Bankinter SA

MAD:BKT

Earnings Call Transcript 2022-Q2

[David Lopez, executive]

Good morning all, and welcome to Bankinter Second Quarter 2022 Results Presentation. Our CFO, Jacobo Diaz, will guide you now through the figures, and we will follow with a Q&A session afterwards. Thank you.

[Jacobo Díaz, executive]

Good morning, everybody, and welcome to this presentation of Bankinter's earnings for the second quarter of 2022. As usual, the related financial statements were posted on the website on the CNMV a few minutes ago before market opens. All related documents can also be found at this time on the Bankinter corporate website.

As we will see through this presentation, the Bankinter group has been able to close very solid first half of the year in one of the most complex years with both sort of macroeconomic uncertainties that makes difficult to anyone to predict the near future. What is clear to me is that the strong commercial performance has continued during the second quarter, and that this is clearly reflected in balance sheet volumes growth and in our income and pre-provisioning profit performance. Thus, we can say that the positive start of the year in Q1 has continued during the second quarter.

Our main highlights of the first half have been Group's net profit closed at EUR 271 million, showing an 11% increase from a year ago excluding the accounting impacts of the Línea Directa spin-off during the first half of last year and more than compensating Línea Directa's '21 regular contribution of the first 4 months.

Return on equity reached 11.6%, quite above '21 performance. Improved income growth supported by a strong customer activity, reflected in volume growth in loans and deposits also by the start of the positive repricing of our loan book, mainly in corporates. All that resulted in an operating income of EUR 963 million, up 5% year-on-year.

Fourth, efficiency. Efficiency remains under control as of June, bringing PPP profit to EUR 535 million, a 6% growth over last year. With solid asset quality and solvency indicators maintained unchanged with almost flat NPLs from December '21, coverage of provision reached 65% and CET1 fully loaded ratio at a comfortable levels about our long-term guidance of 11.5%.

As every quarter, a brief comparison of first half key financial indicators. Group's total loan book continued to grow by 8% to reach EUR 72 billion thanks to a strong corporate demand and the mortgage production. Also in this quarter, Consumer Finance maintains the positive reaction shown in the first quarter.

Gross operating income at EUR 963 million grew by 5% with respect to June '21, showing the strong resilience in the main incomes coming from the business, net interest income and fees and particularly in this quarter, a more negative other income and expenses with a relevant impact from regulatory charges in the quarter, the resolution fund.

After a seasonal cost increase, we were able to keep operating expenses growth under control, allowing pre-provision profit to continue growing at 6% year-on-year.

NPL ratio showed some improvement in line with all asset quality indicators and loan growth despite the more complex economic situation. It dropped by 23 basis points from a year ago to 2.11% in June '22.

Coverage ratio keeps improving now at 65%, a 2.3 percentage points increase over the previous year. And profit before taxes like-for-like, that is only of the banking activity before the extraordinary discontinued operations in '21, went up by a remarkable 30% over last year to EUR 374 million. Therefore, group's net profit stands at EUR 271 million, an 11% increase from a year ago, not taking into consideration the extraordinaries of Línea Directa spin-off in '21. And the capital ratio came at a pro forma level of 11.9% that we will detail afterwards and stands comfortable above our long-term guidance of 11.5%. As I did mention, return on equity reflects this improvement in performance and shows an 11.6%, clearly ahead of the figure of last year and above the cost of capital for the industry.

We will follow the usual agenda. First, our first half and quarterly results, then risk management to end with a review of the different businesses in the period.

So moving to our income statement. Here's the P&L account for the first half of 2022 compared to 2021. And remember, please, that during the first half of '21, Línea Directa was part of the group until April '21 and that their contribution to the P&L was accounted under discontinued operations with EUR 936 million as of June '21. This compared to 0 for this '22 first half and from now on, the comparison will not have any Línea Directa impact. Only the current dividends from our remaining 17% stake.

Our income statement shows positive trends in the main lines of revenue, net interest income and fee income. Other operating income and expenses shows a small negative in line with the growth of the group resolution fund contribution charge this quarter.

Group's net interest income shows a positive trend to the seasonality of the quarter in a number of days. Although it mainly reflects the lending growth and also client margin improvement, it is up by 4% from first half '21.

Despite a very volatile market behavior and thanks to the increased support of our commercial activity, fee income reaches EUR 303 million and shows a continued strong growth of 15%.

Other operating income, as I did mention, was EUR 6 million negative and EUR 17 million higher than a year ago, mostly due to the resolution fund contribution.

Total gross operating income at EUR 963 million went up by 5% from '21. The quality of income remained very high with an increased contribution from Portugal at EUR 82 million by 9% and the Avant Money contribution of EUR 18 million and EUR 36 million, growing at 35% and 25%, respectively.

Group operations costs remains somehow under control in Spain and elsewhere. But despite the seasonal cost increase, the group continued to improve its efficiency ratio.

Group total costs grew by 4% in the first half, mainly from personnel expenses that went up by 4.4% due to the salaries, annual review and performance incentives in the first half. At the same time, general expenses went up by 3.9%, showing good control in overall expenses. This increased income above the cost performance allowed PPP to increase by over 6% from a year ago, showing a very strong resilience. Loan loss and other provisions are down 26%. Cost of risk allowances of EUR 106 million are down 16%, still below our guidance of cost of risk for the year and other provisions of EUR 45 million in the period are 44% below last year. Again, within our guidance for this type of provisions. After the expected reduction in provisions, profit before taxes stands at EUR 374 million, 30% more than a year ago.

The EUR 86 million increase in our profit before taxes more than doubled last year pretax profit coming from Línea Directa recurring activity of EUR 40 million. This shows a clear performance toward our objective of compensating the insurance profits from Línea Directa as soon as 2023.

After taxes, the group posted a net profit of EUR 271 million. This is 76% below of last year, including the full Línea Directa spin-off accounting. But excluding that, is like-for-like, it's an increase of 11% from a year ago. After the close of 2022, first half, we believe that these results are clearly in line for achieving our objective for the full year and make reachable our goal of EUR 550 million net profit by '23.

As you know, we are expecting some details about the new contribution for the banks in Spain recently announced although we have no information yet. However, the necessary caution of the future evolution of credit risk under this complex macro scenario, coupled with the difficult geopolitical and sanitary situation make us to fine-tune a little bit our guidance at the end of the presentation.

On a quarterly comparison, we can see a very positive evolution of the main lines of income. NII growth over 8% quarter-on-quarter and over 6% over the year as well as fee income, growing 7% in the quarter and 16% year-on-year. Seasonal operating costs increased by 6% quarter-on-quarter and 6% over the same quarter of last year. All this results in a pre-provisioning profit that remains resilient, increasing by 1%.

After much lower credit risk provisions, profit before taxes of banking activity has grown by 26% in respect to the same quarter of '21. And finally, quarterly net profit came at EUR 117 million, up 21% or EUR 20 million from the same quarter of 2021.

Moving on, the group's total loan book grew by 8.3% from a year ago, bringing EUR 5.5 billion in net loan growth to reach EUR 72.5 billion -- sorry, EUR 72.4 billion.

Growth in the quarter comes well balanced between our mortgage business, including EVO Banco in Spain, Portugal and Ireland, our consumer finance business and the corporate banking business.

Loan demand in corporates continue to show improvement from last year's stagnant performance after the end of the government programs to provide liquidity to companies.

Although second quarter always show strong growth in lending from increased activity, the EUR 2.7 billion net increase in this quarter is ahead of the EUR 2.3 billion of last year despite some slowdown in mortgage lending in Spain that we will comment later.

On the contrary, consumer loan book is picking up in all geographies and a restored corporate loan demand in Spain has made possible to post a first half loan growth of EUR 4.3 billion.

In Spain, lending growth maintained a pattern from last quarter when it started to pick up, it grew by 5.6% year-on-year, well over the 0.9% from the sector as of May '22, bringing market share increase in both household and corporate loans.

For corporates, loan growth has been 7.2% year-on-year with a strong contribution from working capital facilities, supply chain and international trade finance and almost negligible from next-generation EU funds.

Retail deposits continued to perform strongly in all geographies at 13% year-on-year on over EUR 9 billion to EUR 77.5 billion.

Moving on. Net interest income started to show a more positive trend due to interest rate increases. It grew by 5.5% over the same quarter a year ago and by 8% from last quarter. This is mainly due to increase in loan book in the quarter, over 50% of the growth and the start of the repricing of our loan books, mortgage in a small proportion and the corporate loan book with the other 50% of the growth.

In Portugal, NII grew by 14% with respect to the same quarter of '29 -- sorry, on '21 and by 10% respect to the previous quarter.

The contribution of Avant Money to our NII continued to grow. It contributed by EUR 19 million to the group NII this quarter versus 14% in the same quarter of last year or 34% growth.

Same happens to EVO then, NII contribution has been EUR 8.4 million this quarter versus EUR 6.3 million, that is 32%. The improved trend in our NII during the first half is mainly driven by loan growth, together with an improvement in customer margin the last month of this quarter.

The customer margin improved by 6 basis points from last quarter, thanks to 8 basis points increase in credit yield and 2 basis points increase in cost of deposits, marking the third quarter of '21 as a turning point in customer margin expansion.

Cost of deposits increased by 2% in the quarter has only to do with the wholesale funding and swaps related to this since the customer deposit cost continues at minimum and with no signs of change for the moment.

The 4 basis points, customer margin increase year-on-year is not coming from the positive repricing of Euribor. This has only started in May, June this year. It has to do with the increase in lending rates in mortgages, corporate and consumer finance.

For the third quarter in August, we will start to see a positive repricing of yields on mortgage backed book and on the corporate loan book 12 months reference rate. All this together with the increase in mortgage fixed rate and growing corporate and consumer lending activity at higher rates make clear to us a very positive trend of the net interest income going forward.

Moving to the ALCO portfolio. The group ALCO portfolio showed an increase in the period of less than EUR 1 billion to total EUR 10.3 billion. As of July 1, most of the portfolio sits under amortized cost with no impact in capital ratio and only EUR 1.6 billion stays in the fair value portfolio. Its compositions remain unchanged with the Spanish government bonds being 50% of total. Other sovereigns, mainly Italy and Portugal, 25%, and the rest mainly corporate bonds.

Other portfolio characteristics improved slightly in the quarter with an average maturity of 8.6 years average duration of 4.3 and average yield at 1.5.

After another quarter with very volatile bond markets, the fair value portfolio, again, negatively impacted our CET1 ratio as we will see later in the capital section. Related to this, you should know that once we had our financial statements audited in the 13th of June, we have updated on July 1, our ALCO portfolio business model, and now 85% of the bonds are booked under the amortized portfolio with an additional EUR 600 million booked under amortized cost. This reclassification will reduce or has reduced considerably the impact in the capital ratio from the coming quarters.

Moving into fees. Fee income performed in line with our guidance during the first half despite lower assets under management in the period. Those fee income was EUR 10 million above the previous quarter, and it continued to show growth of 16% over the same quarter last year. Fee income main contributors continue to be assets under management, payment and collections, equity, et cetera. The fees from AUMs were able to grow despite a very negative market effect in the period.

Other fees more related to activity, either corporate or either retail, continued to grow strongly and reflects the solid 14.5% growth over a year ago. Now total fee income accounts for 32% of operating income. The largest contributor to fees is asset management fees, 34% of total fees and still growing by 11%, a strong commercial activity during all the first half helped to offset the continued market volatility by keeping net inflows in positive until May, but the strong market effect about EUR 3 billion in the period, make our AUMs to and only EUR 100 million above those at the end of the first half of '21.

The second contributor to fees is payments and collections from corporate and individuals. Performance has been very strong, and they have been growing by 31%, improving the growth rate. Still positive trend in client trading and custody make fees growth by only 1% to EUR 60 million.

In the following section, in other operating income and expenses, the largest negative is EUR 69 million in regulatory charges, showing a strong increase in the single resolution fund contribution this year.

Gross operating income for the quarter stood at EUR 463 million, an increase of 3% from a year ago. Quarterly comparison, it reduced to the resolution fund contribution in the quarter. On the first half view, we can see a 5% growth over the first quarter of '21 and 11.6% over 2020.

Portugal and Ireland and EVO have been increasing their contribution to the group's operating income. The first grew by 9% from last year, and the second grew by 29%, continuing the improved trend of business in both countries, and the third, EVO, grew by 35% following their business plan to become profitable pretty soon. The chart on the right shows the breakdown of the contribution to income where net interest income represents 69%.

Moving to costs. Group operating cost in the first half totaled EUR 428 million. They are up 4.2% from the previous year and up EUR 12 million or 6% from last quarter.

Personnel expenses are up 4.4% to the performance incentives in the first half and 2022 salary increase.

General and administrative expenses plus amortizations are somewhat under control by growing 4%.

We are straight in our plan to maintain the long-term group cost-to-income below 45%, always trying to improve efficiency in all our businesses and geographies. We continue to do so in Portugal, now with efficiency at 53% and in Avant Money at 56%. EVO is still in a negative efficiency, although improving very much. At the same time, our very efficient Spanish business stand-alone keeps improving efficiency to 42% in the last 12 months.

With all this, pre-provisioning profit for the first half show EUR 535 million or 6% up from first half and 14% from first half 2020, a very strong performance coming from our customer business in all geographies. It is remarkable the improved performance of EVO under its current business plan, cutting by more than 40% their losses.

Cost of risk in the quarter finished at 31 basis points of total credit exposure with only 1 basis point increase from the first quarter. First half, cost of risk ended up 30 basis points or EUR 116 million, 7 basis points lower than a year ago and 9 basis points lower from 2020 due to the asset quality stabilization with increased exposure.

As of today, we have no evidence of any negative impact in asset quality indicators even after the end of the moratoria to individuals in Spain and Portugal and after the end of the majority of the ICO loans end of grace period, as we will see later. We expect this good behavior will continue during the second half of the year. However, in order to anticipate potential credit deterioration, we have updated our IRB models and set more restrictive minimum harder levels. Therefore, we have been actively promoting a Stage 2 migration in the last 2 quarters, mainly in Bankinter Consumer Finance and in small- and medium-sized enterprises with almost no impact in provisions. Thus, for the full year 2022, we continue to see a stable cost of risk with some upward pressure in the second half but without the possibility of extraordinary provisions related to macro adjustment scenario. We now see cost of risk close to 35 basis points at year end. We will review overall guidance at the end of the speech.

On provisions for litigations, the ones from FX mortgages portfolio continued to fall and show a reduction of close to 50%. We think that for the full '22, they will keep a similar downward trend to be maintained at 10 to 15 basis points of total risk.

In the next slide, our quarterly profit before taxes of the banking activity reaches EUR 160 million, growing 26% over a year ago. For the first half, it reaches EUR 374 million, up 30% and more than 6x that of 2020. And group's net income of the recurring business in the first half reached EUR 275 million -- EUR 271 million, up 11% from a year ago, including the recurring contribution from Línea Directa business and 1.5x from that reported on the first half of 2020.

In return on equity stands at 11.6%, clearly outperforming that of June '21 and 2020 and in the recurring contribution of Línea Directa in both years. We expect this trend to continue towards achieving the highs of 2019 return on equity very soon. For the full year, we expect group's return on equity stands above, of course, cost of capital. Excluding intangibles, the group's ROTE is at 12.3%.

Okay. We change section, and now we're moving to credit risk, liquidity and solvency. Nonperforming loans continue their flattish trend despite a more difficult and unknown new economic cycle. Total NPLs went down by EUR 29 million from June '21, and this includes the EUR 100 million approx last quarter the NPL sales in Consumer Finance and Portugal. With respect to the last December are up by only EUR 11.5 million to a total of EUR 171 million.

Portugal NPLs came down EUR 18 million in the quarter. Avant Money in Ireland brings only 0.4% and EVO in Spain down EUR 3 million in the quarter. The group's NPL ratio reduced to 2.11%, the lowest point since 2008 and 23 basis points lower from a year ago, mainly due to stable NPL figures while increasing the loan book and the sale of the NPLs in Consumer Finance in Portugal. In Spain, NPLs stands at 0.3%, 10 basis points below a year ago and 1 basis point from last December. The ratio continues to be way down from the sector average at 4.19%. In Portugal, NPL ratio declined to 1.3% or only EUR 110 million of NPLs.

As shown in the chart of the right, the NPL ratio in Spain went down to 1.9% from households at a much lower level than last year and also for corporates came down 10 basis points to 2.6%.

In the next slide, total provisions for nonperforming assets keeps increasing to EUR 1.183 billion a 1.5% increase from last year. All this had a relevant impact on our provisions coverage, which now stands at 65% of points more than a year ago.

And coverage for foreclosed assets were also improved to 55%, a 10.3% increase and clearly above the average discount of our sold assets.

The foreclosed asset portfolio is 30% smaller than a year ago or EUR 62 million less. The portfolio amounts to EUR 145 million. Total sales in the period amount to EUR 42 million or 25% of the stock at the beginning. We sell most of our repossessed assets through our common network with an average discount on sales at 41%.

Moving into capital. Our fully loaded CET1 ratio stands at 11.85% under a pro forma basis once considered their new composition of the ALCO portfolio since July 1.

Since last December, our return earnings bring an increase of 34 basis points, taking in consideration the accrual of dividends at 50% earnings. Capital consumption of risk-weighted assets has been 23 basis points due to the growth in the loan book and other small items, a positive 5 basis point impact in the period. All this bring our CET1 ratio to 12.21% before market valuation adjustments, and this is a good representation of a strong organic capital generation.

Valuation adjustments since December '21 have been 36 basis points negative impact. And this is net of 13 basis points due to the ALCO new composition in the second quarter of this year. Our ALCO portfolio during this first half contributes with negative 18 basis points, just only 3 basis points in this quarter. And the impact in the insurance portfolio from remaining Línea Directa stake by 18 negative points. That is 7 basis points negative in this quarter.

Total capital ratio remains at 15%, a very comfortable level. And the leverage ratio went at 4.1%. And finally, the 21.1% ratio for MREL remained well ahead of 18.7% requirement for 2022.

Moving into liquidity, recurring increases in our customer deposits keeps our funding gap in negative territory from minus EUR 2.5 billion a year ago to EUR 6.4 billion commercial gap. This negative gap in Spain more than offset the gaps coming from Portugal and Ireland, both having higher lending than deposits. As a result, loan-to-deposit ratio reached a record of 92.3%.

And the TLTRO remained stable at EUR 14.2 billion, and we account the interest earned at a 3-year average of 87 basis points due upon any step down in the year '22 and '23.

Now let's review the performance of the main business lines very quickly. The corporate. Moving into the corporate banking activity, the corporate loan book in Spain and Portugal grew by 7.4% year-on-year or over EUR 2.3 billion in the period, increased by 7.2% in Spain while the sector grew by 0.9%. This growth started in the first quarter of the year and has increased during the second, mainly in working capital financing due to the pickup in internal demand. The increase of raw materials and supply chain and most probably some anticipation of financing needs ahead of an interest rate rise.

In Spain, in the second quarter, loan book increased by EUR 1.4 billion or 7.2% to EUR 28.8 billion. This growth has made us to increase our market share to 5.8% from 5.4% a year ago. Loan growth from June '21 has been different by business segments, 8% in large corporates, 7% in mid and only 1% in SMEs. Total ICO loans with the state guarantee as of June '22 at EUR 6.4 billion have been granted mainly in medium and small corporates. Only 40% of them extended maturity or grace period, and all of them have come to the end. As of June, total ICO portfolio loan had only 2.2% NPLs and 6.9% became Stage 2.

Some indicators of the strong commercial activity during the first half, our new loan production came 27% up. Corporate payments up 28% and collections by 26%. Once again, international banking, with the trade and supply chain finance loan book growing outstanding 26% and to EUR 7.8 billion. This activity has become one of the most relevant sources of income from Corporate Banking. Its operating income of EUR 106 million has increased by 28% from a year ago and today represents over 27% of total corporate income.

In Wealth Management, in the next slide, customer assets keep growing on a continued commercial activity, adding both wealth services, private and personal banking. Assets under management remained flat in the year. The commercial activity was more than offset by the negative market effect in the customer's patrimony in this difficult market environment. Total assets from customers in both segments reached EUR 82.7 billion, up from EUR 75.4 billion last year.

The strong commercial activity measured by net new money the quarter shows a total EUR 4.4 billion increase split between EUR 2.9 billion in private banking and EUR 1.5 billion in personal banking. Market effect has been very negative year-to-date, bringing a negative impact of EUR 3.1 billion in private banking and EUR 1.3 billion in personal banking.

Moving into retail banking. During the quarter, there has been again a strong activity, although slowing down in mortgage new production. Salary account balances continued to grow. They are up 17% from a year ago. Mortgage origination in the period of EUR 3.4 billion was 15% above the last year and almost doubling the first half of 2020, thanks to the increased contribution of Ireland and Portugal and EVO.

In Spain, our market share in new mortgages is now at 8.2% as of April '22, coming from 8.7% as a result of the increase in rate for fixed mortgages. And for sure, more profitable and with a better quality since only 54% of mortgages granted last month were fixed and at a much higher rate, and their average loan to be continues in the mid- to low 60s.

Despite this change in behavior, the mortgage backed book keeps growing and reached EUR 32.8 billion, which is an increase of 6.3%, while the rest of the market grows at 1.4%.

Our Asset Management business reduced its growth trend since the beginning of the year in all categories, but it's still EUR 100 million over June '21, in total funds managed. All this is due to market impact in the asset valuation and particularly in third-party funds despite another difficult year -- quarter, assets under management volumes were maintained from a year ago to reach EUR 36.8 billion.

In the case of own managed mutual funds, net new money in the first half quarter has been positive until May and been able to offset the huge negative market effect, bringing the total mutual funds managed by EUR 10.6 billion or only EUR 400 million below December '21.

Let's move to the geographies. Portugal, the loan book grew by 10% to EUR 7.5 billion and retail funds at EUR 6.5 billion, up 19%. Growth in loan book was in both corporates, 13% and retail 9%. Our balance sheet at EUR 3.8 billion remaining almost flat from June '21. As income statement, operating income for the business grew by 11%, and costs show a 5% increase in line with our plans for improving efficiency. All of the above brings pre-provisioning profit up by a strong 14%.

Finally, after a EUR 7.4 million normalized loan losses provision with a very small impact of EUR 2.5 million from extraordinary recoveries, Portugal profit before taxes post EUR 30 million, 16% increase from last year. Now after more than 5 years since the acquisition, Bankinter Portugal shows an efficiency ratio of 54%.

Moving into Consumer Finance. Our Bankinter Consumer Finance subsidiary. At the end of the quarter, total loan book of EUR 4.4 billion, 41% up from a year ago with a new production of EUR 0.8 billion in the quarter, clearly recovering from last year's stagnant situation.

Geographically, the total loan book includes EUR 1.5 billion from Ireland Avant Money growing by EUR 529 million in the first half of the year and EUR 353 million from Bankinter Portugal, growing by EUR 77 million in the period, and the rest is EUR 2.5 billion in Spain, where the loan book grew by EUR 300 million in the first half.

You can see in the graph, the breakdown by type of financing. Personal loans represent 51% of total, growing by 28%. Transactor credit cards outstanding represent 18% of total with 16% growth and revolving credit cards now stays at 10% of total -- below 10% of total, EUR 432 million, down by 11%.

Household mortgages production in Ireland was EUR 341 million since June '21 and now represent almost total loan book in the country and a market share of close to 10%.

We feel very comfortable with the asset quality indicators. NPL ratio as of June stands at 4.6% from 7.3%. Provision coverage at 85%, cost of risk at 2.2%, very much below the one of 2021, which was 3.6%. And finally, the risk-adjusted return now over 6% for this short-term business and very efficient distribution made us believe that the future contribution of this business will continue to increase.

Regarding specifically Avant Money in Ireland, it is remarkable that since they have started the household mortgage lending business in September 2020, they have been able to reach 10% of new mortgage production in June '22. Plans are to increase and more than double the EUR 400 million mortgage production in '21. During this first half of the year, mortgage drawdowns came at EUR 462 million, slightly above our target. So this new activity, together with the recovery of the consumer finance activity, where personal loans have grown by EUR 53 million or 19% in the period. And credit card outstanding growing at 5% has made the loan book to increase by almost 2.5 -- sorry, 2.4% in the year, and at the same time, improve their good asset quality ratio. Now that 0.48% NPL with cost of risk of 0.73%.

New mortgage granted from December were EUR 467 million. This is 25% more than a year ago. The book now is up EUR 2.2 billion. So net interest margin jumps by 27%. Consumer and personal loans came slightly up to EUR 76 million from EUR 55 million a year ago. As of management ratio, NPL ratio stands at 0.55% or just EUR 14 million in NPLs with a very low cost of risk of EUR 1.2 million.

In P&L terms, EUR 18 million operating income, still not enough to cover the EUR 28 million of operating expenses in the period.

So here, we bring some indicator of our ESG plan, strategic and transversal plan with specific actions and targets to be developed. A summary of measures taking into relation of the bank ECG environmental performance in the quarter are, first of all, the environmental dimension. We have completed a climate stress test performed by the ECB and in Group 2 of 4 and ahead of the average of Spanish banks in Group 3. Some new steps have been taken towards business product lines. We have created a financial solution to Bankinter Consumer Finance to provide to household anticipated finance from the generation new funds to improve the energy efficiency of their homes, and also, we put together an alternative investment option, which is called Ecualia to invest in several projects related to the circular economy.

In the social dimension, some measures have been taken in the initiative, a bank for all related to working web accessibility for the visual impaired collective, also within the social dimension new programs to seek and retain young talent for the staff have been implemented at the same time that we have signed with SICAV to develop specific programs to reinforce senior talent at the bank.

On the governance dimensions, we continue to follow the good governance code with one of the highest percentage of women in the Board of Directors, 45.5% as well as independent members, 44.5%.

So we're coming to an end, a brief recap. A strong set of improved management ratio, return on equity 11.6%, efficiency at 44.4%, NPLs at 2.1%, strong commercial activity in an increased difficult economic scenario with improved loan and deposit growth over previous quarter and maintain an comfortable asset quality and solvency indicators, and a great financial performance more than offsetting the Línea Directa income in the past, increasing our proximity to a target of 23%.

Okay. So after closing a very successful first half in commercial activity, income performance and asset quality and in view of a more complex scenario going forward, but with the intact ambition of keeping growing market share in all business, I will provide our best guidance for the 2020 year.

So growth, we will continue growth expectations in all geographies. Portugal in retail and corporate loans and deposits. In Ireland, more growth in mortgages and improved growth in consumer finance, in EVO, strong commercial activity with a strong mortgage production and customer acquisition. And in Bankinter Spain, we expect for the rest of '22 that corporate loan demand and consumer finance and other nonmortgage retail lending should continue with a strong activity. On the contrary, mortgage lending will slow down in fixed rates, and this will reduce our overall new production of mortgages.

With interest rate increases already started, net interest income should move more positively. Now we see it between the mid- to high single-digit growth, thanks to the steady and positive repricing of the mortgage and corporate loan book. Having said that, as you can see, there is a strong volatility in the Euribor in the last -- in the past weeks, but this is our new guidance, mid- to high single-digit growth.

The increased activity in corporates and individuals, together with more stable markets for the rest of the year should provide fee income support to growth and to stay in the mid-single digit as we predicted in the beginning of the year. Having said that, once again, there is a huge market volatility, and this could be reviewed in the third quarter. But for the time being, we do expect mid-single-digit growth at the end of the year.

All in all, we confirm our expected group's operating income growth by mid-single digit. Group cost growth, although with some upward pressure will remain under control. Pre-provisioning profit should remain resilient, and cost of risk, as I did mention, we set a new guidance of 35 basis points for the overall 2022 year reducing 5 basis points from our initial 40 basis points guidance.

So having said that, I open to answer any questions that you may have for me. Thank you so much.

[David Lopez, executive]

Thank you, Jacobo. Indeed, we had a few questions already, as you would expect. Okay. The first one, for example, we've been asked for a couple of analysts whether we had any visibility on the terms of the new proposed -- on the proposed new tax on the banking sector.

[Jacobo Díaz, executive]

Thank you. No, we don't have any details. We don't have any additional information. We do have the same information that you have. So we do expect in the coming days or week to have much more visibility on these new taxes. I must say that we do consider this extraordinary contribution as unfair. It's been a complete surprise to us. We still need more explanation about the concept of the extraordinary benefits or profits that they are supposed to cover. And as you can imagine, we keep a huge uncertainty around these new taxes. Bankinter has always paid taxes as any other Spanish company. And we do pay, as you know, income revenue as everybody else. However, the banking system in Spain has a higher corporate rate. We do pay 30% instead of 25% from other companies.

In addition to that, and because our role in our financial stability and the system, we do have regulatory charges related to guarantee funds or even resolution funds. And just a quick reminder, that Resolution Fund is something which targets the bailing of institutions, not requiring public funds to recap. So we do already have these type of charges.

In addition to that, we have charges of deposits, nothing to do with guarantee funds, nothing to do with resolution funds. So in addition to that, we have charges in deposits. And since a couple of years ago, we do have to pay all the charges related to mortgage granting. So I do think that we do have already quite a lot of number of charges.

Just bear in mind that our profit after taxes, 50% is dedicated to the retain to retain earnings to reinforce our capital. So whatever additional taxes will be an additional tension in terms of capital ratio. And I think that we do have a lot of pressure to keep our capital ratios up. And I think that the banking system has responded very strongly and very good to the last couple of crisis. And I think that there is a great opportunity to have a good financial system, a safe and sound financial system that can protect at least the Spanish economy from potential future crisis. I think the role of the banking has been splendid, outstanding, and that's why we do not really understand these new extraordinary charges. So sorry for this long answer. But basically, we know nothing about this new tax for the time being, although we think it's completely unfair.

[David Lopez, executive]

Very clear. Thank you, Jacobo. Back to the business. We had questions on loan growth appetite. Where do you want to grow and whether we've been raising prices lately or remain competitive?

[Jacobo Díaz, executive]

Okay. I think we do have our plans to grow. As I did mention, we are growing in most of the -- in all the businesses and in all the geographies. We do have appetite for growth. As I did mention, there is a slowdown in the growth of mortgage grant in Spain. This is due because we have adjusted our pricing in mortgages, basically. We have updated our fixed rate mortgage pricing. We are at 3% our 30-year mortgage. And obviously, the demand is potentially a little bit lower, at least for some months. So apart from this, our appetite for growth is still there. I think in Portugal, we are doing an excellent job growing in retail and growing in corporate.

In EVO Banco, we are growing very well in mortgages with high -- with increasing interest rates. In Bankinter Spain, in the corporate loan book, we are also increasing rates. And I think we need to adapt to the new future that have in front of us. And in Ireland, also, we are increasing in mortgages. As I did mention, also increasing in consumer finance activities. And at the same time, we're also increasing pricing in mortgages in Ireland. Of course, as well as in Spain as well as in EVO and as well in Portugal. So in the corporate banking activity, also prices are increasing. And it is not only just a repricing of the variables reference. It's also the fixed rate prices are increasing.

[David Lopez, executive]

Okay. Two more questions on lending. Whether we have any targets of growth for the business in Ireland. And also whether we expect further growth in the consumer book and also what makes you comfortable on growing that part of the book?

[Jacobo Díaz, executive]

We are very comfortable with our growth in Ireland. I think there is a good opportunity, and we want to capture it. There is an opportunity in the mortgage business. Even if we are raising rates in the mortgage in Ireland, there is still a good opportunity and we want to capture.

In the Consumer Finance business, as you know, the macro environment in Ireland is very positive. There is a double-digit growth in GDP, and there is a good opportunity to keep growing.

The growth is focused in personal loans, with increasing price. And as far as there is an opportunity, our appetite will be there. However, I must say, of course, that we are very focused on the quality of our risk and the quality of our growth. Bear in mind that we keep focusing quite a lot on the type of clients that we have in Bankinter, which is mid- to high net income people with very strong quality of assets, very good profile of clients, and this is something that has not changed, and this is something that will not change. So the risk appetite is under very strict control in terms of quality.

[David Lopez, executive]

Thank you, Jacobo. Moving on to the net interest income. It was up on the 8% quarter-on-quarter. Can you just explain us how much of that was rates driven or any other drivers or even any one-offs?

[Jacobo Díaz, executive]

Okay. Thank you. First of all, there is no one-offs. So this is a result more or less 50% of growth, 50% of interest rate increase. This quarter, as I did mention, we had 1 day more than the first one. We have more than EUR 2 billion more of credited loans in our books. So that is a very strong growth in this quarter. We have increased the average basis points of the average yield in the credit side. The pricing or the yield of the front -- of the new production of mortgages is still higher than the back book.

The positive repricing in mortgages has just started, and we will see the full benefit in the coming months, quarters. There is more, let's say, more mix in the corporate banking book, and that is another indicator of source of increase of the average client margin. And basically, all the volumes are growing in all the businesses and geographies with personal loans are also growing with better yields.

In addition to that, I may say that the volumes that we have in at ECB account balances is pretty similar or even a little bit lower than previous quarter that makes a positive flow also in the NII.

So nothing extraordinary in this quarter. More or less half is due to higher volumes and half is due to better prices. Incipient repricing of mortgages repricing in corporate loan book has already started, and we will see a full benefit of the repricing in the following quarters.

[David Lopez, executive]

Great. Thank you. What shall we expect following on your very last sentence from the coming quarters in terms of NII?

[Jacobo Díaz, executive]

Okay. As we have increased our guidance, as I did mention. So we should, we should see strong quarters in the coming future. We have already mentioned that we do expect for every 100 basis points increase, a 10% to 15% increase in NII in the following 12 months. So this is our best estimation of what we do expect for the future.

[David Lopez, executive]

Thank you. Have we seen any changes to the rate sensitivity in the 12 months and 24 months?

[Jacobo Díaz, executive]

No, as I did just say, for every 100 basis points increase in rates, we expect somewhere between 10% and 15% increase in the NII in the following 12 months.

[David Lopez, executive]

Okay. Regarding the ALCO portfolio, can we expect any further increases in the coming quarters?

[Jacobo Díaz, executive]

I don't -- I mean in terms of increases, now we are at EUR 10.3 billion of the overall size of the portfolio. We do have a measure, as you know, which is more or less twice our equity, 2x our equity. So we should be somewhere between EUR 10 billion not -- EUR 11 billion, but basically, we should be around EUR 10 billion, EUR 10.5 billion. That is the expected volume. We have always been very restricted with the size of our ALCO portfolio, as you well know. So this has not changed.

As our equity increases as a sheet increases, we follow the same rules and the same percentage. So whatever increase in the ALCO portfolio is always under our risk appetite framework, and we shouldn't see any relevant increases in our ALCO portfolio.

[David Lopez, executive]

Thank you. What was the rationale? The reason for the changing in the business model of the fixed income portfolio? And whether you can also elaborate on the 13 basis points positive impact on the capital ratio.

[Jacobo Díaz, executive]

Yes, in this first half of the year. And as a result of last year transaction of Línea Directa, we tried to reduce the volatility of our capital ratios. And therefore, we changed the business model of our ALCO portfolio. So we decide to change some allocation of some issues related to subordinated debt or senior preferred debt on senior nonpreferred debt with a certain level of maturity. So whatever was over a certain level of maturity needed to be reclassified to the amortized cost portfolio. So as a result of this management decision, taking into consideration during this first half of the year, we have reallocated or reclassified over EUR 600 million of fair value portfolio into amortized cost portfolio. And this has generated also a reclassification of adjustments, which represents 13 basis points that have moved from the negative fair value portfolio to the amortized cost portfolio and therefore, has been eliminated from the calculation of the CET1 ratio.

[David Lopez, executive]

Thank you. Regarding the fee income, we have been asked whether there are any one-offs in the fees this quarter. And what do you expect for fee income in the second half of '22?

[Jacobo Díaz, executive]

No, there is no extraordinary fees in this quarter. Everything is related to BAU. We do estimate good and strong commercial activity. As you all know and expect, we expect a quite strong summer season in Spain, so activity from corporates and activity from retail in terms of payment and collections, for example, we do expect a strong season. We do expect a good behavior in terms of endorsements or in terms of brokerage or in terms of FX business or in terms of insurance. So except the assets under management business, which is quite correlated to the market volatility, apart from that, we don't expect major changes.

I think our -- for example, our international business activity, as I did mention before, is a good source of fees and something, I mean, very strong behavior and nothing tells us that things will change in the coming months or quarters, similar to the investment banking activity with, I'm sure that we will launch new vehicles in the coming quarters. So no major changes or neither any extraordinary expectation in terms of fees. I think the behavior is quite clear. Nothing special, nothing new. And the only great uncertainty is related to market volatility, which, obviously, will impact our fees in assets under management.

[David Lopez, executive]

Thank you. Moving on to the expenses now. How much was the contribution to the single resolution fund this quarter? And how much did it change from previous year?

[Jacobo Díaz, executive]

Sorry, the contribution -- I had mic off, sorry. The contribution this year has been EUR 15 million more than a year ago. And the overall volume accounts for around EUR 55 million, EUR 60 million.

[David Lopez, executive]

Thank you. What is your view regarding regulatory expenses going into 2024? Will they finally end?

[Jacobo Díaz, executive]

Well, this is the expectation. We do expect '23 also to be strong year in terms of regulatory charges. And we did expect that '24 will be the end because we reach the ceilings that were identified in the regulation that we have to meet by '20 -- at the end of '23. So we did expect that '24 levels of guarantee fund and resolution fund will be at the top, and then that will be a very, a quite more reduced year in terms of contribution with these type of funds. But as you can imagine, there is a lot of uncertainty around this that we expect to be clarified in the coming days.

[David Lopez, executive]

Thank you. How much of the growth in personnel expenses is by variable compensation related to strong lending activity this quarter?

[Jacobo Díaz, executive]

I don't really understand the question, but basically the increase in the personnel expenses...

[David Lopez, executive]

Yes, it's more related to lending growth, variable compensation...

[Jacobo Díaz, executive]

I do -- it's more related to variable compensation but also to fixed compensation because there is, as you know, our average in the group is even a little bit higher than a year ago. And we had a salary review in 2022 compared to 0% salary review that we had last year. So the increase is due to the annual review but also to the better-than-expected performance, once again, it has been an outstanding first half of the year.

[David Lopez, executive]

Can you confirm that you expect costs to grow below revenues this year?

[Jacobo Díaz, executive]

Yes, you know that this is our mantra. So we need to meet this commitment. And yes, our costs will grow below the level of growth of our income.

[David Lopez, executive]

Thank you. And last one on this topic, cost-to-income. Is the 43% medium-term target still achievable in the current environment?

[Jacobo Díaz, executive]

I think this is a commitment, and we would like to meet these commitments. You know that there is inflation pressures from everywhere, and we are trying to deal with them with the strong and detailed review of every single cost that we have in the organization.

But also, I wanted to remind you that our new geographies and new business are great contributors to this improvement in efficiency. So we do have the Irish operation, the Portuguese operations and the EVO operations, which are doing an outstanding job in trying to reduce their efficiency ratio. To reduce, I mean, to improve. That means to reduce the figure. And these will be the main drivers to drive down the efficiency ratio to that 43% level. We are not too far. We are at 44%, and we are expecting still a good flow of income and growth in the coming quarters.

[David Lopez, executive]

Okay. Regarding cost of risk, we have just updated our guidance for this year. But do you have any visibility for next?

[Jacobo Díaz, executive]

Honestly, no. There is a lot of uncertainty. I guess that after the holiday season, at least here in Spain, we will see a reality of what's going on. For the time being, as I mentioned, we don't have any single indicator that let us be concerned about this topic. That's why we reduced the guidance to 35 basis points. And I do not have a real visibility for 2023. What I can tell you is, for the time being, we have not released any single euro of the overlay provisions from the coverage that we had in the past.

[David Lopez, executive]

Okay. That's one of the follow-ups that we have. Before moving to that, have we seen any impacts from the update in the macro assumptions this quarter? And also, if you can confirm the size of the unused macro overlay?

[Jacobo Díaz, executive]

I can confirm that we have not used any single euro from this macro overlay. And as we mentioned in the past, this change in the macro scenario has not changed the volume of the macro overlay.

[David Lopez, executive]

Thank you. Stage 3. We've been asked if the amount of ICO loans that we are reporting and the Stage 3 is the full amount or is only the non-warranted part by the ICO?

[Jacobo Díaz, executive]

It is the full amount.

[David Lopez, executive]

Thank you. Also on the final one on cost of risk, what is driving the Stage 2 increase?

[Jacobo Díaz, executive]

Yes. The Stage 2 increase, as I did mention, is driven by a change in the way we measure -- the change or update our internal rating-based models. So the first thing is that we have review and update all of IRB models in the bank.

And the second thing that we've done is that we have changed minimum hurdle rates or levels of the probability of the fall to be considered Stage 2 situation. So we have been a little bit more restrictive in the level of change or probability of defaults from the moment where the loan or whatever credit transactions was granted and the current level of the probability of default, and this variation have been changed in terms of minimum required to be a Stage 2.

So we've been much more restricted than in the past. That's why there is a higher volume. But at the same time, that's why there is no additional cost of risk because it's nothing has changed. It's just a new way to be more conservative in the way we approach our positions. But the profile of the Stage 2 from a risk perspective has clearly improved because we have classified more volume from Stage 1 to Stage 2 with no additional cost of risk requirement.

[David Lopez, executive]

Okay. Any views on the TLTROs or any news there?

[Jacobo Díaz, executive]

We have no news. The size is still there. And as you know, in the coming quarter, the first -- at the end of December, we have the first reduction of the TLTRO volume, and then we have every quarter in 2023 some reduction, and it will end up in the early 2023. Nothing has changed, the yield in average, as I did mentioned, was 87 basis points and the average cost of the liabilities is at 36 or 37 basis points.

[David Lopez, executive]

Okay. On very final one, whether you can elaborate on our growth outlook versus our CET1 level.

[Jacobo Díaz, executive]

I think as I did mention, there is a good and strong organic capital generation, excluding the volatility of markets that has impacted our Línea Directa stake and our ALCO portfolio. Excluding that, as I have shared, there is a strong capital generation.

So in terms of outlook, we are not concerned about our level of growth for the coming quarters and the level of capital. So we are still, let's say, comfortable. The level of management buffer is still very high and the quality of the risk that we are granting is within our risk appetite framework. So no major news on that side.

[David Lopez, executive]

Excellent. Thank you very much, Jacobo. Thank you all again for joining us today. The Investor Relations team, obviously, is at your disposal for any further questions. Goodbye.

[Jacobo Díaz, executive]

Thank you very much. Keep safe, and I hope that you can avoid the heat that is taking over Europe and go quickly to the beach or to the swimming pool. Have a very nice holiday, and I hope to see you soon back in October. Bye.