Caixabank SA

MAD:CABK

Earnings Call Analysis

Strong growth continues, with significant capital generation and positive market trends.

In the third quarter, CaixaBank reported a net income of €1.57 billion, up 3%. Customer funds grew 20%, while net inflows in wealth management increased by 9%. The bank achieved a 5.5% rise in deposits year-to-date. They foresee net interest income (NII) exceeding €11 billion for FY24, aided by stable deposit costs. A fifth share buyback of €500 million was announced alongside an interim dividend of €1.1 billion. CaixaBank is optimistic about maintaining its market share in Spain amid improving economic conditions, expecting Spanish growth to surpass 3% this year.

Strong Financial Performance

In the third quarter of the year, the bank reported a net income of EUR 1.57 billion, reflecting a year-on-year increase of slightly over 3%. This stability and growth in earnings highlight the bank's robust operational performance, especially considering the typical seasonality under which Q3 results are impacted.

Net Interest Income and Revenue Growth

Interestingly, net interest income (NII) has shown resilience, with a year-to-date increase of 13.6% on a quarter-on-quarter basis. This is attributed to improved commercial dynamics, despite some challenges from loan index resets. Overall, gross income rose by 1.9% year-on-year, although it dipped 2.7% from the previous quarter, illustrative of the inherent seasonality affecting banking revenues.

Wealth Management as a Growth Driver

Wealth Management continues to shine, with a remarkable 12% growth year-on-year and 6% quarter-on-quarter. The bank is gaining momentum in this segment, highlighting its strategy to capitalize on the increasing wealth and investment opportunities among its customer base.

Stable Loan Production

Loan production surged by 20% in the current period, signaling a healthy appetite for loans, particularly in the mortgage sector. Despite ongoing competition in the mortgage market, the bank has successfully navigated through and increased its lending capabilities.

Cost Management and Efficiency

Cost-to-income ratio remains favorable at around 39%, reflecting efficient management. Operating expenses grew by 4.5% year-to-date, aligning with the bank's guidance to control costs just below 5% for the year, ensuring profitability remains on track.

Capital Generating Initiatives

The bank's capital generation is noteworthy, with a 171 basis point increase year-to-date. The fifth share buyback was announced, along with an interim dividend payment of EUR 1.1 billion, representing 40% of the first half-year results. Cumulatively, EUR 9.5 billion has been distributed over the last three years, with EUR 2.5 billion yet to come, attesting to the bank’s commitment to returning capital to shareholders.

Positive Economic Outlook

Spain's economy is anticipated to grow by about 3% this year, a significant divergence from the Eurozone, which is projected to grow below 1%. With an influx of 200,000 new clients over the last 12 months, the bank is positioned well to capture the growth arising from improved economic conditions.

Prudent Loan Quality Management

Non-performing loans (NPLs) have slightly decreased to EUR 10.4 billion, maintaining an NPL ratio of 2.69%, which is below the industry average in Spain. The bank continues to uphold sound credit underwriting standards, ensuring asset quality remains solid.

Future Guidance and Projections

Looking ahead, the bank has indicated guidance of over EUR 11 billion in NII for fiscal 2024. This positions the bank on a positive trajectory for continued revenue growth in the coming years.

Overview of Potential Risks and Challenges

While the outlook remains positive, the bank acknowledges that competition in the lending space is intensifying. Concerns regarding tax changes and potential regulations could also pose risks. However, management maintains confidence in the bank's capacity to adapt and weather these challenges effectively.

Earnings Call Transcript 2024-Q3

[Marta Noguer, executive]

Good morning, and welcome to CaixaBank's results presentation for the third quarter of 2024. As usual, we are joined today by our CEO, Gonzalo Gortazar; and our CFO, Javier Pano.

In terms of logistics, we plan to spend about 30 minutes with the presentation and about 50 minutes to 1 hour with the Q&A. The Q&A is live, and you should have received instructions by e-mail on how to participate. My team and I will be at your full disposal after the call.

And without further ado, Gonzalo, the floor is yours.

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Marta. Good morning, everybody, and welcome to this presentation. You've seen our results this morning. I'd say as the slide says, it's a very strong operating momentum, activity levels, particularly in customers funds is what I will highlight the most. New lending, up 20%, although in terms of balances, as you will see later, Obviously, we're still in a very low growth environment, but some positive signals here. And when you look into net inflows, protection premium and then customer funds, both off-balance sheet, wealth management balances are up 9% and on balance sheet deposits at 5.5%, quite remarkable only in 9 months. It's very strong activity growth here, which also explains how we will get into how is our customer spread, et cetera, evolving in the quarter based on great news, which is the fact that we are attracting more funds and growing nicely.

Revenue growth is obviously relevant both in terms of NII. If you look at it on a 9-month basis, if you look at it quarter-on-quarter, we managed to stabilize NII. We have been expecting growth -- sorry, negative growth in sort of quarterly NII, but we managed to avoid that one other quarter. Cost income, cost of risk, all pointing into the right direction. And then -- that leads us to a fairly solid result in terms of net profit. And obviously, again, significant capital generation. This quarter, we are announcing the interim dividend at the top end of the range that we gave some quarters ago. So 40% of the first half year result, 1.5 -- sorry, EUR 1.1 billion. And then even if we have not yet finalized the fourth share buyback, we have already received approval for the fifth one, which, obviously, we will execute after we present our plan in the Capital Markets Day. And obviously, after we finalize the fourth one.

So activity, profitability, asset quality, efficiency and capital generation, all moving in the right direction in line with expectations, but it's nice to see them mostly at the top of the range in almost all dimensions now. A quick reminder, we want to continue to emphasize, and we do this, obviously, for you, but also for a wider audience that we're a different bank that we have a different place in society. And some of the initiatives that you see on this page in terms of financial inclusion are, I would say, outstanding compared to other players in the Spanish market, micro-finance as well.

Our social DNA, our volunteering effort, which we are -- we have had in Valencia, terrible rains and flood are having -- already our volunteers helping out besides number of initiatives that we're taking in terms of extending facilities and facilitating insurance payments, all that here in this heavily affected region of Valencia, where we are currently based and I'm talking from Valencia.

ESG well ahead of our mobilization finance commitment -- sustainable finance mobilization, sorry.

And obviously, looking forward to present in the next Capital Markets Day, what our targets are for the following years. Spanish economy doing very well. You see how conservative we've been in our projections. I think generally, most economies have been in Spain, but always surprised on the upside. Last projection is for 2.8% growth this year based on yesterday's figure for the third quarter, there's clearly upside towards the 3%, I would say. But obviously, our economic research team will come up with our own conclusions.

But clearly, economy growing 3%, while Europe is growing below 1% is quite remarkable. Portugal doing well this year, not as well as Spain. But as you can see, we're expecting them to converge in 2025. Employment, PMIs, tourism, generally, we see the right trends and obviously, very significant divergence with the Eurozone and nicely this time is for the better, okay?

Business volume, up 4.5% in these nine months. Obviously, it's mostly related to customer funds. But you see how we have now regained our ability to gain clients, 200,000 in the last 12 months, also with increasing the proportion of relational, more loyal clients and generally with increasing market shares in Spain, and as you will see later also in Portugal.

Loan generation, new loan production up 20%. You see particularly higher in mortgages. Obviously, there's a significant process of amortization as well, our payments and prepayments, scheduled payments and prepayments. But as you will see, the balance of mortgages is also growing. Consumer lending is up and new business lending also with some positive momentum.

When you look at the balance sheet, I think one very remarkable thing is consumer lending. Again, another 1.5%, 1.4% growth this quarter for a total of 5.9% in 9 months, which is obviously way ahead of our expectations for this year. And the dynamics are pretty good also in terms of the asset quality of what we see from the behavior of our clients.

The other highlight is mortgages with basically flat in the year, but you see on the bottom right-hand side, how we have had now two consecutive quarters of stock growth in our stock of mortgages growing, which is obviously pretty good. Businesses are up as well. Here, we have a bit of seasonality in the third quarter. I'll have to see how the fourth quarter evolves, hopefully, again, we'll confirm that inflection point that was -- we were talking about last summer when we present our second half results. But clearly, given the seasonality and the traditional weakness in the third quarter, to me, these are pretty good numbers the same way that the customer funds were quite remarkable.

And here, you have some details on the 9% year-to-date in wealth management in the quarter and deposits, again, pretty good. Deposits are stable this quarter, but remember, we have big seasonality -- positive seasonality in June. We're expecting a drop in deposits. This quarter, actually, they did not come down, and I'm sure Javier will elaborate into that, so I won't spend more time. But again, very good dynamics. You see some of the market share figures quite good, giving us comfort that we can actually built on our ability to grow volumes faster than our competitors here in Spain as we have traditionally been doing.

Wealth Management, volume growth, net inflows, all pretty good. You have the numbers. Market shares, as you can see, particularly remarkable again in insurance -- savings insurance. And then the fact that we have both an underpenetrated customer base coming from original banking clients that is gradually moving and converging, but we still have plenty of potential there and the fact that overall the market is still underpenetrated vis-a-vis the Eurozone make us fundamentally bullish on this business.

Something similar in protection insurance in terms of our ability to further penetrate former banking clients and the convergence with Europe, you can see that those statistics on the right-hand side. And again, the quarter has been pretty good, 11% growth year-to-date in premium and then a good diversification between all the nonlife components, health, home, auto, and I can see obviously opportunities across the board as well here.

BPI, mentioned it briefly. Good performance, return on tangible equity, 20%, cost income below 40% at 39% pretty impressive numbers for a bank that 7 years ago when we took control was obviously with very different statistics cost income above 70% and very low profitability. It's been a fantastic job, BPI, asset quality, coverage and market share, all doing well. Obviously, still a plenty for them and for us to do in Portugal.

Revenue is up based on all the factors that I mentioned: efficiency, cost of risk leading to our return on tangible equity at 16.9%, just very close to the 17% and above that we are expecting for this year.

And one final word on capital. I mentioned the highlights that we've actually generated a lot of capital, 171 basis points year-to-date based on high profitability and still pretty good or pretty low rather than pretty good RWA growth. We have announced the fifth share buyback, as I mentioned before, and also the interim dividend payment. And with that, we basically have either executed or announced the ongoing EUR 9.5 billion of capital distribution during this 3-year period. So there's another EUR 2.5 billion pending, which we obviously expect to get to between now and the end of the plan, including, obviously, distribution of the final dividend and any additional capital distribution that we need to do to get to that EUR 12 billion, which is obviously clear now very, very close to us for it to be reached.

And with that, I'll leave you with Javier.

[Javier Pano Riera, executive]

Okay. Thank you, Gonzalo, and well, good morning. From my side, I will try to be brief with my comments on details on the P&L and the balance sheet. Starting with this consolidated income statement, focusing on the evolution for the third quarter, net income EUR 1.57 billion. That is an increase of slightly over 3%. You know that the third quarter is usually a quarter with some seasonality impacting some of the key P&L lines. So hence, you may see gross income up by 1.9% year-on-year, but down 2.7% quarter-on-quarter.

It's not the case for net interest income that, as Gonzalo said, is progressing also quarter-on-quarter. I will elaborate on the following slide on that topic. Wealth Management doing really well, up by close to 12% year-on-year, close to 6% quarter-on-quarter. Protection insurance with strong commercial dynamism, although we have some nonrecurring factors impacting the evolution year-on-year and quarter-on-quarter also will elaborate on that in a few minutes.

Then banking fees that, as you see on a year-on-year basis, close to flattish as this, let's say, underlying pressure from maintenance fees on current accounts is gradually fading. And quarter-on-quarter with that seasonality impacting a few of the key businesses among those CIB, the third quarter always softer.

Then on other revenues, not much to remark. I would only say that we have somewhat lower trading income this quarter. And then below on total operating expenses and loan loss charges. I say that this is everything doing according to plan. So we are set to meet the guidance for the year on both. And then finally, other provisions with some improvement, as you may see.

Let's move now to the details, starting with NII. I will have a more detailed explanation about some of the different moving parts here. So year-to-date, we have NII up by 13.6% quarter-on-quarter, as we have said a little bit positive. That commercial NII that is having a negative contribution as we have loan index resets that are impacting negatively, but this is at least partially compensated by better performance on the commercial gap and higher average liquidity.

And on top of that, we have a positive contribution from ALCO mainly as precisely lower rates are already filtering into our wholesale funding that, as you know, is mainly swapped into floating. So below, you have the evolution of the customer spread. It's down by 15 basis points to 343 basis points. Then what is behind that is precisely that we have the back book yield of the loan book down by 12 to 447 basis points and then client fund costs that are up by 3 basis points.

On the right-hand side, we have added further additional information. Gonzalo has already commented that we have had a really strong quarter in terms of inflows into deposits. I would say that close to offsetting the really strong seasonality, we usually have a positive seasonality, we usually have in the second quarter. Remember that it was like deposits growing by EUR 20 billion. So we have been able almost to compensate that in the third quarter. As a consequence, average deposit balances are already 4% up year-to-date, 3% up quarter-on-quarter. We have had a strong inflow, some of those coming from large depositors, public sector.

As a consequence, the weight of interest bearing deposits has gone up by 2.2 percentage points to 25.8%. But at the same time, the cost of those same interest-bearing deposits is already trending down 2.86% for this quarter on average and set to clearly come down as a major part of those are fully indexed. But what we have added here is precisely the evolution of noninterest-bearing balances -- this is, as we call it internally, the jewel of the crown, and we have been able to maintain this stable quarter-on-quarter. And as you may see, pretty much stable in the first quarter of this year. So as a consequence, we are now expecting fiscal year '24 NII to be over EUR 11 billion.

Let's move now to revenues from services on that front, year-to-date, we are up by 3.8%. Wealth Management, as you see, up by more than 12%, protection by 6%. And precisely on that front, we have some nonrecurring factors that are impacting the view quarter-on-quarter or year-on-year. Quarter-on-quarter, remember that on non-life insurance, we had last quarter an extraordinary positive in Portugal, and this is impacting the quarter-on-quarter evolution. And year-on-year on the third quarter last year, we had an exceptionally low pace of claims on life risk insurance. And as a consequence, the year-on-year comparison is less favorable. As I said, this business, as you know well, we are strong believers and is set to continue to do really well in the long term.

Fees, as I commented, that seasonality impacting CIB and maintenance fees that are really having less impact, as you can see on the year-on-year evolution.

A few words on costs, up by 4.5% year-to-date. We are planning to meet our guidance. Remember, costs slightly below 5%, although we are going to be at the upper bound of that guidance. You may see on the central chart below that our cost-to-income is hovering 39% with -- on the bridge on the right with a strong contribution from revenues.

And I think finally on comments on the P&L, some words on all of charges. It has been an eventful quarter, I would say, with cost of risk at 28 basis points on a 12-month trailing basis. We continue to hold a comfortable NPL coverage at 71% and still maintaining unassigned overlays circa EUR 500 million.

Moving to the balance sheet. Some comments on NPLs, down by EUR 100 million, EUR 10.4 billion is the stock. As a consequence, the NPL ratio remains pretty much unchanged, 2.69%, well below the average of the industry in Spain, as you may see. You have the breakdown across the different segments, as you may see, very close to the average. So there is not any particular segment deteriorating or showing signs of deterioration, something that actually we are no longer expecting in any case.

A very ample liquidity position, which is part of our DNA, as you know very well, our liquidity coverage ratio at 213% at a stable funding ratio 148%, more than EUR 200 billion of liquidity sources, EUR 224 billion, a very stable deposit funding and 77% retail, 23 large depositors. This has increased a little bit partially due to those inflows I mentioned before.

A few words on MREL and the funding plan that is actually completed for the year successfully. We closed the quarter with an MREL ratio at 28.33%. The requirement is 366 basis points below. So with a very comfortable buffer as you may see, we are complying with requirements mainly with subordinated instruments. And for the year, we have issued EUR 7.3 billion, of which 39% ESG issues successfully, it's the third quarter of EUR 3 billion, EUR 1 billion Tier 2 for the year, we have issued more than 30% in foreign currency, mainly U.S. dollars, continuing with the currency diversification we already started a few years ago.

And finally, capital. We are already deducting this fifth EUR 500 million share buyback. I just announced today, minus 22 basis points on CET1. And from there, we have plus 71 basis points of organic capital generation, minus 43 basis points from dividend accrual and AT1 and then minus 5 from other impacts, resulting into a CET1 ratio at 12%, 24%. That is a very comfortable MDA buffer of 362 basis points. Continue increasing shareholder value with the book value per share up by more than 11% once considering the dividends paid. And well, you know that we keep with our evolution policy that for share buyback that is approximately three quarters already executed. The interim dividend with a DPS of EUR 0.1488 and this fifth share buyback approved by DCB and by the Board and I set to start at some point from the November 19. At November 19 is our Investor Day. That day, we are presenting a new 3-year plan. Remember in Madrid at 9 a.m. local time. We are happy to see that plenty of you have already confirmed attendance, so we'll be glad to host you there.

So thank you very much, and I think we are ready for questions.

[Marta Noguer, executive]

Yes, please, operator, first question, please.

[Operator]

The first question is from Antonio Reale of Bank of America.

[Antonio Reale, analyst]

Antonio from Bank of America. A couple of questions for me, please. The first one is on liquidity, which continues to be one of your key strengths. And if I'm not mistaken, this quarter, I think you've increased average liquidity by almost EUR 10 billion, which is a big number for a bank that doesn't need it. Now you're paying for this, of course. And if I heard correctly, I think, Javier, you said 2.8% or so. But then you get a positive carry against the ECB rate. I guess you can continue to make money as long as your cost of liquidity is lower than the ECB rate. So my question for you is at what level of ECB rates, do you think that this smart no longer works for you. And I'm not necessarily looking for an answer, but I think your general logic around it, I think, will be very helpful. That's my first question.

The second one is on your activity levels in Wealth Management with nearly EUR 9 billion on net inflows in the first nine months, can you give us a sense of what the product mix has been for us to understand the fee margin coming from this? And how can this affect your fee growth outlook going forward?

[Gonzalo Gortázar Rotaeche, executive]

I think that's for you.

[Javier Pano Riera, executive]

Okay. Antonio. Well, in terms of deposit growth, yes, you are right, we have had a really strong third quarter, as I said, close to offsetting the very strong seasonality -- positive seasonality we had during the second quarter. Well, we have -- we are growing on liquidity on deposits, but for the good reason.

So first thing, deposits to have a margin. Usually, those large depositors, let's say, that the rate that we agree with them is an index. So it's basically on the overnight index. And there is, I would say, almost always a margin, and it's always a positive margin. So to the point about the ECB mismatch. So when rates go down, the same will do what we pay for those deposits because it's automatic. So it's indexed. So that positive margin always will be within the bank.

This is probably, we have had some extraordinaries on that front from large depositors, but I would rather focus on the underlying, which is precisely what I mentioned, while presenting the slide, jewel of the crown as we call it internally, which is precisely those noninterest-bearing deposits that are remarkably being stable during the quarter. So we are not cannibalizing, let's say, that deposit base with transforming those into expensive deposits. So I think that this is the way we are focusing our commercial focus. So I would say that -- that's the case.

And precisely, I think that I forgot mentioning when I presented the slide, but probably you realize that we have increased the amount of hedges during the quarter, so by EUR 7.5 billion. So we are now holding an outstanding amount of EUR 37 billion. So basically, we are trying to hedge precisely that pool of deposits that are noninterest-bearing and to retain -- that is spread for us as longer as possible. So this is a little bit what is behind that hedging. Now at the same time, probably you -- for those of you that follow that slide where we detail plenty of information about the ALCO activities. You also probably would realize that we have increased EUR 3 billion on fixed rate mortgages in a quarter. So all that is gradually hedging the positioning of the bank, the sensitivity of the bank. You know that we are aiming this kind of 5% sensitivity to parallel shift of the yield curve of 100 basis points. And this is why we are trying to hedge as volumes are doing better. But there is no mismatch in that sense.

On Wealth Management, well, we are having strong inflows in the year. Last year, inflows were probably more skewed towards annuities. It was probably 2/3 last year. This is a little bit over 1 quarter. So it's a little bit less. There was like a pent-up demand for the product and that was -- when rates went up, the long end went up. So we were able to originate those -- those products at a better yield. And I think that probably last year, there was a pent up demand into those.

Now this year, still, we have strong demand for money market funds. And so I think that over time, this will flow into other products. So far, despite having a stronger wave of money market funds, we are being able to maintain quite stable management fee that is on average circa 80 basis points for our AUMs. And well, once you add into the mutual fund ecosystem, then you know that for tax reasons in Spain, you can move around different asset classes very tax efficiently. So we think that, that process will accelerate eventually. And as markets keep doing well, et cetera. So it's a process that takes its time. And for sure, it will come. I don't know if I am missing something else here, Marta.

[Marta Noguer, executive]

No, we're done, I think. Thank you, Antonio. Next question, please.

[Operator]

The next question is from Maks Mishyn of JB Capital.

[Maksym Mishyn, analyst]

I have three. The first one is on loan book growth. You mentioned in the presentation that you were protecting margins in the third quarter. Could you please share some more color on what happened there? Do you see more competition? And if so, in which segment has it been changing or most competitive?

The second question is on the share of remunerated deposits. How much would have been your cost of deposits if there were no inflows of public sector deposits? And how do you see the share of remuneration deposits evolve as rates move down to 2% in the coming years? And then the last one is on taxes. And have you included any provisions related to the recent revision of the special tax paid in 2023 and '24? And what kind of impact do you expect from the changes currently proposed by the government?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Maks. Let me start on two of the topics. On the loan book, you would say -- I would say there is very strong competition across the board. Mortgage is certainly very competitive and the business front is also quite competitive. Banks continue to be liquid. They have capital, and they generate more capital. And growth is limited. I'd say you've seen our mortgage loan book growing slightly. The new production is pretty good, but the loan books are stabilizing now, moving from slightly negative to slightly positive there. And on the business front, generally, in the market, there's still no growth. Now we're doing pretty well. We're also obviously helped by our growth in our international branches. So there's very strong competition. That is the reality. There's also very visible offer in Spain that is not resulting in any one being distracted, quite the opposite. I think competition is pretty strong across the board and is particularly intense in the asset side.

I say we obviously always look at protecting margins, but we cannot be isolated from the market environment overall, I am not expecting that to change. I think this is likely to continue to be fairly competitive on the asset side. That's a reality. And then across the board, I think on the consumer lending, obviously, price and margins have different dynamics because it's smaller, it's more just making sure that you have the appropriate sort of point-of-sale convenience being at the right point in the right time. And that will continue, our guess to be that way for most consumers, others are also fairly price sensitive. But I wouldn't expect a change in the environment from that point of view.

In terms of taxes, we have appropriate provisions for the current sort of tax reviews that are taking place. It is not entirely closed. But certainly, as we see, we are a very conservative institution with provisions for these contingencies that cover appropriately our risks. The future of the tax is under debate. As you know, it expires this year. But actually, yesterday, there was a proposal to create a tax that is, I would say, in line with existing ones, but with some differences. We are analyzing those. The proposal is to create this tax for just 3 years, not as a permanent, but obviously, 2 years up to now and then another 3 years. So it's not an initiative that we obviously like and support and we will be vocal and we have been vocal about the negative consequences of converting this tax into a kind of a more permanent one.

But in terms of the impact on the future, I think it's too early. And I don't think it's going to be necessarily very different from where we are now. And I would say if I were in your shoes, I would sort of keep something in line with what the banking tax has been so far because what I have seen on the one hand is higher. But on the other hand, there are deductions, which seem to me may offset each other, but we are still early days, and we need to look how this evolves. And obviously, we're not going to stop actively explaining why we think it's not a good idea going forward to maintain this, okay?

[Javier Pano Riera, executive]

Well, Maks, there are a few forward-looking questions that I'm sure that in a few weeks, we -- well, just less than three weeks actually, we can give you further detail, on the percentage of remunerated deposits, et cetera, but let's say that you had a question about the deposit inflows. Let me elaborate a little bit here more.

So basically, what happens here is that the public sector had access -- to direct access to the DCB and directly to up to March '23, actually continues to have access but at a lower rate. So what is happening is that over time during the last few quarters, plenty of balances that were deposited by the public sector directly into the ECB are being recycled into the system. And well, this is having an impact. So if we were stripping out those balances, but just those balances, well, our average cost for the quarter probably would have been a few basis points lower. But I will not -- I would say, reach too many conclusions from that because as I said that I think that the first question, those are deposits that are mainly indexed, and we already hold 50% of our interest-bearing deposits that are indexed. The major part of those indexed to the overnight interest rate. So hence, we are basically set to reprice these downwards really soon.

And as indexed to the overnight index, if it's different if you are indexed to the overnight index, that index to 12-months Euribor because 12-month Euribor is more forward-looking and actually, rates are starting to come down faster. But if you are indexed to the overnight, there is a small lag until the rate actually comes down. So I think that -- all that is probably having an impact. But well, in any case, all those different dynamics impacting NII are actually taking into account while managing our sensitivities, et cetera. So that's from my side.

[Marta Noguer, executive]

Okay. Thank you, Maksym. And next question, please.

[Operator]

Next question is from Alvaro Serrano of Morgan Stanley.

[Alvaro de Tejada, analyst]

I have kind of one follow-up and sorry, Javier, because I know you're going to point me maybe to the Investor Day, but just on your 5% rate sensitivity, can you remind us because some banks have different assumptions here. I'm sure you're aware, what kind of mix shift would you expect in your either term deposits or interest-bearing mix because one of the competitors was expecting that with rates at 2, the term deposits could actually the mix could fall by half. Just wondering what you have there in your assumption? And then a completely different question, maybe for Gonzalo. What's the logic behind the buyback announcing it now? We were kind of prepared for interim buybacks from the experience last year. Should we start to think about quarterly buybacks? What's maybe talk us through the logic and what to expect in the future?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Alvaro. I'm happy to take the second question and then let Javier. Well, the -- our share buyback logic is, obviously, we generate capital. We generate capital that is above the 12% target level and that we do this very recurrently. And hence, when we see that we have some decent size, we're not going to do buybacks probably smaller than EUR 500 million, well, never done, but we are thinking that EUR 500 million is a round number. And when we get to having enough capital above 12% that equates to at least EUR 500 million, we're getting into the approval process with the ECB. As you know, the ECB does not want to see buybacks announced until they are approved, which I understand why. And obviously, when we receive those approvals, receive this approval a few days ago, then we have a Board meeting to make it effective. And in this case, it actually was at the time of our quarterly results. So it was a natural thing to announce.

While we see this capital generation this space, logically, what you should assume is that we have a level of above EUR 500 million beyond the 12% that we are likely to start that process. There could be, at some point, some circumstances. I will not come into that sort of 100% of cases, if we're expecting at some point that maybe there is a headwind here or there or our sort of use of the future change, we could be a bit more conservative. But otherwise, we want to be very disciplined recurrent. So you should be fairly confident that we'll continue to behave in this way and as long as we create capital because risk weighted assets continue to grow very low level, and we generate capital well above our dividend. This will continue. That's the plan, yes.

[Javier Pano Riera, executive]

Well, as you say, plenty of that will be the focus of our next meeting. But we have -- we tend to think that in a positive rate environment, it's going to be difficult that for those clients that are already holding a time deposit, eventually, will stop having a time deposit and those balances will shift into noninterest-bearing account. So what is behind is more probably the thinking that we are going to be able to pass on lower rates into those time deposits, not the fact that those time deposits will disappear and balances will shift into 0% accounts. And this is the case as in our case, in particular, as we have circa 50% of our interest-bearing deposits at that.

[Marta Noguer, executive]

I think it's because we are in Valencia, and we received this alerts. My apologies.

[Javier Pano Riera, executive]

Yes. It's an alert, because of the floods, I don't know. Sorry. I was saying that we have 50% of our interest bearing deposits that are indexed. So we tend to think that those will remain remunerated, although at a lower level because it's indexed so -- my point is that probably balances that will not change that much, but at a lower yield.

[Marta Noguer, executive]

Thank you, Alvaro. Next question, please.

[Operator]

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

[Ignacio Ulargui, analyst]

I just have two questions, if I may. I mean the first one is on fees. And I mean, given the performance that we have seen so far in the year, should we expect about the performance of these into the year, you have a guidance for low, low single-digit growth on fees and on the Wealth Management Fees and Insurance businesses, how should we think about that? Should we expect this to gain more relevance in the future?

And the other question is on Portugal. If I just look to Portugal, you have been gaining market share over the last 3, 4 years and steadily bank has done very well on both lending and deposits. Just wanted to understand a bit how do you see Portugal, whether you think that is still organic growth opportunities and where you potentially consider inorganic growth.

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Ignacio. And I'll start with Portugal and I'll say we continue to be very bullish in Portugal. We have -- I mean, the economy is doing well. And I think there's a good basis for that structural growth to continue and to continue performing. Bank is done extremely well, continues to gain market share. Competition is probably more robust now than 5 years ago, but still it's gaining market share, quality of service, perception of the bank reputation, asset quality. It's really an outlier in a positive sense. So we continue to see a great opportunity, not only for the country, but also for BPI to continue doing better than others, have a great team. And honestly, we don't want to break that virtuous circle. So the threshold for anything that is not organic growth is very, very high for us. And we expect to continue giving you good news about Portugal in the next years indeed.

[Javier Pano Riera, executive]

Well, as for fees, Ignacio, I understand that you are talking about the whole complex of what we call revenue from services, that includes AUMs, protection and banking fees. Well, usually, the fourth quarter is a better one. Let's see if this is the case. So far, Wealth Management is doing extremely well. Market is performing well, adding into that. So probably this has added a more positive tone than our initial expectation. On Protection, we had this kind of, let's say, nonrecurrence that probably starts a little bit, but the underlying is very positive 6%. And then this kind of trade-off that we always have had with maintenance fees on current accounts so far more or less mitigated, although there is like an underlying structural pressure on that front. So all in all, honestly, this low single-digit guidance is our best estimate now, potentially with some upward risk if the fourth quarter is quite a sound one, but let's see.

[Operator]

The next question is from Sofie Peterzens of JPMorgan.

[Sofie Peterzens, analyst]

Yes. This is Sofie from JPMorgan. In terms of [indiscernible] SNP net interest income, previously, you said that the previous consensus net interest income of EUR 10.2 billion in 2025 looked a bit low. The latest consents is now EUR 10.4 billion in 2025. Do you think this makes more reasonable under EUR 7.5 billion structural deposit hedge that you did in the quarter, will this have any positive impact on net interest income in the outer years?

And then my second question would be just around the rationale for changing your Chairman. Your new Chairman seems to be slightly older than the one who is stepping out or stepping down. If you could just give your thoughts around the Chairman change and what that means for CaixaBank?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Sofie. I guess, again, I'll start with the second question. And I'd say the change in Chairmanship, obviously, for a large organization happens from time to time. In this case, it is due to personal decisions, which we have to respect for the outgoing Chairman, who will be leaving on 1st of January. He's completed his mandate of four years after the merger. And obviously, now we start a new cycle with a new plan, et cetera. He thinks the bank is in a position of strength, which it is, in my view, and that this is the right time for him to move on. And obviously, we're very respectful of his decision. I appreciate a lot. He has been a great banker, both in the last 4 years and obviously previously back to his time at BBB or BBVA but we need to obviously respect his decision.

Then at that point in time, the Board convinced to decide after the appointments committee previously has looked at various options and very quickly comes to a conclusion that there is one Board member, Tomas Muniesa, who is currently Vice Chairman, is perfectly suited to take the job and just keep the bank running without any interruption because obviously, Tomas has been involved with CaixaBank for 45 years. He's been the Vice Chairman and supports completely on what we're doing, the plan, et cetera. We know him well. Those because he's been in the management committee and then of the Board for a long time. So I'm convinced that, that is going to work very well. I wouldn't read into this anything that has to do with change other than personal decisions.

And fortunately, the fact that there's someone on the Board that is very prepared to take that important Board Chairman responsibility facilitates things a lot. I think on the executive side, basically, there's no real impact. We keep being very focused on what we need to do. We have the right strategy. We have the right starting position, and we have the right team in place. So I wouldn't expect anything of significance out of this change in the Chair role.

[Javier Pano Riera, executive]

Okay, Sofie, yes, about market NII consensus for next year. At EUR 10.4 billion, I would say that, well, you know that rates are quite volatile and we saw the last few days, again, rates going up. So I would say that 10.4% is within the range of scenarios we are working on. So, I'm sure that in a few weeks we would further elaborate, but it's within that range. So I think that is correct. If the hedges do have a positive impact, I would say that not materially because the yield curve, we are hedging basically still like short- to medium-term maturities up to 4, 5 years.

And the yield curve in that part of those maturities is quite flat. So I would say there is not much steepness. In order to be accretive to NII, we should go longer. Something that we don't rule out. So eventually, we can do, probably not via derivatives, but also using bonds as we did some time ago. But well, let's wait for that. So you could see the yield curve in the U.S. is steepening a lot in recent weeks, not so much in Europe. We have some geopolitical events ahead of us. So let's see, so we eventually may have some opportunities to do so, but not for the time being.

[Sofie Peterzens, analyst]

That's very clear. Thank you.

[Marta Noguer, executive]

Thank you, Sofie. Our next question, please.

[Operator]

The next question is from Marta Sanchez Romero of Citi.

[Marta Sánchez Romero, analyst]

Thank you very much. So my first question is on capital. I was holding on to every word Gonzalo was saying on the rationale for the timing of the buyback, and it sounds quite positive. So does that mean that we should not expect relevant changes to your current 12% capital target?

The second question is also related to capital. The RWA growth is lagging loan growth. So can you explain or can you give us some sense of the front book density of your mortgage and corporate book, how does that compare to the back book. I guess now that you are accelerating loan growth, it's important to understand that we have that RWA growth well captured. And here also related to capital and RWA growth. Do you think that as that loan growth accelerates, the incentive to optimize your capital base to go deeper into how optimized your RWA base is increases, so we should expect RWA growth to be below loan growth in the coming years?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Marta. Just briefly before I hand it over to Javier. What I said is, obviously, what we're doing now with respective to the 12%, we will communicate soon in the Capital Markets Day what we're going to do for the next three years. So whether that 12% benchmark is maintained or not, I'll have to wait. There's actually no decision has been taken by the Board on this point. We have discussed in the past, obviously, the impact of this countercyclical buffer and the possibility of passing on part of these on to our target, which is something that is to be decided and announced by the Capital Markets Day.

But what I said is valid wherever the benchmark is, whether it's 12% or another one, this is the way we want to look at our capital base. Currently, we've said very clear that there would be no impact of the countercyclical buffer certainly in -- for this strategic plan, and that is a decision for the next one because this is obviously phased in -- during '25 and '26. So I see no reason why we would change anything for '24. But whether the 12% is still a magic number for this decision on capital going forward is something that we need to wait just a few weeks to be decided.

[Javier Pano Riera, executive]

And well, Marta, unfortunately, for the other question, I think it's a key topic also to elaborate on our Capital Markets Day. And I cannot -- very few comments now. So first thing is that we are -- something that I think that I have actually commented in so other occasions. So I think that probably incorporating more active capital management going forward in terms of SRTs, et cetera, is something that will come. And we were already doing some of those transactions, but we are keen to incorporate this more as business as usual and more recurrently. So I think that this is one message I can already give you.

Internally, we have a clear golden rule which is loans should have at least a profitability over 15%. So this is a golden rule. And actually, when we are envisaging loan growth is because it's profitable loan growth and that golden rule applies. So I think that just to provide you some comfort about, okay? We are talking about growth, but it's always profitable growth. So I think that is the key. Otherwise, that will not be the right thing to do. But I am sure that we will be able to elaborate on all that on a few weeks. We are trying to give you plenty of information about what we are thinking going forward on loan growth, on risk-weighted assets, capital consumption, profitability, et cetera. So I think that I would rather prefer to wait a few days.

[Marta Noguer, executive]

Okay. Thank you, Marta. Operator, next question, please.

[Operator]

The next question is from Andrea Filtri of Mediobanca.

[Andrea Filtri, analyst]

First question is on capital allocation. As an established financial conglomerate with a large insurance company, you have the option of growing in asset management leaving the goodwill deduction at the VidaCaixa level as we have been seeing from European peer, something many other banks are unable to do just as interest rates are coming down. Could this or a deal in Portugal banking be a good alternative to buybacks, also considering the valuation versus tangible book value per share when you look at capital allocation?

And then just 2 quick questions. Funding costs, where are you seeing the evolution of liquidity in the coming quarters? And what about the Portuguese funding cost evolution? And there is a decline of 4.5% quarter-on-quarter of life risk insurance. Could you elaborate a bit more on that if there is any one-offs in this number?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Andrea. On capital allocation, obviously, we're aware of the various capital treatments and that compromise and all that, and we're a financial conglomerate. So the view we have is that we want to make sure we do not do things we're not comfortable with from a business point of view because there is some particular arbitrage. And obviously, I'm not criticizing others and maybe others are in a different situation or they are more comfortable with. But the asset management and insurance business that we have are extensions of our brands business. We are not going to enter into being an asset manager distributing through other channels getting into the institutional market and asset management. We just want to serve our clients.

And obviously, as we keep growing our business in Spain and Portugal, the Asset Management business is going to keep growing, but we do not want to extend that operation into being in Asset Management for other purposes. Even if, as you say, obviously, you may think it's a pity that we are not taking advantage of one particularly positive regulatory environment. By the way, I think the more that banks get into arbitrage through this, the more likely it is that they will have some regulatory pressure at some point on the whole system because I don't think supervisors are going to be looking favorably around significant arbitrage through insurance subsidiaries.

We're not going to do it. We think there's a very sound justification for the current capital treatment for Danish compromise. And our insurance business is a real jewel, and we are happy to keep growing it, but for our own purposes.

Just one comment on Portugal I already mentioned that we're focused on organic growth. But the other thing you mentioned is share buybacks. And obviously, share buybacks for us, share buybacks are a good use of capital. If there's no better use for that capital, the best use of that capital is to grow the business, grow it organically. And in the past years, we have had very significant share buybacks because there was very limited loan growth in Spain and very limited RWA growth. It'd be desirable for that to change gradually and hopefully, we will actually leave more capital in the business because the business is growing nicely at returns on tangible equity of now currently 17%.

We're not seeing tangible book value per share as a good indicator of our value. I think I understand that many people in the market and I have full respect for people that look at that as a significant indicator. But I think we need to look at sustainable profitability. You look at our price to earnings basis and our expectations. I feel that there's very good reasons to keep buying back shares at these valuation levels and tangible book value is -- and in fact, we're trading at 1 point, I don't know, depending on which date you take 1.2x, 1.3x tangible. And I don't see why that should be something. Another thing is if we were trading at, I don't know, 15x earnings, I would fully agree with you. But trading at 7x, 8x earnings, I think it's an easy decision for us as long as we don't have better uses. Again, I go back to what you say always, and I fully agree that better to grow the business profitably, that's the first good use of capital for us.

[Javier Pano Riera, executive]

Andrea, you had a few questions about funding costs. I understand you are asking for client deposit costs. Well, first thing, volumes, and you asked about liquidity evolution, et cetera. Well, long term, we are of the view that both loans and deposits should grow closer or at least closer than now to nominal GDP. So this is like a long-term view. Let's see how this actually lands into, let's say, short-term plans or medium-term plans, but that's the view. So I think -- we think that focusing on the deposit side of the business is something that is accretive long term. So this is my first statement here.

Second, in terms of the future evolution, some data have already disclosed during this presentation. We have close to 50% of our interest-bearing deposits that are indexed, mainly to the overnight internal rate. There are a few that are indexed to 12-month Euribor. So that reprices, let's say, later. But generally speaking, reprice fast as soon as the Central Bank cut rates. So I think that this -- and this is coming. So this is coming because it's by the term sheet. So that's one point.

In Portugal, it's not exactly the same. So in Portugal, that is basically also you deal with large corporates with time deposits. So there is not so common to have indexed at current accounts. So in Portugal, you need to keep like rolling over that -- those time deposits. So it's like a different way of doing the business. So well, our expectation is the funding costs will gradually come down and obviously will be one of the key offsets of -- for lower rates going forward. But I'm sure that we will have the opportunity to discuss all that also in a few weeks.

Then you had a question on life risk and I think you are asking for the year-on-year evolution. Basically, in the third quarter last year, we had exceptionally low claims on life risk, hence, the comparison on a year-on-year basis is a little bit less favorable. But I would say that this is something that actually, it's not happening this year. So you should not derive any further conclusions from that also you saw that the evolution for the overall protection business is up by 6% year-to-date. So it's evolving actually in line with our expectations.

I remember at the beginning of the year when being asked about the evolution of this business that last year delivered double-digit growth, I remember by saying that what probably this year, double digit growth is not going to be the case and actually is what is happening. Thank you, Andrea.

[Marta Noguer, executive]

Just to complement what Javier was saying on deposit costs in Portugal. This quarter, they were already falling Q-on-Q at BPI, just to complement it. Thank you, Andrea. Next question, please, operator, sorry.

[Operator]

The next question is from Britta Schmidt of Autonomous Research.

[Britta Schmidt, analyst]

Actually, I just wanted to pick up on the deposit cost in Portugal, which were down quite significantly this quarter. We've seen some of your peers actually reprice upwards, but still being at a lower level than what you booked previously. I mean how is this being managed? And if it's not something that's down to indexing, how can you ensure that the fast repricing of the asset side could be offset by lower deposit costs in Portugal as well in the coming quarters?

And the other question I had was, do you have any sort of sense or idea what the potential impact of the devastating floods that we see in the Southeast of Spain could have on the operations, potential cost but also potentially on the cost of risk in NPLs?

[Gonzalo Gortázar Rotaeche, executive]

Thank you, Britta. Javier will comment on Portugal BPI is actually doing a great job in this respect. But anyhow, obviously, with respect to the floods, has a very significant impact in terms of human lives losses, infrastructure, particularly housing and vehicles. You know that there is a consortium company [indiscernible] some of these costs are going to be borne by basically this public sector system, but there will be obviously some impact on our insurance non-life company, nothing material for the purposes certainly of CaixaBank.

And there's going to be a significant reconstruction effort and help, obviously, from the central government and why not from Europe. We will be actively involved in that reconstruction effort as a leading bank in the region. It's about 5% of the GDP of Spain. The capital city in Valencia is not damanged. So I think that impact on tourism is going to be fairly limited. But there will be impact, we're going to be standing by our clients here helping them out. They will be receiving, I'm convinced state support and public funds will be made available.

So hopefully, even if there is some impact, obviously, some businesses would be badly hit and you could say that there will be some asset quality pressure. I think overall, we will sort of get through this without an impact on us. To be honest, what at this stage and again, having been here for the whole week, and you just heard the alarm, which is sort of just reminding people, I guess, that they cannot just get on to a car and drive safely currently. It means that all of us are obviously moved by the human cost that obviously is associated with a disaster like this one. I do not, again, think that the financial consequences are going to be an issue for us. But we will, on the contrary, be supporting our clients, those that are really impacted as a bank and as an insurance companies, we can do a lot.

As I said, we have started advancing payments by both the consortium and the other insurance companies. So we are making sure that people get the funds immediately when they need it. We have launched funding efforts from AgroBank for, obviously, agricultural businesses, from Micro Bank for small businesses, business interruption in particular, which is an issue,people that have lost their vehicle or they have big problem in the shop, et cetera, just make sure that they can keep obviously, on business. And then generally from CaixaBank. I am confident that whole society is moved and we will get through these tough times.

[Javier Pano Riera, executive]

Well, on Portugal and deposits well as actually, I forgot to mention before, but Marta said no. So it's actually progressing very well. There's quite a difference in the mix because at group level, so interest-bearing deposits is like circa 25%, but in Portugal it's 40%. And so the yield of those deposits at the cost is pretty much the same. It's like 2.85% or circa that figure, but it's -- the weight is like 40%. So it's quite different.

It's a market that had a lot of pressure at some point with some actions taken by the Portuguese Treasury distributing retail, let's say, treasury bill. But well, since then, that situation is much calmer. So I would say that probably who had the chance to purchase or to invest into that product has already done so. And from there, probably what we are having is to some extent, recovering part of those flows that went out. And the situation is it's pretty much calmer than several quarters ago. So BPI is doing a great job.

The starting point is strong because the liquidity position of BPI is as strong as at group level. So with a liquidity coverage ratio over 200%, also, et cetera, so no funding needs. So we think that we can manage the situation with some flexibility. And what we see in the market is that the market is being competitive as always, but rational. So we tend to think as corporates and SMEs, et cetera, are used of this way of functioning with time deposits instead of indexed current accounts. That the natural way of things is that at the rollover date, those time deposits will gradually come down. And actually as being the case. So we are happy to see that as rates have started to come down and Euribor coming down, we have been able to pass on those lower rates into the new -- from book yields. So we are estimating that this is not going to be a problem.

[Marta Noguer, executive]

Okay. Next question, please, operator.

[Operator]

The next question is from Ignacio Cerezo of UBS.

[Ignacio Cerezo Olmos, analyst]

The first one is on loan pass-through and loan yields. I mean, qualitatively, do you think it's logical to expect similar pass-throughs on the way down than the kind of 65% you have seen on the way up? Or any strong reasons actually for big variations there, maybe mix or the capacity actually to keep fixing in the future? And the second question basically is on the noncredit impairment line. I mean, it's come down a little bit actually from the last couple of quarters. So just checking basically if everything is going according to plan on the legal side actually for you, there's any discrepancies versus the view you had 2, 3 quarters ago.

[Gonzalo Gortázar Rotaeche, executive]

I can confirm this. There is -- things are according to plan on the second question. But Javier, you may want to comment.

[Javier Pano Riera, executive]

Yes. Well, I would say that the environment is pretty much the same than in the last few quarters. The landscape is, as usual, very competitive on mortgages. We are making like this third quarter actually close to 80% of the new production at fixed to maturity, which is remarkable. And well, it's probably with long rates that are not moving as much as the short end of the yield curve, we have a little bit more stability in terms of -- from book yields on the new mortgage production. That is like circa 2, 3, quarters, a little bit below that. So I think that is pretty much stable, although I would say, competitive.

We don't expect that long-term rates will come down much more from the current levels. So as new mortgage production is more linked to that long end of the yield, probably, we are going to be able to maintain approximately current from book yields. And basically, when you talk about SME and business lending, I would say that approximately 80% of the new production is at floating, usually indexed to -- well, to 3, 6 or even 12-month arrival. But I have commented this often that usually on this kind of commercial relationship, the negotiation is about the spread, more than the absolute yield.

And spreads, well, the negotiation is tough as always. But I would say that rational. And yes, we think that for the new production, we are going to be able to maintain, I would say, the margins. So in our view, yes, because -- well, hopefully also as we have this, let's say, long-term view that lending should improve theoretically as lending improves in terms of volumes also should theoretically have a lesser impact on the yields of the new production.

Let's see. But yes, we think that we can replicate the evolution. And then on top of that, consumer lending that actually, we are growing nicely, up by close to 6% year-to-date. This is few correlated -- little correlated with the market rates. So our rates that are higher, clearly. So the correlation is lower. Thank you.

[Marta Noguer, executive]

Another provisions you have...

[Javier Pano Riera, executive]

I will follow up [indiscernible]

[Marta Noguer, executive]

I'm sorry. [indiscernible] following...

[Gonzalo Gortázar Rotaeche, executive]

Nothing unexpected...

[Marta Noguer, executive]

Okay. So I think that's all for today. So it has been a pleasure hosting you one more quarter. Have a wonderful weekend, a long one for some of you. And hopefully, we see you all in a few weeks.

[Gonzalo Gortázar Rotaeche, executive]

Thank you very much.

[Javier Pano Riera, executive]

Thank you.