Caixabank SA

MAD:CABK

Earnings Call Transcript 2023-Q1

[Edward O'Loghlen, Director of Investor Relations]

Good morning, and welcome to CaixaBank's Results Presentation for the First Quarter of 2023. For first time viewers, note that we are joined by the management team of the CEO, Gonzalo Gortazar; and the CFO, Javier Pano. We usually spend around 30 minutes for the presentation followed by 45 minutes to an hour of Q&A, which is live, and you should have received the instructions to participate in that via e-mail.

One additional housekeeping issue. Please note that this is the first quarter that we are reporting under IFRS 17, the new accounting standard for insurance contracts and that our insurance subsidiary is also adopting IFRS 9. We published a document last week, highlighting the differences between IFRS 4 and IFRS 17. And as you know, within the P&L, they are mainly related to classification issues with very limited impact on the bottom line.

With that, let me just end by saying that my team and I are at your full disposal after the event, and let me hand it over to the CEO, Mr. Gortazar.

[Gonzalo Gortazar, Chief Executive Officer]

Thank you. Thank you, Eddie, and good morning, everybody. Welcome to this first quarter results presentation. As Eddie said struggling to get to substance.

Okay. Here's the summary of the quarter. I have to say in a nutshell, it's a better quarter than what we expected. So it's a great start of the year for us. Business volumes, particularly in light of results that have been posted by others are pretty good. You see that we have a stable loan portfolio and growth in customer funds, 0.5% in the quarter with a significant production in long-term savings and also in insurance premiums, you would see.

So a good level of commercial activity. Net income, obviously, underpinned by revenues, particularly NII with significant growth across all lines of the income statement, as you know. Asset quality, pretty good. It's actually falling EUR243 million in terms of non-performing loans because of rounding, it stays at 2.7%, but it's basically down year-to-date 2.3%.

So good news that also allowed us to maintain in a good level of provisions, 26% cost of risk, sorry, 26 basis points rather than 26%. Our coverage ratio has increased two percentage points to 76%, which indicates how well prepared we are for an eventual deterioration in this line if and when it happens.

And then finally, on the capital front, we've absorbed the IFRS 17 impact and still grew three basis points. So 12.5% core equity Tier 1 with other transitional adjustments. MREL and liquidity continue to be at very good levels, no relevant news there because we have a fairly very good level. So return on tangible equity, double digits finally, hopefully, the start of many quarters in that territory and net income growing by 21%.

In terms of the economy, last week, we had the figures of GDP growth. And a couple of days ago, we had it for employment in April, and the numbers are actually stronger than what we expected. So what we see there -- what you see there, the 1.3% projection for growth in fiscal year 2023 is now being reviewed by our research team, and it will be reviewed upwards in a significant manner to the 2% region.

So clearly, what we see is much more resilient and even growth in Spain, generally, obviously, the environment outside Spain is also better than expected, but particularly in Spain, you see the numbers are really supportive.

Employment figures, you have along the last four years history there, pretty good. I think the net exports is amazing. We've been over 10 years now with positive trade balance, not trade balance, but current account surplus, which is quite impressive. And, obviously, the level of the debt in the private sector is much, much lower than it used to be and lower than in Europe. So, again, the macro view felt pretty good, certainly on a relative basis.

Some details on the activity. Loan book stable, as I said. Obviously, there's a sharp contrast between business lending up 1.2% and residential mortgages down 1.4%. And in between consumer lending with fairly good showing in this environment, positive growth in the year, 0.4% better again than our expectations.

A topic that is relevant, and I'm sure Javier will elaborate on that and asset quality considerations. But our floating mortgage book, 84% of it has now repriced at positive rates. So this is a process that this started just now in -- with force. But still, we still have 80% of these that have not yet repriced at Euribor plus 3% or Euribor at 3% level and above. So, I think here, we have a good combination of resilience in the portfolio and, at the same time, upside in NII going forward. We just get our affordability ratio on average to circa 30%, actually south of 30% at Euribor 4%, which is not a base case now. So I think a good combination there where we are.

Another point is gaining market share in business loans. As you can see, 14 basis points year-to-date, which is obviously satisfying for us. Loan production, as you can see, pretty good levels, particularly in business lending. On the mortgage front, I have to say this is likely to change in the next quarters as the very strong growth that we show from second quarter of last year onwards is not likely to continue. But still, in this third quarter, we have a significant positive growth in new production and obviously, at levels that are in line with the current market.

Customer funds, as I mentioned, up 0.5%, obviously, contrast between long-term savings and our balance sheet and what's deposits and other reduction of 1.2%, overall positive growth, which is relevant. And you can see in terms of market share, we have gained market share in deposits year-to-date and also in the combination of deposits and long-term savings. So the same way on the asset side, a bank is at full speed, is doing nicely, and I think it's a good sign for the rest of the year and the coming quarters. Now, certainly, the insurance business becomes even more attractive with long-term rates now in significant positive territory.

I mentioned protection, and it's been a pretty good quarter. Growth in premiums, you see 15% in life-risk and 23% in non-life. And non-life, as you can see across the board, health, home, auto and some others, significant success of, remember, we launched late last year the MyBox Jubilacion and combined saving and life-risk product with optimizes both financial and tax considerations for our clients is actually working very nicely. We now have over 100,000 clients with MyBox Jubilacion, growing steadily. It's small premium, recurrent monthly payment sent to MyBox Jubilacion. So a very good future ahead of it.

And as you can see on the right-hand side, some of the differences in penetration of the non-life are starting to be reduced. I mean, difference in penetration between former Bankia clients and former CaixaBank clients, you can see striking distance in health and how former Bankia moved from 0.8% to 1.4%, which is still very low levels compared to the 6.5% that we have with former CaixaBank clients.

But, obviously, the beginning of a process to deliver the revenue synergies that we are committed to, and you can see actually better progress even in auto and in home insurance, but plenty of growth potential, particularly because I expect that the right-hand column, the block of CaixaBank will continue to grow because we're going to continue to increase penetration among former CaixaBank clients. So the ability to converge will be, not just to those levels, but to even higher over time. This is a slow process, as you know.

BPI doing well, very good contribution to profitability, very rewarding to see BPI clearly breaking through the 50% cost income. Look at that below 47%. It's a tremendous track record. And I expect it to honestly continue. Asset quality and the strength, particularly on the asset side and on the mortgage side, continues to be present a good quarter also in mutual funds, BPI will be providing further details today as well, but very solid quarter, one more.

Net income, obviously, influenced heavily by the growth in revenues, which in turn comes from very strong growth in NII, also insurance and much less so to fees. A small increase in costs in the quarter and impairments. But all-in-all, despite the bank tax, which amounted to EUR373 million this quarter, as you can see in the note, the reality is net income grows by about 21%, and we get to that double-digit return on tangible equity.

Looking forward, obviously, our pre-provision profit is growing. Our cost of risk is stable or fairly low. We have actually a very significant degree of comfort there in the income statement itself against any deterioration in conditions. Non-performing loans, as I mentioned, they are stable in terms of the ratio, but coming down in absolute numbers. Coverage is up.

Liquidity, you have the last 12 months liquidity coverage ratio, and you have the last 12 months that's the one that is most easily comparable in terms of disclosure by some of our competitors, among the top 10 listed banks in the eurozone, and you can see a strike in distance. Good performance in capital, high levels of MREL. Honestly, we have reasons to see the future with optimistic feelings after, again, a very strong quarter, including of the Spanish economy.

But even if that view is eventually proved wrong because conditions deteriorate, the solidity of what we have here in terms of balance sheet gives us a lot of comfort. And also, not just comfort, but feeling that any period of weakness if it materializes, would be a period of relative strength for us, and we will make the most of it, I am sure.

Finally, on my side, a comment on our role as a bank that goes beyond, obviously, our financial results. Our financial results are allowing and the payment that took place in April of 2022 dividend is a good proof is EUR1.7 billion, which has been directly reverted to society through mostly foundation, also through the stake that goes through the FROB. So I keep saying, obviously, you understand this well, but to the general audience that profitability of CaixaBank goes up.

That's good news for society. We should all be happy, not just shareholders because actually half of that profits go back directly to society. And obviously, the other half go to the shareholders that are over 600,000 and have many reasons to serve it. So all-in-all, I think, we have a very special position to combine optimization of financial results and of impact broadly in society and an ESG angle that is difficult to be replicated. Those results also allow us to confirm our payouts and certainly our target of capital available for distribution over the period. Actually, they gave us plenty of comfort given where we are now.

And on the left hand side, I'm not going to go through that, but we have a unique sort of scorecard of things that we do that are different. Our position as a financial inclusion in Spain with microbanking the largest one in Europe, what we do in terms of social solutions and diversity in top three Bloomberg Equality Index for three years in a row and a long list, obviously, of points, both in environmental front with our net zero commitment and also in terms of the cooperation we have with foundation like la Caixa, quite a special position to make sure that everyone understands that.

Again, profitability, which a 10% return on tangible equity is just moderate, I would say. But improving profitability because we obviously want to go further beyond that 10% is not associated to anything other than great profits for society as a whole, okay?

And with that, Javier, please, you can carry on. Thank you.

[Javier Pano, Chief Financial Officer]

Okay. Thank you. Thank you very much and good morning to you all. Okay. I take it from here with the usual details on the P&L and the balance sheet.

Let's just start with an overview on the consolidated income statement. As commented, net income, EUR855 million, over 20% on a year-on-year basis and close to 30% on a quarter-on-quarter basis. Strong revenue on the back of NII performing strongly year-on-year and quarter-on-quarter with margin expansion that is more than offsetting foregone TLTRO. Fees year-on-year show resilience to the end of corporate deposit fees with evolution in the quarter affected basically by seasonal effects.

On the new P&L line, on insurance service results, we have discontinued growth in insurance result close to 24%, with evolution quarter-on-quarter, mostly reflecting the fourth quarter positive one-offs in unit linked. Then on costs, I think that we are in line with our guidance for the year with that expectation of circa 5% cost guidance that we have been reconfirming today.

Below the P&L, you have, on loan loss charges, that evolution in provisions that is much better than our initial expectation. On that front, you may see that we are at 26 basis points on a 12-month trailing basis.

Let's move now to NII. On that front, I would say that we would rather focus on the evolution quarter-on-quarter. You may see that we are up by 20% ex-TLTRO and 10% including the TLTRO. You may see on the NII bridge that on a quarter-on-quarter basis, we have the impact from the account and then we have strong repricing from client NII.

Basically, on that front, on the back of strong repricing on our floating rate loan portfolio. And then on ALCO and other, we have, on that front, still a strong repricing from our wholesale funding that, as you know, is basically swapped into floating rates.

Then on the bottom left, you may see the evolution of back book yields. I would remark here that on the loan book, we have a very strong progression to 318 basis points. Also, this higher yield environment results into a front book loan yield that improves by more than 133 basis points to 448 basis points and that obviously is accretive going forward.

On client fund costs, we have an average cost for the quarter of 32 basis points. But when excluding the impact from structural hedges and foreign exchange funding, we have had a cost of our deposits at 17 basis points, which is a bit of circa 7%, which is extremely low. That results into a strong margin expansion, as you may see, up by 68 basis points to 286 basis points.

A few comments on the ALCO portfolio, a slight increase to EUR73 billion. We took advantage of the peaking yield so far back in February and early March and ahead of the incoming maturities that as you may see, below the left still close to EUR7 billion maturing during this year. The back book yield keeps progressing gradually at 0.9% now. And you may see the average ratio on life pretty much stable, slightly below five years. We continue with the diversification process with our exposure to Spain, approximately three percentage points down at 64%.

On the right hand side, you may see the evolution of our wholesale funding costs up to 91 basis points. In this case, this is over six-month Euribor as we have all that funding basically swapped into floating as new resources have been made, obviously, at wider spreads than the back book.

Let's move to fees. On that front, I would rather focus on the evolution year-on-year. Basically, we have a flat quarter year-on-year, but remember that we had the impact still during the first quarter of last year of cash custody fees. Ex-cash custody fees, we are up by 3.3%. You may see the breakdown by main categories, recurring banking fees up by 5.5% year-on-year ex-cash custody fees with the support from payments and other transaction-related fees.

Bottom left, precisely in this regard, you may see the evolution of credit and debit card spending, that is up by 20% compared to pre-pandemic levels. Also, continuing with asset management, evolution year-on-year is mostly reflecting market impacts on average balances. This is already being offset positively but net inflows, as you said, you see -- you saw during this first quarter and quarter-on-quarter affected by the usual seasonality.

On insurance distribution, basically that the line here is non-life affected with a little bit more volatility depending on the commercial focus, depending on the quarter that are more or less focused on the commercial side. Wholesale banking performing really strongly, up by 62%, clearly a very positive surprise.

And below in the center, you have precisely the evolution of AUM balances. And remarkably, I would say, that by the end of the third quarter, thanks to markets performing well during this third quarter, we are up by 3% compared to the average of last year. So markets permitting on that front, we think that we may have some tailwind.

Let's move to this new P&L line, other insurance revenues that now includes, not only former life-risk insurance result, but also after IFRS 17 other segments of the insurance business. On the chart on the left, you have precisely a summary of a little bit that complex restatement after the introduction of IFRS 17. To that life-risk insurance result, we add now NII from insurance.

This is basically NII from savings insurance annuities. Then net fees, basically, in that case, from unit linked and that is here a netting effect from other factors. And then what is deducted in that line is, are the costs directly associated to insurance contracts. There are some other minor adjustments. And with that, we have restated insurance service results for fiscal year '22 at EUR961 million.

From there to the right, what we have are the usual reporting as before. In blue, what is the new insurance result EUR263 million for the first quarter of this year. And then we had the usual impacts on the equity accounted basically from SegurCaixa Adeslas with some more volatility. But when adding everything, you may see a very positive evolution quarter-on-quarter and also year-on-year that, as you may see, close to 37%.

On the right, you have the breakdown by the main businesses categories that is now life-risk insurance as before and now including life savings insurance and also unit linked. You may see good progression across the board, although in unit linked impacted by year-on-year basically by market effects with correction in markets during the last year and quarter-on-quarter by strong success fees that were collected in the fourth quarter.

Let's move now to costs. There is not much to say on that front. I would say that we are on track to meet the guidance that we are reconfirming today, as you probably have already seen, despite quite significant inflation impacts and other non-manageable factors that we were already commenting on the three months ago, the first quarter. The most remarkable probably here is that, the restatement that cost-to-income has after the introduction of IFRS 17, as you may see, slightly over two percentage points down and now standing at 48.2%.

Cost of risk, as Gonzalo already said, stable and below our initial expectations, 26 basis points on a 12-month trailing basis. And still a reduction of NPLs close to EUR300 million, down by 2.3%. The NPL ratio, due to rounding effects, stable but slightly a few basis points down at 2.7% and increasing coverage by two percentage points and the breakdown on NPLs, you may see a progression across the board, although there is a small uptick in consumer lending.

Regarding ICOs, a few comments. 39% have already amortized. The current exposure -- current outstanding balance is EUR16 billion and 4.4% of the initial exposure is now classified under Stage 3, stable, I would say. And on that front, also very positive news and no visible deterioration at all.

Liquidity, let me elaborate a little bit further this time on this slide. Well, liquidity is part of our DNA and now it's clearly becoming also a competitive advantage. You have plenty of liquidity indicators here. The most remarkable, in my view is the liquidity coverage ratio, pro forma ex-TLTRO by the end of the third quarter. So that is, as if we had already paid back in full, standing at 161%.

And then we can compare that with the central chart below. It's the same chart that Gonzalo was already commenting. This is the average for last year for the liquidity coverage ratio for the top 10 European banks by market cap. So as being the average for last year, it already -- it still includes a large chunk of TLTRO funding. And as you may see, our liquidity coverage ratio ex-TLTRO compares extremely well with the peer average, even that average includes in the major part of the TLTRO funding.

On the left, our liquidity sources, on top of HQLAs and ECB facilities, just to highlight here that we have EUR59 billion of covered bond issuance capacity for a total EUR192 billion of liquidity sources.

And on the right, something that is very well-known, which is the fact that we are clearly a retail bank, and we have more retail deposits than our peers in general. So here, you have those same top 10 banks classified precisely by the percentage of retail deposits. We have 79% of those being in retail.

That results also into a high percentage of insured deposits by the deposit guarantee fund, that is 64%, close to two-third. And then more -- with more detail also in terms of liquidity ratios, 69% of our deposit base is considered a stable retail or even being wholesale funding wholesale, I mean, by wholesale here corporate being operational. So that gives plenty of stability. And at the end of the day, it's a competitive advantage in terms of managing also the cost of that funding as you are already seeing this first quarter.

MREL, everything has already been said here, comfortable position, 26.25%, close to two percentage points above requirements that M-MDA buffer really comfortable. On the central chart, you have wholesale funding maturities until the end of '24, that is EUR11.1 billion. That includes, not only contractual maturities, but also potential calls on callable instruments. Obviously, a decision will be made in due time on those. And you may see that we have maturities across the board across several asset classes, I mean. So you can expect us in the market rolling over those in order to maintain a comfortable M-MDA buffer.

And finally, capital. On that front, stability, 12.5% CET1 ratio, but absorbing two significant impacts, which is the first application of IFRS 17, minus 20 basis points. We had already flagged this many quarters ago and also the banking tax, that clearly is affecting organic capital generation, that is 30 basis points would have been obviously higher were not for that impact.

Then minus 20 basis points from dividend accrual. Remember, we are accruing a cash payout ratio at 60%, 81 coupons, that is minus 27 basis points. And then this quarter, we have positive other impacts basically from markets on OCI portfolios. On top of that, we still hold a marginal buffer from IFRS 9 transitional resulting into an MDA buffer at 416 basis points.

On the right, you have the tangible value per share waterfall. We have those EUR0.05 impacting the tangible value per share from IFRS 17. From there, and including the dividend already paid, we have progression at 3.8%. And when excluding the dividend, the tangible book value per share at EUR3.69.

And with that, let me move to an update on guidance. We have tried to be as explicit as possible on that slide. On the first two columns is the previous guidance already given three months ago under IFRS 4 standard. Then we have a restatement for -- under IFRS 17 for fiscal year '22 and the third column and the fourth column is the formal guidance restated to IFRS 17.

And finally, on the fifth column, you have the updates. We are upgrading NII to more than EUR8.75 billion. That is an increase of more than EUR250 million. And then we keep unchanged fees and other insurance revenues and costs to EUR5.1 billion and EUR5.8 billion, respectively. And then we make also an important upgrade on cost of risk to less than 30 basis points from less than 40 basis points.

So thank you very much. And I think that with that, we may be ready for questions.

[Edward O'Loghlen, Director of Investor Relations]

So thank you, Javier and Gonzalo. Good news and upgraded guidance.

With that, let's open it up to Q&A. Operator, can you please let the first call in.

[Operator]

Yes. So the first question is from Ignacio Ulargui of BNP Paribas Exane.

[Ignacio Ulargui, BNP Paribas Exane]

Thanks. Good morning, everyone, and thanks for taking my questions. I have two. The first one is on NII. I mean, given the trends that you have seen in deposit betas in the quarter with 7% and the upgraded guidance like just to see what is the deposit beta evolution that you are factoring in that EUR8.75 billion guidance for NII in 2023? And how you would see it progressing throughout the year, whether there is upside for growth from here in coming quarters? And the second one is on capital. If you could update us on the regulatory headwinds pending for the year? And whether you see this kind of run rate of capital, organic capital generation being something sustainable over the coming quarters in order to get a bit of a sense where do you think the capital could be at the end of the year? Thank you.

[Gonzalo Gortazar, Chief Executive Officer]

Thank you, Ignacio. Beta is your favorite, Javier.

[Javier Pano, Chief Financial Officer]

I will do it. Okay. Hi, Ignacio. Thank you very much for your questions. Well, we are not changing our estimates for beta as we disclosed last quarter. So we are expecting to end the year circa 20%, and we are expecting that to keep progressing into 2024 to those high-30s we already mentioned.

So that continues to be the plan. We are doing well, at least in what others are reporting. We are happy to see that. So we are happy to see that, I think, that the superior transactionality we have with clients compared to some of our peers is at the end of the day, resulting into probably lower betas than the average.

And I think that this is something that, obviously, we are focused on and it's part of our, I would say, DNA, as I said before, and we expect that trend to continue. So we expect that we can deliver on that. So that is the -- that's the summary on that front.

In terms of capital, if I may. Well, finally, we had a delay on -- that we need regulatory approval for several models, internal models. And so, this is not just one. So we need like several approvals. And finally, for different reasons, but this is more having to do with the ECB.

We have had a delay. And we are now expecting those impacts to be the same as initially expected. So those pending impacts that would be now are circa minus 40 basis points. This is the best estimate that we continue to have as of today. And those to happen in the second quarter. But is there any chance that there is some of those still being delayed into the third quarter? There is some chance. So I cannot now have 100% visibility that all of them will be in the second quarter, but the estimate is unchanged.

And in terms of organic capital generation, well, that connects probably with another question, which would be the loan book. The loan book has performed. I mean that in terms of risk-weighted asset growth, we are not expecting much. Obviously, there will be an impact on risk-weighted assets from -- precisely those -- the review of those internal models, but let's say this is like an inorganic impact.

Organically, we are not expecting much risk-weighted asset growth. The loan book has performed well during this first quarter, but we are cautious towards the, let's say, the rest of the year. There are uncertainties. All of us, we know we see our peers also probably not doing so well. So we should think about it. So this is something that we are thinking that probably keeping during all the year, the loan book flat is going to be probably challenging.

So assuming that we don't have much risk-weighted asset growth, I think that basically, all net income goes to capital -- organic capital generation. So if you do the math that may be approaching close to 50 basis points per quarter on a run rate. Remember that during this first quarter, we have been in a situation where we had to absorb the tax but the tax now is fully absorbed.

So let's say, for quarters without the tax, those 50 basis points before, obviously, the dividend accrual and AT1s probably should be a good figure. Thank you, Ignacio.

A - Edward O'Loghlen

Okay. Thanks, Ignacio. Let's move on to the next one, please, operator.

[Operator]

The next question is from Alvaro Serrano of Morgan Stanley.

[Alvaro Serrano, Morgan Stanley]

Hi. Good morning. I kind of have two follow-up questions actually. On deposits first. Could you maybe talk a bit about the flows? How they performed in March and April, both in the absolute amounts and the mix change to term deposits? Is that going better or worse than you expected? I guess, I'm trying to assess how conservative your guidance is. And the second question on capital, my favorite topic, apologies on potential buybacks. So the answer you just gave, Javier, I think, points to capital being almost about 13% even at the end of the year, even with the headwinds that remain. So if that's the case and some of your competitors that had similarly very strong capital print in Q1 have raised the expectation for a buyback even in Q2. Do you think that's possible given the strong capital print? Thank you.

[Gonzalo Gortazar, Chief Executive Officer]

Thank you, Alvaro. Let me give you some color on flows, particularly in terms of what we've seen in March and April. Basically, first of all, there has been no change in customer behavior as a result of the instability mainly in the US during the month of March and some of the recent news that's business as usual in terms of the behavior that's not having an impact.

I would say, from our point of view, what we have seen is a flows as discussed and including also sort of acquisition of treasury bills that our clients are doing, which we do not technically include in customer funds. Clearly, our funds are not moving away or staying within our perimeter with some changes from balance sheet to treasury bills, mutual funds and saving products.

This is a trend. Within this trend, which is continuing in April, what we have seen is a slowdown in this movement, particularly towards mutual funds and treasury bills in March and April, and a steady and fairly good level of growth on the insurance business, particularly the annuities. Okay. So no exceptional changes as a result of the changing market share consensus.

And the trend from balance sheet to off-balance sheet staying, but slowing down, I would say, with the exception of the long-term insurance saving business, which is doing very well, okay? And I don't see necessarily a reason for this to change in terms of -- the trend will continue, but I don't see that changing necessarily. We remain vigilant, obviously, in terms of market conditions.

With respect to capital, we have not provided or given an estimate of where our capital will be at the end of the year. So I don't want to confirm or reject your own sort of back of the envelope estimate. But what I have to say on capital is, first, we've made a very clear statement of how much capital generation we could achieve in the three-year period, this EUR9 million.

Today, we feel comfortable. And I would say we can add the word very, we feel very comfortable about that level. That level implies an extraordinary capital distribution beyond the payout of 60%. Remember, we have a very high payout compared to others. But clearly, we're very comfortable with that number, and that number implies an extraordinary capital distribution, which needs to take place basically between 2023 and 2024.

The timing is going to depend, and I think I mentioned this earlier, it's going to depend really on the speed of the capital build and on the external environment. And what I can say now with the first quarter completed is the speed of the capital build is being faster than anticipated. This quarter has been very good. And let me emphasize, Javier was saying it. We have not only IFRS 17, but the full impact of the banking tax in the quarter, which is obviously two burdens that we could overcome and still grew capital by three basis points.

So clearly, the speed of the capital build and expectations, Javier was mentioning what's the expectation of RWA growth. I hope it's a bit better because we are at this stage, feeling that we can invest capital in the business at clearly above the cost of capital even if the cost of capital is very high. But in any case, the expectation is a very limited growth in assets.

So this profitability that has already improved and is going to continue to improve during the year, particularly because, obviously, we will not have the impact of the banking tax. And obviously, the trend in NII is going to continue for quite some time. It means that we are certainly generating capital, not only better than expected at the end of the first quarter, but also the feelings are very good.

With respect to the external environment, I discussed it earlier, it's also a better one. So I think all of that means that all the things being equal, we could think of upside both in terms of quantity and in terms of timing with respect to capital distribution. Having said that, to be more specific, we want to wait.

Javier was very clear, our pro forma core equity Tier 1 as of the end of March, given this 40 basis points is 12.1%. So talking about what we will do in the future, I think it's enough to say there will be an extraordinary capital distribution. It will take between the end of -- between the -- what rests or what remains of 2023 and 2024, but let us be prudent before we disclose more details.

As of now, our capital is still a projection into the future rather than something that is actually available for this distribution today. Those would be, I think, the main lines of how we feel about capital, which in a nutshell is very, very well.

A - Edward O'Loghlen

Okay. Thank you, Alvaro. Let's move on to the next question, operator.

[Operator]

The next question is from Maksym Mishyn of JB Capital.

[Maksym Mishyn, JB Capital]

Hi. Good morning. Thanks for the presentation and taking the questions. I have a couple. The first one is on loan book growth expectations. You seem to have outperformed the market in corporate loans new production, but underperformed in mortgages. And I was wondering if you could shed some more light on what are the expectations for growth by segment for 2023 and your strategy. The second one is on consumer spreads. Could you please give us your thoughts on where we should expect customer spread to settle after the repricing is done? And then the last one is on SegurCaixa Adeslas, the results have improved significantly, and I was wondering if it's related to one-offs or it's a new sustainable level of profitability. Thanks.

[Gonzalo Gortazar, Chief Executive Officer]

Thank you. Let me give you some color on loan growth by segments, and then I will let Javier complement. In terms of where we are, clearly, we're going to see a significant reduction of the loan book on the mortgage front.

We've seen 1.4% in this first quarter. Production is kind of stable, but we're seeing, obviously, ordinary payments and an increased level of prepayments. And although we cannot necessarily forecast how strong this is going to be for the rest of the year. I would say is annualizing the 1.4% would be too much. But clearly, we're going to see further significant reductions in the mortgage book.

On the consumer lending side, we've had a very good quarter. We see that the financial condition of what we have defined as the consumption universe is over 10 million people to which we have pre-granted lending, it's actually not deteriorating, it's doing fairly well. And hence, consumption and consumer loans are actually growing.

Looking at the year, I think, this is probably the most which we can expect on this front. Slow sort of limited growth in the portfolio with some downside depending on how the year evolves, assuming that the year continues to kind of erode purchasing power of people, even though so far, it has not happened. But anyhow should be flat to slightly positive.

And then on the business front here, we have had an extraordinary first quarter. Clearly, the lending demand from all kind of businesses is coming down. You saw the survey from the ECB, which is quite striking in terms of where demand for credit is. Uncertainty about the environment, a certain position of high liquidity at this stage, but difficult to take sort of investment decisions in this environment means that, again, not much growth as Javier was saying.

I am a bit confident on our ability to gain market share here. In the first quarter, we gained 14 basis points in market share coming from the merger, very strong. We are everywhere. I think we still have some upside there. But in any case, it'd be a challenge to keep the pace of growth that we have had on the corporate and business book in the first quarter during the year, unless at some point somehow the circumstances change and the external environment becomes clearer.

And hence, as a new cycle of CapEx decisions, which were not yet seen. A lot of the growth is also related to working capital associated with higher level of inflation. Javier?

[Javier Pano, Chief Financial Officer]

Yes. Hi. Thank you. Good morning. Well, you asked about the customer spread, and that obviously has to do with the evolution of betas. We gave you already our base case in terms of evolution for this year and next.

But according to those forecasts, we can make the numbers, but I would like to emphasize here that, obviously, we will try to outperform that guidance. So giving you a specific guidance for customer spread, it's a little bit tricky because it depends on the asset side of the final level of rates, the evolution of rates themselves.

And at the end of the day, how we can manage our deposit base. And if we find always the right balance between volumes and the cost of those deposits, so far it's something we are doing. But well, I think, that we can see a margin at least in the short-term, circa 3%. I think that we are going to be close to that figure really shortly.

And then time will tell because as I insist, it depends also from markets and on the loan book in terms of what is going to be repriced, thinking into 2024 mainly and then on the management on betas. So far, as I say, the situation is evolving for us better than our initial expectation. Let's see if we can sustain that, which we think we'll do.

In terms of SegurCaixa Adeslas, there is a one-off in that case, it's an affiliate that SegurCaixa Adeslas already had a participation and they have increased that participation. As a consequence of that, there is a revaluation of the original stake and what that has resulted into some one-off, yes, on that extent. But I would say that in terms of organic performance, it continues to be in line what has been in the past.

A - Edward O'Loghlen

Okay. Maks, I hope that answers your question. Let's move on to the next one, please.

[Operator]

The next question is from Sofie Peterzens of JPMorgan.

[Sofie Peterzens, JPMorgan]

Yes, hi. Here is Sofie from JPMorgan. Sorry to go back to the net interest income and kind of cap it off. But firstly, on net interest income, you mentioned that you still have 80% of your mortgages that haven't repriced. How should we think about the net interest income trajectory in 2023? Do you expect net interest income to be up in all quarters, quarter-on-quarter throughout 2023? And when do you expect net interest income to peak? And then my second question would be, how do you view the Single Resolution Fund and Deposit Guarantee Fund? Do you still expect the regulatory fees to come down in 2024? And then my final question would be kind of on your thinking around M&A and growth, it sounds like loan growth this year is quite challenging. But how should we kind of think about growth opportunities, both organic and inorganic beyond '23? How do you think about M&A, especially outside of Spain? There are some smaller banks for sale. Is that something you would consider maybe Portugal? So if you could just discuss your thinking around M&A? Thank you.

[Gonzalo Gortazar, Chief Executive Officer]

Thank you, Sofie. Let me comment on the second and third question on the contributions to the Single Resolution Fund and Deposit Guarantee Fund. There was nothing changed, and we foresee a very significant decline in 2024. There is a debate now around the whole system coming after the events in the US and in Switzerland, but it's going to take a long time.

Clearly, as you have seen by the crisis management and deposit insurance initiative now that is -- that initiative is by itself, not necessarily leading to any change in Resolution Fund contribution or Deposit Guarantee Fund contribution, but in any case, it's going to take a long time. So, certainly, no change in view for 2024.

With respect to M&A, nothing new. We love our business and the way we have it now. We see plenty of opportunities. But we love the fact that after exploiting all these opportunities, there's a lot of capital available for distribution. We like it and hence there's no M&A plans and you should look at our group with a stable perimeter. We have no other ambitions currently and I personally do not expect any movement on the M&A front in the foreseeable future.

[Javier Pano, Chief Financial Officer]

Hi, Sofie. Well, regarding NII, I think that our base case maybe that yes, that we may have a positive quarter-on-quarter evolution on NII for the remainder of the year. Obviously not by a large extent, but at least some in some of the quarters. But that will have a lot to do basically with the beta evolution.

So far it's very well managed in our view from our side and doing better than our competitors. I think that we will be able to continue delivering so at least in April has been also the case I can already say you. And unless there is like at some point during the year like a sudden change in the conditions and obviously we have to catch up in a faster way. But if not the case, I think that yes, we will be able to manage quarter-on-quarter growth and the peak -- well the peak is the big question.

I really don't know when is the peak because it has to do with plenty of things. It has to do with rates as you know well and the situation for rates for 2024 is now quite an important debate.

And depending on the moment the market discounting rate cuts already, in the US even rate cuts this year due to the financial turbulences we are having during the last weeks and then all of a sudden, it looks like what matters is inflation and job growth, et cetera, and economies that are doing better than initially expected and then rates go up again.

And at the end of the day it's going to depend on our beta management also and also on volumes, which is quite an important factor. Volumes Importantly not only on the loan side, but also on the deposit side. So I think that it's difficult to have much visibility on the combination of all those and as are highly volatile because for example imagine in a scenario where rates are going to be lower next year.

I think that in that case probably the guidance we gave you for terminal betas in the high 30s probably does no longer apply because if rates are going to go down, I'm sure that probably we will be able to manage betas on a better way. So it's complex so I would rather prefer not to pre-commit on a specific date for a peak, if I may. Thank you.

A - Edward O'Loghlen

Okay. Sofie, hope that answers your questions. Let's move on to the next one, please.

[Operator]

The next question is from Francisco Riquel of Alantra.

[Francisco Riquel, Alantra]

Yes, thank you. And another one from me on deposits, which is the topic of the day. If you can give more color on the customer behavior that you are observing in the last few months particularly between retail and institutional clients. If retail clients are migrating off the balance sheet, whether T-Bills or mutual funds and deposits do not fall that much so you may be recovering some of the institutional money that you lost during the second half of last year. Other large banks in Spain are letting that money go, I don't know if you're benefiting from that or not. And then you can also comment on the trends between Spain and Portugal. The Portuguese deposits look weaker in terms of performance here. So what beta in each market and what is the environment in each market? And second question is in terms of cost of risk, you are lowering the guidance, so I wonder how much of the overlay provisions, if any, will you be using in '23 to sustain the cost of risk? And if not, what makes you so comfortable to lower the guidance at this point in the year when there are fears about the credit tightening and macro recession? How can you reassure about your asset quality trends? Thank you.

[Gonzalo Gortazar, Chief Executive Officer]

Thank you, Paco. Let me comment maybe on the second one and I'll leave Javier for the first one. In terms of the cost of risk, clearly we have had a much stronger quarter both from the macro point of view and the micro point of view. So our guidance of minus 40 basis points was based on a scenario that is at this stage not a base one clearly and we're at the end of April and we can see we were too conservative.

Actually the first quarter we have had a reduction, as I mentioned, of over EUR240 million in NPLs. Cost of risk has been stable, but coverage has increased. The economy in Spain is doing much better. Job creation in particular is doing very well. So we do not think that 40 basis points is a relevant benchmark and we brought it down to 30. That's the reality. We have not used our macro reserve buffer in this first quarter so it's entirely available. We continue to have approximately EUR300 million of PPA associated to the acquisition of Bankia plus some other smaller amounts outstanding from other corporate transactions.

So in total, really the unassigned collective provision is close to EUR1.4 billion. We are going to be using some of that during this year among other things because we need to update our models with the latest macro forecasts and we do this twice in a year, second and fourth quarter.

So we now need to update our models in the second quarter and by including more conservative macro forecast, not more conservative than the current that we have of EUR1.3 billion which is going to improve, but the ones that we had in our models dating from last year that by definition we'll use some of that provision certainly, only some and certainly not all.

So we are consistent with that minus 30 basis points is using part of the currently unassigned collective provisions and obviously we will be updating depending on how things evolve. On the new macro forecast, we will be updating provisions under IFRS 9. As you know, there's a bit more complexity on that front. But clearly the expectation is minus 30 basis points and using part, but not all, of the unassigned provisions.

[Javier Pano, Chief Financial Officer]

Hi, Paco. Well, more color on deposits. Well, as you rightly pointed out the situation, the evolution in Portugal has not been the same. So we gave figures and it's minus EUR4.8 billion at the group level in terms of deposits and some other related, but included deposits minus EUR4.8 billion. Of which minus EUR1.9 million in Portugal.

In Portugal, we have little bit a different dynamic so far. Basically there you have the Portuguese Treasury offering, a very competitive product to retail, and that has been affecting in general the system. I think that we were probably a little bit late reacting to that in terms of pricing.

We have already done so and it's, I would say, a pace in terms of loss of deposits that I think that will not continue. That results into probably EBITDA in Portugal a little bit higher than in Spain. But when we gave guidance, we gave guidance overall for the group. But you can expect a slightly higher EBITDA probably in Portugal than in Spain.

In Spain, we had then minus EUR2.9 billion. This is less than 1%. We gained 20 basis points market share. Of those minus EUR2.9 billion, I would say that the major part have gone from CIB and retail and in retail because as you have already seen and been commented, we have had strong inflows into AUMs, EUR3.6 billion.

And on top of that, close to EUR2 billion of an additional, let's say, subscription of treasury bills, et cetera, and fixed income. There has been a move from site minus EUR8 billion at the time plus EUR5 billion and that's it. But generally speaking a better outcome than probably initially expected.

Needless to say also that we have had a slight uptick in terms of mortgage prepayments as I think everyone has experienced as well. Well, so far in the month of April, I would say that the trends continue to be the same although those purchases of securities by retail are being now at a slower pace. That's the summary.

A - Edward O'Loghlen

Okay. Paco, thank you for your questions. Operator, let's move on, please.

[Operator]

The next question is from Carlos Cobo of Societe Generale.

[Carlos Cobo, Societe Generale]

Thank you very much and congrats on the results. Three quick questions from me. One is on the deposit hedge and the swaps you have there. If you could elaborate a little bit more on the duration and when those swaps will expire and I'm assuming they won't be rolled over from there. Second is on deposit betas, I'm trying to assess my views on your guidance here. You are guiding for the high 30s and you expect to be below the system average so that seems to be pointing towards a system average of around, let's say, about 40%. But my point is that that is consistent with historical beta in the system. Am I right to assume that you have been extra conservative on your guidance for the terminal betas in Spain and you are not even factoring in the stronger funding and liquidity position in the system compared with the historical average of loan-to-deposit well above the current levels. And lastly a very quick one on costs. Other peers have been guiding a little bit more optimistically on the capacity to control cost inflation. Are you feeling the same way even when you reiterated your guidance? Do you think that cost inflation is well under control and this could give room for positive surprise here later in the year?

[Gonzalo Gortazar, Chief Executive Officer]

Thank you, Carlos. Let me elaborate on part of the question and then pass it on to Javier as always. On betas, obviously Javier is better equipped than myself to deal with the question, but let me say what we think. Obviously it's very difficult to estimate exactly what the terminal beta is going to be in the system.

But we don't even know what the terminal rate is going to be and the terminal beta is going to depend on the terminal rate, i.e., the higher the terminal rate, the higher the terminal beta. Some people estimate beta on deposit facility rate or let's look at Euribor or let's do average for the year, let's do quarterly average. So there's a bit of numbers all over. There's one message that I want you to keep is we will be doing better than the system I am absolutely convinced. That's because precisely the nature of our business and the way we're going to manage.

So if your view is that the beta of the system is going to be lower, you should certainly be comfortable in thinking that we will be clearly markedly below the level of the system. That's my feeling and we will do what is in our hands on that front. And I'm happy for Javier to elaborate because he obviously is dealing with it in a very intense way.

With respect to cost inflation, looking at what's inflation in Spain and Portugal but in Spain and Portugal because obviously inflation in other markets has sort of different behaviour from some of our peers that are present in other markets. The main impact is going to be certainly a renegotiation of the collective bargaining agreement, which has not started yet and which we should start later on in this year and this is obviously relevant for the long-term.

For this year, I think we have good degree of comfort in terms of what's our expense forecasted for this year, the EUR5.8 billion. Again let's look at costs. I know you all know this, but sometimes when we do the numbers, we tend to look at cost as just destroying value and that is true numerically.

But obviously in order to grow our business, we need to spend some money and we are going to keep doing that because I think we are entering a fairly good moment for us. Obviously in the short term we have some clouds on the economic environment. But looking at the position we have on a competitive basis, the attractiveness of the economy, the fact that rates are likely to be in positive territory on a sort of a regular basis. Our business is a good business. We keep thinking of business as bad business or good business.

So with judgment and limiting obviously investment to make sure that it's optimal, but we will continue growing the business. This year we have this very specific impact of the employees' credit facilities that have to go through the cost base and have an offsetting revenue entry as NII and that is neutral on bottom line, but is sort of affecting our facial optic growth ex-synergies. This is obviously not likely to be a factor into 2024 and beyond. We are working on a number of programs to continue making our operations more efficient.

Technology is obviously not disappeared and it continues to be a big tool for us to offset inflation with the work we do to be more efficient. And that's clearly going to continue. So I don't see here issues coming forward and what I expect is for us to continue to improve our efficiency through what we're doing increased revenues.

[Javier Pano, Chief Financial Officer]

Hi, Carlos. Thank you. Regarding the deposit swaps you mentioned, we have approximately 1/4 of those expiring early next year and well those are swaps that were set once rates were negative in order to protect well the fact that we were paying zero for deposits, but we had negative rates on the deposit facility.

And I say one quarter expiring early next year is obviously there is no decision yet on what we are going to be doing. Time will tell depending on the situation in rates, et cetera. And not much to add on betas. Just to emphasize that models are hard to assess because when there's exactly a turnaround in rates and the evolution of betas is not the same if rates go to the peak and then stay there for a while compared to a situation where rates peak and then go down, let's say, immediately.

If rates stay at a peak for quite a while, then Betas keep accelerating and probably reach those levels we are guiding. But if rates go up and then suddenly go down, I think, that we will have additional capacity to manage the beta as obviously we already know that rates are going to fall and probably in terms of managing our deposit cost base, we are going to be able to outperform what we say the model.

But well, this is not science. This is, I would say, it's an art and it's our commercial team that is doing a great job on managing that situation. That obviously is a clear change compared to what we have been doing in the recent past. But we have had to rescue the deposit management toolkit and we are trying to do our best. So I think that if the system does whatever, we really feel that we are going to outperform. Thank you.

A - Edward O'Loghlen

Thanks, Carlos. Operator, let's have the next one, please.

[Operator]

The next question is from Andrea Filtri of Mediobanca.

[Andrea Filtri, Mediobanca]

Yes. Thank you. You've elaborated already a lot about this, so I'm going to ask a more generic question. Given the current conditions, which I recognize keep moving up and down, at the current conditions what is you’re feeling about 2024 year-on-year NII evolution? And the second is on the other revenue line, it seems to be less negative than expected. Is there any one-off item positive one compensating the banking tax or was the banking tax lower than was guided before? Thank you.

[Gonzalo Gortazar, Chief Executive Officer]

Do you want to take this one, Javier?

[Javier Pano, Chief Financial Officer]

Yes. Well, the current conditions, it's difficult to answer, Andrea, because yesterday it was two weeks ago. So it's difficult to say. I insist I would not like to pre-commit on 2024 vis-a-vis 2023 on NII because things are changing really fast, moving a lot. There is plenty of uncertainty in terms of volumes first and on rates and it's hard to say.

Now we have in recent days obviously the yield curve turning negative as the situation in the US is not stabilizing. And as I said before, you have already priced in the U.S. dollar rate cuts in 2023. So do you really believe that or not? So it's hard to answer. So I already said that we are expecting on a quarter-on-quarter basis for 2023 growth in terms of NII.

It will depend a lot on better progression. If it is quite steady, I think, that this is going to be the case, we will be able to deliver. If suddenly there is a sharp increase for whichever the reason or there is like a catch-up at some point, this is the disclaimer I make as of today.

On the tax, yes, we said like circa EUR400 million if I remember well, at the end of the day it has been EUR373 million. It has to do with some final changes looking to the details, looking to specifically which revenues need to be taken into account, which not, et cetera, the perimeter. So some small adjustments on the final numbers. Nothing exceptional I would say on that line.

A - Edward O'Loghlen

Okay. Thanks, Andrea. And let's have the next one, please.

[Operator]

The next question is from Ignacio Cerezo of UBS.

[Ignacio Cerezo, UBS]

Hi. Good morning. Thank you for taking my questions. I've got two on NII and then one on detail on capital. On the NII, if you can tell us when do you expect the lending book to be fully repriced under existing yield curve conditions? And if you can give us some color basically about sensitivity of your NII to 100 basis points rate cut right now? And then the one on capital is if you can update us on the losses on the held to maturity portfolio end of March or end of April if you have the number? Thank you.

[Gonzalo Gortazar, Chief Executive Officer]

Okay. Hi, Ignacio. Well, the lending book is going to be repriced continuously so you have second repricings. So fully I think if I am not mistaken, it's going to be at some point in 2024. So I don't have the numbers here, but we can come back to you.

This is according to the current yield curve so that will depend a lot on the situation. The sensitivity is unchanged so it's between 5% and 10% for plus or minus 100 basis points and this is unchanged compared to the situation we had three months ago. In terms of the hold-to-maturity portfolio, I give you the answer in a minute, but let me elaborate a little bit.

So we have here a situation where you have to see that portfolio as part of the interest rate risk management of the balance sheet. It's one of the key parts, but obviously it's not the most important one for us. And there are two other big issues here. One thing is deposit and you know that we are a retail bank with quite a strong franchise that results into quite a stable deposit base.

We gave you some figures on the presentation about that, very granular deposits, et cetera. So that means that those deposits are probably less sensitive to rates than others and because of retail, because we have plenty of transactionality with clients, et cetera. And then you have to combine that on the asset side with a situation where we have a large part of our loan book at floating rates.

That is two-thirds approximately at floating rates. That means that on that part, we have beta 100% on two-thirds of the portfolio. So and here the role that the fixed income portfolio plays out is to try to reduce the high gearing we have towards higher rates naturally because structurally we have those deposits that are with low sensitivity and then we have a floating rate portfolio with very high sensitivity.

So we have fixed rate assets in order to reduce a little bit that extreme gearing towards higher rates that we have and as you know that well because we are obviously having a sharp improvement in NII compared to last year.

So that's the role of the fixed income portfolio. And well as such obviously at some point, we had also to cover the risk of rates going down not only going up. Now the scenario is very clear, but at some point it could be worse and going down. So that's the situation and this is the role I insist of that portfolio.

So by the end of the first quarter, the unrealized or the mark-to-market of that portfolio is minus EUR5.9 billion down and we are not worried about that. I understand that there is focus. Those are all high quality liquid assets. We can always repo those assets in the market and ultimately add ECB.

But obviously first, there is a first step in the market. So that's my answer on that topic and I hope that helps to understand a little bit the different sensitivities of the balance sheet and how we take advantage of the different instruments in order to manage those sensitivities. Thank you.

A - Edward O'Loghlen

Thanks. Just to add, Ignacio, that would be pre-tax so the EUR5.9 billion is pre-tax. Moving on. Operator, can we have the next one, please?

[Operator]

The next question is from Marta Sanchez Romero of Citi.

[Marta Sanchez Romero, Citi]

Good morning. Thank you very much. The first question is on new lending yields. Thank you for the chart on slide eight. So the spread versus Euribor 12-month has gone up from 33 bps in Q4 to 97 bps this quarter. So how much of that is mix effect and what can we expect for front book spreads for corporates and mortgages going forward? The market is rightly concerned about deposit betas, but perhaps underestimates the bank's pricing power on the asset side. And the second question is a follow-up on your mortgage strategy. What's your expectation for the size of new mortgage lending at sector level and what market share do you want to have? Mortgages were a great focus for you last year and you now seem less interested. Thank you.

[Gonzalo Gortazar, Chief Executive Officer]

Thank you, Marta. Let me try and answer in terms of margins. Obviously we have had a significant improvement in margins, as you mentioned, 60 basis points in the quarter. Half of it is approximately mix effect and the other is improvement across segments. And how are things going to evolve going forward is difficult to know.

I would think that margins are not going to substantially move from where they are. There is also an impact of how the capital markets evolve to what extent looking now at corporates, to what extent they are open expensive or not for corporates and obviously bank lending will have an impact in terms of volumes and margins associated to that. I would say all-in-all as a base case, I think margins are likely to be stable across the board. But circumstances can change obviously and as long as my assumption and our assumption is that the system remains pretty liquid, hence a relatively benign view on how beta may evolve with upside there.

Then if the system is pretty liquid, we can also have to think that on the asset side spreads are not necessarily going to be moving up in a significant manner. I don't think they will be coming down because even if the system is pretty liquid, clearly liquidity has been much more scarce now than it used to be.

So let's see, but I don't expect great changes. In terms of mortgages, we like mortgages now and we like mortgages last year. So our commercial strategy and the market environment may result in a higher share of new production in one given quarter or period, but that's not because we like or dislike. Obviously mortgages are a key part of our offering and at the same time, it's a fairly competitive market and pricing has to be an important part of decisions here.

With the numbers in January, February because we don't have the numbers for March, our market share in new production is approximately 20%. We're comfortable with that number. I know it's below our stock, which is closer to 25%. I don't think we need to aspire to produce exactly the same amount given that obviously the market for new mortgages is very competitive.

Many players that are taking clearly a higher share of the new production and the current stock, including some relatively new entrants. So 20% is a good indication of where we are and also a good indication of where we would be comfortable with. If the situation is reasonable in terms of margins and we're successful, we can do a bit over that like somewhere between 20% and 25%, I would be happier.

I do not expect us to be doing 30% or 35% of new lending market share because that would mean we would be systematically underpricing in order to get there and that's not what we want to do. We're also not changing our credit standards and those have tended to be fairly strict in the past in terms of loan-to-value, debt-to-income, sensitivity to changes in rates, et cetera.

So it means that probably the sort of the target market for us is not 100% of the mortgage market, but maybe 90% of it, which also explains why we're slightly less aggressive in terms of what market share we want to have in new production versus than we would otherwise be. But we like mortgages and we will try to be -- over time I think month-on-month and quarter-on-quarter, numbers could have some volatility, but be around that 20% market share.

A - Edward O'Loghlen

Thanks for the questions, Marta. Let's move on to the next one, please.

[Operator]

The next question is from Britta Schmidt of Autonomous Research.

[Britta Schmidt, Autonomous Research]

Hi there. Good morning. Three quick questions. The first one is a follow-up to your comments just now. If we look back to the lending targets in comparison with the business plan, you guided to less than 35 basis points cost of risk. Is there any impact on that from a potential mix shift of now seeing less mortgages and more consumer? Second one would be on the SRM charge, which was a bit lower last year. Some of your peers have reported a 20% reduction year-on-year. Do you expect that to be booked as well? And then lastly, could you just detail the rate assumption you have included in your NII guidance? Thank you.

[Gonzalo Gortazar, Chief Executive Officer]

Thank you, Britta. Yes. Sorry, Britta. The last one is the EBITDA embedded in our NII guidance.

[Britta Schmidt, Autonomous Research]

It is the Euribor forward assumption?

[Gonzalo Gortazar, Chief Executive Officer]

The Euribor forward assumption. Well, actually for 2023, the final level of rates is not affecting that much to be honest. So the pricing is already ongoing. So you know that mortgage repricing takes into account the Euribor rates two months before.

So once we have already rates at current levels, the final level for rates is not changing that much. We have done the numbers with the yield curve we had by the end of the first quarter. But if you look at today's levels are not that different. The market is obviously having an impact into 2024, but not that much on 2023.

On the Single Resolution fund, you are right. So we have a larger contribution this year that may be approaching approximately EUR80 million compared to the situation last year and that had to do with some adjustments when we had the M&A transaction with Bankia.

And on the cost of risk for the overall plan of less than 35 basis points, no, we are not planning to make a change on that as with the guidance we have -- the update on cost of risk guidance we are making today, the implicit for next year is quite high. I don't mean that this is going to be the case, but obviously there is ample room, but we are not now thinking about changing it if that's the question.

[Javier Pano, Chief Financial Officer]

Important to emphasize that our guidance for the strategic plan is below a certain level. So at this stage the same way with return on tangible equity or cost income where we have above 12% or below 48% or now on cost of risk below 35%.

We obviously have the ability to comply with that guidance by being well below or well above depending on the cases. Now we've decided that it's not the time to change what was the three-year target plan. Even though as of today, we clearly have a better view of the future than we had in May last year when we presented the plan, things are going better than expected and they look good when we look forward to the future.

A - Edward O'Loghlen

Okay. Thank you, Britta. I think we have one more question, operator. Let's have that final question, please.

[Operator]

The final question is from Fernando Gil de Santivanes of Bestinver.

[Fernando Gil de Santivanes, Bestinver]

Hi. Hello. Thank you for taking my question. Two quick ones, please. First one is on rates in ALCO. What is the strategy regarding the maturities and the pace of reinvestments of the ALCO portfolio? If I recall, well, I think you were targeting EUR90 billion size on that portfolio and you're currently at EUR63 billion. If you can comment on that would be great. And the second question is on the NII on BPI in Portugal, year-over-year is up 80% and you have commented that betas are going to be somehow higher than in Spain. Can you please split the guidance on NII growth for the year 2023 in Portugal, please? Thank you very much.

[Gonzalo Gortazar, Chief Executive Officer]

Big ask, Javier.

[Javier Pano, Chief Financial Officer]

Big ask, on the ALCO, we are going to be opportunistic and as I have said in the past at current yield levels, the ALCO is not adding value because the yield curve is flat or negative. So it's more about hedging to the downside so we'll see. You can expect us to add if we have higher yields and obviously a steeper deal curve. So on BPI, I don't have the split figure with me now. But just to give you some color, we have less negative impact from TLTRO.

So this is one thing that explains a little bit probably the performance and there is less wholesale funding that justifies differences. But overall despite not giving you a specific number, I would say, the overall trends are pretty much the same. So probably we have slightly higher betas. But on the other hand in terms of the loan side of the equation, the performance is really a good one that I'm sure that is going to compensate. So you cannot expect major changes in the dynamics in Portugal compared to Spain.

[Fernando Gil de Santivanes, Bestinver]

Okay. Thank you.

[Edward O'Loghlen, Director of Investor Relations]

Okay. Thank you, Fernando. That's all we have time for today. It's been a pleasure to host you one more quarter. Thank you and goodbye.

[Gonzalo Gortazar, Chief Executive Officer]

Thank you.