Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2022-Q1

[Gerardo Artiach Morenes;Head of Investor Relations, executive]

Good morning, and please be welcome to Banco Sabadell's First Quarter 2022 Results Presentation Audio Webcast. This presentation, which will be followed by a Q&A session, will be run by our CEO, Cesar Gonzalez-Bueno; our CFO, Leopoldo Alvear.

We expect the presentation and Q&A to last 1 hour altogether. Thank you again for your attendance. And let me now hand it over to Cesar Gonzalez-Bueno.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Thank you, Gerardo. Good morning, everyone. As you will see during the presentation, our Q1 results were solid and more important, consistent and aligned with our guidance.

Let me start by highlighting some of the key elements of this quarter. Firstly, we are pleased to announce the launch of Sabadell commitment to sustainability, which sets the main pillars of our ESG strategy and establishes its objectives. This represents a strong and firm commitment to become an organization fully aligned with the best ESG practices. Secondly, our commercial activity improved along the quarter, which is the usual performance for the first quarter of the year. Thirdly, we delivered another stable quarter in terms of asset quality metrics as we are seeing no signs of credit deterioration. And finally, Sabadell Group recorded a net profit of EUR 213 million in the quarter. TSB earned GBP 21 million on a stand-alone basis, which is more than double compared to the same period last year.

On top of these positive results, our core Tier 1 fully loaded ratio reached 12.45% and the return on tangible equity stood at 6.5%. All these figures allow us to be confident that Sabadell is on the right path to continue improving its profitability and to meet the return on tangible equity target above 6% in the year.

Let's move to Slide 5. In March, we presented commitment to sustainability, a framework that defines the forward-looking vision of our ESG agenda. This agenda is leveraged on 4 pillars: to progress as a sustainable institution ourselves, to support customers in the transition to a sustainable economy, to offer investment opportunities that contribute to sustainability, and to work together for a sustainable and cohesive society. The 4 strategic pillars materialized in 60 objectives, which -- with specific midterm targets for each one of them. These objectives are concrete, measurable and have scheduled targets. We have defined specific action plans to achieve each objective.

In Slide 6, I would like to share some examples of the objectives. For instance, by 2025, we have committed reaching 33% of women in the management team, EUR 65 billion mobilized in cumulative terms in sustainable finance, et cetera, et cetera. As I said, concrete, measurable and scheduled objectives. Detailed information on our commitments is available on our corporate website.

Moving to Slide 7. Spain remained stable despite usual first quarter seasonality. U.K. maintained a solid growth, reaching 0.6% growth quarter-on-quarter in euros. Growth in local currency was above 1% in the quarter. These align with our guidance of mid-single-digit growth for the year. In other international geographies, we are still seeing some deleveraging. In terms of customer funds, on-balance sheet funds remained stable in the quarter. Mutual funds drove the decline in off-balance sheet funds in the quarter affected by the Russian conflict. Volatility in the financial markets impacted both the valuation of existing assets under management as well as net inflows.

Let's move now to Slide 8 to start the review of the commercial activity in Spain. Mortgages in the first quarter performed in line with the previous year. We are observing competitive pressure in pricing in the context of rising interest rates, and our focus is to maintain a level of new production at adequate prices. Our mortgage stock market share was up by 11 basis points in 2021. Indeed, our market share growth has a slowdown compared to the previous quarter, but taking into account the competitive environment that I just mentioned and our objectives, we are performing in line with our targets.

Granting of new consumer loans increased by 11% year-on-year. This is supported by the economic recovery, but also by transformation initiatives implemented in recent months which are already delivering results. Some examples are a more segmented pricing approach or an increased customer base targeted with preapproved loans. Our consumer loans stock market share was up by 4 basis points in 2021. Both in mortgage and in consumer loans, we had a positive monthly trend during the quarter.

On Slide 9, new protection insurance premiums were slightly lower than in the first quarter of 2021, in line with the evolution of mortgage origination and the induced life insurance business it generates. In 2021, we had an increase of 69 basis points in our market share of life insurance premiums. Regarding mutual funds, assets under management were impacted in the quarter by market volatility, but remain 6% above the previous year. Our market share declined moderately by 3 basis points in the quarter.

In Slide 10, you can observe that payment-related services continue to improve on a year-on-year basis along with the economic recovery in Spain. Regarding cards turnover, we reached a relevant quarterly turnover increase of 27% year-on-year. Although our market share fell by 14 basis points in 2021, it remained stable in the last quarter of the year.

Regarding payments through our point-of-sale devices, quarterly turnover increased by 36% year-on-year. As you can see, however, we lost some basis points of market share in 2021, but this is the expected result from executing our strategy. As we have explained in previous quarters, we are managing for profitability and not for volumes. This approach has resulted in a reduction of exposure to single name clients with high turnover volumes but very low margins. In fact, as you can see in the bottom right of the slide, our market share of number of point-of-sale devices increased by 65 basis points in 2021. Moreover, let me also share that first quarter point-of-sale turnover increased by 36% year-on-year, while fees increased by 40%, again the result of managing for profitability and not for volumes.

Moving now to Slide 11. New lending in Business Banking increased gradually over the quarter, although it has still subdued due to several factors. Firstly, we still observe a certain degree of excess liquidity after company's accumulated liquidity in previous quarters, for instance, through or mainly through ICO loans. And secondly, we are observing that companies are holding mid- and long-term investments, which require bank financing as a result of the current macroeconomic context. However, financing of working capital is behaving well as a result of the economic recovery. The deployment of next-generation EU funds in Spain has been channeled so far mainly through direct spending by the public sector and through subsidies to private companies. Therefore, it has not induced a significant amount of bank financing yet. Having said that, I would like to highlight that we gained 19 basis points of stock market share in 2021.

In Slide 12, we share our performing loan book by segment and products. On the one hand, households and individuals grew in the quarter, particularly in consumer loans as labor market in Spain remains strong. On the other hand, SMEs and corporates as well as public sector declined in the quarter. This is mostly related to seasonality. In addition, the international loan book, excluding TSB, continues to reduce its size, as you can see on the right-hand side of the slide. This is in line with our strategy of optimizing capital allocation.

Looking at TSB in Slide 13, we continue to see positive dynamics. Its new mortgage lending volumes decreased by 29% year-on-year, but this is mainly due to an all-time high volume of new lending in 2021 due to market conditions and to the current focus on profitability versus volume in a competitive market environment in terms of pricing. Regarding the stock of mortgage lending, TSB delivered a 1.4% growth in the first quarter, in line with our guidance. Finally, our stock market share for mortgages has increased 3 basis points in 2022, with new lending market share above the stock market share, less than before the growth but still gaining market share.

Taking a look at TSB's financial performance in Slide 14, we can see that the franchise recorded a net profit of GBP 21 million in the quarter, which more than doubles the net profit it posted in the first quarter last year. This is an indication of the consolidated turnaround of the franchise. Taking a closer look at the different items. NII remained stable in the quarter despite being affected by the usual Q1 seasonality related to a lower number of calendar days. Higher volumes and higher interest rates should drive NII also at higher levels in the coming quarters. The cost line maintained a stable trend and provisions continued to be very low given the healthy risk profile of the loan book and the strong macroeconomic situation in the U.K. Finally, the reduction of the bank levy from 8% to 3% imply a revaluation of DTAs, which implied a GBP 13 million higher taxes in the quarter. It is worth noting that it particularly reverts the impact that we had in the second quarter last year due to the increase of tax rate in the U.K. from 19% to 25%.

In Slide 15, we will take a look at the financials on a group basis. We recorded a net profit of EUR 213 million, which shows a remarkable trend on both a quarterly and an annual basis. These results entailed a return on tangible equity of 6.5%. In addition, it is worth noting that our core results, which include NII and fees minus recurring costs, showed a remarkable trend and grew by more than 20% year-on-year, while decreased on a quarterly basis by 6% due to the usual Q1 seasonality. Regarding solvency, our fully loaded core Tier 1 ratio continued to show good progress in the quarter and increased by 27 basis points to 12.45%.

Finally, in terms of shareholder value creation, tangible book value per share increased by more than 5% year-on-year, including the distribution of a cash dividend of EUR 0.03 per share approved in our Annual General Meeting at the end of March.

And with this, I will hand over to Leo, which will continue the presentation. Thank you.

[Leopoldo Alvear Trenor, executive]

Thank you, Cesar, and good morning, everyone.

Moving on to the financial results, I'd like to start by going through our quarterly P&L. Let's first focus on the year-on-year evolution in order to get a glimpse of the potential evolution for 2022. So NII advanced 3% year-on-year, while fees were up 5% and costs, after the execution of the efficiency plan in Spain, have been 5.6% lower. [ So out in the ] 3 lines, NII, fees and costs, we see an improvement of 20.9% on the core results year-on-year. Provision charges are also improving since they are well below 2021 numbers and are already within our guidance for 2022 in Q1 as expected.

In the quarter, we've had a few one-offs that broadly offset each other. On the one hand, positive contribution from the equity method partly offset in the line of minorities, higher than recurrent trading income, some losses from amortization of intangibles in the line of gain on sale of assets. And finally, the EUR 50 million impact in higher tax in TSB related to the revaluation of DTAs due to the reduction of the U.K. tax rate for banks as Cesar just mentioned.

So all in all, in my opinion, a solid set of results, leading to a net profit of EUR 213 million in the quarter, where all relevant revenue and cost lines present a positive evolution year-on-year.

Allow me to go through the different items of the P&L in more detail as well as the Q-on-Q comparison in the following slides. Starting with NII on Slide 18. We see that the line decreased by 0.6% on a quarterly basis, clearly impacted by the lower day count in the period, while on a year-on-year term, a more comparable base, NII grew by 3%.

On the top right-hand side, you can see the bridge of the NII evolution in the quarter. Moving from left to right, the lower day count represents an impact of minus EUR 11 million. Customer NII contribution was stable with a EUR 2 million less from the loan book that was completely offset by lower deposit costs. The ALCO portfolio increased its contribution by EUR 5 million, benefiting from higher rates and slightly higher volumes and [indiscernible] we've already started rebuilding the portfolio. The rest of the elements of NII contributed positively with EUR 1 million. Among this, we have seen wholesale funding costs producing a positive contribution as some costly covered bonds matured during the quarter.

Now looking forward, there will be 2 main tailwinds that benefits from higher interest rates in the loan book and higher ALCO contribution as the portfolio is rebuilt. Therefore, we believe that this quarter's NII shall be the lowest for the year as positive levers will more than offset any negative headwinds such as the end of the accrual of the extra yield of TLTRO III from June onwards. Finally, as you can see on the bottom left part side of the slide, customer spreads slightly improved in the quarter, while the group's NIM picked up by 2 basis points.

Moving on to fees. On a Q-on-Q basis, fees have decreased by 9.7%. This evolution is partly explained by the Q4 seasonality associated with the usual asset under management and insurance business success fees booked every Q4. In this case, it was EUR 17 million last year. Other reasons that explain the Q-on-Q evolution are the negative seasonality in credit risk fees, a weaker asset management contribution due to higher volatility of capital markets in the quarter as well as lower syndicated loan fees. On the other hand, when comparing year-on-year, which will give us a better understanding of what may happen in the year, fees have increased by 5%. This year-on-year growth is underpinned by healthy growth rates in the main 3 lines of fee-generating business. This is credit and contingent risks growing at 3.7%, services growing at 5.3% and asset management business growing at the same 5.3%.

Leaving the revenue line aside and moving on to costs, I would like to highlight that our cost base was down 4.3% in the quarter and by 5.6% on an annual basis. I'm pleased to share with you that in Q1, as expected, we finished the execution of the second phase of the efficiency plan in Spain. And therefore, cost savings have begun to come through. Employees leaves have been taking place through the quarter and the last exits took place on March 31. These exits are already reflected in the P&L. As Q-on-Q, we have benefited from a EUR 13 million cost reduction. In any case, this will not be the run rate of savings that we expect going forward because, as I just explained, leaves have been taking place until the last day of the quarter. On another topic, we have renegotiated all contracts with relevant suppliers, and we have made sure that cost increases going forward are reasonable and manageable. Also, we have mentioned in the past this, we are looking into different cost-cutting opportunities that will help to control even further our cost base.

As a summary, even under the current inflationary context, due to all the different initiatives mentioned, we are convinced to achieve a total of EUR 110 million of cost savings for this year, which means that we still have to see a further EUR 97 million of cost reductions coming through in the remaining 3 quarters.

On the next slide, we take a look at core results, which include, as always, NII plus fees minus recurrent costs. As you can see on the left-hand side, group core results have decreased on a quarterly basis by 5.7%, being mostly affected by seasonal impacts such as the before mentioned seasonal impact in fees or the calendar days in NII. When focusing on the year-on-year evolution, we see an increase north of 20%. This positive evolution is driven by all lines, an increase of 3% in NII, 5% in fees and a reduction of 5.6% in costs. Going forward, we expect core results to improve over the year on the back of a positive contribution coming from growing fees and a further reduction in costs. NII should also contribute positively, although it may be affected by some quarterly volatility as the end of the TLTRO will have an impact from third quarter onwards.

Turning now to the bottom part of the P&L. This is to provisions. This quarter, credit cost of risk stood at 41 basis points, while total cost of risk reached 54 basis points. Taking a look at the breakdown of total provisions on the top right-hand side. If we follow the graph from left to right, we can see that we booked EUR 172 million of loan loss provisions. We also booked EUR 8 million for charges on foreclosed assets. As we explained in Q4 '21, we recorded some extraordinary provisions on this line last year related to branch closures that we do not expect to have this year.

NPA management costs were EUR 36 million, 20% down versus quarterly average in 2021, a figure that we believe should remain stable going forward. And finally, other provisions basically related to litigations stood at EUR 11 million. We expect this line to also remain reasonably stable throughout the year.

I'd like to highlight the reduction in the noncredit cost of risk, which has come down from historical 20 basis point levels to the current 13 levels. And we believe that this reduction will be consolidated going forward. Regarding credit cost of risk and driven by the good evolution of asset quality that we will address in a minute, we reconfirm our guidance that it should stand within the ranges recorded between 2019 and 2021. This is between 32 basis points and 49 basis points.

Moving on in the following section of the presentation, we review as always, asset quality, liquidity and solvency. Starting with asset quality. Let me start by reminding that all retail payment holidays expired throughout the last quarter of 2021. And that portfolio has continued to perform without any signs of this deterioration as we basically expected. On the ICO loans side, the demand of ICO state-guaranteed facilities have been subdued in the quarter, having granted EUR 34 million for a total amount round to date of EUR 8.5 billion. During the first month of the year, we've started to see a small part of the grace period maturities expire. 92% of this Q1 maturities expirations are performing, while 85% of the Stage 3 amount is unlikely to pay. This is they're not past due 90 days. So a similar performance as existing book that is already paying down principal.

At the end of Q1, 64% of the book is already facing principal payments. And as you know, the first part of the ICO exposure will end their grace period and therefore, start repaying principal in Q2 2022. It is important to note that for the whole book, the percentage of loans in Stage 3 is 5%, a ratio that has remained stable Q-on-Q, while unlikely to pay, still represents circa 60% of this Stage 3.

In the next slides, we show the evolution of the problem of our problematic assets, starting with NPLs in Slide 25. NPLs remained stable in the quarter, and this is reflected as well in the NPL ratio, which closed the quarter at 3.66% at group level. Total coverage on NPLs remained at 56%. In addition, our exposure across stages remained broadly stable Q-on-Q as well as our Stage 3 coverage, which has stood at 41.2%.

Finally, it is worth remembering that more than half of our current NPLs are classified as unlikely to pay. In essence, and as we have seen when reviewing the cost of risk, there has been no deterioration on credit portfolios, and that reflects in the evolution of the different asset quality KPIs.

In terms of foreclosed assets and total NPAs, Slide 26, you can see that the stock of foreclosed assets declined by EUR 63 million in the quarter and stood just below EUR 1.3 billion. Coverage ratio for this portfolio remained at 38% according to the fact that 95% of foreclosed assets are finished buildings.

Regarding total NPAs, stock shows a small reduction and amounts to EUR 5.7 billion, which is driven by the previously mentioned decrease on foreclosed assets and broad stability in NPLs, while total coverage has remained steady at 53%. Finally, the gross and the net NPA ratios stand at 4.4% and 2.1%, respectively, with stable year-on-year and Q-on-Q evolution.

Moving now on to liquidity. The group ended the quarter with a very solid liquidity position, reflected in an LCR of 235% or EUR 56 billion worth of high-quality liquid assets. Loan to depo ended the quarter at 97%. In terms of European Central Bank funding, we currently have EUR 32 billion of outstanding TLTRO III, while in terms of TFSME, we have GBP 5.5 billion outstanding.

As per our capital position, we continue generating capital organically as our profitability improves. Our CET1 ratio stands at 12.45%, having increased by 27 basis points in the quarter. When we look at the quarter's evolution, we see, on the one hand, an increase driven by organic capital generation of 25 basis points, while accruing 2021's 31.8% cash payout ratio. On the other hand, the rate hikes observed during the last months impacted in the fair value reserve related to the fixed income portfolio by 9 basis points. As our ALCO portfolio is significantly hedged, the impact related to interest rate hikes is manageable.

Finally, RWA evolution has been positive in terms of solvency, providing an additional 11 basis points, fostered by improvement in capital allocation and slightly lower volumes. From a regulatory perspective, the CET1 ratio stood at 12.59% on a phase-in basis. In terms of total capital, the variance in the quarter is explained by the amortization -- the authorization of the anticipated amortization of the AT1 issuance with call due in May 2022. It should be noted that this does not impact the MDA buffer, given that this issuance was prefunded in 2021. Consequently, our MDA buffer now stands at 413 basis points, above our requirement of 4.46%, having increased by 22 basis points in the quarter.

To conclude this section, the following slide shows our current MREL requirement for 2024, which we are already compliant with, based on both risk-weighted assets and leverage ratio exposure as well as on full requirement or on a subordinated perspective. The issuance plan will be, therefore, focused on optimizing the funding costs and the funding sources as well as keeping capital buckets and MREL management buffer. In this sense, let me highlight that we issued EUR 750 million of senior number for debt this quarter under a green bond format. And also, as just mentioned, remember that we will early redeem one of our standing AT1s in May.

And with this, I hand over to Cesar, who will conclude our presentation today.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Well, thank you, Leo. As a matter of fact, it is a pleasure, it was almost 1 year ago that we did our first presentation -- quarterly results presentation together. And it has been 5 meetings with basically very well results, which, by the way, you explained very well. So thank you for that. So to finish our results presentation today, I would like to recap a bit on the key messages of this quarter.

To begin with, in terms of commercial activity, volumes performed basically as expected. Secondly, the Spanish efficiency plan has been fully executed this quarter and contracts with suppliers for this year, as Leo just mentioned, have already been negotiated. So we are comfortable on that side. Therefore, we can confirm that our cost savings of EUR 110 million in 2022 will be materialized. Thirdly, regarding asset quality, cost of risk is in line with our guidance, and we are not seeing signs of credit quality deterioration. Fourthly, our core Tier 1 fully loaded increased to 12.45%, while posting 21% year-on-year growth of our core results. And that's, I think, quite meaningful.

All in all, return on tangible equity reached 6.5%, and we are confident to meet the return on tangible equity target above 6% in the year.

And with this, I will hand over to Gerardo to kick off our Q&A session. Thank you.

[Gerardo Artiach Morenes;Head of Investor Relations, executive]

Thank you very much, Cesar. We will now begin the Q&A session. As always, we have a limited amount of time. We would like to ask you to make an effort to keep your number of questions to a low number of them, two or three. So operator, could you please open the line for the first question.

[Operator]

Yes, our first question is from the line of Francisco Riquel from Alantra.

[Francisco Riquel, analyst]

I'd like to ask about the guidance and NII. You were initially guiding for flattish NII in the year, but you now mention that first quarter will be the trough of the year, so meaning that there could be upside risk. If you can please update on this guidance and also on the sensitivity to interest rates and how much of the forward rates are included in this -- in your projection?

And second, on the costs, if I were to analyze the cost base in the first quarter, I mean, I would get to EUR 2.9 billion, but you mentioned EUR 100 million of savings still to capture from the second quarter, meaning that the cost base could be closer to EUR 2.8 billion. You mentioned that the contracts with suppliers have been already renegotiated. So shall we expect any impact from the cost inflation elsewhere? I mean if you think that the cost base would be closer to EUR 2.8 billion or EUR 2.9 billion, I mean, the tailwinds and headwinds that you see in the cost lines.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Okay. I think everybody is very aware that despite we are not seeing any impact on our cost of risk or that -- things continue to evolve in a very positive terms, there is uncertainty. And that's why we kind of maintain our flattish view. But if you break it down, and there are also chances for a little bit more of more optimism. But at this time, we prefer to continue being prudent. As you mentioned, we are already, Francisco, at 3% year-on-year on NII. And we have, nevertheless, two main headwinds to offset. If we look at item by item, first, the ALCO portfolio. But that will be reversed its impact to a very large extent by our reinvestment in government bonds along the year with higher yield curves, and that will help.

We also have another headwind, which is the end of the TLTRO in June 2022, but that we expect to be more than offset by TSB on the back of higher volumes and higher interest rates. So what we have not included yet is the interest rate hikes assumed in Spain and only we included in our guidance 50 basis points for the Bank of England in the U.K. But it's too early to update the guidance. But you're right that there are some elements that show a little bit more positivity. I don't know if you want to add anything on that one, and I'll leave the cost to you, but certainly, Francisco, we confirm, as Leo and I said, that the EUR 110 million improvement in our cost due to the measures that we have taken, both on the headcount, that will kick off completely along the year and have only partially kicked in during the first quarter and also other measures for cost containment together with all the agreements that we've made with our suppliers and partners. But Leo, please.

[Leopoldo Alvear Trenor, executive]

Sure. Let me just try to complete a little bit the answer on NII. So yes, it's true that rates are looking on the bright side if compared to our budget. In any case, I think the impact in 2022 will be small because this is -- as you know, this takes a little bit to reprice. We will have some positive impact coming out of the repricing of Euribor for the back books of mortgages, but we've seen none in Q1. And as you know, normally, this repricing takes a couple of months of luck. So we will start to see some of these at the -- starting in May, so it's for the last part of the year, basically. So there will be some good news there. But as I said, the biggest impact will come from 2023 onwards.

As for the sensitivity on NII, we've discussed this before, and it's complex because there are several ways to look at this sensitivity. If we look at the regulatory way of looking at this sensitivity, which is probably what you can compare more with other banks, what we publish in our annual accounts. It's basically a parallel shift of 100 basis points. Instant parallel shift of 100 basis points. Well, I'm not sure that's extremely realistic. It will be in the long term, if you look from 2024 looking backwards. But it's going to take some time to come through. Now if you look at that sensitivity, our NII would grow around 14% in 2 years. In my opinion, probably the first few hikes in rates will be a little bit higher than that because we will not be repricing deposits. And then after a certain amount of hikes, we'll probably be closer to that.

In any case, the sensitivity is extremely sensitive, if you allow me to use the word again, to how much we, as a sector, pass through both in prices of the asset side and the liability side. In any case, good news, but more for '23 than for '22, in my opinion, although we will start to see some of that coming through in the second part of '22.

And as for cost, sorry, I might have misled you. What I meant is that we still have EUR 97 million to come in the next 3 quarters when compared to 2021, okay? So the -- what you need to take into account is that our guidance is to reach a cost base in 2022, which will be EUR 110 million less than in 2021 as a whole, okay? So it's comparable quarters year-on-year that will show these EUR 97 million coming through, not compared to the Q1 numbers. So basically, our cost guidance needs to be below EUR 1.9 billion, not at EUR 1.8 billion. So basically, 110 -- sorry, 2.9 -- below EUR 2.9 billion. So basically, EUR 110 million less for the full year 2022 if compared to the full year 2021.

[Operator]

Our next question is from the line of Fernando Gil from Barclays.

[Fernando Gil de Santivañes d´Ornellas, analyst]

The question is about capital and [indiscernible] 12.45% that we've seen this quarter. How are you thinking in terms of RWA inflation for the rest of the year, would be one? And if you -- if trends continue like they are going, will you contemplate any change in the dividend policy will be the other question?

[Cesar Gonzalez-Bueno Wittgenstein, executive]

So let me take the second one on the dividend policy. There are active -- it should be expected, active discussions on the side of the Board. And looking at different scenarios of dividend policy, both in terms of amounts and in terms of structure of how that payout should be handled. And the proper answer will come in due time with a firm decision from the Board. The only thing that I think is shareable at this point in time, and we have done it already in the past, is that as profitability and if profitability continues to improve, it will make sense that the payout also continues to improve. And on the capital, Leo?

[Leopoldo Alvear Trenor, executive]

Yes. Well, I think we believe that capital will keep on improving throughout the year, probably not as much as it did in Q1, among other reasons, because we expect some loan growth on the book. So I think we will see capital going up for the rest of the year. But I wouldn't count on this amount of increase on a quarterly basis.

[Fernando Gil de Santivañes d´Ornellas, analyst]

And how much of the regulatory impact is left? I remember, I think it was 5 basis points for this year.

[Leopoldo Alvear Trenor, executive]

Yes, it's all taken for. So nothing.

[Operator]

Our next question is from the line of Carlos Cobo Catena from Societe Generale.

[Carlos Cobo Catena, analyst]

Congrats for the numbers. Two questions from me. One is on capital, following up on Fernando's question. You're starting to accumulate some comfortable capital surplus, assuming there are no big headwinds on the relative front. What are your priorities going forward? Are you looking to expand or invest in EPS growth? Do you think you need to do more restructuring, which I guess you aren't after the 2 plans? Or we could start to think about share buyback at some point? I mean how do you think about that? If you could also, in this line, explain the risk-weighted assets capital generation with flat loans, is that purely a mix effect? Or is there something else?

And lastly, another more general question on the strategy. You have this 6% target for this year, which, I mean, has improved. But still not close to the cost of equity. So what's Sabadell strategy going forward? What are the next steps to converge with the cost of equity and then profitability and how does TSB plays out? Of course, profitability is improving a lot in TSB as well. But is it still a core business, or how you're thinking about TSB in the context of the turnaround or the profitability of the business in Spain?

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Thank you, Carlos. A lot of questions and very good ones, by the way. In terms of what we plan to do going forward, and let me start with the second question with the strategy. I think we set a clear target for 2.5 years, a little bit more than 2.5 years when we established the strategic plan. And we have tried and we have, I think, succeeded to be extremely focused in keeping the perimeter, the basic perimeter of the business and just improving all the businesses one by one. That's what we continue to do and that's what we foresee doing during the course of the strategic plan and to continue improving.

We gave an orientation of 6% return on tangible equity when we started the plan. We are now well north of 6%. We are now at 6.5% 1 year later, and we are aiming to be above 6% during this year. And we expect to really deploy beyond that in '23, but furthermore in the long run. The plan of exactly how that will be, of course, our aspiration is to reach the cost of capital and even, if possible in the future, to surpass it. But we have to go step by step. And if we get ahead of ourselves, we will probably not reach the improvements that we aim for. So prudency and execution is the name of the game.

In terms of TSB, there is no change. TSB is part of the group. It is consolidating extremely well. It is performing on an improving basis as we said all along since the first presentation that Leo and I did together exactly 1 year ago. And this is happening to our satisfaction, and all the discussions in the Board lead to believe that we have absolutely no intention of doing anything as we have said all along. There's nothing on the table and we will continue having TSB in our portfolio for the foreseeable future.

And in terms of what we would do with the capital is a little bit of everything. I think, of course, we will continue to improve EPS. Restructuring is not in the foreseeable future. It's not envisioned during the plan. And in terms of share buybacks, I already mentioned that the Board is discussing both the amounts, but it's still early, and we have to see exactly how the numbers consolidate and is also discussing on the different alternatives on how to deploy that payback. And these are ongoing discussions, and they haven't been settled, and we will announce them when the time comes.

In terms of the risk-weighted asset mix effect, I think one of the things that we have brought is greater discipline. So the metrics before, which are also valid metrics, were also -- were mainly around commercial factors. We have -- it's not that it didn't exist before, but it has become at the core of the way we manage the RAROC, the return on tangible equity, the return on equity. And therefore, we have optimized the way we manage and the way we choose the investments that we make. But this was such a broad question that I'm sure Leo would like to add something and certainly please do so.

[Leopoldo Alvear Trenor, executive]

Sure. So just a couple of things, I think. I think on the evolution of our return on tangible equity, I think as Cesar was explaining, I think the raise doesn't end this year. Moreover, it will continue to improve going forward. And even more so now in this context where we are seeing hikes in rates, the company, the bank, it's highly leveraged and highly operationally leveraged. So for example, an increase of 4% in NII would lead to an increase of 1% of return on tangible equity. I think this is clearly going to happen in the future, not in 2022, as I mentioned before, but certainly coming forward. And a number of other things that we're putting through, such as all the restructuring that we're doing in the retail front, for example. So we do expect to keep on increasing and improving our return on tangible -- on tangible equity.

Now in terms of your question regarding RWAs and what happens, I think Cesar was basically explaining. Now we're looking at businesses, the different businesses of the bank now through a return on equity perspective. So basically, all businesses are looking for a better capital allocation. And I think we've covered this before, the consumption of capital and, therefore, density of the exposures that we have internationally are higher than the ones that we have in Spain. And that's why we've seen a little bit of a shift on the loan book on that regard.

And finally, just for the -- for any kind of avoidance of doubt, what Cesar was saying about the buybacks must be understood only within the distribution of recurrent dividends. So it's not something we're not discussing at all now any potential return of excess capital. What Cesar was trying to explain is that, well, there are alternatives within the distribution of a given payout and whether this must be done on a cash basis only as we did last year or with a mixture of different alternatives, which is something still to be discussed and decided.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Indeed. Thank you, Leo. Good clarification. Thanks.

[Operator]

Our next question is from the line of Maks Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have two. The one is on the equity accounted results. If you could provide a little bit more color on what happened there and whether this was a one-off? And then also a small follow-up, there were news that you could potentially be contemplating disposing of the payments business. If you could touch on this, that would be great. And then the other question is on mortgages in Spain. I was wondering if you could tell us what affordability rate you have on the mortgages? And also, what kind of macro scenarios you are using for your macro provisions? And how does it compare to the recent Bank of Spain estimates?

[Cesar Gonzalez-Bueno Wittgenstein, executive]

So let me cover a couple of them, Leo, and then hand it over to you. So on the payment business, we are exploring alternatives and that makes a lot of sense because it's a very industrial activity. For us, it also has a very strong commercial drive. As you know, we handle market shares above 60 might improve both the hardware and the software related to that. So yes, we are looking into alternatives but at a very early stage.

In terms of affordability for the mortgages, we are being cautious. And certainly, we have changed our models in -- especially in the lower brackets of income. And that makes a lot of sense because for those brackets, the core of [indiscernible] to the new environment and some players adapt more slowly. And there are, in the short term, some changes in the short-term market share. I think our aspiration, when things become normal again, is to continue prudently growing our market share after this period of transition of adaptation to the new interest rate environment.

[Leopoldo Alvear Trenor, executive]

For around EUR 100 million coming from both equity method and trading income, it's true that after the evolution of the first quarter, these may be a little bit higher. Perhaps it can be around EUR 150 million. But certainly, we will not be seeing these levels all through the year. So what I will count is that for the full year, instead of the EUR 100 million that I mentioned before, perhaps I will take into account about EUR 150 million.

Regarding the affordability of mortgages, honestly, I do not have the number within my reach at this moment. But I do remember that in general terms, the affordability is still at low numbers when compared to historical statistics. So in this regard, we are -- I think nothing has changed significantly in terms of the quality of the mortgages that we are lending. In any case, the leverage of the private economy in Spain has been deleveraging for almost 10 years now. So we are in a much better shape to start with now within the context than what we were back in 2010 or something like that.

And regarding the macro assumptions and whether they are -- they comply with or they are more or less in line with Bank of Spain's, yes. Basically, the numbers that we have in our models are very much the same. Very, very, very similar to the ones that were disclosed by Bank of Spain a couple of weeks ago.

[Operator]

Our next question is from the line of Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, analyst]

Just one from me. Apologies if I'm coming back to the NII, specifically in the U.K., I mean we haven't seen customer spread expanding in the last couple of quarters despite that pickup of rates by Bank of England. So I was trying to understand if it's like a delayed reaction or we're going to have a lower sensitivity and you're still sticking to that NII growing in line with volumes type of guidance actually you provided 3, 4 months ago. I mean we have expected the customer spread to start going up already in the last couple of quarters and it hasn't happened, so we're just trying to understand why.

[Leopoldo Alvear Trenor, executive]

Yes. And this is one of the things that I mentioned before regarding sensitivity. It depends very much on the actions of the banks. I think in the U.K. market, what we've seen is that some of the incumbent banks, well, they have a very, very low loan to depo because of the ring fencing. And therefore, well, they've been a little bit more aggressive on prices in the latest months. So up until very recently, we saw very little of hikes in terms of pass-through of these rate hikes towards those customers.

I think we are seeing this -- starting to see these in the last few weeks. But as we mentioned before, within our franchise in the U.K., we are price takers here. So we don't have the market shares to move prices. We need to follow a little bit what the big players are doing. And I get the impression that they're starting to move towards that side, but it has taken a little bit of time. Again, as Cesar mentioned before, when we see such big increases in rates in such a short period...

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Well, I think it's something that is worth emphasizing in very simple terms. It's not new that when there are dramatic change -- dramatic, very significant changes in underlying interest rates, the rhythm of both in Spain and the U.K., the rhythm at which this is followed and passed through by the different banks is different. And then you return to normality. What is our stance? And this is what I think is very relevant. We continue to [indiscernible]

[Operator]

Our next question is from the line of Borja Ramirez from Citi.

[Borja Ramirez Segura, analyst]

I have two quick questions, if I may. The first is if you could please provide the amount of existing, call it, overlay provisions. And also if this could be partly utilized in case of deterioration in the macro environment? And my second question is, given your stronger capital position, would you -- and as a follow-up on the previous question on the potential uses of capital, could you envisage maybe using capital to do an accelerated asset quality provisioning?

[Leopoldo Alvear Trenor, executive]

So the first one, basically, what we provisioned back in 2020 was around EUR 650 million. And these provisions still remained unused. So we are not planning on doing any write-back and it remains part of our provision bag, if you wish. So if there is any deterioration, yes, we still have this on board. And regarding the capital, I think we've been -- we try to explain, we are comfortable with the capital position that we have right now. As we always explained, we always thought that as profitability would increase, capital levels would increase also, and we would generate capital organically. And this is exactly what is happening. So it's what we expected.

As for the asset quality, I think the evolution is fairly good, given the context. So even though COVID, we have not seen any kind of increases in our NPA's ratio, so we remain at the same levels that we had pre-COVID. And I believe in the coming years, these levels will go down on a natural way. So we don't feel the pressure either to put a lot of provisions on that book.

[Operator]

Our next question is from the line of Ignacio Ulargui from BNP Paribas.

[Ignacio Ulargui, analyst]

I just have two questions. One is, I mean, coming back a bit to what you have commented about how some players adapt and others don't or faster or lower to the rate movements. Wondering to get a bit your sense about how do you see the market in terms of competitive dynamics in Spain in the corporate sector. If there is -- you have seen sort of like it's competition from BNP -- of the TLTRO and you're starting to see a bit of a pass-through of higher swap rates to margins. And also yes, a very nitty-gritty question probably, but if you could explain a bit why there has been a decline of around 9% quarter-on-quarter inside account fees in Spain? Is there a bit of a change in the strategy moving to retail becoming less in terms in charging fees on these basic services or it was a bit of a one-off or seasonal factor?

[Cesar Gonzalez-Bueno Wittgenstein, executive]

So I'll give it a first try and then you can go further if you feel like, Leo. On the corporate side, what we see is that the pass-through is more gradual. It's more progressive and, in a certain way, more if I could even say a bit more -- the word is not very precise, but allow me to use the word professional, okay? It's not that just a one decision of moving prices like you can see in mortgages, but it's more account per account and on a continuous basis. So it's more gradual and more predictable in that sense.

Last year, the last quarter on fees was an extraordinary quarter. On many instances, we had -- first, there is seasonality. Second, the markets on assets under management were very, very, very strong in mutual funds. And thirdly, it was an excellent month from the point of view of syndicated loans and fees. And therefore, you should not see a trend there, but more the extraordinary results of Q4 2021.

[Leopoldo Alvear Trenor, executive]

Yes. And specifically, in side accounts, we saw a very good quarter, very good fourth quarter, when you compare it, you can see Q1 also -- Q1 last year, which was much lower than that. I believe this quarter might have been a little bit slower in this regard. But the average run rate that I would take for these lines should be in the region of low 70s.

[Gerardo Artiach Morenes;Head of Investor Relations, executive]

We're already into 10 a.m. territory. So if we may, let's just give access to the last call.

[Operator]

Our last question is from the line of Britta Schmidt from Autonomous Research.

[Britta Schmidt, analyst]

I've got two questions remaining. One is could you perhaps comment a little bit on the Spanish mortgage market, what are you seeing with regards to pricing? It seems that there are some very competitive fixed rate offers still out there? And how do you manage the interest rate risk of fixed rate mortgages with the current forward curve? And the second one would be on the AUM flows. There have been some outflows in March. Could you comment a little bit on how this has developed in Q2 so far?

The second one was on flows into assets under management. There's been a deterioration in March, which is easy to explain, but could you comment a little bit on how this has developed in April?

[Leopoldo Alvear Trenor, executive]

First one was regarding mortgages and the competence in prices in the Spanish mortgages -- Spanish mortgage system.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

So any further detail in the question because I think we've...

[Leopoldo Alvear Trenor, executive]

Nevertheless, I think during the course of the month of April, we have seen some movement in changes of prices for fixed mortgages across the system. So it's what we were trying to explain before. The movement has not been instant in terms of passing through the changes in rates towards customers. But I think we are now, in April, in the fixed mortgage prices.

As for the second...

[Cesar Gonzalez-Bueno Wittgenstein, executive]

I am aware of the question now. It's also about the -- the relationship -- prices in the market now are more aggressive on fixed rate than on variable. And it's kind of an abnormality in the sense that they should be priced at similar levels of return on equity. And, therefore, that's an abnormality. The prices are lower and more attractive for customers right now on fixed than on variable. And we are adapting our prices in fixed and in variable, but the market in that sense is yet, and I think we will see changes over the course of the months. It's still a little bit biased at this point in time.

[Leopoldo Alvear Trenor, executive]

And as for asset under managed, geopolitical volatility, February was still positive despite all what happened in the market, but then March was negative. In April, we're back to positive numbers. In our case, as you know, we have little exposure to equities because our clients basically request for lower yielding funds, basically lower risk -- but we have -- I think now we've seen more stability there. And I believe that if this remains to be the situation, stability, we should be seeing some recovery of flows in the coming months.

[Gerardo Artiach Morenes;Head of Investor Relations, executive]

Thank you. Thank you all. We now wrap up our Q&A session. Thank you all for all your questions. As always, the whole IR team is available for any further questions that you could have. Once again, thank you all.