peixoto from Caixa.

[Carlos Peixoto, analyst]

My first question would actually be on the cost guidance, so should we expect costs to remain growing more or less these levels throughout the year? And also as we discuss full year guidance, should we adjust for any specific costs related, for instance, with [ Sony ] JV last year? Or is the guidance including that -- those costs as well. Then on the second question would be focused a bit on NII, still. But so first, I noticed there was a bit of an increase in the output portfolio in the quarter. Are we now -- are you now at levels that you see is more or less stable for the portfolio? Or do you expect continue to build it up throughout the year? And within that line as well, what's the current interest rate sensitivity of your balance sheet, given the evolution that we have throughout the quarter?

[Gloria Portero, executive]

I will answer you the cost question on Carlos. As you might have already in the presentation, costs are growing in new businesses. This is Portugal Ireland at EVO as you've seen in the slide that we've presented. So -- but Basically, here, we have very optimistic expectations of growth in the business, and we are investing, and this is why we are investing there. Nevertheless, I want to point out that we invest growing, and this is what allows us to still have a best-in-class cost-to-income ratio, which in Spain is under 30%, but in Portugal is in 30%. And as you have seen also in Ireland is a very comfortable levels, much better than any of the competitors in that geography. So think we can invest. This will make, of course, costs grow, but we will keep our best-in-class efficiency ratios looking ahead. I pass you through the NII.

[Jacobo Díaz, executive]

Yes. Carlos, I think I heard that you have a question regarding the ALCO. The ALCO portfolio on its size. Yes, I mean, it has increased a little bit the ALCO portfolio. It may increase again a little bit in the coming quarters. I mean, as you know, we have some limits on the size of the ALCO portfolio related to the size of the equity since the equity is growing a little bit, then the ALCO portfolio can grow a little bit, but no major changes are expected in -- regarding the size and regarding the contribution. The contribution has always been a little bit around or below 10% of the NII, and this is something that it will stay unchanged in the coming quarters.

[David Lopez, executive]

The next question comes from the line of Borja Ramirez from Citi Bank.

[Borja Ramirez Segura, analyst]

Firstly is on this. You had a very strong growth in asset management that is around 21% year-over-year. I would like to ask if you could provide more details on the margin -- on the asset management fee margin over AUM. If your customers are shifting into products with a better fee margin? And then my second question would be I understand that your rate sensitivity is 4% of NII or 100 bps change in interest rates. If that were correct, then your -- if I look at the change in the forward rates for 2024, the market is pricing in an average Euribor 3 months of 3.6% for this year.

This is an increase of around 40 basis points compared to the expectations during your Q3 -- Q4 results. So that would mean roughly that based on your sensitivity, 40 bps better rates multiplied by 4% sensitivity to interest rates would be at 2% better NII compared to your guidance of flat NII that you provided as you give Q4 results. I would like to check if this would be correct.

[Gloria Portero, executive]

I will answer you with regard to fee income in asset management fees. Well, Here, there are two effects. One is the volume effect that you have seen a very significant growth of 18% year-on-year. And this, of course, accounts for an important part of the growth in fee income. The other effect is the increase we've had in the average commission. It has increased around 3 to 4 bps in since -- well, compared to the average that we had last year. And this is due to several actions that we took last year in order to increase this margin. Basically, one of the things we did was to try to transfer some of these funds that the clients have from very low monetary, very low-income monetary funds to our own funds which have, of course, much greater fee income.

One of the funds, actually, we launched the -- we launched it in the last quarter of last year. We have actually it has actually now more than EUR 1 billion, and it has 30 basis points better margin than the funds were -- the funds were clients were positioned. So this is one of the reasons also for very low, for instance, funds from third parties. We are starting, well, depending, of course, on the client because it goes on a one-on-one basis, but we are charging depository fees that we weren't charging before and many other actions that we've taken to support and increase the average fees in asset management. And looking ahead, we continue to see good volumes. And of course, you we'll continue to see some bps increase in the average commission.

[Jacobo Díaz, executive]

Regarding the NII sensitivity, I think your -- I mean the assumption or the comment on the NII sensitivity that we provide in the first -- in January, I mean that's correct. And it's exactly the same. We have a minus 4% for every 100 basis point parallel shift. I think basically, rates are behaving better than expected since they are probably higher for longer, we'll definitely are more optimistic. I'm not going to check your figures and that you know right now if I totally agree or not. But basically, what I'm trying to say is that we are definitely more optimistic. And as I mentioned before, in Q2, we will provide an updated guidance but of course, we'll perform better than expected.

[David Lopez, executive]

The next question comes from the line of [ Miruna Kirea ] from Jefferies.

[Unknown Analyst]

I just had two, one on NII and one on asset quality. On NII, I just wanted to check with you that it's fair to see now that NI has likely picked in Q1. And I would like to understand how you're thinking about asset yields versus the cost of deposits in further quarters from here? Because asset yields are more or less mechanical in the function of the level of interest rates in the market, but cost of deposit is probably where you have more control. So how do you think about your ability to manage down cost of deposits further as asset yields are starting to come down as well? And then on the asset quality, in Q1, you had a cost of risk of 39 basis points, which is towards the higher end of the 35 to 40 basis points guidance that you provided at the full year, while some of your peers, if anything, are guiding for upside risk to their cost of risk guidance given full year. So is there any segment in your loan book that is may be performing a bit worse than you were expecting that full year? And specifically, how is the ICO loan portfolio performing, please?

[Jacobo Díaz, executive]

I'm going to try -- I'll start with the second one. Regarding the cost of risk, I think, of course, this -- we have some seasonality also in the first quarter. So it's a much more stable level. And that's why the final figure might be in the higher range. But we don't have any expectation in terms of changing that figure on the coming quarters. We haven't noticed any increase in delinquency levels. You were mentioning some business segments and nothing has changed. I mean the consumer finance segment and the SME segment are the ones that by themselves that have the higher normally cost of risk.

And of course, in the SME business, we have full protection either from real guarantees, either from ICOS that you have mentioned. So from that perspective, we are a very defensive and prudent loan book in the SME business. Regarding to the first question regarding to NII, and apologies if I missed something because we couldn't hear you very well. But I think you mentioned something about how are you -- are we managing the reduction in the cost of deposits and I think, as I mentioned before, we have much more room than others to reduce this cost of deposits. I think we are chartering the durations. We are trying to transfer or to switch on balance sheet into a balance sheet that provides a very good long-term relationship with clients and very good flow of income in the future.

So this is the balance that we are managing. And I think also you mentioned something regarding peak in terms of yields or yields and cost. As I mentioned, I think this is going to be resilient across the year. We need to manage the timings of the things because the repricing speed of the deposits is not exactly the same of the assets. And excluding those potential timing effects, I think that at the end of the year, we will end up with quite good resilient figures in terms of client margin.

[David Lopez, executive]

The next question comes from the line of Hugo Cruz from KBW.

[Hugo Moniz Marques Da Cruz, analyst]

So I wanted to ask a bit on rate expectations. And it's great that we have an open Q&A because it was never clear to me what your expectations were when you gave the guidance to. So if you could clarify how many rate cuts did you assume for 2024? And then on the fees, is there a performance fee effect in your guidance? And if so, is there any or also on the fees you reported in Q1 and if there is a performance fee effect, is there any seasonality in that? Do you book it in particular quarters? That's it.

[Gloria Portero, executive]

With respect to fees because I was answering the question before, No, we are not factoring any success fees into -- or any extraordinary successes into our expectations of fee income. We expect as I say, very good performance in asset management, also in anything that has to do with payments and with payments with corporates and with the volatility that we are seeing in the U.S. dollar, I think that also income from interest rates sorry, from exchange will be up also in the year. So we really have very good expectations with fee income this year. With respect to NII, I think that we -- with respect to rate cuts, what are expectations, okay? Really -- we are very much in line with the market. So what we are expecting is probably but huge cuts by the ECB probably in June and July, sorry, one in June or July and then maybe another or to maximum in the second part of the year, but we are not expecting huge cuts in the year. Many less than we were expecting at the beginning of the year.

[David Lopez, executive]

The next question comes from the line of Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, analyst]

I've got -- sorry to come back on the loan yield. I would probably have expected loan yield to go up this quarter. I mean we have 3 months kind of flattish 12-month tailwinds are still coming you still have 1/3 of your lending book in fixed rate status. So is there anything in particular this quarter that has basically stopped the loan yield expansion. The second question is a bit more qualitative, if you want actually. I know it's very early to think about next year. But I mean, if you can give us your views about how you plan to sustain your normal approach basically of keeping operating jaws flat or positive, considering that probably the pressures on NII should be accelerating in coming quarters and the carryover into next year is negative.

[Jacobo Díaz, executive]

I mean, loan yield is a combination of some assets that reprice much longer term, like the mortgages that are priced once a year. And from that -- as I mentioned before, from that perspective, there's still positive repricing in the mortgage book. But we also have corporate banking activity, which has a shorter duration, which are linked or repriced faster. So even if rates are probably higher than expected, the repricing of those assets have been faster and Euribor has gone down in the second half of 2023.

And therefore, there is a lower level of yield in that part. Combining both of them. Today, we are in a stable position in terms of the movements of the loan yield. And regarding the operating jaws, we still, I mean, confident that we can keep positive operating [ joules ] in the future. we're still positive, not only '24 but old in '25 that our total income in 25% is going to be growing again. So we don't have any specific concern as of today regarding the level of cost because we are very confident today that the level of income in 2025, still going to be positive with good news. And therefore, [indiscernible] will remain resilient in the future.

[David Lopez, executive]

The next question comes from the line of Fernando Gil from Bestinver.

[Fernando Gil de Santivañes d´Ornellas, analyst]

A follow-up question regarding deposit and the deposit mix, please. Just back has any targets between site deposits and term deposits. We have seen in this quarter a stabilization in the trend moving from site to terminal. I just want to explore a little bit that strategy.

[Gloria Portero, executive]

Well, basically, effectively, what we've seen is the contagion of site deposits to stop. Actually, we are seeing increasing site deposits now in the retail, a very stable and maintaining costs in private banking and where we are seeing maybe a little more drop in term deposits is actually in the corporate segments. We think that the movement to term deposits is almost over, unless there is an increase of course, in rates, which is very unlikely, as you can imagine. And what we are trying actually now is in the renewal of these term deposits to reduce significantly the duration so that we can adopt the price quicker in the year. We are quite happy actually what we are seeing is a reduction of cost in retail. As I said, stabilization in private and where -- and incorporate is also stable. And we foresee because we are seeing it already within month after month and week after week that the overall costs are going down.

[David Lopez, executive]

The next question comes from the line of Alberto Nigro from Mediobanca.

[Alberto Nigro, analyst]

I have just one follow-up question, and it is again on the switch of deposits into AUM if this is also coming from the term deposits and in particular, if you are changing your assumptions regarding the evolution of term deposits throughout the year in terms of volumes? And how much reach you think you can do in the coming quarters according also to the duration of the term deposits?

[Jacobo Díaz, executive]

Yes, as Gloria has just mentioned, we think that the level of term deposit has reached the maximum. We do expect some stabilization and probably some decrease in coming quarters since interest rates will go down the attractiveness of term deposits will reduce over time. And in addition to that, as we mentioned before, there is a reduction in the duration of those deposits. Therefore, the transformation into assets under management is something that we will stay over the following quarters because we believe that in the long term, we can provide a much better profitability and try to advise our service to our clients switching from the thermal deposits into a much more value-added product.

So in summary, I mean, there is a stabilization in the level of proportion of term deposits versus site deposits. And in the coming quarters, we will expect the starting of some decline, a small decline in the future as the attractiveness of assets under management will increase in contrast to the term deposit.

[David Lopez, executive]

The last question, I think it comes from the line from Marta Sanchez again from Citibank.

[Unknown Analyst]

Sorry, just a follow-up on cost. Have you changed your guidance? Because I think before, you were very committed to positive jaws. And I think, Jacobo said that cost growth will be close to income growth. So I just wanted to clarify that, please.

[Jacobo Díaz, executive]

Yes, we expect positive [indiscernible]. We expect income to grow more than the growth of the costs. I did mention that in 2025, because there was another question regarding to cost in 2025, we do also expect income growth that will provide us some resilience in terms of that positive [ jaws ]. Sorry, if it was not clear before.

[Operator]

Thank you. This has now ended our live Q&A session. And on behalf of Bankinter, we thank you all for your interest and participation in the webcast. Prior to closing the webcast, I would like Jacobo, if he has any closing remarks he would like to add?

[Jacobo Díaz, executive]

Thank you, Laurie. Yes. First of all, thank you for your questions. And before finishing this webcast, I would like to announce that our colleague, David will leave the Investor Relations team after 13 years in this role. David joined the Investor Relations team in 2011 with Gloria as a CFO and has performed an outstanding job during this period, providing support to all of you over time. .

Now it is time for new challenges for David. And David is taking over new responsibilities within the financial team, leading the financial analysis function of the group. I want to publicly thank David for his outstanding job during these years. I strongly believe that you have appreciated his role over this time. And thank you, David. If there's anything, David, that you want to mention?

[David Lopez, executive]

Thank you, Jacobo, obviously, for this opportunity. And thank you, everyone, obviously, for listening to us today and joining. Thank you so much. Bye-bye.