Caixabank SA

MAD:CABK

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and welcome to CaixaBank's financial results presentation for the third quarter of 2022. We're joined today by the CEO, Mr. Gonzalo Gortazar; and the CFO, Javier Pano.

In terms of logistics, just a brief reminder that we aim to spend around 30 minutes of the presentation, followed by 45 to 60 minutes of Q&A for which you should have received instructions via e-mail. Let me just end by saying that the IR team and I are available after the call for any questions that remain. And without further ado, let me hand it over to our CEO, Mr. Gortazar.

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Eddie. Good morning, everybody, and let's go on to it, if I managed to put the presentation on. It doesn't seem to be working now. You have another one? Sorry for that. Okay. Well, I will go through my paper version. If in the meantime, you get it sorted out, you project it for me, would be easy. Okay. Well, Good morning again. I would say the third quarter for us has been a very good quarter. We see another strong operational quarter. That's certainly the case. In terms of commercial activity to start with, it's been on the lending side. Now I can see the screen as well. Apologies for that. On the lending side, we have significant growth both year-to-date and quarter-on-quarter. And quarter-on-quarter, in fact, with growth businesses, consumer lending and mortgage lending in terms of balances and obviously, in terms of new production as well.

On the customer funds side, we have positive inflows yet another quarter with EUR 0.7 billion in the third quarter and EUR 2.8 billion in the total of the year in a year, which you know better than anyone, how difficult it is. So activity is, I would say, at a very good level. We are very pleased to see this level of activity with an institution that only 1.5 years ago, completed a very large and complex merger.

Net income is obviously up. And here, we have core revenues going in the right direction and cost associated to the integration also coming down. Asset quality, very rewarding. It's 3% now, and it was 3.6% at the beginning of the year. While we still see obviously some -- or a number of or many clouds on the horizon in the economy, generally in -- particularly in Europe and obviously, also in the U.S., the reality is that we've been doing very well on asset quality. Coverage is going up. And again, early defaults before they are nonperforming loans are also at historically low levels. So very, very rewarding. And then capital, some impact on the quarter associated to markets, but still at 12.1% above our levels, comfort level. So very good distance to MDA and liquidity, again, at a very high level. So very pleased with the quarter.

I have to say -- looking at the asset side, you see what I mentioned, growth year-to-date and quarter-on-quarter of the 3 categories: mortgages, consumer lending and business lending. That's not been the case in the market and for some of our competitors, particularly in this quarter, which gives us a good indication that some slowdown in terms of market activity on the asset side that we had in the second and third quarter of last year is completely over. And in terms of new production, it's very notable, the increase in mortgage production. I'm sure we can talk about that later, but also consumer and business, clear, good signs of how we are positioning the market.

Customer funds, a tale of 2 cities, you include the market impact, which is unfortunately the reality then you have a reduction in terms of one, both in year-to-date and in the quarter. But when you take into account what is ex-markets, you see significant growth in deposits and long-term savings. And obviously, in this context, I would say, a fairly good result.

Market shares, up and pension plans, mutual funds, savings, insurance, long-term savings, again, a very good feeling of having the commercial strength that we've always had at full speed and with some significant developments in the quarter, particularly the launch of MyBox Jubilacion, which is going to be obviously not having an impact in the very short term in terms of the financial results. But in the long term, I think it's a very, very promising initiative.

Protection insurance, MyBox offering, 25% in life, 21% up in non-life overall, MyBox and non-MyBox, all production premium on the new business, up 11% as continues to be a source of growth for us and a very rewarding one. You put all that together and look at net income, obviously, we have increasing revenues, mostly associated to activity fees and insurance income.

NII is still negative on the year-to-date. This is the 9-month comparison. Obviously, on the quarter, we've seen a complete inflection point with a strong growth, which is to be maintained. Cost savings more than offsetting inflation so that we had an improvement in profits of EUR 197 million from recurring expenses. This is the after-tax number and then positive because the development of asset quality has been so positive. We have been able to both reduce loan loss charges and increase coverage levels. So it's an ideal world, efficiency, the recurring cost income coming down to 109 basis points year-on-year. We're going very well towards our objective in the plan in terms of cost income and obviously, very positive operating environment in the year.

Moving on to the economic environment. We've just seen some good news in terms of GDP in Germany. According to our expectations, also in Spain, 0.2% growth in the third quarter. But in any case, we all know the economy is set to slow down. In our case, we see Spain moving from 4.5% this year to 1% next year. I think it's relevant to remind that our view is that Spain is going to be doing better than the euro area. You have it on the bottom of the page. We expect GDP growth to the euro area of 0.2%, so basically flat. And in fact, over the fourth quarter, first quarter of 2023, likely to be in negative growth territory. So 1% for Spain is obviously much lower than this year, but it is consistent with a 0% growth in Europe as we see it because Spain is now in a better position.

Obviously, we have a different energy situation with -- sorry, 9% of gas imports dependence with respect to Russia, compared to the 44% of the European Union. We have a different installed capacity with 1/3 of the European Union capacity for LNG, for regasification plants. So we're not going to have a shortage problem. We obviously will have some impact associated to higher energy prices. But other than that, we have no real estate bubble. You have the figures there in terms of where we are, and that is just the price, but you look at activity or the exposure of banks and new houses started, et cetera, all point towards a fairly solid real estate market, even if we will have some slowdown. You can see on the slide, the house prices for next year is 1.5% with inflation running at 4.5%. It means a negative real price appreciation, but it's positive in nominal terms. And obviously, our mortgages are paid on nominal money. So it's good to see that house prices keep growing in nominal terms.

And at the same time, private sector is much less indebted than it used to be. You can see the graph basically on the business side, we used to be at 140% in 2008, 1-4-0. We're now at 99% and below the Eurozone 108%. And when you look at households, we are below the Eurozone in line but slightly below. But again, 57% of debt to GDP compares to 85% at the peak, 85% at the peak down to 57%. So resilience in the private sector is very different. Employment is doing well. And then not on the chart, but also you should realize that our external sector, we have had a current account surplus now for 10 years in a row. This is absolutely unprecedented in Spain. So we feel there will be a slowdown. There's no question around that and an impact. But we think this time, the Spanish economy is going to be affected, clearly, moving from 4.5% to 1% is a significant impact, but less so than the euro area, which we expect to see at 0.2%.

Now with that environment, which is obviously a worsening one, we have to see where we are, and we feel very well and very good about where we are for a number of reasons. Obviously, the inertia that we have in results is pretty obvious. You see here pre-provision profit and the significant increase in pre-provision profit that we're seeing. And obviously, there's much more to come, while at the same time, cost of risk is well maintained. But obviously, a first line of defense here is having more revenues, more profits, and that is working. The actual asset quality of the portfolio has been improving for 14, 15 years. It's the best ratios we had since before the crisis in 2007.

Coverage, as I mentioned before, is at a very high level, 68% because we continue to have a very large number of unassigned provisions on which Javier will comment later, also on the structure of the mortgage portfolio, which is going to prove very resilient, in my view. We continue to have liquidity and -- both on short- and long-term structural ratios at very high levels, well above our competitors on average and the requirement. And we start with a very strong solvency position, and that almost 400 basis points of MDA buffer. So we feel situation is likely to worsen. It's likely to worsen less in Spain than in Europe. But then when we look at ourselves, we've never been in better shape in the last 15 years. That's clearly my and our view.

And in that regard, obviously, we have our duties on the ESG front, both the social and the environmental agenda, a few comments here. I think on the environmental side, very relevant, our decarbonization targets for 2030. We have started with 2 sectors that actually account for 70% of emissions, oil and gas and power generation. We've actually come out looking at our competitors with levels that are, as of today, well below most other competitors and also putting some additional pressure on further reducing that along the way to 2050, getting to 0.

We have, again, I think, a strong track record on this front in terms of our green and social bonds issued. We just actually incorporated into the Poseidon Principles banks and have been recently by Sustainalytics named as -- or ranked as having the lowest environmental risk among the Spanish banks, which is good news. And then on the social side, we have a different philosophy in terms of financial inclusion. Our proximity to vulnerable groups where we have solutions for both day-to-day banking but also micro credits and obviously, social housing and then all the activities we do together with the foundation, which puts us in a different bucket from most other banks and something which we plan to continue reinforcing during a tough period and certainly continue explaining to society all what we are doing.

And with that, Javier, maybe you can take from over from here.

[Javier Pano Riera, executive]

Okay. Thank you. Good morning. Let me go deeper into the details now. Well, starting with an overview of the loan book, you know it well. But you may see on the central chart that we have a clear turnaround since late last year, the loan book up by 3.4% year-to-date. Even despite the third quarter seasonality, we have been able to keep a nice pace into the third quarter. Also below the chart, you may see also the evolution of the performing mortgages already in positive territory in terms of volumes year-to-date. On the right-hand side, you'll see that clearly on this waterfall of our loan book, it's business lending, what has been driving growth. And well, we expect that probably into the fourth quarter, we may face some slowdown in that front. But in any case, probably a more flattish quarter.

Moving to the ALCO. We have grown the book slightly this quarter to EUR 72.5 billion. It has been extremely volatile quarter, as you know very well, but with a relentless increase in yields since late August. So well, in this environment, you may see that we have been able to add to the portfolio in taking advantage of market volatility. As a consequence, the yield of the book increases to 0.7%. And as -- also, you may see the average duration very much unchanged at circa 5 years. Also, we continue to progress on our diversification process and our -- the wave of Spanish government bonds being reduced by 9 percentage points year-to-date.

In terms of wholesale funding, stability, you know that we have almost 100% that funding swapped into floating. And the spread over 6 months of rival remains pretty much unchanged at 76 basis points.

Moving to customer funds. Gonzalo already commented that we have had strong market effects on our AUMs, minus EUR 18.4 billion year-to-date. But even under those circumstances, we keep having inflows, EUR 2.8 billion for the year, given this third quarter, positive inflows -- positive net inflows by approximately EUR 700 million. It's not even a single quarter this year despite the market correction in negative net territory. And also you may see that our deposit gathering capabilities continue being there, EUR 8 billion accumulated during the year despite the quarter-on-quarter seasonality.

And more interestingly, on the right-hand side chart, you may see the average AUM balances, you can see that for the third quarter, already below by 2%, approximately the average of last year. And by the end of the period, by the end of the third quarter due to a strong market correction late into the quarter, approximately 5% below. Obviously, this may have some impact into fee revenues coming from that business. But anyhow, you may see that is moderated.

Let's move to the consolidated income statement. The most remarkable is the improvement in terms of core revenues. You may see that at the bottom, growing by more than 6% year-on-year also quarter-on-quarter approaching 4%. Basically, there is a turnaround on NII. You may see that NII is growing quarter-on-quarter by 5.4% and year-on-year by slightly more than 6%. Clearly, we -- this is supported by higher rates and the repricing on our floating rate portfolios but also volumes that year-to-date have been doing well as we saw before.

On fees, we have the traditional third quarter seasonality. But despite this, we are over the EUR 1 billion mark this third quarter and up by 4% year-on-year, strong recurring fees, more than offsetting any market impacts on AUMs. And also remember that since this third quarter, the corporate deposit fees is going. On insurance, I would say that a very good performance. We keep growing on a quarter-on-quarter basis even up by more than 5%. And year-to-date, remember, boosted by the consolidation of 100% of BKIA VIDA.

On noncore revenues, basically, we no longer have Erste Bank when you compare year-on-year. And then below on costs, down by more than 6% year-on-year, on track to meet our guidance for this year and loan loss charges and also other provisions, low levels of new provisioning. And what -- taking all that into account, net income at EUR 884 million, that is close to 19% over last year.

Let's comment about Portugal, where the positive momentum really continues. You may see also that core revenues improved markedly quarter-on-quarter, but also over double digits year-on-year. On that front, clearly, the loan book growth is supporting importantly in -- strongly in Portugal, you may see across the board, also mortgages, but businesses. We are gaining market share in Portugal in terms of loans, 11.4% and now 0.4 percentage points year-on-year. And at the same time, keeping very low levels of NPLs and provisions. This, together with good performance on fees and also a flat cost or flattish costs year-to-date results into higher operating leverage up by close to 30% for the first 9 months of the year. The net attributable profit in Portugal EUR 74 million.

Let's move to further details on the different P&L lines. NII, close to flattish year-to-date for the 9 months, as you may see. And on the bridge quarter-on-quarter, you may see a very strong contribution from client NII. This has to do with higher average volumes, but basically index resets that, as you may see, bottom left also result into an increase of fiscal 21 basis points on our back-book yield on the loan book. Also, back to this NII bridge, you may see that ALCO and other have a negative impact of EUR 98 million. That's basically repricing on wholesale funding that is at floating. As I commented, money markets and some other hedges and also it's basically a lower impact from TLTRO in lower positive impact from TLTRO quarter-on-quarter. As a consequence of all this, margins also improved. And well, this index repricing is expected to accelerate from the fourth quarter but basically also into 2023.

Fees -- as I commented, for the quarter, over the EUR 1 billion mark, this seasonality that is always affecting the third quarter, minus 2.2% quarter-on-quarter. But you may see that also for the year, we are up on fees close to 4%. You may see on the bridge upper right that it's a year-on-year bridge that recurring banking fees are really supportive for the period. This has to do with improvement in credit card activity, everything related to payments and other transaction-related fees. You may see actually in the chart, bottom left, that traffic on credit and debit card during the third quarter has continued to be really good compared to the same levels in 2019. And so far in October, it's still being the case.

Asset management back to the bridge year-on-year, having a slightly negative contribution due to the average balances we commented and still positive momentum in insurance distribution and also wholesale banking. And also, you may see that the breakdown year-to-date is positive across all fee segments. And remarkably, for example, on wholesale banking, we are up by 15% for the year.

Continuing with other revenues on that front is other insurance-rated revenues. And the most relevant here is, as you may see on the central chart, a new record high on quarterly results from our life risk insurance activities, EUR 220 million. And when combining this with the equity accounted from basically CaixaVida you may see that we are up quarter-on-quarter and also year-on-year by slightly more than 17%. Remarkable activity here, and we are quite upbeat about the evolution of this business.

Continuing with costs. On that front, actually, not much to comment. I would say that we are on track to meet our fiscal year guidance. Remember, circa EUR 6 billion. We have already delivered approximately 65% of cumulative cost synergies, and we expect that this level will be approximately at 80% by the end of the year. Remember that we have an increase in depreciation this year that is related basically what IT investments and some programs we already flagged on our Investor Day, but also remember the amortization of the Bankia Vida BPI.

Asset quality. On that front, low loan loss charges, you see that this results into a cost of risk that is really flattish in recent quarters, circa 23 basis points now and on track to meet our guidance circa 25% for the year, a clear reduction of our stock of NPLs year-to-date actually EUR 2 billion, which is remarkable. And this results into an NPL ratio together with organic NPL reduction of 3% this third quarter. You may see that across the different segments, the reduction is also very clear.

A few words on ICOs that part of the portfolio is doing much better than initially expected. We have now 4.4% of our ICO exposure classified as Stage 3. We have 28% of our total initial ICO exposure that was granted in the past that has been already amortized and of what has not been amortized, 90% is already repaying principal. So that part of the book that was a strong focus some time ago is clearly, and we reiterate doing better than initially expected.

And let me give you further details in the following slide because there are plenty of details we think are interesting. We commented that we face the uncertainties ahead with confidence. And well, regarding our asset quality looking forward, this is based basically in 2 pillars. Well, first thing, quite a strong coverage NPL ratio, which is quite strong at 68%, and we have been able to increase it by 5 percentage points year-to-date. It's EUR 8 billion of credit provision funds. But this, combined with a low-risk loan portfolio. And you have here the details across the main segments of which part of our loan book is collateralized. And once you take this into account together with the exposure we have to the public sector, it results that 2/3 of our loan book is collateralized or granted to the public sector, which makes this loan book better resilient while we face this increased uncertainty going forward.

But there is a more important aspect that I would like to remark, on the right-hand side of the chart, sorry, -- and this -- well, in this environment, with higher rates, obviously, there are plenty of borrowers that have -- that face higher monthly installments. But this is the breakdown of our mortgage portfolio. So you may see that we have 60% of our mortgage portfolio that has been originated before 2012. And this is a part of the portfolio that, as you may see, is basically at floating, but it's very seasoned. So those are borrowers that have been paying the mortgage for more than 10 years. And actually, at the region, they have been paying even higher rates than the rates that we face in the near future.

Then we have a period of time with low origination. This is what the aftermath of the real estate crisis. And then since 2015, we have 33% of the book that has been originated since then. And as you may see, we have 72% at fixed. So those borrowers are shield against the new rate situation. So the summary is that the part that is at floating is very seasoned and the part that is more recent actually is at fixed. So this results into quite a resilient portfolio in our view. In order to add some further details below, you may see -- the average monthly installment of floating rate residential mortgage is approximately less than EUR 450 with rates at 3%, which is at some point what the market has been pricing, now it's slightly below. But although today, we are seeing again rate increases in the yield curve. The monthly installment would increase by slightly less than EUR 100 per month. So this is for the average of the portfolio.

And also a key piece of data is that the average affordability ratio is less than 25% for the average of the portfolio. And in -- with rates at 3%, with 12-month Euribor at 3%, the affordability ratio is going to be still below 30%. So I think that is quite interesting information or even quite relevant to understand the resilience of our portfolio.

Let's move now to the final 2 slides. Liquidity. On that front, we keep an ample liquidity position, as you know well. Here, you have all the metrics. And regarding MREL, we are complying comfortably with requirements, as you know well, with an M-MDA buffer at 288 basis points despite very difficult debt capital markets during this year. We keep executing our funding plan, EUR 3.8 billion issued and well, going forward, focused basically on the rollover of upcoming maturities and diversification of the investor base.

And finally, Solvency or capital requisite, we end the quarter with a CET1 ratio at 12.11%. That is the result of plus 30 basis points of organic capital generation, of which approximately minus EUR 11 million due to risk-weighted asset growth because basically, we have had a larger book during this third quarter. Then we have the minus 27 basis points from the accrual of 60% cash payout and the AT1 coupons. And then on top, we have minus 12 basis points, basically from the impact of markets on our fixed income portfolio classified as fair value OCI and also on Telefonica share price.

On top of, we have 26 basis points from IFRS 9 transitional, and we end with an MDA buffer that is at 398 basis points. And finally, tangible book value per share improving to EUR 3.81, an improvement of 6.4% year-to-date.

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

[Edward Michel O'Loghlen, executive]

Indeed, thank you, Javier. Thank you, Gonzalo. It's time to proceed to a Q&A. Operator, could we please have the first call with the name of the institution that it works for. And just a brief reminder for everyone to keep the questions as brief as possible. Thank you.

[Operator]

[Operator Instructions] The first question is from Alvaro Serrano of Morgan Stanley.

[Alvaro de Tejada, analyst]

Two questions. First one on TLTRO. Can you give us the specific contribution in millions in the quarter in the NII? I know there's been some headlines in the preconference but the contribution in the quarter from TLTRO. And given that there's no carrytrade, is there any point in holding it given your CR ratios, how should we assume that you're going to return all of it in the November window?

And the second question regarding payout, you're accruing the 60% capital was down slightly. As we think about the full year and potential distributions for the new year, can you help us understand how you're thinking about it? Should we assume I mean -- what I'm trying to say is if buybacks are still possible and should -- is a possibility that you may not pay out the 60% in dividend and you might choose to do a bigger share in buybacks. Are you going to play around with the payout in the mix? Or should we continue to expect some kind of buyback, just some reflections on full year distribution.

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Alvaro. On TLTRO, I think this is a start topic today for Javier. On dividend, I think at this stage, we have sort of in practice given the range of over 50% and maximum 60%. And I think the word -- the Board needs in due course to take a decision within that interval. I wouldn't like at this stage to say anything more. I think that range is valid, and the decision will be taken in due course, looking at a situation and obviously with sort of better visibility into 2023 and beyond. But obviously, we are, at this stage, accounting for 60%, which is the most prudent strategy. And hence, if we do 60%, you should have no impact from that in our capital, as I know you know.

On TLTRO, Javier?

[Javier Pano Riera, executive]

Hi, Alvaro. well, a very specific question, and I want to give you a very specific answer or at least I will try. The positive impact on NII from the TLTRO funding plus depositing it at the ECB deposit facility has been circa EUR 65 million this third quarter. It was in the second quarter, circa EUR 94 million approximately EUR 94 million, EUR 95 million. So on a quarter-on-quarter basis, we have a negative impact, and this is what I flagged on that, let's say, NII bridge quarter-on-quarter that on ALCO and other activities, we had a negative impact quarter-on-quarter from TLTRO of approximately EUR 30 million. So this is -- those are the details.

And just to add some further information, I give also the percentage of the accrual. So we have been accruing at minus 32% the TLTRO facility. And on the other hand, these average you can calculate it, obviously, but I give you the figure. So the average of the deposit facility for this third quarter has been 0 because it was negative at the beginning of the quarter, and then it was more positive, but the average is 0. So those are the figures. And you mentioned if we are thinking to early redeem, but no final decision has been taken yet. But very probably, we will early cancel this funding because as you say, we don't have any benefit from it.

[Edward Michel O'Loghlen, executive]

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

[Operator]

The next question is from Sofie Peterzens of JPMorgan.

[Sofie Peterzens, analyst]

Here is Sofie Peterzens from JPMorgan. So I was just wondering, yesterday, we saw ECB got retroactively changing TLTRO terms. Do you think there is any risk that Spain could retroactively change the guarantee terms on the ICO lending? And have you done taken any legal opinions around this? And then my second question would be my usual one. Could you just outline the core equity Tier 1 headwinds and tailwinds to come? Is it still 20 basis points start from IFRS 17 and then another 20 basis points from other kind of M&A transactions? Or should we expect more headwinds or less?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Sofie. In terms of the question on the ICO loan. I see no risk on changing those retroactively for many reasons, starting with legal points, but also with practical ones given the relevance of this. So we can discuss the changes of the ECB on TLTRO, but they are obviously on -- I mean, you know all so I don't think it's a good use of our time now to get into that part. But what is your question and more relevant is, I see no risk of that happening in terms of changing the ICO loans and certainly from a legal point of view, I just don't see how that could happen. And Javier?

[Javier Pano Riera, executive]

Sofie, well, you say, well, no, we have positives and negatives ahead for the fourth quarter. We don't foresee any major net impact for the fourth quarter, but into 2023, yes, we're estimating now the major part of the impact will be into 2023. So here, remember that we still had approximately 20 bps from applying the Danish compromise to BKIA Vida. So that was a positive we had earlier in the year. And then from now on and into 2023, and I don't know, to some extent, something may even skip to 2024, we may expect a combined impact from IFRS 17 plus those, let's say, update on models you mentioned of circa 50 basis points.

[Edward Michel O'Loghlen, executive]

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

[Operator]

The next question is from Francisco Riquel of Alantra.

[Francisco Riquel, analyst]

I wanted to ask first about NII. If you can update guidance for '22. Other banks have also given indications for '23. I don't know you -- if it can also be the case you can share with us? And in particular, if you can walk us through the mechanics of the repricing of the loan book, how much has been done year-to-date? How much is left in the mortgage and in the corporate? And also on the liability side, how and when do you expect to start paying for time deposits, if you think that this trend could be accelerated in the sector after repaying the TLTROs or not?

And second question is about the fee income. Also, you can update guidance in general here and also in particular on asset management fees, which are growing quarter-on-quarter despite the falling in the assets under management. If you can please comment what is driving this growth, the mix, and products that you are offering to attract inflows? And if you can remind also on the performance fees in the fourth quarter last year and if we should expect any this year at all.

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Paco. I think guidance, I'm going to let Javier, please go ahead.

[Javier Pano Riera, executive]

Well, that's the key of the call. So let me try to elaborate. Well, for the fourth quarter on NII, I would say here that we are having faster asset repricing than expected. So obviously, 12 month Euribor and other rates are being higher than our initial expectations. Also in terms of volumes, we are doing well. So we're starting the quarter in good shape on that front. And for the moment, in terms of deposits or let's call it deposit beta, we don't see any pressure. So this is a little bit the summary. So the TLTRO goes from November, but still there is a positive contribution into the fourth quarter. So taking all this into consideration, yes, we are in a position to upgrade our NII guidance for this year. And we think that we are going to be very close, if not at 6.7% for 2022, for the whole year. So this is our view for 2022.

For 2023, well, again, the starting point is a good one in terms of volumes. So on that front, we are going to have a larger part of the portfolio already repriced and repriced at higher rates than initially expected. The TLTRO clearly is not going to have a positive impact at all. So we have this year-on-year effect. But in any case, this is much more than offset by the book repricing during the year. In terms of deposits, so here, we gave you details on our Investor Day about what we thought about betas, et cetera.

What we are thinking and just to update a little bit, what we commented on a qualitative basis because on -- I would say, on a numeric basis, I think that everything is -- we are in the same place. So what we think is that probably the beta is going to take a little bit longer than initially expected to increase. Probably we still, during 2023, don't face what we may call the terminal beta. So probably the terminal beta is not in 2023, but it's actually in 2024, once already, the loan book has already been repriced. So we may have this kind of a slight lag on that sense. So this is very positive for 2023 NII.

But time will turn because what we have now, the redemption of TLTRO, we have some talk from ECB about quantitative tightening to what extent this is going to actually affect the deposit betas or, let's say, demand for funding in general is yet to be seen. But generally speaking, what we said back in May is still valid. Obviously, with higher rates, betas are going to be slightly higher, but not, I would say, on a material well, but probably more skewed into 2024 than 2023. So this is a summary. So we are not now in a position to give you a quantitative guidance for 2023. But what I can say is that we expect very significant growth for NII for next year. So this is our message today.

You had a question also on fees. On that front, it's true that we have done better than expected. And everything related to what we call transactional banking, from payments, transfers, foreign exchange, even securities. All those areas have been doing really well. We have been able to offset with that part of the business, some more pressure on AUMs, as you say, because obviously, average balances are having an impact. And well into the fourth quarter, here, we face uncertainty in terms of AUM balances. It has to do with markets, extremely volatile.

You mentioned the impact from success fees. It's also uncertain. Not all success fees are in absolute terms, some are relative to indexes or benchmarks. But probably, we face also some headwind on that front. But all in all, combined with our insurance business, remember that we gave guidance at EUR 4.9 billion for the year for the combined, let's say, fees plus insurance. And as the insurance business is doing very well, as you could see, we are in a position now to upgrade again this guidance to very close to those EUR 5 billion we were before. So this is now the message we can give you.

And to the specific question about fees or asset management fees on the third quarter, it has to do with the mix of products that we can distribute to our clients and basically, this is it.

[Edward Michel O'Loghlen, executive]

Paco, thanks a lot. Let's have the next one, please.

[Operator]

The next question is from Andrea Filtri of Mediobanca.

[Andrea Filtri, analyst]

I wanted to ask about ALCO. Where do you see it going progressively in terms of size and contribution to NII? And if you could elaborate a little bit more than you have done so far on the actually corridor of the deposit beta. Right now, it's very, very low terminal rate, where do you see it? And how do you see it evolving between now and the terminal rate. And if you could give us your view on the negative correlation between interest rates and fee income, and in particular, wealth management including insurance and how do you see it evolving as NII rate and how high is fee income going to behave? And finally, what were the negative interest rate fees in Q3? Do you use them in the fee income and how they're going to do in Q4?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Andrea. Javier, please.

[Javier Pano Riera, executive]

Hi, Andrea. Well, on ALCO. In terms of contribution, well, actually, the contribution in terms of NII is not that large. Basically, with the ALCO, well, with a fixed rate ALCO, which is what we are thinking about, is we are, to some extent, locking the current rate situation because if you look at the yield curve, it's not actually that steep compared to, let's say, short and forwards. There are not -- there is not quite wide, for example, sovereign spread. So actually, what you are capturing is more than margin. You are actually locking, let's say, the sensitivity of the balance sheet and you are reducing that sensitivity to higher rates, but also to lower rates. And while this is quite an important decision we can take.

So in terms of volumes, what we have commented in the past about EUR 90 billion is still in place. So we think that this is the goal to figure at some point. But when to really take a step forward, has more to do with the fact that we see that we are really done in terms of this rate hike cycle and what this obviously is not easy. And obviously, we will not be lucky enough to be successful just one time, and this is going to be a gradual process, and we will decide according to our better view on that front.

On deposit beta corridor. Well, I already hinted a little bit our views. So we think that beta will gather pace slowly. This is our view, starting with basically with large depositors, corporates and so on. And it's going to take a while in retail, basically because we have a different profile. We have to explain it in detail with first thing, we have a very large deposit base from retail. This is the first thing. But even within retail, our deposits with, let's say, relational clients, our operational accounts. And we think that there is a very large part of that pool of deposits that is actually not sensitive at all.

So for -- there is always -- there will be at some point where for sure, we may be starting paying also for some retail deposits, but we think that it's going to take some time. This is why I mentioned that probably the terminal beta is probably more to be in 2024 than in 2023 in this cycle. And actually, according to the models, we have been analyzing. This is also what has happened in the past, not also in Europe but also in other jurisdictions.

In terms of rates versus asset management and insurance, well, I think that insurance is a business that is very shield, let's say, with very low correlation to the rate situation. Insurance in terms of protection. Insurance, in terms of savings insurance, actually, is positively correlated because so far in the past, we have not been able to construct products attractive enough because of the low levels of long-term yields. And with the current situation, this is something we can start doing again. So this is positive. And in terms of protection, we don't see much correlation. We don't see much correlation and you can see that we have been doing well this third quarter and this year in general. And we think that this positive momentum is set to continue.

On asset [Technical Difficulty] let's say, stocks but also affecting fixed income is unhelpful. That's clear. But despite this being the case, we have been able to keep having inflows. So we have a very well-established business model, advisory model, as you know, quite unique in Spain to be said. And once this volatility settles or at least this correction settles, we think that the pace of inflows will restart again because we think that -- well, people and clients already understand that this is the best way for them to save, not saving into short-term deposits effectually with current levels of inflation or even if inflation is at, let's say, the ECB target at 2%, what deposits will be actually not offering positive real returns. So I think that the message from our side will continue to be that for long-term savings, AUMs and the different even insurance solutions, et cetera, is the right thing to proceed.

And then you had a question, a very specific one about custody fees in Q3. So we were making approximately EUR 10 million per month before ECB removed negative rates. And this in the third half has been half of that. So actually, we have had a positive impact on fees of approximately EUR 15 million. And in the fourth quarter, this is going to be 0 for sure.

[Edward Michel O'Loghlen, executive]

Thank you, Javier. That was very comprehensive. And thank you, Andrea, for the questions. Let's move on to the next one.

[Operator]

The next question is from Maksym Mishyn of JB Capital.

[Maksym Mishyn, analyst]

I have one on mortgages. Your new production increased again. We don't have the data for September for the sector, but it looks like you're already above in new production market share above your back book. I was wondering what's the reason, if you could remind us, you were able to grow your market share so fast. Do you see less competitive pressure? And also, how does cross-selling of new clients compare with the back book?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Max. The market share we estimate in the last 3 months where we have public information is around 30% in terms of new production. And that compares to 25.6% of market share in the back book. So it's slightly above, which is good news. We have not changed our credit standards. In fact, if anything, we are slightly tightening them. But we are just tightening them slightly because we had very strict policies in terms of affordability and loan-to-value and a number of others. So from a risk point of view, we feel very good, and we look at the expected loss and probability of default of the new vintages that we do track them month by month. Those are actually very good. So we have no concern on that front. We have produced over 90% of these at fixed rate.

And I think this has also been a reason for our success. We are very associated with the fixed rate mortgage in Spain because of our size and the push we've made not this year, but over the last 7 years, as Javier pointed out in his slide and certainly word of mouth about us being competitive in the long-term sort of mortgage fixed rate has certainly helped. We also started this year with a strong focus on the product, as we thought it was the right time. Remember, we launched in MyHome, which we have talked about. And you know well and basically the stars got aligned in that front. My expectation is that going forward, this market share is going to be lower in terms of the share of new business.

And as you remember, we said that we wanted a market share that would be at 20% above but not in our strategic plan as a target. And I think that is -- that range of 20% to 25% is probably more likely as a sort of final destination. Those are the comments I make. We're very pleased again on how we've done here and how our people, our branches reacts to the right incentives, which we have put in place because the target was to grow and we're meeting that target in a very conservative manner.

Now you had a second question, I couldn't really…

[Maksym Mishyn, analyst]

The cross-selling on the front book is the same as the cross-selling in the back book.

[Gonzalo Gortázar Rotaeche, executive]

I don't have the exact figures with me, but generally, I would say, cross selling is better. The fact that typically cross-selling has been more associated to household insurance and obviously, payrolls and other things that are not profitable by itself, but generate revenues of another type. We have developed this ecosystem of MyHome now where the cross-selling is not related to insurance only. It stays and it's actually obviously very profitable from that point of view and very effective.

But we are also doing, as you know, solar panels. We're doing alarms. We're doing some of the sort of white appliances and electronics for houses. We're now moving into mobility, electric chargers, et cetera, for the car. So the ability of the range of products we can actually cross-sell is much higher. And certainly, all this is happening in the front book and increasingly so versus not in the back book because we didn't have the same number of products. Some of them, like alarms we've been doing for 5, 7 years, but others we've been adding more recently, okay?

[Edward Michel O'Loghlen, executive]

Okay. Thanks, Max. Let's move on to the next question.

[Operator]

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

[Ignacio Ulargui, analyst]

I have just 2 questions. One of the liquidity coverage ratio, what kind of buffer are you seeing using half over the minimum level? What should be the comfortable level for you at this stage? Second question, it's related to the NPL formation. We have seen a very good quarter in terms of NPLs and also I know you commented during the call that early indicators are very construct very positive. So could you just give us a bit more color on that? And what should we expect in terms of NPL formation and NPL evolution in the coming quarters? And just one very small detailed question. The decline in ICO loans in the quarter had something to do with the deposits. Have you seen corporates using deposits to repay ICO loans?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Nacho. Let's deal with the last 2 questions, and then Javier can comment on LCR. On decline on ICO loans. We haven't seen any particular sort of unusual activity. Certainly, deposits have kept fairly stable. And on the business side, there are some changes in deposits that are associated to very large movements, some of them associated to temporary collection of taxes and some specific large items, okay? So no changes from that point of view. There's some seasonality because we have deposits that are higher at the end of June due to extraordinary total sort of payment of salaries and the pensions advance. So nothing there. But obviously, what you are seeing and what we are seeing is that business have been able generally to pass on cost increases to customers. They are a fairly stable situation and where they have cash, they repaid ICO loans early. As you know, we have now a figure close to 30%. I think it's 28% that has been already repaid. But no particular impact on deposits.

On NPL, yes, we have had an extraordinary year, to be honest, looking into all what has happened. The fact that we have been reducing nonperforming loans in such a way is EUR 2 billion in a year and 0.6%. Here, we have had both sort of portfolio sales and organic improvement, which is very significant. And to be honest, what we see for the fourth quarter is at this stage, the same trends, including the month of October with no sign whatsoever of a change in payment behaviors.

And again, with early defaults, including month of October up to date at historically low levels. So there's a very good feeling from that point of view. We have to see whether there's any deterioration in the last 2 months of the year. Probably not. But I think at the end of the year, we'll always make some judgment on overlays all those other considerations depending on just what's happening in the last 2 months, but how do we see 2023? But to be honest, what we see so far has been so positive that I think gradually the market is going to be coming to the view that we have.

There will be a deterioration in asset quality. There's no question, but this should be a modest deterioration. And if we end the year at around these levels of 3%, we will look at 2023 ending 2023 with a higher number, but a number that would still start with a 3. This is what we're seeing. It allows us to continue to think that given the resilience of the portfolio, the fact that we think Spanish businesses and families are going to suffer less than other places in Europe. And the fact that we have built this very large provision in unassigned provisions and what's coming from the PPA, we feel fairly comfortable with the guidance we gave on the whole period for the whole strategic plan on asset quality.

When you look at -- if that is contained, then obviously, this very significant increase in net interest income, as Javier explained, and I would emphasize the word very, is going to have a significant impact on our profitability, going forward. Now we need to be alert because obviously, the situation is fluid, is volatile, but we have been alert now for some time, and we've been very effective in containing any damage. And because actually, the situation has not deteriorated. Our efforts have resulted not just not seeing a deterioration, but in seeing a notable improvement. We will see. But I would say, in terms of confidence, this is obviously an area of difficult outcomes. But I would say our confidence is very high on being well prepared for this deterioration. Javier?

[Javier Pano Riera, executive]

Well, there was a question about our comfort level on liquidity coverage ratios. I think it's circa 150% is the go to area.

[Edward Michel O'Loghlen, executive]

Thanks, Nacho. Let's get the next one, please, Operator.

[Operator]

The next question is from Carlos Cobo of Societe Generale.

[Carlos Cobo Catena, analyst]

A couple for me. One would be on the ongoing negotiations with government for low-income families, you have in the recurrent media, you have proposed a slightly different approach in terms of freezing the installments. I wanted to understand how much of the potential portfolio that could be effective is already restructured? If you could give some numbers around that, and what could be the difference in potential provisions between one option in terms of freezing the mortgage or restructuring, it will be helpful to time. I know it's not going to be very, very sizable, but it's good to understand before the agreement is confirmed.

And secondly, the cost of risk. You have a run rate of around 33 basis points in the 9 months, but you still maintain the 35 basis point guidance for the year. Why not lowering the guidance? Are you still considering a top-up, which wouldn't make sense based on what you just discussed about asset quality, help me to understand that. And just a clarification, sorry, about the grade of capital impact, maybe I have the numbers wrong, but I have 20 basis points from IFRS 14 and another 20 basis points from other regulatory impact. And you've now said 50 basis points for IFRS 14, would that be on top of the other 20 basis points? So could you clarify what's the total gradatory impact ahead.

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Carlos. Let me respond. I think the last one is 50. Javier?

[Javier Pano Riera, executive]

50 combined.

[Gonzalo Gortázar Rotaeche, executive]

50 combined IFRS 17 and the other regulatory impacts. On the cost of risk for this year, the 25, obviously, as you correctly said, if we were to move to 25, it means that in the fourth quarter, there will be a higher level of provisions than in this quarter or previous quarters because we're saying we're at 23 basis points, but that is on the basis of the last 12 months, and we had some higher charges in the fourth quarter, which as you know, you may well think that banks tend to do that generally when the fourth quarter comes. We've said around 25. It doesn't mean it's precisely 25. If we look -- so that obviously gives us the ability to accommodate a lower number.

At the same time, while we are not seeing a change in patterns now I think by the end of the year, we probably will have a better degree of visibility of what is the likely deterioration in 2023. And that given the way that provisioning rules work may or may not have an impact. But I would say on this front, we feel comfortable with that around 25 basis points. I don't think it's too relevant what is finally the charge in the fourth quarter versus 2023. I think what I feel very -- or we feel very confident now is in this environment that I'm describing, we're going to contain provisions to the levels we said in our strategic plan. And in fact, we can accommodate a fairly significant degree of additional deterioration and still meet our guidance based on how things have evolved in 2022, much better than what we expected.

That's -- in terms of the impact of the negotiations with the government on solutions for mortgage affordability for more vulnerable customers. This is a discussion that has to be had by the banks among themselves and with the government. And I think it -- it's in the benefit of everybody to keep that discussion in this circle and not speculate on different solutions, different costs for different institutions depending on which solution. Again, there's a lot of discussion. And eventually, we need to have all these discussions and reach an agreement with the government.

And I think that while that doesn't happen, it's better not to -- each banker start saying what is best from their own point of view on what impact it may have because it's not going to be helpful to find an agreement and an agreement that is positive for all. So if you allow me, I would not comment on the specifics. But in any case, I go back to what we are saying is with the combination of fixed rates for the majority of our customers in the last 7 years and very seasoned portfolio, which we have for most of the floating rate portfolio. We're talking about some moderate numbers, which are consistent with what I said, we should have a deterioration in nonperforming loans.

But the figure should start with 3 during next year. We don't see further deterioration. And part of that is not going to be because you mentioned refinancing and restructuring. We're looking at this crisis as a crisis where job transaction is going to be very limited. So generally, we're going to be looking at clients that can pay, but they cannot pay in full now. So typically, this would result in changes that if there's a significant increase in credit risk, which there will be for a part of the portfolio, we'll move to nonperforming loans, but as unlikely to pay, we'll continue to pay a reduced amount.

And our experience is that eventually, they will be back, obviously, after cure periods, et cetera. And so after a couple of years, 3, they will be back as performing loans in the majority. But we will have some reclassification on that front during next year, limited. And obviously, I would like to make sure that we agree with the government what do we do because that will also sort of position the industry on the right side in terms of helping the economy being part of the solution and not part of the problem.

Whatever happens, whether we have an agreement or we do not have an agreement, we're going to do the right thing. That's clear. And again, with an impact, but less marked than certainly what we had in the past.

[Edward Michel O'Loghlen, executive]

Thank you, Carlos. Let's move on to the next one. Please, Operator.

[Operator]

The next question is from Ignacio Cerezo of UBS.

[Ignacio Cerezo Olmos, analyst]

One is on costs. You're sticking to the EUR 6 billion target in 2022. If I remember correctly, your business plan target is around EUR 6.3 billion in '24. You still have some synergies coming through next year according to the plan, I mean, how comfortable are you that those synergies can compensate underlying inflation next year? Or we need to think about absolute cost growth in '23 and some pressure into the business plan target.

And the second question is on capital return. I mean, given those 40, 50 basis points impact from IFRS 17 and regulation, considering that you're closer to 12% CET1, how comfortable are you actually on being able to distribute the kind of 80%, 90% payout actually that you have left in the rest of the business plan? Or do you think there's going to be some restrictions around that coming from either the regulator or your profits actually being lower?

[Gonzalo Gortázar Rotaeche, executive]

Thank you. I would say in terms of the cost base, we are going very well into meeting our cost targets for synergies, which as you know, we reviewed upwardly last year, and that's in place. There's no question that we're having inflation at higher levels than what we expected. And hence, we're going to have over the life of the plan higher cost pressure. This year, we are actually, as you pointed out and Javier mentioned, we are keeping our guidance, and we expect to deliver EUR 6 billion, but the risk is of upside pressure vis-a-vis our targets in 2023 and 2024.

This is, I would say, quite obvious. I think what really is relevant here is how does this compare to our revenue potential. The reality is that this inflation is put in and will put pressure on 2023 and 2024 in terms of the cost base. But is providing us with an increase in revenues that more than offsets any potential inflationary effect. So we are certainly going to keep our targets in terms of efficiency even if we eventually do have which we will try to resist but do have some impact on the cost base associated to the inflation situation, okay?

In terms of capital, I would say we continue to see the group as highly capital generative. We do have this around 50 basis points that Javier mentioned. And obviously, that if as it will impact us during 2023 mostly, it means that beyond our payout, which we have committed to for the 3-year period, to stay above 51% at least 50 basis points, the further additional capital buildup in the short term during 2023 is going to be limited. When we look at the whole of 2024 and our targets, we see obviously increased profitability, certainly accelerated, i.e., 2023, we're going to see a lot of the good impacts that we were expecting to have in 2024 are being brought forward to 2023, given the evolution of rates in a very significant way as Javier mentioned, and therefore, we're going to have a higher capital buildup because we will be more profitable.

We have the famous tax, the unexpected banking tax, which, as I said, is EUR 400 million to EUR 450 million because revenues are going in the right direction, more likely to be in the EUR 450 million for 2023. And this, again, in 2024, it's obviously something that we need to accommodate. But when I look at the whole picture, there are some things that are better, others that are worse, like the banking tax. And all in all, we're certainly at this stage, remain committed to deliver this ambition in terms of capital. And I think it will be done in a nicer way, i.e., we'll have a bit more growth and more profits, which obviously will generate even if we maintain the same payout higher cash distribution for shareholders.

There's some uncertainty because of the economic environment. But to be honest, if you ask me today, how do I feel about the future compared to when we presented our plan, I would say I feel better despite the short-term challenges.

[Edward Michel O'Loghlen, executive]

Okay, Nacho, thanks for your questions. Let's move on, please.

[Operator]

The next question is from Britta Schmidt of Autonomous Research.

[Britta Schmidt, analyst]

I've got a couple of clarifications, please. Could you help us with the -- a couple of numbers on the year-on-year comparison. What amount for deposit tiering, Tier 2 or 3 and excess liquidity fees will drop out year-on-year? And another clarification on capital. Do the minus 50 bps include anything from BPI models as a positive?

My second question is on the NII sensitivity. What is the incremental sensitivity to where the rates are now? And what would it be with the terminal beta.

[Javier Pano Riera, executive]

Well, I don't know if I have all the figures you asked for, but I will try. So on TLTRO, so what we are going to miss -- well, better said, which has been the impact from TLTRO year-to-date, it has been circa EUR 250 million, okay? Then still on the third -- sorry, on the fourth quarter as the TLTRO let's say, growth or the, let's say, the benefit from TLTRO grows from the end of November still into the fourth quarter, we have some positive impact. So for TLTRO, what is going to go is going to be, well, slightly over EUR 300 million.

Then on -- you asked also about TRIM. I don't have this figure with me. But well, this is approximately 6x our, let's say, reserves. This is approximately EUR 27 billion, EUR 28 billion. Probably you can do the math. And that was, let's say, at 0 instead of at minus 50 bps. And then about custody deposits, we were making like EUR 10 million per month. So we -- I said before that in the third quarter, we had EUR 15 million. So probably this is approximately EUR 75 million that is going away into next year. Then you had a question on those minus EUR 50 million combined. Well, where we said before, EUR 40 million EUR 45 million. Now we have refined the figure to EUR 50 million.

Your question is, does this include positives from internal models from BPI? Yes, this is part of the positives and there are positives and negatives. So yes, I gave the overall impact. And on NII sensitivity and deposit beta, I'm not going to be able to give you a specific figure. A specific -- I try to be as a qualitative helpful as possible. What I said is what we presented in May is valid. What I say is if rates are higher, betas are going to be slightly higher, but at some point, betas to have a cap even if rates are at, let's say, saturating at 5%. So there is always a cap. So you don't have a linear trend upwards. And what I said and is what we are actually assessing and this is why I'm not giving you a figure, is that we think that probably this -- the slope of the beta increase is going to be slightly flatter and probably the terminal beta is going to be more into 2024 than in 2023.

Sorry for not giving more specific figures, but I try to give you our qualitative thoughts now. But in any case, and I would like to reiterate that we have done so several times today. So the expected growth for NII next year is very significant. So I think that this is the summary.

[Edward Michel O'Loghlen, executive]

Okay. Thank you, Britta. And operator, I believe we have one last question. Please push it through.

[Operator]

Next question is from Esther Castro from Banco Sabadell.

[Esther Maria Castro Garcia, analyst]

I only have one more question remaining. If you don't really mind, I mean, recently now in the sensitivity provisions for every minus 100 basis points on GDP.

[Gonzalo Gortázar Rotaeche, executive]

Can you help me out?

[Edward Michel O'Loghlen, executive]

Basically, the sensitivity of cost of risk…

[Gonzalo Gortázar Rotaeche, executive]

That figure is EUR 125 million approximately. Obviously, a change in GDP is different depending on what's the impact on employment and real estate, in particular. So those are 2 variables that have a significant role here. But the figure that we publish is that EUR 126 million.

[Edward Michel O'Loghlen, executive]

Okay. Esther, I think you were the last one. So thank you very much for your attention and catch up with you next quarter. Bye-bye.

[Gonzalo Gortázar Rotaeche, executive]

Thank you.