Caixabank SA

MAD:CABK

Earnings Call Transcript 2022-Q2

[Edward O'Loghlen, Director, IR]

Hello. Good morning, and welcome to CaixaBank's Financial Results Presentation for the Second Quarter of 2022. We are joined today by the CEO, Gonzalo Gortazar; and the CFO, Javier Pano.

In terms of format, for first-time viewers, just a reminder that we aim to spend around 30 minutes with the presentation, with 45 to one hour after that available for live Q&A. You should have received instructions via e-mail to participate in that. Let me just end very quickly by saying my team and I are available after the call.

And without further ado, let me hand it over to Gonzalo.

[Gonzalo Gortazar, CEO]

Thank you, Eddie. Good morning, everybody.

And let me start with the highlights of the quarter, and the main highlight is the level of activity we have had. At the final phase of the integration, we're showing the strength of the franchise. Volume has been, given the trends in the market, pretty good.

We saw results this morning with 3.2% growth in performing loans and with positive development in terms of long-term savings inflows, €2 billion, obviously, pretty bad markets, and AUM are down because of mark-to-market. But in the full quarter, we have actually attracted €20 billion if we include customer deposits together with this €2.1 billion of net inflows.

So pretty good level of activity. Net income growth, and here we have higher revenues, cost savings coming from the integration and lower impairments, all working in the right direction. You have the statistics there of 6.9% reduction in costs, a 2.1% increase in revenues. And in terms of NPLs, very large drop in the quarter from 3.5% to 3.2%, aided by both organic trends and sale of portfolio - a mortgage portfolio in an attractive market. Coverage has increased. We keep now €1.26 billion of unassigned collective provisions.

So we still have a very significant buffer for a potential deterioration of the economy or for the likely deterioration of the economy. Bear in mind that, on top of that, we have round numbers another €600 million of PPA from the Bankia transaction. So you add all that, it is more in the region of €1.8 billion of provisions that we have to face deterioration in the macroenvironment.

And finally, solvency, obviously, in this quarter, you're seeing the impact of the full deduction of the share buyback, still at a level that is above our targets and reflecting, as I'm sure you'll see, the good level of activity, significant increase in the lending portfolio, and hence on RWA.

I was saying that this is quarter where integration tasks were still a part of what we had to do, and that is the case. But I would say this is the final quarter where a significant part of activity is dedicated to integration.

If you look at, what we see is the commercial model is working. We have growth again in our relational client base, significant. We have finalized or achieved the redundancy target that we had in place, the 6,450 departures. We will have a few more at the end of the year, but that's in line with what we were forecasting.

Branch network, 1,500 branch integrations that are done now by the end of July. There will be some further branch integrations during the year, but we have already achieved the targets that we had in our business plan associated to integration.

And then as you saw during the quarter, we reached an agreement with CASER Helvetia to acquire the 80% of Sa Nostra that we did not own, which will close in future quarters, but it means that basically now all the decisions with respect to the reorganization of insurance and other JVs coming out of the transaction have been agreed.

Activity on the lending side has been particularly remarkable. Here you see mortgage production up 58% if You compare the first half of this year versus last year. And in the quarter, you see it up 79%. These are quite remarkable numbers. I'm sure we'll discuss later on, but MyHome campaign has made a big difference and this has been gaining strength during the year, and it's actually shown it's full impact on this quarter.

On the consumer lending, there's good growth, 21% vis-a-vis last six months or the first six months of last year. And then second versus first quarter, also some growth. And on the business lending, again, you see 57% growth in the six months period.

And if you look at the last quarter, it's actually 54%. It's clearly, a very strong rebound of activity where we are recovering the full strength that we had and where, as you know, we had a couple of weaker quarters in the middle of last year. Now I think the message is the franchise is at full speed, particularly on the business front.

As a reminder, that associated to MyHome campaign is not only mortgages but also significant sales of protection insurance and of other consumer lending, including Wivai and solar panels that have been evolving very, very positively. The market share in new lending that we have - and these are figures up until May, as the June figures are not available, is 21%.

So this is now I think the level that we had targeted to reach. We'll see how this evolves in the next few months. And the other thing to mention is we have also gained market share on the business lending side.

During the year, it was 13 basis points of increase, and this has actually accelerated in the second quarter. So very good news in absolute terms, and I think very good news in terms of a clear confirmation of an inflection point and clear potential of the large franchise leaving behind integration times.

Customer funds, as I said before, it's a fairly volatile market. What can I say? You know that better than I do. On the right-hand side of this slide, you can see our market share evolution. We've gained market share in pension plans, mutual funds, and savings insurance during the six months, like we did last year.

But again, we have the full commercial power of our franchise working here. In total, growth is 0.7%, and obviously, markets have been taking a negative toll year-to-date, as Javier will elaborate later.

On insurance protection, MyBox continues to be a big success, 25% growth in life-risk and 44% in nonlife-risk, and you can see diversified with a household, health, motor, burial insurance, and some other categories.

In total, protection insurance revenues are actually up 10% year-on-year. So very good performance. Hence, loan spectacular growth, particularly new production; on the customer funds, very good performance on off-balance sheet and on-balance sheet as well; and then you see protection insurance also working at full. So a great quarter for activity.

When we look at the net income, you see the 17.1% growth. Revenues are basically stable. So we're still having negative headwinds in NII, and Javier will get into that detail. But obviously, there's a lag period between the change in rates and our NII.

But we have been able to offset with other revenues, so fees, commissions, insurance, all that has allowed us to end up with plus 6% in revenues. And then the big contributors to the growth in net income, as I said, recurrent expenses and loan loss charges allow us to move to the 17% growth.

Credit quality, I was looking at 3.2%. And I realized that the last time we were below that level was 2008. So it gives you an indication of the cycle. This has been achieved despite the fact that the ICO loans were maturing in terms of the moratoria for principal payments, mostly in May and June.

The impact of this end of moratoria has been minimum. We only have 3.7% of ICOs as nonperforming now, and part of that are just paying - unlikely to pay, but they are currently performing. So it's a pretty good number. And we have with the figures of July, we see no sign of deterioration there. It's been clearly very good news. So that's why our cost of risk continues to be at low levels and coming down.

The active reduction of NPLs has also allowed us to increase NPL coverage, maintain this level of unassigned collective provisions that I mentioned earlier, and just as a reminder, we have also a very high level of collateral in our loan portfolio, one of the highest in Europe. So it's a very comfortable position from which we can face a more difficult environment. And capital, again, at good levels, well above our targets and also MREL levels.

In terms of the macroenvironment, during the quarter, we have reviewed the expectations for GDP for 2022 and '23 to 4.2% and 2.4%. In all honesty, we have had positive news on the economy today. Earlier this morning, the levels for the second quarter of the Spanish economy were much higher than were anticipated.

So I think there's clear upside on that figure for this year. However, there is obviously also downside on the figure for 2023. What we've seen last week on gas prices is suggesting that this number is likely to be adjusted downwards in the future, as most commentators, as the year goes by, tend to have new predictions that are worse. Well, time will tell.

Inflation, we had bad news today. Again, close to 11%. So it's still a fairly complex environment, one which we have reflected here, but where there are elements looking at 2023 that suggests that things can deteriorate. The reality is the news today is that both our activity, clearly, our asset quality, payment performance also - early defaults are down to record levels in history.

Payments with our credit cards throughout Spain with our cards, again, very good level during the second quarter. July, more or less, in line. So we are having a very good numbers - we're having very good numbers right now. But obviously, we all know that the things are going to be worse down the road.

The fact that we continue to have lower leverage than our European peers, as you see both business and families, are certainly much lower than what we had before the previous crisis is also a sign of comfort for us that whatever happens, I think both Spain and certainly CaixaBank are going to be less impacted than some of our close countries and some of our peers.

So this is what we see in terms of the economy. And just one final comment. We continue to progress on our ESG agenda. I think highlights of the quarter, as we were leading the league table for sustainable financing in EMEA, which is obviously quite remarkable, given that our size and the scope of our operation would not necessarily suggest that we should be leading this league table, but it's very comforting to see that we are actually being able to lead the pack for at least for these six months, continue to be actively working in terms of financial inclusion through our volunteers and with Caixa Foundation helping, particularly in the Ukraine situation, in terms of micro credit and social accounts.

We have this social DNA, which I think is very special, very much a differentiating factor, which we try to make sure we put in value as much as we can, particularly when we have noise, as you know, in Spain, about how do banks contribute to problems of others. We have a great scorecard, and here are some of the facts that we have to make sure we continue to do, but also to make sure we continue to communicate to society.

That's all from me. I'll leave it to Javier. Thank you.

[Javier Pano, CFO]

Okay. Thank you. And a very good morning from my side.

As always, some further details on the balance sheet and the P&L. The loan book was a very good performance this second quarter of the year. You may see the performing loan book up by 3%. Note that we have the second quarter the usual seasonal impact from advances to pensioners.

But having said this, the performance is really sound across the board, remarkably loans to businesses also. Tight debt capital markets probably helping on that front but I would say that with quite a strong organic evolution. On mortgages, you may see on the central chart, year-to-date, the performing loan book, minus €400 million, but this is deleveraging, but a much lower pace than in the past, thanks to the success of our MyBox commercial offer. And remarkably, even in the second quarter up by 0.4% our mortgage portfolio.

Moving to the ALCO, you may see that the size of the portfolio has increased slightly to €71 billion, but we need to take into account that this second quarter we have had €4 billion maturities, thus we have deployed into the market close to €5 billion. Clearly, a much better market levels. We had clearly opportunities during this volatile period. And as a consequence, the yield of the portfolio at 0.6%, up 10 basis points in one quarter and the average life and duration approximately circa five years.

You may see the maturity profile still €3.8 billion pending this year, basically in the fourth quarter. And as we already outlined in our strategic plan, you may see an increase of the diversification of the portfolio. And as you may see, a decrease of the weight of Spanish government bonds and an increase on basically Eurozone core economies and other, but in any case, with strong credit quality.

You may see also on the right-hand side, the evolution of our funding costs. Remember that last quarter, we had a reduction of the spread due to market developments. We have been able to lock in that spread. And as you may see, 74 basis points over six months of arrival now having at floating the major part of this funding.

Moving to the customer funds, the most remarkable is the market impacts on our long-term savings, but at the same time, very remarkably with long-term saving net inflows at €2.1 billion. This is basically €1 billion per quarter, approximately. But this speaks well about the strength of this business franchise, and we expect that we can keep with this trend in the coming future. You may see, interestingly, on the right-hand side chart, the evolution of our average AUM. You may see the second quarter already below the average of last year.

Obviously, this affecting already quarter-on-quarter our fee revenue evolution. And we also display here the volumes by the end of the period, and clearly below that average. But it's true also that during the month of July, markets have been performing, so this figure probably will have been recovering recently. Obviously, this has the consequence of some headwind going forward on this revenue line unless markets recover.

Now moving to the P&L and to the financial consolidated income statement. The more remarkable in my view is net income, €866 million, up double digits, both year-on-year and quarter-on-quarter. It's about higher revenues, lower costs, and lower provisions. And on revenues, you may see total revenues up by 2.1% year-on-year, also quarter-on-quarter doing well, and also core revenues.

On that front, remarkably, NII resumes growth in the second quarter, up by 3.6% quarter-on-quarter and fees on mid-single-digit growth, I would say, year-on-year and quarter-on-quarter; in this case, with a strong activity on the recurrent fee front, which has clearly offset any market impacts on AUMs.

On life-risk, positive trends. And I would say that we have a very good organic evolution on that line. And obviously, on a year-on-year basis boosted by the consolidation of 100% of Bankia Vida. And on noncore, we have had another strong second quarter on trading. Obviously, a different perimeter in terms of strong financial stakes that result into a lower contribution from equity accounted, but this is well known.

And then on costs, much lower costs, obviously, in line with guidance and reflecting personnel-related cost synergies. And on top of this, I would say that loan loss charges very contained at below €150 million. And as a consequence of this, this net income at €866 million.

Looking at our activities in Portugal, so I would say that this is a success story that continues. So you may see the evolution on NII, 7%, year-on-year up. And you may see the continued positive evolution of the loan book across, I would say, all segments. An fees, also, 10% year-on-year, also growth quarter-on-quarter.

And with a very well contained cost base, this results into higher operating leverage and the pre-impairment income up by close to 17% year-to-date compared to last year. At the same time, very low credit losses with an NPL ratio at very low levels, 2.3% stable, and this results into €55 million of net attributable profit on our activities in Portugal.

Let's move now to the details. This positive NII evolution in the second quarter, up 3.6%, obviously, on a year-to-date basis. On year-on-year still having the headwind from lower rates as we have had in the past. But it's about the account, but interestingly, it's basically client NII. So we have strong tailwinds from average volumes and also a wider balance sheet margin. So this is basically the explanation.

ALCO pretty neutral, although we have increased the size of the portfolio and better yields. This has been offset by wholesale funding that is repricing faster and also foreign exchange money market and also one week less of the special interest rate period from TLTRO. Interestingly, bottom left, you may see the evolution of our back book yield that has already improved by two basis points, and clearly, this is set to continue as we reprice our portfolios.

You may observe that the front book loan yield has come down by 20 basis points, but basically, this is due to the strong weight of CIB lending this quarter. Actually, 40% of the new production has been from CIB and obviously at tighter spreads than the average. And as I said, margins improving. So all in all, although in the third quarter, we will still have the impact of lower contribution from TLTRO, going forward, NII is clearly set to improve.

On fees, very good performance. We have had more than €1 billion, so we are over €1 billion mark during the second quarter, growing by mid-single digits across the board, comparing quarter-on-quarter, year-on-year. You may see recurrent banking fees contributing is everything related to transactional activities.

This is about credit card, foreign exchange. You may see bottom left, the debit and credit card spending that clearly is improving. These are our figures over the same period in 2019. And this clearly has been quite a positive development during this second quarter that we expect may continue into the third quarter on that front of payments with a good summer season.

On asset management, already having quarter-on-quarter some impact on lower balances due to market effects. On insurance distribution, we have had more focus on life insurance during the second quarter. It was on the contrary in nonlife during the first quarter. So you may see for this reason, this negative evolution quarter-on-quarter, but we are quite a bit on future evolution on this business, as you know well. And also, wholesale banking doing very well, up 30% quarter-on-quarter.

And for the rest of our core revenues, you may see other insurance revenues here. On life-risk, you may see that we are on a quarterly basis at an all-time high of €209 million of revenues. This is 3.7% up quarter-on-quarter and also the equity accounted of our insurance activities, obviously, reflecting nonorganic impacts, the consolidation from now on of Bankia Vida and other impacts are well flagged on SegurCaixa. This drives our core revenues up quarter-on-quarter and also year-on-year. And year-to-date, obviously still feeling some headwind from NII earlier in the year.

On costs, everything is going according to plan. We are on track to meet our guidance for the year. Remember, €6 billion for this year. We have basically personnel-related costs as the restructuring process fits in. And also in general expenses, we have cost synergies. On depreciation, we have an increase basically derived from the change in the CapEx mix towards more IT.

And obviously, this drives up depreciation and also remember the intangibles from Bankia Vida we already flagged on our Investor Day. As a consequence, higher revenues, also a contribution from costs, our pre-provision profit up by 10% year-to-date. And our recurrent cost to income also improving by 1.3 percentage points on a 12-month trading basis for this quarter. Loan loss charges at very low levels, very well contained.

You may see that our annualized cost of risk is 20 basis points, and we are on track also to meet our guidance for this year, circa 25 basis points. And remarkably, the CEO has already mentioned, this quarter, we have allocated €214 million of unassigned reserves to specific provisions. This is a process driven by the semiannual IFRS 9 risk model update. But afterwards, we still keep an ample unassigned buffer of €1.25 billion.

Moving to the balance sheet. On NPLs, we have a steep reduction. It has been aided by portfolio disposals, but it's €1 billion less of nonperformings. As a consequence, the nonperforming loan ratio are now at 3.2%. We keep a very sound NPL coverage ratio at 65%. And you may see that the improvement in terms of NPL ratios across the board, I would remark, on residential mortgages, minus 50 basis points year-to-date to 3%. it has already been mentioned, but it's remarkable.

A brief comment on our ICO exposure. 23% of our original ICO loans granted have already amortized or being prepaid. Of the remainder, 80% - 85% are repaying principal. The major part of them will do so by the end of the year and only 3.7% of the ICO loan exposure is classified under Stage 3. And I would say 40% is, I would say, unlikely to pay but still paying.

Moving to liquidity. No much news on that front, very ample liquidity position. You know very well our metrics. Liquidity coverage ratio, over 300%, and net stable funding ratio at 150, remarkable figure.

On MREL, complying comfortably with requirements with an M-MDA buffer at 250 basis points. And you know that our funding plan, as we were pretty clear on the Investor Day, is focused on the rollover of upcoming maturities and also the diversification of investor base. Thus, you can expect us also issuing into foreign currency, something we have already been doing and also our U.S. dollar MTN in place to do so in the future.

And finally, solvency. On that front, we closed the quarter with CET1 ex-transitional IFRS 9 well above our targets at 12.2%. We have the well-flagged impact of the share buyback, fully deducted from regulatory capital ratios, minus 84 basis points, 22 basis points of organic capital generation, obviously, impacted by strong loan growth, actually, minus 18 basis points has been the impact of risk-weighted asset increase. The impact from dividends and AT1 coupons and then minus 8 basis points from markets basically. This is the negative impact from the fixed income portfolio as accounted as fair value OCI.

With this on top, we have 25 basis points from transitional IFRS 9, ending with an MDA buffer over 400 basis points. A brief comment on our tangible book value per share, obviously, impacted by the dividend payment in the month of April. Not taking this into account, you may see a good progression and ending the quarter at €3.75. And well, as you know, finally, we continue progressing executing our planned 1.8 billion share buyback now executed over 50%.

Well, thank you very much. I think that we may be ready for questions. Thank you.

[Edward O'Loghlen, Director, IR]

Yes. Thank you. Thank you, Javier. Thank you, Gonzalo. It's time to move on to Q&A. Let me just please remind everyone to keep your questions brief. We have a long list of people waiting on the queue. And with that, operator, let's have the first question, please?

[Operator]

The first question is from Francisco Riquel of Alantra. Please go ahead.

[Francisco Riquel, Alantra]

Yes, hello. Thank you for the presentation. My first question is about loan growth in Spain. You have recovered five percentage points of market share in new mortgage lending this quarter. Some local peers claim that you have been aggressive in pricing, particularly in fixed rate mortgages. So I wonder if you can comment on the pricing of the new lending and also on the overall profitability of the MyHome offering? And then on corporates that we have also seen fast growth. I wonder what is driving this growth, if it is working capital financing, given the rising inflation or large ticket loans in CIB? And also what is the average yield on the new corporate lending?

And then the second question is on the NII guidance for '22. You mentioned €6.1 billion, €6.2 billion. If you can update on this outlook, which I think should we see that given the detail tailwind from Euribor still to show up? And then what would happen if you were to incorporate the forward - static balance sheet? What's the uplift to NII? Thank you.

[Gonzalo Gortazar, CEO]

Thank you. Paco, I'll make some comments and pass it on to Javier. On the mortgage side, we have obviously been very successful by refocusing the attention of our people on the mortgage product, while including in this whole home ecosystem offering. The campaign has been very successful in terms of volumes and also very successful in terms of its overall profitability.

With respect to the mortgage portfolio in both the mortgage pricing in particular, we have obviously been competing and adapting to the financial market. Again, when you look at the share of new production, 21% compared to the back book that we have at 24% plus. It's actually very reasonable.

And obviously, I think as the interest rate evolves and moves upwards, which has happened during the quarter. But then obviously, in the last few weeks, there's been a different view or a moderation of that trend, we will continue to adapt to the actual market and remain prudent, but at the same time, we remain commercially focused and aggressive on mortgage.

So I would expect that we continue to compete successfully in this part of the business. Some of our competitors, because we have been so tight in pricing for a few years, may have forgotten what it is to compete with us on the mortgage market like in other places. And we're a top competitor. And obviously, if we are playing appropriately hard the market given our size, notices it, that's clear. Beyond that comment, for guidance and corporate yields, et cetera, Javier, please go ahead.

[Javier Pano, CFO]

Paco, well, on the corporate front, the short answer in terms of yields, I was consulting the data is that the yield for the new production this quarter has been 1.2%. The major part has been made at floating. So what you may see actually that the spread is a good one. You can derive the numbers of the risk-weighted asset intensity that has been approximately around 40% in terms of the new production this quarter.

So you may see that - well, it's a good business, profitable, always meeting our, let's say, profitability standards internally, over 15%, generally speaking. So it has been broad-based, different sectors, so very good business in summary.

To the key point, which is NII guidance, well, it's clear that we are starting the year with better average balances than initially expected. We are not expecting this pace of loan growth year-to-date. We don't think that into the second half of the year, this pace is sustainable. So probably we will face some slowdown, obviously, for seasonal reasons in the third quarter, but obviously, with more uncertainty ahead of us.

On the other hand, we have DCV from rolling rate hikes. We saw last week 50 basis points instead of what was priced in the market, 25. Obviously, this is having an earlier positive impact into our NII repricing. And on other hand, we are not seeing any pressure at all in terms of deposit pricing, let's say, deposit beta. So on that front, there are not any kind of pressures. And well, those are the positives.

On the other hand, you know very well that the third and the fourth quarter will be negatively impacted because we will no longer have the funding benefit at minus 1% from the TLTRO. So this is approximately minus €100 million per quarter, although we already had one week impact during the month of June. But all in all, the situation is better, even considering what we already knew about TLTRO.

And you mentioned it, we gave guidance for this year at €6.1 billion, €6.2 billion, so we are now in a position to improve this guidance to €6.3 billion, €6.4 billion. And obviously, we give a range because there are some uncertainties in terms of the pace of rate hikes, the impact this may have on money markets, et cetera. And this is why I give you this range.

You asked about beyond 2022. I would say that, generally speaking, what we presented to more than two months or 2.5 months ago, is valid. And there is a lot of volatility in the rate markets in recent weeks. But our base case, I would say, according to the levels we are having as of today is still valid because we have this, let's say, front-loading in terms of higher rates into 2022, into 2023 maybe pretty much the same or slightly lower, but the fact that you front-load 2022 also has a positive impact into 2023. So I think that the messages are the same. The messages in terms of deposit beta remain the same. I can reconfirm that as of today, we don't have any pressure on that front. And this is my view.

But although you have not made the specific question, I would also add a comment on fees because actually, is to some extent related to NII. And you know that we had a part of our deposits - corporate deposits that were being, let's say, charged or we were applying according to Spanish regulation, cash custody fee, and it was a balance - it has been a balance over €35 billion.

And you know that now with rates at 0, gradually incoming, I would say, months, this fee will grow. And obviously, this is going to have a faster negative impact on fees than initially expected. Moreover, and I already mentioned, we have had this correction in markets, average AUM balances have been negatively affected. It's true that July is doing very well. So let's see the evolution in markets is difficult to forecast, as you know well. But obviously, this offers also some headwind to some extent.

So for the rest, just taking the opportunity to comment on fees as I am already touching on that topic The rest of the business is doing very well. You saw very good performance on transactional fees, everything related to payments, even following exchange, strong activity on that front. So this is doing well. Everything related to non-life insurance that is accounted as fees we expect to perform well.

But all in all, you remember that we gave guidance for the combined of fees plus insurance and thinking about only the fee part of this guidance, we think that we have the chance to be closer to €4.9 billion instead of €5 billion we gave as guidance. Basically because those impacts from cash custody fees plus the headwinds in terms of volumes on AUMs. Sorry for the long answer, but I thought it was interesting to give you the full picture on the matter. Thank you, Paco.

[Operator]

The next question is from Maks Mishyn of JB Capital. Please go ahead.

[Maks Mishyn, JB Capital]

Hi, good morning. Thank you for the presentation and the opportunity to ask questions. I have two. The first one is on cost of risk. Your full year guidance leaves room for an increase in the second half. My question is what do you think should happen for this to materialize because so far, there are no signals from a quality deterioration as stated by other banks as well? And then the other question was on the new banking tax. I know that we still don't have all the details, but it would be very helpful if you could share your view on this change in Spain with us. Thank you.

[Gonzalo Gortazar, CEO]

Thank you, Maks. On the cost of risk, the reality is what we see today is all very positive, as you said. And in fact, it's even more positive than what we were expecting. It's great news. The eco performance has been very good. And on top of that, we've actually been able to reduce NPLs. And again, I think there is more to come.

Our expectation is that we will be at around 3% by the end of this year in NPLs, meaning further improvement in the next two quarters. So my expectation is as you know, this was our target for the end of 2024. I think we can get there by the end of this year. So very good and answer your question is very appropriate. But at the same time, when you look at what we will be providing for in the third and fourth quarter is going to have an intimate relationship with the economic environment and the deterioration of this environment is something that we all expect.

We don't know how bad and how much, but there will be a deterioration. I am hopeful that it's something that we will be able to cope with appropriately, thanks to our unassigned reserves. And as you said, we have some headroom between the current cost of risk analyzed for the first half and the 25 basis points that we gave as guidance. So I think that indicates that we have some ability to - beyond our unassigned funds have some further provisions anticipating developments that would be negative into 2023. Time will tell.

But yes, we are, in a way, accumulating buffers to face a deterioration in the economy, which we're not seeing yet, but which we are thinking it's going to come because there are very powerful forces that it will be the case.

We continue to be comfortable not just with our guidance for this year, but also with our guidance for the strategic plan because we're going to have, in fact, I think, a lower use of these unassigned reserves that we could have anticipated because our current eco loans, et cetera, everything is evolving in the right direction. So in fact, by the end of the year, we're going to have a higher buffer to offset that macro deterioration. And time will tell how bad that is. And hence, what is the final picture.

Second question on the tax, I would say most relevant. Based on what was published yesterday, as you know, there's this proposition of law presented to parliament. And this is, a, does not yet have all the details and b, will be subject to change, obviously, and obviously, will also be subject to approval or non-approval.

Let's not take everything for granted at this stage. But in any case, with information we have trying to be helpful, we get to a preliminary estimate for next year, which, as you know, the tax is going to be based on '22 figures, but it's going to be applied and accounted for as much as we know at this stage in 2023, the number would be between €400 million and €450 million based precisely on the guidance that Javier just came for what we expect in NII and fees and applying sort of the fiscal rules, we get to this €400 million to €450 million for as a tax in 2023 that, as you know, the current losses, it's not tax deductible. So it would be directly a hit to the bottom line if it's approved in this form.

With respect to what we think is we are obviously against this measure, against this measure, clearly. We think it's the wrong measure for Spain at this moment. We think it's unfair because it's based on the fact that the Spanish banks are having extraordinary profits, and that you know better than anyone else that is not true.

So we need to just clear, have clear the facts. And the fact is as you look at the return on equity of banks on their Spanish operation under the Bank of Spain information for the last 12 months, ROE was 5.3%. 5.3% is obviously very far away from extraordinary profits. The situation this year is not likely to improve much, to be honest, because of the lag period with increases in NII.

When you look at 2023, time will tell. Obviously, the system will benefit from higher rates. But obviously, there are other issues, including particularly loan losses that they depend on how the situation evolves. So to establish a tax now on extraordinary profits is just doesn't respond to reality. There's no doubt that you understand this better than I. So it's not fair. The tax has not been designed to tax profits. It's been the same to tax revenues. And hence, if you want to tax extraordinary profits, but you go for revenues, you're really using a tool that is not the right one. And obviously, this is something very unsettling for all of us. I'm being very clear and public that this is based on, again, the wrong facts.

Second, it's actually a distortion. It creates a distortion from a competitive point of view. There's only a few entities that are affected by this tax. We actually compete in many regions in Spain with entities that are maybe local champions, but are not getting to the standard of the €800 million in revenues.

We're competing against foreign banks that in Spain are not getting to that level. Why should I be less competitive to fund Telefonica or Iberdrola for a tax reason imposed in Spain versus a large French, Italian, American bank. It makes no sense. It's not a good competition role. It also puts us at a disadvantage vis-a-vis hedge funds, credit funds, others that are going to be funded without that tax. We're making this very clear to everybody. This has a competition impact, which we need to be aware of.

It also creates a big complexity. As you know, you know how banks we do credit. We actually have to incorporate in the price of credit, the cost of capital, the cost of funding, operational cost, the cost of credit. Actually, the EBA guidelines forces us to also include taxes in that pricing.

And on the other hand, there's now a Spanish law that if it's approved, would say that actually you cannot incorporate all this in your - the pricing in your credits, we have a big conflict of jurisdiction. Spain is in no way in a position to go against EU rules in something like this and obviously, EBA and ECB will require us to do one thing if EBA guidelines are in place. And actually, this law requires us to do the opposite. So again, this is a distortion vis-a-vis European rules that make no sense.

And then it's also finally comes proactive. I think we all know that in difficult times, having a strong financial system is critical to make sure the difficult times are less difficult and do not last for a long period. We can only look back to 2008 to 2012 in Spain to see what is the impact of a crisis where the banking sector is not strong. And you don't like to have that again. So this is weakening the banks at this moment in time. It makes no sense.

And then finally, if we have a tax on - again, on credits, we either pass on that tax to clients because we do what EBA tells us to do. And then credit is more expensive or if we do not do that, sometimes we may do cheaper, but many others will just not keep that credit because it doesn't work. The numbers do not add up. So whether it's through expensive credit or reduction in the level of credit, this is precisely what you want to avoid from an economic point of view when times are getting tough. So this is a bad idea. In our case, obviously, these taxes - our money is not ours.

Our money is for shareholders. So the tax is on shareholders. And there beyond the 600,000 retail shareholders, we have very many respectable institutional shareholders that represent many people in due course. And then we have the - our foundation, which is actually using these funds to return them to society and help the poorest part of the population, which is precisely what we need to foster currently. And the tax is actually going to do the opposite. It's going to mean we have lower funds to direct to our shareholders. And hence, it's clearly the wrong idea. Again, it's unfair. It's distortionary and it's counterproductive. So this is our view.

We just had a press release and I made a press conference. I made it very clear. We obviously - the main impact - main bank impacted by this tax in absolute numbers in Spain because of our size. And anyhow, this is just the wrong measure. Let's not take it for granted. This will go ahead in its current form. There are obviously issues about whether there are double taxation here, which is not something that can take place. We really are paying for profits, but we're also paying for revenues.

And hence, there's a very clear to me, at least double taxation here, and there's the principle of equal treatment, which is not being protected at some institutions because of size are having to pay this quite artificially on this €800 million level, others are not. Let's see what time brings, but you can count on us doing what we can to explain and convince everyone in Spain that this is a mistake in terms of policy, we'll see.

[Edward O'Loghlen, Director, IR]

Okay, thank you, Maks, for your question. Operator. Let's please move on to the next one.

[Operator]

The next question is from Sofie Peterzens of JPMorgan. Please go ahead.

[Sofie Peterzens, JPMorgan]

Here it's Sofie from JPMorgan. In terms of capital, in the past, I believe you said that you expect limited kind of capital headwinds or tailwinds to come. Could you just elaborate if this still is the case? And then my second question would be around your kind of capacity or your plans to distribute around BRL9 billion back to shareholders in cash dividends and share buybacks, which was announced at the Capital Markets Day with the increased macro uncertainty, the new banking tax, also a 12.2% core equity Tier 1, which is maybe a little bit on the leverage side. How confident are you that you can deliver this $9 billion in capital returns? Thank you.

[Gonzalo Gortazar, CEO]

Thank you. If I may with the latter part of the question, Javier, and then you take it from there. Obviously, if there is a banking tax and the impact is, what I said, €400 million to €450 million times two or well, depending whatever is the figure for revenues in 2023, obviously, this is going to have an impact in our plan. This was not included and if it's included, we need to rebase our commitments. We will try to do our best to compensate in other ways. You can take that for sure. But let's be clear.

We were not planning to have whatever is €900 million if we do times two the higher sort of end of the range, that was not included in our numbers. And it's unfortunately not tax deductible, so that will be a direct heat to the €9 million. And again, we will do our best to compensate it with better numbers, higher growth, whatever. You can take that for sure.

But other than that, I think we have had a pretty good quarter, pretty good loan growth. Hopefully, that means bodes well in terms of future profitability. We're very happy with that. Obviously, we will have quarters with lower growth in terms of RWA. And time will tell. We need to see a bit more how the current economic environment, which is evolving, affects the overall market. But our commitment towards this figure with the sort of in brackets, the comment I made on the banking tax, which finally happens is obviously an issue. The rest is something we feel we're going to be able to deliver.

[Javier Pano, CFO]

Sofie, from my side on further CET1 impacts further down the road. We are pretty much in line, although I will elaborate, but probably the impacts are going to be generally postponed into 2023. And I further explained. Remember that what we mentioned is that we had in the first quarter, this positive plus 20 basis points impact from applying the Danish compromise to the Bankia Vida consolidation once we consolidated Bankia Vida late into the year.

And the message was we don't expect to have additional, let's say, regulatory impacts, basically the major part of those related actually to the M&A because it's about the almost initiation of different IRB models, and that would not be higher than those 20 basis points or not much higher. And this continues to be the view. I don't know if it's going to be 20, minus 25, but not much more than this.

And probably, this postponed on a net basis because there are positives and negatives, more skewed into 2023, and into 2023 still with an uncertain calendar. You may ask why. And this has to do with the regulatory or supervisory approval process. So those are many internal models that need a supervisory approval.

And depending on the backlog that actually the supervisor has, those are being approved sooner or later. And our expectation now is that it's going to be later, and as I say, into 2023. Remember that on top of that on our Investor Day, we made clear that once IFRS 17 applies into next year, we have this impact of up to 20 basis points. And I explained it well the reasons for that. So those are the impacts, as I say, basically now skewed into 2023. Thank you.

[Edward O'Loghlen, Director, IR]

Thank you. Okay, thanks, Sofie. Operator, let's move on to the next one, please.

[Operator]

The next question is from Pamela Zuluaga of Credit Suisse. Please go ahead.

[Pamela Zuluaga, Credit Suisse]

Good morning. Thank you for taking my questions. Most of them have already been answered, but I have one more. How are you thinking about your excess liquidity position? Will the repayment of TLTRO funds and the stronger loan growth that we've seen limit your ability to further expand your ALCO portfolio versus your original plan of growing it to $90 billion? Thank you.

[Gonzalo Gortazar, CEO]

Pamela, well, the short answer is no. We were planning this portfolio, considering our forecast of the evolution of what we call the commercial gap with quite an ample buffer, so we can fund this portfolio without relying on, let's say, money market funding on the repo market. And the strong growth we have had on lending, as I mentioned to another question actually in the presentation, probably it's not a pace sustainable for every single quarter.

So there are some seasonal effects. Also, as I mentioned also, tight debt capital markets, to some extent, making corporates a little bit more reliant on bank funding. But well, I think that we are doing well, but probably not at the same pace. So I don't think that this is actually going to be limiting our cash pool to an extent to result into a constraint on our ability to fund our fixed income portfolio. Thank you, Pamela.

[Edward O'Loghlen, Director, IR]

Thank you, Pamela. Let's move on to the next one, please.

[Operator]

The next question is from Ignacio Ulargui of BNP Paribas Exane. Please go ahead.

[Ignacio Ulargui, BNP Paribas Exane]

Thanks very much. Thanks for taking my questions and for the presentation. I just have two questions. One on fees. I mean coming back a bit to the guidance that you have provided, so what should we expect - what is embedded in the guidance for payment fees in the second half of the year? And secondly, I mean, on the NPL disposals, the statement that, Gonzalo, you made on reducing the NPL ratio to 3% by 2022 instead of 2024 as it was in the plan. I mean, did you see still a strong appetite for portfolio disposals? Does this new tax impact the credibility or the ability to dispose NPLs faster? Thank you.

[Gonzalo Gortazar, CEO]

Thank you. I'll start with the second one. I say, yes, we still see a good market. Obviously, I think the factor that is most relevant is, for acquirers of assets that require some leverage, leverage has become more expensive. Obviously, spreads have gone up. So that might have a little impact on pricing, but so be it. Other than that, I see good interest, and I think it's a good opportunity to continue reducing nonperforming loans. We have reasonable visibility. But obviously, when you're talking about portfolio transactions until they are signed, things can change.

And whatever we do, it will only be done, we think we get good value. But at this stage, we think there's still value out there, and it will allow us to sell. If anything, this tax is an example of the distortion that it creates, actually, even from NPLs, you still get some interest to be recovered, which would be taxable for us, but not for the acquirer, that will be below the threshold, -- anyhow. That's a side comment, but whether we have a tax or not, we'll continue to try and use portfolio divestitures as a way to manage NPLs because otherwise, the collection time in Spain is so long, but it really hits on - hits the regulations that we have and the expectations that we all have on NPL management. So hopefully, yes, we'll be able to continue on that front.

[Javier Pano, CFO]

From my side, on fee guidance on payments. Well, this is approximately a €500 million per year business year-to-date and adjusting for the disposal of the merchant acquiring Bankia business to Comercia. We are growing like 10%, so a 10% pace. So it's a positive evolution. You saw on the presentation, a chart with precisely the volumes, traffic on credit and debit card and this is doing very well.

Obviously, the summer season is going to be a good one, with foreign visitors, obviously, making use of our payment facilities. So the third quarter, I think, is going to be a good one. The fourth quarter is a little bit more uncertain, and with all the uncertainties we have around. But generally speaking, we have a positive view, but sorry not to be more, let's say, specific on that point. But just giving you the trend, we are having year-to-date, probably you can figure it out. Thank you.

[Edward O'Loghlen, Director, IR]

Thank you, Ignacio. Let's have the next one, please operator.

[Operator]

The next question is from Benjie Creelan-Sandford of Jefferies. Please go ahead.

[Benjie Creelan-Sandford, Jefferies]

Yes. Good morning. Good afternoon. Thanks for taking the questions. Two for me, please. The first one was just on M&A appetite, I realize still work to do on Bankia, but looking further forward, is there any change in your appetite for additional M&A? And I guess, I'd frame that question around two developments. One, obviously, if we look at the broader performance of the sector year-to-date, valuations have gone down, your valuation has gone up, so your relative purchasing power has improved. So does that change how you think about M&A? And secondly, going back to the point about the bank tax in Spain, does that perhaps drive a greater appetite to diversify the business earnings footprint potentially overseas going forward. So that was one question.

Second question was just a quick follow-up on excess liquidity. The ECB obviously mentioned last week that they may look to change the compensation of excess liquidity holdings going forward. Just wondering whether you had any thoughts about how that will impact on your net interest income sensitivity, how it may change how you manage your liquidity? And I guess to be specific, would it potentially lead you to look to repay your TLTRO borrowings more quickly? Thank you.

[Gonzalo Gortazar, CEO]

Thank you, Benjie. I would just say we have no M&A appetite. We have a lot to do with our current perimeter, and we're likely to be focused on improving that for a good while, no M&A update. Javier, do you want to...?

[Javier Pano, CFO]

Yes, on the ECB and TLTROs, well, it looks increasingly likely that the, let's say, the term sheet of the TLTROs is not going to be changed, but it's true what you say that the - Madam Lagarde mentioned, some potential restrictions on the excess liquidity balances. I really don't know. So obviously, it's a very sensitive information for money markets.

And just to keep in mind that this - for 2022 is not having, I would say, a major impact on precisely if I gave this guidance with €100 million, spread, it already takes - I don't say that it's €100 million the impact for 2022, but it already takes into account some uncertainty regarding precisely this factor.

So the potential positive impact is more into 2023, and in terms of NII sensitivity, we took already a cautious view on that front when doing the numbers that we presented on - in the month of May, so it's not changing actually our views, because remember that we were actually giving more sensitivities thinking on 2024. The impact for 2024 of this issue, the TLTRO funding is literally zero. So it's more something for 2023. And time will tell, I hope that the ECB in the September 9 meeting will be more specific, because it's something important.

Basically, for money market position in repo market, everything, I think that the ECB should be clear on that, and we will see. It's a little bit complex. I suppose that they can try to engineer some kind of teething some balances being paid at the deposit facility, some excesses potentially - not potentially linked to the TLTRO you have disposed or not.

So there are plenty of combinations we have been working on, but it's difficult to assess and also difficult to assess, which may be the potential impacts in a situation where actually the ECB is hiking rates and what may - the actions, the impact may have on money markets actually going the other way around. So I think it's not easy, but obviously, they have all the information to decide. Time will tell. Thank you.

[Edward O'Loghlen, Director, IR]

Thanks, Benjie. Let's move on to the next one, please.

[Operator]

The next question is from Andrea Filtri of Mediobanca. Please go ahead.

[Andrea Filtri, Mediobanca]

Yes, thank you. A follow-up from Paco's initial question on NII sensitivity. I don't think it was answered. I wanted to ask what would be the NII sensitivity plugging in forward rate curves and zero deposit beta, so that we have a better tracking of how this is evolving and we can replicate it better. And I just didn't catch before, what is the expected negative impact from the removal of negative interest rate fees that you mentioned beforehand? And just a quick follow-up here on the banking tax comments just made. It is not essentially an incentive to increase the deposit beta transfer, more upside to your depositors, rather than paying a banking tax and use your fleshier muscles on the local market? Thank you.

[Gonzalo Gortazar, CEO]

Thank you, Andrea. On the latter one, I - again, we have a very solid liquidity position. And obviously, even if there is a 5% savings associated to interest expenses, because we would save these extra costs, there is 95% cost on paying. So I do not think at this stage, that this is going to alter our strategy on customer deposits. But in any case, with these measures that are unprecedented, when they are applied, there's always sort of secondary effects that no one has thought of, and we'll have to see how things develop generally in the market. But at this stage, I would say, it is unlikely to change our policy with respect to customer funds. Javier?

[Javier Pano, CFO]

Hi Andrea. Well, if the question is - which is our NII sensitivity, assuming 0% beta, I don't have the numbers right now, but are not difficult ones to construct at least approximately. We gave you our assumptions of deposits at costs, with the cost being between 30%, 35% during the period of the strategic plan, assuming the yield curve that, as I mentioned before, is pretty much in line with what we have as of today. And with a pass-through approximately of 70% of 12-month arrival, and what - I can come back to you and give you the numbers. But I think that you can figure out with those figures and our deposit base.

Obviously, it's a theoretical exercise. It's not something we think is going to happen. I would like to be clear on that. We will have to pay for some of the deposits, some of corporate deposits, obviously, and some others in a situation where rates are, let's say, in the 1% handle. In our view and according to what we are seeing in other jurisdictions as of today with a loan-to-deposit ratio well below 100% and excess liquidity situation in the system, still this beta has the chance to be lower than in other processes or hiking rate processes in the past, and we have to rely probably to have a better understanding of those dynamics on past experiences in other jurisdictions. And this is my message, but we will follow this very closely in coming quarters, because you will be able to track our deposit cost base on our statements.

And on custody fees, I mentioned that we were charging to a balance of approximately €35 billion. We were making like €10 million per month, and this is going to go gradually. But over the summer, probably over September, October, obviously, depending on the relationship with the client, the different agreements we have in place. So this is not a standard process, with everyone the same. So it's going to be a process, but what we assume, is that by the end of this year with rates in positive territory, these will have gone. Thank you.

[Edward O'Loghlen, Director, IR]

Thanks, Andrea. Let's move on to the next one, please.

[Operator]

The next question is from Alvaro Serrano of Morgan Stanley. Please go ahead.

[Alvaro Serrano, Morgan Stanley]

Good afternoon. Just a couple of follow-ups really. On the distribution question that came earlier, I took note that Andrea made some comments. I think it was late last month or earlier this month around banks, when they come to setting distribution will have to take into account a recession. Does that have any practical consequences, the way you think about sort of your distribution? I mean, I don't know if that's a generic comment or that does change because you have to lower the payout or something like that? Just some thoughts around the risk there?

And second, I know you've touched on the fees as well, but just on the recurring banking fees, that 12% quarter-on-quarter growth, can you explain what - is it general activity? Is there any seasonality there, and can we annualize that? Or should it continue to grow because, obviously, if payments is a big chunk, then inflation at least is helpful for that. So a bit more color on that item, recurring banking fees. Thank you.

[Gonzalo Gortazar, CEO]

Thank you. I will take the first one on distribution. My reading is that, there is not going to be a blanket ban on dividends or capital distributions, which is obviously very important. And hence, I take it positively. On the other hand, what the supervisor is saying, is obviously, entities that are approaching distribution time, need to be well prepared to face a potential recessionary environment or the consequences of sort of interruption of gas supplies from Russia, which I think is fair enough, is what I think any of us should do, because it's an uncertain environment.

And I think, hence, it's a very reasonable position from Mr. Andrea, and from our own point of view, to be honest, that's what we would do in any case. And again, even if we have good reasons to think that the environment is going to deteriorate, I am in a situation where as a bank, we've never been so strong in the last 12 years.

We have the capital, the liquidity, we have the NPLs, we have the unassigned provisions. We have the PPA from Bankia. We have been quite prudent in the past. We have a good level of profitability. So we feel it's not a good time to face a difficult environment, but we feel it's a time where we are completely prepared and very confident, that we can go through and weather the storm very successfully.

Maybe hopefully, the storm would not be that big, maybe it will be very big. But I think we are well prepared and hence, we'll be able to argue our case and do our sensitivities. And in fact, we're obviously already doing sensitivities to pretty tougher scenarios, and see how resilient our profitability, and hence, our capital distribution is. So that will be my reading.

[Javier Pano, CFO]

Well, on fees. Here, there are a few effects. Well, first thing, it's a calendar effect. It's a longer quarter. So more days, more revenues. We have had a strong recovery in credit card fees, as I mentioned, also strong volatility in foreign exchange markets, precisely on foreign exchange for customers. We made plenty of transactions, everything related to transfers. Well, I would say that is overall a strong activity in the bank - in terms of operational point of view, has led to this result.

Counterintuitively, we have also had some increase in custody fees, with rates still negative, and just to be clear that beta has nothing to do with 12-month. We were still challenging even a little bit more during the second quarter for, let's say, large corporate deposits. And also keep in mind that, during the first quarter, we had some, let's say, one-offs related to the home ownership initiation of the loyalty programs between, let's say, former CaixaBank - former Bankia clients and CaixaBank clients - and what probably the first quarter was a little bit affected also, from our point of view for this factor.

So going forward, I already mentioned that custody fees will gradually go, everything related to credit cards, et cetera, the third quarter is going to be, in my view, a good one. In the fourth quarter, it's a little bit more uncertain with the uncertainties we face. And in terms of the loyalty programs, this is going to - is being worked out.

But keep in mind that for those, let's say, current account maintenance fees, there is like a secular trend downwards, as we make more and more relational clients, we are close to 70% of our clients being relational, then they enter those loyalty programs and obviously, those charges, explicit charges just to hold current account, are gradually diminishing. But this is a long-term trend, thinking on a quarter-on-quarter basis. I think that it is going to - have to do more with overall activity in the economy, and we as a major, let's say, counterparty in terms of payments in the system, obviously, taking advantage of this. Thank you.

[Edward O'Loghlen, Director, IR]

Okay. Thanks let's move on to the next one, please Operator.

[Operator]

The next question is from Borja Ramirez of Citi. Please go ahead.

[Borja Ramirez, Citi]

Hello, good afternoon. Thank you for taking my questions. I have two quick questions, if I may. The first one is regarding mortgage demand in Spain. So in the first half of the year, it has been quite strong. I would like to ask, what are your views for mortgage demand in the second half of the year? And then my second question is regarding AUM close. You have been gaining market share in terms of AUM close have been very resilient. I would like to ask, what outlook do you expect for the rest of the year?

[Gonzalo Gortazar, CEO]

Borja, I think, in terms of mortgage growth, we look into the second half of this year. We're still going to have significant growth figures that are out there, indicate mortgage growth for the first half. There are different sources, 8% to 9%, 10%. This is likely to slow down, but I think during the second half, it's probably going to be still at 5%, 6%. And obviously, as we see the impact of higher rates and potentially on confidence, when you look into 2023, our expectation is that, that will further moderate and hence, we'll have probably a lower increase in prices, still positive and a more significant reduction of transactions.

It's difficult to see, because in reality, it has actually surprised us on the upside, not just in Spain, but in many markets, as you know, there should be a slowdown, but not a radical slowdown.

[Javier Pano, CFO]

Hi Borja. You had a second question on inflows on AUMs. Well, I think that having been able to keep having inflows during the first two quarters of the year, is a remarkable success. It tells us about the strength of the franchise we have, the business model we have here, it's something that we have been explaining in detail in the past, based on advisory, not only private banking, it's, I would say, more affluent banking, et cetera. And to some extent, explaining to clients that the way to save - looking forward and obviously, in this high inflation environment, is not on deposits, it's on with a long-term horizon, et cetera, no?

So I think that we are successful on this. In my view, if markets stopped to some extent, the downward trend and just, let's say, settle in a range is going to be a positive development. And hopefully, in the second half, at least, we can keep with the pace of inflows we have been having in the first half. But it's true that it's natural, that people - savers think twice before entering long-term investments in this kind of super high volatility we are having, not only in equity markets, but also in the fixed income market. Thank you.

[Edward O'Loghlen, Director, IR]

Well, thanks a lot. Let's move on to the next one, please.

[Operator]

The next question is from Carlos Cobo of Societe Generale. Please go ahead.

[Carlos Cobo, Societe Generale]

Hi, thank you for taking my questions. Yes, I'm one of the last one as well. Two quick ones on product consumption. Some banks, I believe, in the U.K. have been sharing some insight on how they are seeing their customer behaving, I would like to see if you have any insight in terms of how do you see the balance between people using the savings and high savings ratios, to keep on consuming, despite the increase in the energy bills and energy costs? Or you have seen some - the other banks have said, that people are cutting on streaming subscriptions, gym memberships and stuff like that. It will be interesting to see, if you can share some of that? The other question is about NII. I recall - and correct me if I'm wrong, but you said that the NII could even slip a little bit in this quarter, as you reprice all the funding higher. But what we're seeing is an important expansion, and while we haven't really saw - seeing any material change in the average EURIBOR rates during the quarter, because of the two or three months lag in repricing. So what s changed that performance? Is it that you've been comfortable enough to buy more bonds from ALCO earlier than you expected, or would you change that - surprise to expectations? Thank you.

[Gonzalo Gortazar, CEO]

Thank you, Carlos. I'll say, obviously, it's something we follow very closely. We publish regularly on a weekly basis, consumption we see through our cards. And there yes, to summarize, what you see in an average in July, which is very much also in line with the previous quarter, is increased and it's 12% of spending of cards. So this is comparing 2022 with 2019, i.e., pre-pandemic, where these are obviously nominal levels.

So if you take into account inflation, you see already that on a real basis, the evolution is not that great, but on nominal euros, which is what we present in our income statement, overall spending in cards in Spain is 12% up in July, versus 13% that used to be in the second quarter. So very much in line from April, May, June, July, at similar levels. And then spending first necessity goods, if that's the right translation, is up 50%. And then tourism, it's up 11% now. E-commerce up 52%, and then foreign expenditure is up 26%. So there's a clear indication of tourism having an active impact.

Generally, with respect to accumulated savings, we have the feeling that this has been helping the economy clearly in the first and second half. And also, as per the previous question on mortgages, it has also been helping the mortgage market. And this is still out of our estimate of €75 billion of accumulated savings, there's probably €60 billion that has already flowed back to the economy and a little more that is likely to flow during this quarter, maybe next quarter, but that will be exhausted. And we are likely to have a clear reduction in consumer.

You see the figure in consumer consumption volumes. You see what's happening in the U.S., the figures from - saw the other day, figures from Unilever worldwide or from Walmart in the U.S. or Coca-Cola, et cetera, nominal consumption is up, real consumption is down. The consumer is suffering a consequence of inflation, and that is likely to come. Now again, I insist - we measure ourselves in nominal euros, as long as we keep not being in a hyperinflation country, which hopefully is going to be the case in the Eurozone. So when we look at nominal numbers, we're going to see good nominal numbers, I think.

And even though, given the level of inflation, which is more persistent, you saw the figures today in Spain, again, going up from closer to 11%. And I think that's a big risk. At what point is really inflation going to come down, flex. And so far, it's very difficult to predict, and that would also have implications for monetary policy.

And now the latest is that recession or the risk of recession is going to be enough to confront inflation, and hence, rates are going to stay at, I don't know, 1% is the latest sort of future market for the ECB. I have my doubts, that 1% is going to be enough to confront inflation. But anyhow, we'll see.

[Javier Pano, CFO]

Carlos on the last question about NII and our initial expectations. It has been basically about volumes, and to some extent, the frontloading of rate hike expectations that has resulted into faster, let's say, 12-month of EURIBOR repricing, and we saw this tenure going up, I would say, faster than initially expected, pricing - frontloading of rate hikes and while this widened our overall balance sheet margins, on top of this, we were able to increase the size of the portfolio - not increase, but to roll over maturities at better levels than initially expected. So it's a combination of things, and it has actually been better than expected.

I would take the opportunity to remind that the third quarter - I already said this, but just to be clear, the third quarter is still having a negative impact from the, let's say, the minus 1% funding from TLTRO, that goes and obviously, will have some kind of impact on third quarter NII. Just to be clear on that front. Thank you.

[Edward O'Loghlen, Director, IR]

Okay. Thank you, Javier, Gonzalo. Thank you, everyone. That's all we have time for today. The IR team will follow up with anyone who has been left in the queue. And with that, it's been a pleasure to host you one more quarter. Thank you for watching, and have a great summer break. All the best. Bye-bye.

[Gonzalo Gortazar, CEO]

Thank you very much.

[Javier Pano, CFO]

Thank you.