Bankinter SA

MAD:BKT

Earnings Call Transcript 2022-Q4

[David Lopez, executive]

Good morning, and welcome to Bankinter Fourth Quarter 2022 Earnings Presentation. Our CFO, Jacobo Diaz, will start explaining the figures, and we will follow up with a Q&A session afterwards. Thank you.

[Jacobo Díaz, executive]

Hello. Good morning. Good morning to everyone, and welcome to Bankinter's earnings presentation for the fourth quarter and full year of 2022.

The related financial statements were posted on the website of the CNMV before market opens. All documents can also be found on our corporate website.

Let me start with a quick review of the main achievements of the year 2022 just finished. It has been another outstanding year in commercial performance in all regions where we operate. A strong volume growth in balance sheet, together with the unexpected rate increased speed, have become the driving forces of the relevant growth in our operating income and pre-provisioning profit to 12% and 16%, respectively.

All this together with a maintained solid asset quality and capital level has made 2022 an exceptional year. When in 2019 we decided the segregation of Linea Directa, our plans contemplated to reach a net profit like the one in that year, EUR 551 million by the end of 2023, based in our continued organic growth and the new diversification of businesses and countries.

We have been able to reach that very demanding mark 1 year earlier by 2022. Thanks to the start of the interest rates normalization in the year. We consider this as a remarkable performance in a continued challenging environment, with an increasing complex geopolitical situation and an unexpected high inflationary environment.

Let me be more specific about some of the things we have achieved during this very special year. First of all, one more time, we have been able to close the year with solid growth in our loan portfolio, mainly in our corporate loan book, but also in our consumer finance activity. We continue to support our balances with very positive commercial activity in part thanks to the strong customer acquisition in another good year.

Second, the strong increase shown in our net interest income in the second part of the year is due to the impact of the ECB rate increases in our variable rate loan book. That resulted in an increase of our operating income by more than 12%, clearly above our guidance at the beginning of the year.

Third, fee income has been able to maintain the record levels of 2021. But this year, with no extraordinaries, I recall, EUR 45 million in 2021 and with a much more volatile market impact in our assets under management.

Fourth, since the year has been better than expected in incomes, we have led our operating cost to grow, but always below our income growth. And in this fourth quarter, in an extraordinary manner, above our yearly run rate. In this last quarter, apart to the seasonal increase in expenses, personal expenses grew to the anti-inflation extraordinary pay to Bankinter employees and the variable pay linked to our exceptional commercial performance in 2022.

Despite all this, our efficiency keeps improving till 44% in Spain at 40.5% and allowed pre-provisioning profit of the group to grow strongly by 16% year-on-year.

And fifth and finally, asset quality continued to show stable balances in the year with a reduced NPL ratio and increased provision coverage as well as our solvency that remains at comfortable levels of CET1 fully loaded at 12%.

Okay. Let's move to the key financial indicators. The first one, the group's total loan book grew by 9% to EUR 74 billion. Thanks to the strong corporate lending in Spain and Portugal and mortgage production in Ireland and EVO. All these more than offset the slowdown in Spain mortgage new production.

Second, gross operating income above EUR 2 billion for the first time in our history at EUR 2,084 million grew by 12% with respect to last year, showing improved trend in the new rate environment.

Third, we believe efficiency and those operating costs remain under control, making possible one more year pre-provisioning profit to improve growth rate to 16% reaching EUR 1,166 million, again, a new record. The NPL ratio came down in the year in line with our asset quality indicators at 2.10%.

Coverage ratio has kept growing, reaching a comfortable 66%. Profit before taxes of the banking activity went up by 46% over last year to EUR 785 million. Group's net profit closed at EUR 560 million. Like-for-like, that is excluding the Linea Directa transaction in 2021, net profit has grown by 28%.

Our CET1 fully loaded capital ratio closed at 12%, maintaining our 50% dividend payout and well above our long-term guidance of 11.5%. Our return on equity at 12% reflects clearly the improved performance of the year and stands 240 basis points ahead of the figure of last year and safely above our cost of capital.

We now go through the usual agenda of our presentation.

Here on the first slide, the following slide, moving to the full year income statement. We see a strong growth in the most important revenue line, the net interest income, improving its growth trend after another quarter with very positive seasonality in interest rates.

It is up by 21% from December '21 and very much ahead of our guidance. A difficult capital markets environment was somehow offset by an increased commercial activity during the year and had made possible to support fee income. It grew by 0.4% from 2021, but excluding the third quarter one-off in 2021 in extraordinary fees from our investment banking activity, the growth would have been a strong 9% and above our yearly guidance of mid-single-digit growth.

Other operating income and expenses at minus EUR 59 million were EUR 35 million larger than a year ago, due to the usual increase of regulatory charges, resolution fund and guarantee fund.

Total gross operating income at EUR 2.084 billion went up 12%, as I mentioned before. Not only this growth, but also the diversification of incomes remains very high with increased contribution from Portugal, Bankinter Consumer Finance, EVO and Avant Money and from a brand new investment banking subsidiary, as we will see later in the presentation.

Group operating costs after inflation have started to impact and went up by 7.6%, as I did mention in previous presentation, always below income growth, though despite the seasonal fourth quarter increase and some extraordinary front-loaded mostly in personal expenses, that I will explain later.

Efficiency has improved to the group to 44% as well as in Spain, Portugal and Ireland stand-alone. This positive income and cost performance makes pre-provisioning profit to grow by 16.4% above the growth rate of 2020 and 2019, what we think shows a remarkable performance of our customer business for the year 2022.

Loan loss provisions went down 4% from 2021 in line with the maintained asset quality. Provisions for NPLs stayed in line with our review forecast and cost of risk for the year below 35 basis points of cost.

Other provision, as expected, had a strong reduction of 42%, even including the front-loading of some litigation expenses in '22 for '23. And like-for-like, that is excluding this extraordinary effect, provisions went down by more than 50%.

After lower provisions, profit before tax stands at EUR 785 million or 46% above 2021. And after taxes, group net profit reached EUR 560 million, 28% ahead of last year, excluding the extraordinaries of Linea Directa spin-off.

So after closing a very positive performance one more year, we continue to feel optimistic for the future and see 2023 as another challenging year.

Moving into the quarterly comparison of the P&L. We can see the impact of last quarter extraordinaries from the resolution -- sorry, the guarantee fund and some extraordinary expenses. Also, the strong performance of our net interest income and its evolution every quarter of the year and EUR 71 million up in Q4 with an 18% increase in the quarter.

Also, a very resilient pattern in fee income, up 3.4% in respect to the same quarter last year and recovered in previous year third quarter extraordinaries.

As we have mentioned before, operating costs increased by 16% in the quarter and by 15% year-on-year, mainly due to a one-off of EUR 15 million, of which EUR 13 million represent the extraordinary front-loaded in personal expenses that went up and by the anti-inflation one-off payment of EUR 1,000 to Bankinter employees and by the extraordinary variable distribution after a unique year in commercial activity and results.

Despite this, pre-provisioning profit shows an increased rate of almost 50% in respect to the same quarter last year and a reduction from the previous one after the extraordinary expenses.

Net income has been EUR 130 million, 58% up in comparison to previous year same quarter and down from the third quarter due to guarantee financial charges and extraordinary expenses that we have booked in the quarter.

Moving to the next slide. The group's total loan book grew by 9.1% from a year ago, bringing over EUR 6.2 billion in net new loans to reach EUR 74.2 billion. Growth in the year was driven by our corporate lending in Spain and Portugal, together with a strong mortgage production in EVO Banco and in Ireland Avant Money.

At the same time, as unexpected, mortgage lending in Spain were impacted by fixed rate increases and a slowdown in demand. After another good quarter in corporate lending, as the last quarter of every year, working capital activity improved and loan book grew by EUR 0.6 billion in the quarter to end the year growing by more than 9%.

Also, consumer finance loan book improved growth again by 6% in the quarter, mainly in personal loans in Spain and mortgages in Ireland.

In Spain, growth in the year has been 5.3%, again, gain in market share since the sector has grown by only 0.9%. In Portugal, lending is up 15% from a year ago to reach EUR 8 billion. EVO was also able to grow their loan book by 45% year-on-year, thanks to the strong mortgage production.

And otherwise, the retail deposits continue to perform according to plan. They grew 3.7% year-on-year and bridged EUR 2.7 billion to reach EUR 75.2 billion. During the last quarter, a decrease of EUR 1.1 billion in deposits occurred due to an accelerated commercial activity in investment funds and alternative investment vehicles from private banking. We have also perceived an increase in activity of institutional money seeking for deposits rates elsewhere.

Deposits were up by 3.3% in Spain, while the market grew by 4.7% in November, those losing some market share for the reasons just mentioned.

In Portugal, deposits continued to grow strongly, 9%. The cumulative rate of growth of deposit over the last 5 years has been 10% above the 7% growth of the loan book, thus improving our liquidity and commercial gap with a solid trend.

Group net interest income, in the next slide, has been showing a very positive trend during the last 5 years with a 10% cumulative growth rate. But due to the change in interest rate pattern in the second half of '22, the jump in the last 2 quarters has been remarkable, making net interest income growing by a stunning 21% in the year.

This good performance is not only a consequence of the rate increase in the second half of the year, but also of being able to grow the loan book every year at 7% on average, while successfully defending customer margin.

I want to emphasize the increased contribution of EVO to our NII that now expands at EUR 38 million. Also in Portugal, NII grew by 35% with respect to '21. And finally, in Avant Money, our net interest income reached EUR 78 million, growing 46%.

As for the customer margin, it keeps increasing by 33 basis points from previous quarter and 57 basis points above that of the previous year, a clear upward trend. And this is reflected in the yearly evolution of the customer margin over the past 5 years in the chart.

Credit yields jumped 30 basis points, mainly due to the repricing of the loan book and new production with better rates in both mortgages and corporate lending. At the same time, our cost of deposits only increased by 7 basis points from the low end of interest rates.

We believe improving credit yields in our loan book will be key to customer margin resilience since we expect for 2023 to show some initial data on customer deposits and for the second half, the finishing of the repricing of the corporate loan book.

Moving into the TLTROs. The TLTROs, the total stake now is EUR 12.2 billion after EUR 2.5 billion amortized in December, and they will follow the calendar shown in the left chart until the final amortization -- sorry, in the right side of the chart, till the final amortization on June '24.

Let me remind you that after the changing conditions introduced by the ECB last quarter, the impact of TLTRO in our net interest income has become quitely small reduced to only EUR 10 million in this previous quarter, and the trend will go down to 0 in the first half of 2023.

Moving to the ALCO portfolio. The year showed some increase due to the increase in perimeter. It closed the year at EUR 11.6 billion, it splits 77% under amortized cost with no impact in capital ratio and 23% at fair value. As of December, Spanish sovereign represents 54% of total and the rest is split between other 22%, mainly Italy and Portugal and other corporate data.

The portfolio's metrics improved with an average maturity of 7.9 years with an average duration of 5 years and an average yield increasing to 1.9%. At the end of the year, unrealized gains amount to approximately EUR 940 million, of which 90% of them sits on the healthy maturity portfolio with no impact in capital.

It is worth mentioning that we finally were not able to move from fair value to amortized cost categories in our portfolio for business model changes. Thus, the current situation is similar with what it was before. Amounts anyway were not relevant in any case.

Over the next years, maturity of the portfolio are minimal except for 2023, where EUR 1.5 billion will amortize or manage to renew.

Moving into fees. The fee income shows resilience, thanks to the fees related to activity in a very difficult year for the markets and related fees. It grew by less than 1% or EUR 3 million and below our mid-single-digit guidance for the year.

If for comparison purposes, we exclude the extraordinary fees of the third quarter of 2021 of the investment banking activity, the yearly growth is 9% over the previous year. In the fourth quarter, we have been able to increase fees by 3.5% due to better seasonality and continued commercial activity.

Quarterly fees were down 4.3% from the previous year last quarter due to the EUR 9.9 million success fee charged in the same period last year, and this year has been 0.

The largest contributor to fee income with EUR 194 million is Asset Management, down 5% year-on-year. This reduction is due to a relevant negative market effective 2021 ahead of EUR 5 billion. That has been almost offset by an increased commercial activity in investment fund subscription that finally brings assets under management to a level close to the ones of last year.

The second contributor to fees is payments and collections growing 27%. This very profitable business has been recovering in the year with a pickup in economic activity. Third is fees from trading and custody down by 3% reflects volatile market conditions in the year.

Other relevant fee income or FX business with customers' activity that it went up 10% from a year ago, back on the strong international commerce activity. And then the last one I want to mention is the risk-related transactions and life insurance and pension funds bring their fees to EUR 80 million by 14% -- up by 14% and 6%, respectively.

In the next slide, in other operating income and expenses. The most relevant components are EUR 89 million of trading income plus dividends and the EUR 140 million in regulatory charges that increases by 13% or EUR 16 million in the year.

Going ahead, the gross operating income for the year stood at EUR 2.084 billion, above the EUR 2 billion for the first time, an increase of 12.3% from 2021. This is an improvement of the compounded growth rate during the last 5 years of 7%.

In Portugal, gross operating income grew by 25%, a very positive business trend. In Ireland, gross operating income grew by 35%. In EVO, income grew EUR 37 million and 55%. And finally, in Luxembourg, the gross operating income reached EUR 20 million and grew by 22%. 74% of all our income come from NII and 29% from fees.

Moving into cost. The group operating cost in the year totaled EUR 918 million. They are up 7.6% from the previous year. This growth includes, as I did mention, EUR 15 million due to the extraordinary expenses booked in the last quarter, which in majority are in personal expenses.

Personal expenses are up 7.6% of the last year due to the increase of staff variable pay following the strong commercial activity and the mentioned one-off payment of anti-inflation bond provided to Bankinter employees.

General and administrative expenses also went up by 7.6%, starting to be impacted by the current hyperinflationary environment. Operating cost of EVO were up 7.4% or EUR 4 million. And in Avant Money, they were up 26%, when at the same time, incomes are growing by 35%.

In Portugal, costs are up EUR 8 million or 9% over last year, while the same period of revenues grew by 25%, also improving their efficiency ratio. I want to mention and in all these new businesses, there are still a period of new investment, and that is the reason, again, why the rate of growth in cost is above the Spanish reference.

With all the efficiency continue to improve in the group, the cost-to-income dropped 200 basis points to 44%, and it's almost 500 basis points lower than in 3 years ago. For 2023, we plan to achieve our long-term cost-to-income target of 42%, thanks to the improved efficiency in our new businesses and geography.

In Portugal, now efficiencies stands below 50%. And in Ireland Avant Money efficiency stands at 55%. EVO is very much improving its negative efficiency. And finally, as I mentioned, our efficient Spanish business' stand-alone runs at 40% levels. With all this, pre-provisioning profit shows EUR 1,166 million, a stunning 16% up increase and more relevant almost 2x ahead of that in 2019 prior to the COVID crisis and the full contribution of Linea Directa. Let me highlight that the growth rate has multiplied by 4 in the period.

Talking about the cost of risk. Cost of risk finished the year at EUR 274 million or 34 basis points, 5 basis points down from 2021 figures.

The cost of risk in 2022 reduced mainly in Spain and the only small growth occurred in our consumer finance business. In Spain, net NPLs grew by EUR 59 million in the year with reductions in commercial banking and in large cost rate. And the small increase is only coming from Mid and SMEs companies where almost 50% were government-guaranteed ICO. In Portugal, NPLs reduced by EUR 18 million.

As we see things today, we expect cost of risk to start the year slightly higher, but finished at close to 40 basis points. I will come back to this guidance at the end of the presentation.

On the other provisions, mostly for litigation expenses ended at EUR 107 million or 13 basis points downward trend was improved again with a reduction of 50%. The downward trend in this provision will make possible again, a reduction of 10% to 20% in 2023.

Group net income reached EUR 560 million, a new record, excluding the extraordinary profit from Linea Directa transaction. It compares with a net income of EUR 437 million and EUR 317 million in 2020, when we took the decision of front-loaded EUR 243 million of extraordinary provisions related to the COVID macroeconomic scenario.

This EUR 560 million mark is EUR 9 million above the 2019 net income of EUR 551 million that just, bear in mind, included EUR 57 million of extraordinary badwill from the acquisition of EVO. Without net this -- without this net income is up 13% since that figure. 16% compound average rate of growth over the last 10 years, very strong performance.

ROE stands at 12%, and ROTE stands at 12.7%, clearly above cost of capital. After closing a very good year in 2022 and clearly above our targets, we expect for this year and onwards to obtain a return on equity is clearly above this 12% mark, excluding the banking tax.

As every year, in the last quarter, here we bring the total annual return to shareholders of Bankinter. As you can see in the chart, the Bankinter share price return in 2022 has been 39%. Should you add dividends spend in the year which reached EUR 0.28 with an increase of 20% of the dividends paid in 2021, so we reached a Bankinter shareholder return of 45%.

We go now over the credit risk and liquidity and solvency section. Non-performing loans continue under a stable trend with total NPLs in December '22 at EUR 1.73 billion just EUR 41 million up from December '21 and EUR 22 million up from September.

The consumer finance NPLs grew by EUR 48 million during 2022 to EUR 214 million. The group's NPL continued bottoming at 2.10%, up 13 basis points lower. In Spain, NPL ratio stands at 2.32%, 4 basis points below that we got in September. And this ratio is -- continues to be way down from the sector average at 3.77%. In Portugal, NPL ratio declined to 1.31%, which is, again, a stunning performance. As shown in the chart on the right, the NPL ratio in spend went down to 1.8% for households and 2.8% for corporates.

Total provision for non-performing loans stands at EUR 1,220 billion -- million, up 5% from last year. All this had a relevant impact on our provision coverage, which now stands above 66% from 64% last year.

The foreclosed asset portfolio is 28% smaller than a year ago, again, extraordinary performance. Now the portfolio amounts to only EUR 123 million.

Moving into capital. Our fully loaded CET1 ratio finished the year at 12%, an increase of 11 basis points. On the year, our return earnings contributed with a total of 77 basis points, 10 basis points more than in 2021. The capital consumption of our risk-weighted assets growth has been 29%, the IRB deficit and other regulatory parameters, brought 16% positive. And finally, the valuation adjustments brings 68 negative points due to market's volatility in the bond portfolio and in the Linea Directa share price.

With all this, the total capital ratio reached 15%. The leverage ratio stands at 4.4% after the loan book growth in the year.

Finally, the year-end 21.4% ratio of risk-weighted assets for MREL remained well ahead of the regulatory requirement for 2022 at 18.7% and 20.05% for 2024.

Our commercial gap. After the relevant reduction since 2017 from EUR 5.5 billion 5 years ago to a negative EUR 5.3 billion in 2021.

Last year, it changed direction and now it stands at negative EUR 2.2 billion commercial gap. Still this gap in Spain offset the ones coming from Portugal and Ireland where lending is larger than deposits for the movement.

As a result, loan-to-deposit ratio moved to 97.2%, owing to more growth in loans than in deposit this year. Last year, it was at 97% -- sorry, at 92.2%. Liquidity assets that stands close to EUR 20 billion and wholesale maturities calendar looks pretty balanced.

Okay, let's go to the different business lines. Here, we can compare the improved diversification of our operating income from 5 years ago with better balance between the main recurrent contributors and the new businesses with continue -- which continue to gain share of income.

Going to the corporate and SME loan book, it increased by EUR 2.7 billion or 9.3% in a very good or excellent year of corporate business, ahead of our 7% growth run rate over the last 5 years. In Spain, after a strong last quarter, like every year, loan book reaches EUR 29 billion, growing by 8.2%, while the sector grew by only 1.8%.

Those will continue to gain market share in the business now at 5.8%. New production of corporate loans grew by 28% from 2021. Our corporate loan book is split between large companies, 55% with close to 10% growth in the year, mid companies 28% and that have grown at 7%. And SMEs, 19% and just a small growth of 1.7%.

In Portugal, our corporate loan book grew by 20% or EUR 400 million in the year. And once again, different sources of revenues for this corporate segment. International trade and supply chain finance enjoyed another good year. Transactional business with corporates clearly improves 2021, growing by 48%.

Regarding the ICO financing for corporates and SMEs, the outstanding at year-end 2022 is EUR 5.9 billion from a total of EUR 8 billion in limits. Investment Banking, after an exceptional good year in 2021, Investment Banking has started it's own line in 2022 as a 100% subsidiary of the group and focus in alternative asset management vehicles.

This new business will create a recurring and stable income stream with a much higher valuation from the market now on by its own. Some of the key indicators of Bankinter investment in the year are the management of 19 different vehicles of alternative investment for EUR 5.7 billion of our -- sorry, yes, EUR 5.7 billion or private banking customers with a total capital committed over EUR 4 billion.

More relevant, they have already distributed to investor EUR 800 million in returns of their investments since inception. Also, activity in our structured finance team continues to be strong, managing over EUR 4 billion.

Here in the next slide, you can see a snapshot of the different vehicles for alternative investment, 4 of them in the renewable energy, 3 in private equity and virtual capital, 8 in real estate and finally, 2 in infrastructures.

In Wealth Management, customer assets under management have continued to grow, thanks to the strong commercial activity and an increased number of customers. Adding both businesses, wealth and retail banking, assets under management increased by 3.2% to EUR 92 billion in patrimony under management, split between EUR 51 billion in wealth and EUR 41 billion in retail.

Strong track record of the last 5 years shows 47% growth in AUMs in wealth banking, previously private banking and growth in the new segment, retail banking, only comparable to 2021 since in 2020, a new segmentation occurred in the bank.

The strong commercial activity can be measured by net new money in the period that shows a relevant EUR 7.5 billion increase. Market effect has been very negative in the period, bringing a combined reduction of EUR 4.8 billion.

Our Asset Management business had a difficult year and suffered from the increased market volatility, particularly in third-party funds and pension funds.

In the case of own-managed mutual funds, net new money has been very positive and able to offset the huge negative market effect, bringing the total mutual funds managed to EUR 11.3 billion.

Special patrimony service and CCAPs also suffered from the market impact in the asset valuation, but also for legal changes that has made customers to switch to other similar products, plus the 21% drop in assets.

Despite this difficult year for the bond and equity markets, total assets under management add to a relevant amount of EUR 37.2 billion.

Our retail banking in the next slide continue to enjoy strong activity. In fact, customer acquisition in Spain set a new level of over 100,000 customer -- new customer in a year.

In product, salary account balances in Spain grew by EUR 1.8 billion in 1 year, totaling EUR 16.7 billion, more than 2.4x the balance 5 years ago. In mortgage, strong origination in the year of EUR 6.7 billion represent an increase of 13% from that of 2021.

EVO contribution continued to grow with EUR 1 billion and Avant Money in Ireland even more with EUR 1.2 billion of new production.

Bankinter continues to keep market shares in the mortgage origination, clearly above our natural one, it stands at 6.7% in the last 12 months ended in October.

Our total mortgage back book keeps growing in the 3 different markets to reach EUR 33.1 billion (sic) [ EUR 33.7 billion ].

Let's look at the Portuguese franchise now. They have closed another very good year and ahead of plan. The steady growth can be seen in the right-hand side graph from 5 years ago, 10% compounded rate of growth in the business, loans, deposits and our balance sheet.

In 2021, the loan book grew by 15% to EUR 8 million and retail funds at EUR 6.4 billion. The growth in loan book was split between corporate banking, EUR 2.4 billion up, and retail banking, EUR 5.6 billion up. Like in Spain of balance sheet had a poor performance in the year.

In 2022 -- sorry, operating income and cost. The evolution of the last 5 years speaks by themselves with some extraordinaries after the acquisition in 2016 related to write-backs. Since 2018, a clear and steady path of improving efficiency by increasing incomes with a similar cost base make their cost-to-income move from 74% to current 49.5%.

As the income statement, operating income grew by 25%. This evolution can be seen in the right-hand graph from positive -- in the left from positive cost of risk of the first 3 years to a normalized one in the 3 last years.

The above brings pre-provisioning profit to a very strong 47% growth. And the operations profit before taxes reached EUR 78 million, a strong 54% up.

Moving into Bankinter Consumer Finance. Including Ireland, mortgage production reached a total loan book of EUR 5.5 billion, which is EUR 324 million up from September and 55% up from a year ago, held by the strong mortgage origination in Ireland and despite the contraction in revolving cards in Spain.

The breakdown of the total loan book by geography is EUR 2.2 billion coming from Ireland Avant Money. The rest, EUR 2.8 billion is Spain, where the loan book grew by 26%, mainly in personal loans to Bankinter customers despite the reduction of EUR 32 million in revolving credit card outstanding.

The breakdown of the loan book by product is on the right hand. Personal loans represent 47% total, growing 36%. Transactor credit cards in Spain, Portugal and Ireland represent 16%.

Revolving cards in Spain are only 8% of total book and less than [ EUR 414 million ], decreasing 7%. And very relevant today are the home mortgage in Ireland that reached over EUR 1.6 billion and represent now 28% of total loan book. New origination in 12 months, mainly in personal loans in Spain and in Irish mortgages represent EUR 3 billion, 2x the 2021 origination.

NPL ratio reduced to 4.2% from 5.1%. Cost of risk 2.5% lower than the 3.5% a year ago. We continue to see very good opportunities in this profitable business. In Ireland, the underwriting of mortgages under the new name of Avant Money has been running well ahead of our expectations. This new activity was the main driver of the loan book to grow by 132% in the year to reach EUR 2.3 billion in total loan book.

The mortgage loan book ended at EUR 1.6 billion with a new production of EUR 1.2 billion or 2.7x more than 2021. All this growth came with improved asset quality. Now NPLs stands at 0.4% and cost of risk at 0.9% with a coverage provision over 200%.

We aim to keep growing in mortgage lending in 2023; however, at a slower pace now that we have updated and increased rates for the new interest rate cover ahead of competitors.

Okay, almost closing, getting to EVO. EVO has been a steady development of its business plan with expected recovery in credit cards and personal loans during the second half of the year, but with the most focus in the new mortgage underwriting. New mortgage granted in the year were at a record almost EUR 1.984 billion, 30% up.

And the loan book reached EUR 2.7 billion, 45% up. The quality of those mortgages is very high. Indicators like amount, affordability, loan-to-value and the fact that 98% of this new production available has been fixed rate.

As for liabilities, EVO has EUR 3.8 billion in retail deposits, up 3% and EUR 250 million in all -- in off-balance sheet.

NPLs, 0.51%, EUR 37 million operating income, which is still not enough to cover the EUR 56 million of operating expenses.

And let's go to the conclusion. Sorry, first, we go to the ESG plan.

So a summary of the measures, thanking in relation to the Bank ESG performance. The first one is related to climate change. We are already carbon-neutral in relation to Scopes 1 and 2 as our electricity is 100% green.

We have started including decarbonization measure in our corporate and mortgages lending policies. We got measures in social initiatives that have been social investment of EUR 2.9 million, staff in voluntary actions of 15%, beneficiaries of financial inclusion programs and web and app accessibility, 95% and 81% respectively.

And finally, in governance, we are one of the banks with the highest percentage of women in the Board of Directors, 46% as well as independent members, 55%. So the launch of ESG training to 100% of the staff and 100% following of the code of good practice in the country.

Okay. So now a quick recap. I think we are on time. A very strong commercial activity reflected in solid volume growth and in all geographies. We remain best-in-class in asset quality and with a provision coverage well enough to manage for future potential risk arising from any future credit quality deterioration. The strong operating income growth allow us to improve growth rates in our pre-provision profit to grow by 16% and reach EUR 1.166 billion, which is a new record.

Group net profit, EUR 560 million, which anticipate 1 year our target, and a strong set of management ratio with a return on equity of 12%, efficiency at 44%, NPL at 2.1% and CET1 ratio up 12%.

So let me go in a few words on 2023. We expect selective growth in all geographies, Portugal in all 3, mortgage, corporate and customer -- consumer loan book.

Ireland continued focus on mortgages and growth in personal loans and in credit cards outstanding. EVO Banco also focus in mortgage production and continue developing personal loans and consumer finance business. We expect for spend some slowdown in mortgage lending, but more than offset by increases in other non-mortgage retail lending and in the corporate loan book to continue the trend started in 2022 with increased activity in corporate demand.

And let me share some guidance for the year 2023. Net interest income should continue to grow strongly particularly during the first part of the year with a similar rate of growth of that in 2022, which is above 20%.

Increase in activity and more stable markets should keep fee income growing again at mid-single digit. The group costs will grow again in this inflationary environment by more than a mid-single digit, like in 2022, but always growing below incomes with the objective of making pre-provisioning profit to remain resilient at the current level of growth.

And finally, the cost of risk that we expect at comfortable levels at 40 basis points for the 2023.

And now I'll be happy to take your questions. Thank you for your time.

[David Lopez, executive]

Thank you, Jacobo, and thank you for just reminding us of what the guidance is for '23. Obviously, we have some questions. And as usual, we will try to group them by topics.

Starting with the NII. We had some questions regarding our guidance you just mentioned. And what are the assumptions on deposit volumes and costs and obviously, bit on deposits and the Euribor scenario for '23 for that guidance?

[Jacobo Díaz, executive]

Okay. Thank you. Yes, I just did provide a guidance that should be -- or we do expect above the 2022 figure in terms of growth. So we end up the year with 20% increase in net interest income. And we do expect, again, a quite a strong year for 2023 with all the repricing effect even with deposit beta.

So we do expect over 20% growth in our net interest margin. We do assume, of course, uncertainty in this figure. We do expect a beta to be in average in '23 around 20% to 25%. This is our main assumption.

We assume Euribor to be around 3.5% during the next year. And this is basically the most relevant items. We still have around 70% of our mortgage book in variable rates. We still have around 2/3 of our corporate banking book, which is variable and renew very quickly. So we are optimistic for 2023 and especially for the first half of the year.

[David Lopez, executive]

And regarding the deposit volumes and costs, can you comment on that?

[Jacobo Díaz, executive]

Well, I just did mention that we do expect deposit volumes to be -- to have a beta of around 20% to 25%. We do expect across the year, more attention in the remuneration of deposit, that is something which is obviously expected.

And in terms of volumes, I think we have a very strong franchise to keep our liquidity levels at very, very comfortable levels. We have I just remind you that we have operations in Portugal, we have operation in EVO, we have operation in Spain that have a strong franchise to capture deposits.

So we've -- we are in a very, very comfortable liquidity position. We have a very diversified sources of clients. Of course, the evolution of the liquidity will depend also in the level of growth. But I think we are optimistic about the volumes or deposits for next year.

[David Lopez, executive]

Thank you. Specifically on the quarter, how much was the contribution to the NII coming from the TLTROs?

[Jacobo Díaz, executive]

In the quarter, it was around EUR 9 million.

[David Lopez, executive]

And what shall we expect for '23?

[Jacobo Díaz, executive]

Figures close to 0.

[David Lopez, executive]

Thank you. And one more on the contribution to NII, this time coming from the ALCO book. How much is the yield of the EUR 1.5 billion that is amortizing this year?

[Jacobo Díaz, executive]

The yield is 1.9%.

[David Lopez, executive]

Amortizing this year, the EUR 1.5 billion that amortize in '23? Or government bonds that are very ages. Yes. No, no, the ALCO book, the EUR 1.5 billion that amortize this year?

[Jacobo Díaz, executive]

3%.

[David Lopez, executive]

3% yield. Thank you. Okay. Moving to the liquidity you just mentioned a minute ago. What is our current liquidity coverage ratio?

[Jacobo Díaz, executive]

Yes, we have ended December at 195% level.

[David Lopez, executive]

Thank you. And what is the target for '23?

[Jacobo Díaz, executive]

We -- I mean, our target for 2023 is to keep quite comfortable levels above 150%, which is a very comfortable figure for us.

[David Lopez, executive]

Thank you. Do we have the funding plan already to fund for our loan book growth this year?

[Jacobo Díaz, executive]

Yes. I mean, we do have -- of course, we do have plans to issue whatever is required to meet our MREL requirements in senior preferred and senior non-preferred. And of course, we are ready to start issue short-term issues in commercial paper or whatever is required.

[David Lopez, executive]

Thank you. Moving on to volumes now. What are we seeing in the mortgage and corporate books. What is the outlook in volumes?

[Jacobo Díaz, executive]

For 2023?

[David Lopez, executive]

Yes.

[Jacobo Díaz, executive]

Okay. In average, we do expect another good year in growth. So we do expect, again, figures around 5% growth. Mortgages will be, again, a good relevant player that I would say they should account more or less for half of the growth of the following year. And the remaining should be majority also in the corporate banking book and consumer finance. So I would say more or less almost 1/2 will be from mortgages, then around 40% come from corporates and around 10% from other items like consumer finance, et cetera.

And bear in mind that all the geographies, we do expect growth in all the geographies. We do expect another -- a good year in production in new mortgages. We understand that 2022 has been an excellent year, especially in Ireland. We do expect a reduction in demand of mortgages in Ireland because we have increased sharply the rates of mortgages some months ago. So we do expect at least some time to recover that new production levels until competitors come up with a good proposition in terms of rates.

But again, I think, in Portugal, we do expect a good performance. In Spain, we do expect also a good performance, especially in the corporate banking book and consumer finance.

[David Lopez, executive]

Thank you. Moving now on deposits. If you can explain the latest deposit dynamics, deposits going down in the quarter and some slight growth in term deposits.

[Jacobo Díaz, executive]

Yes. Today, our current deposit base is around 90 -- more than 95% is in current accounts and around 2/3 are in commercial banking and retail banking and around 1/3 is in the corporate banking world. This is our structure of resources.

In the last quarter, we have seen a reduction. And that reduction, as I did mention, is related to 2 different things. The first one is we still promote a very strong activity in moving balances from current account to value-added products, which is investment funds, which is alternative private banking vehicles.

So this type of value -- stocks to be -- to get the returns on custody. So this type of advisory service that we provide to our clients. So this is one reason. And in fact, the commercial activity and investment fund this last quarter of the year has been the largest and the highest in different quarters in the past.

So we've got a very strong performance in this type of value-added products for our private banking and retail customers.

And on the other side, in Corporate Banking, we've noticed, and I just did mention, is that some institutional clients are looking for better rates, and that is the only reason why they have -- some of them have left the bank.

[David Lopez, executive]

Can you share with us if there is any of that institutional money still left or pending -- do you think you're pending to move away?

[Jacobo Díaz, executive]

No. I mean that money is very volatile, can go and go back very easily. So nothing is expected as of now. I think those that 1 and 2 left have already left.

[David Lopez, executive]

Thank you. Very clear. Moving now on to expenses. We have some questions regarding -- well, whether you can repeat your comments on the one-offs in the quarter, in the 4Q? And also, what is the likeliness of any of that to repeat in '23?

[Jacobo Díaz, executive]

Okay. As I did mention, we had one-off expenses in this quarter. As you can imagine, while we got such a huge and strong performance in income, we are happy to do some extraordinary items in the expenses.

Now first of all is, we got a commitment with an extraordinary pay anti-inflation bonus to Bankinter employees that we have recorded in December. And that is the reason why we have an extraordinary one-off expense in this month, in this quarter.

In addition to that, as you can imagine, our extraordinary performance, which has been accelerated at the end of the year, which is obviously reflected in our NII returns, have generated more-than-expected variable incentives to our staff. So this is the reason why there is a one-off overall amount of EUR 15 million of non-recurring costs, and there is no other new.

We continue to manage costs as we've been done in the past. We still have our mantra of growing more income than the growth of cost. And we are the same. We are of a stable headcount in the bank, and this is going to be the case in 2023 for the time being, the same amount of staff for the group and nothing to worry about.

[David Lopez, executive]

Thank you. We are getting questions also regarding whether we can guide on cost-to-income ratio? And also, what could be the quarterly run rate going forward in cost?

[Jacobo Díaz, executive]

Efficiency ratio is, as I did mention, is around 42% for the next year. And the run rate for the cost in the following quarters should be similar to the annual level that we've seen, which is around -- the final figure around 7%, more or less.

[David Lopez, executive]

On the efficiency rates that you just mentioned, are you including the new tax on banks?

[Jacobo Díaz, executive]

No. On the efficiency ratio, we are not including the tax on the bank.

[David Lopez, executive]

Thank you. Moving now on to asset quality. Have we done any NPL sales in the quarter?

[Jacobo Díaz, executive]

We have not done any NPL sales in the quarter.

[David Lopez, executive]

Thank you. Now which segments did you see at most vulnerable in '23?

[Jacobo Díaz, executive]

I imagine that you are thinking about credit risk or NPLs?

[David Lopez, executive]

Yes, in asset quality...

[Jacobo Díaz, executive]

I don't think this is a surprise, but normally, the consumer finance business and the SME business are the most vulnerable. That is the reason why, for example, in the SMEs, we had a very strong level of guarantees, either through a real guarantees or either through government facility, gov facilities. So we have a very good protection in -- at least in the SME segment.

In Consumer Finance, as you know, we have a large proportion of this business with Bankinter clients, which are much -- with much better risk profile.

[David Lopez, executive]

Okay. Still on credit quality and our cost of risk guidance. What kind of deterioration are you factoring? And what macro scenario are you seeing for '23?

[Jacobo Díaz, executive]

Okay. So the macro scenario is similar that you've seen or that you have with Bank of Spain. So macro scenario, we have a GDP growth at 1.3% for 2023 and 4.6 -- sorry, 2.7% for 2024. And the most relevant is the unemployment rate, which is 12.9% in 2023 and 12.2% in 2024.

The unemployment rate for us is the most relevant indicator and that is the reason why we feel comfortable with a level of risk for 2023 based on those good figures of the economy. The guidance, again, as I mentioned, is around 40 basis points, which is similar to the original guidance that we provide for 2022.

[David Lopez, executive]

Moving now on to capital. What kind of risk-weighted asset inflation and capital CET1 ratio do you see for '23?

[Jacobo Díaz, executive]

For '23, we do expect a slight increase in capital figures. Just bear in mind that growth is going to be -- is lower. I mean this -- in 2022, we had finished the year with 9% growth in the loan book. And for 2023, we are targeting some figures around 5%.

So the level of consumption should be a little bit lower. So -- and the other key issue in 2022 has been the valuation adjustments. As you know, there have been a negative contribution of 68 basis points. Just imagine the '22 ratio without that valuation adjustments. So just if we have a normal year in terms of valuation adjustments in 2023, I can assure you that the capital ratio will go up.

[David Lopez, executive]

Okay. Two more on capital. Given the 12% current CET1 current ratio, any room to increase payout?

[Jacobo Díaz, executive]

Now for the time being, we maintain our policy at 50% payout.

[David Lopez, executive]

And any regulatory headwinds expected for '23?

[Jacobo Díaz, executive]

Not in terms of capital, I guess, apart from the bank tax.

[David Lopez, executive]

We will get there. One question regarding our medium-term guidance, given the fact that we have already reached the EUR 550 million that we had in plan for '23, do we have a new guidance or a new target?

[Jacobo Díaz, executive]

The EUR 550 million was, I think, a unique moment in the story of Bankinter with the Linea Directa spin-off. And I think we thought at that moment, that was necessary to have a proper target for external and internal purposes. I think it has been the first time in our lives, and I don't know if we will repeat it again. So we do not have a specific target or guidance for the long term right now.

[David Lopez, executive]

Thank you. Regarding the new bank on tax, we had a couple of questions there. First one, how are we going to account for the new tax, whether it's '23, '22, whether you can confirm that?

[Jacobo Díaz, executive]

Yes. Okay. Yes, I confirm that the registration is going to be in 2023. It's going to be, as far as we know today, in the first quarter of 2023. And as far as we know today, it will be registered or recorded as a contribution that is in the same line as the guarantee fund and the resolution fund. But as I said, this is the information that we got today.

[David Lopez, executive]

Do you have an estimate of impact to revenues?

[Jacobo Díaz, executive]

We -- our estimate is for '23 and '24 because it's 2 year -- or we do expect it's a 2-year bank tax, a range of 80 to 100. This should be the range for '23 and '24 the bank tax.

[David Lopez, executive]

Thank you. Moving on to a different topic. Regarding the code of good practice to help vulnerable households, have you seen any impacts there?

[Jacobo Díaz, executive]

The answer is no. The level of impact in our case is not relevant. Just bear in mind that the profile of our clients is medium to high net income or large wealth, and therefore, the impact of those measures in our case, are quite reduced.

Of course, we have signed this code of best practice, and we are fully aligned to help our customers in whatever situation they can be.

[David Lopez, executive]

Thank you. And last one, the -- where do you see the ROTE excluding, obviously, the banking tax in '23?

[Jacobo Díaz, executive]

Excluding the banking tax, I think we can reach at least 2 points, 1 to 2 more points in return on equity in the following year.

[David Lopez, executive]

Thank you. Thank you, everyone, for joining us today. Obviously, the Investor Relations team is at now at your disposal for any further queries. Goodbye.

[Jacobo Díaz, executive]

Thank you very much, and thank you for following us in this 2022-year summary. Again, I think it's been an outstanding year in our case with new record levels of income, margins, et cetera. I'm sure that we have ahead of us a very, very exciting 2023 to deal with. So thank you, and hope to see you soon.

Bye-bye. Take care.