Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2023-Q1

[Gerardo Artiach Morenes, IR]

Good morning. Thank you for joining us on Banco Sabadell's First Quarter 2023 Results Audio Webcast, please be welcome. In the next hour, our CEO, Cesar Gonzalez-Bueno; and our CFO, Leopoldo Alvear, will present the main highlights and details of the commercial and financial performance in the quarter. The presentation will follow up by a Q&A session.

Let me now hand it over to our CEO, Cesar Gonzalez-Bueno.

[Cesar Gonzalez-Bueno, CEO]

Thank you, Gerardo. Good morning, everyone, and welcome to Sabadell's First Quarter 2023 Results Presentation. As we will explain today, the bank keeps doing well. I would like to start by sharing the key messages in Slide 4. First of all, in the current environment, we are focused on managing margins versus volumes. In this context, our loan-to-depo improved by 60 basis points in the quarter and stands at 95%. Second, NII increased by 28% compared to first quarter '22. Our customer's spread increased by 51 basis points year-on-year. Third, TSB continued to deliver positive results and posted a profit before taxes of GBP77 million, 67% up year-on-year. Fourth, Group's net profit reached EUR205 million in the quarter, this represents an increase of 69% year-on-year if we exclude the EUR157 million of the new Spanish banking tax, recognized in full, in this quarter. Finally, our core Tier-1 reached 12.78%, increasing 33 basis points year-on-year. Return on tangible equity stood at 9.9%, 11.4% if we exclude the new banking tax. On Slide 5, we'll talk about volumes, starting with the quarterly evolution of performing loans. Volumes decreased by 2.2% quarter-on-quarter or by 2.5% at constant FX. This is mostly explained by the usual first quarter seasonality as well as by weaker demand, slightly weaker demand for loans, particularly and that is more accurate -- acute in the U.K. On a year-on-year basis, lending volumes decreased by 1.4% or by 0.5% at constant FX. There are different dynamics by geography. In Spain, we had the maturity of EUR2.1 billion loans to the Spanish treasury, without considering the maturity of this loan, the rest of the lending book grew by 1.6% year-on-year. In the U.K., the mortgage market remained weak. In the year following the mini-budget episodes last October. Thus, performing loans at TSB decreased by 5.2% in euros, or by 1.5% at constant FX. In other international activities, we delivered a solid growth of 5% or 2.7% at constant FX.

Moving now to customer funds. On the balance sheet, funds declined by 1.1% in the quarter. On the other hand, off balance sheet funds increased by 2.7% in the quarter, driven by positive net inflows and market performance. As a result, total customer funds decreased by 0.4% in the quarter. Finally, our commercial gap improved by EUR1 billion in the quarter and by EUR3 billion year-on-year. In Slide 6, we take a closer look to our deposit base. 61% of our customer deposits at Group level are insured by national deposit [insurance] and deposit guarantee schemes. Furthermore, our deposit space is granular. 76% of the total deposit base are retail deposits. This figure has remained stable in the past year. Looking at the breakdown by type of deposits, almost 90% are site accounts. This quarter, we have seen a flow from site accounts into term deposits, which includes also commercial paper. This is in line with the deposit beta we forecasted for the year. Finally, our loan-to-deposits ratio improved in the quarter and stands at 95%. So, it's a very stable deposit base. On Slide 7, we review the commercial activity in Spain. Mortgage origination fell by 19% year-on-year, broadly in line with the market. We also decreased on a quarter-on-quarter basis due to both a market slowdown and seasonality in Q1.

On the other hand, new consumer loans continued to perform well, growing by 32% year-on-year and by 12% quarter-on-quarter. Moving to Business Banking. In the lower left-hand side of the slide, new loans and credit facilities in Q1 remained broadly stable in the quarter and on a year-on-year basis. Working capital financing fell slightly versus previous quarter due to seasonality, but increased 10% year-on-year.Slide 8. Payment-related services continued to perform remarkably well, both in terms of turnover and number of transactions. Cards and Point of Sale turnover posted a strong increase on the year-on-year basis, 11% in Cards and 19% in Point of Sale. Quarter-on-quarter turnover decreased in both cases, but that's due to seasonality. Regarding mutual funds, we had a positive net inflow in Q1 of EUR125 million. Despite having net positive inflows, these were lower than in previous quarters. Allow me please to elaborate a bit on this. We have a broad portfolio of investment products to suit the needs of each customer according to their investment profile. Lower net inflows of mutual funds in the quarter were offset by higher net inflows in other investment products such as structured deposits, commercial paper or savings insurance, which altogether increased by EUR2 billion in the quarter. Finally, in the lower right-hand side of the slide, in new protection insurance premium, there is a downward trend as expected and as previously explained in previous results presentation.

In Life Insurance, we are moving from single premium insurance to renewable premiums, which results in lower upfront payments by the customer. The downward trend will continue for the coming quarters.Slide 9. On the X-axis of the graph, you can see the year-on-year variation of business origination for our products in Q1. On the Y-axis, you can see the year-to-date stock market share variation. Our products in the A group are performing well. In Consumer Loans, Cards, Business Banking and Point of Sale, we are increasing our origination volumes while maintaining or increasing our market shares. So good performance there. Mortgages. Despite increasing marginally our market share, origination volumes are decreasing. As explained before, this is due to a softer mortgage market. In the C group, protection insurance and mutual funds. As I explained before, the performance in protection insurance is in line with our expectations, mainly due to shift from renewable premiums in life insurance. As I also explained, the lower net inflows in mutual funds in the quarter were, when compared with the previous year, is offset by the performance of other investment products such as structured deposits, commercial paper or savings insurance. So in summary, a good commercial performance in Spain.

On Slide 10, I will share an update on the progress of our transformation. In Retail Banking, we had three clear strategic priorities, more digital customers, more digital processes and more specialized service model. Regarding digital customers, remarkable progress here. In 2021, digital onboarding wasn't even available while currently, we are acquiring more than 50% of our new customers digitally.Regarding digital processes, we are also progressing notably well, for example, digital [entry]. Finally, we are deploying a more specialized service model. As we have shared in the past, we have already deployed around 800 specialized RMs for mortgages, investment products and insurance, and we launched a new private banking model earlier this year But of course, we have not finished our transformation process in retail banking. The degree of execution of each strategic priority is different. But in all cases, we have specific projects and initiatives to be delivered in the upcoming future. A sample of them have been included in the right-hand side of the slide.

Moving on to Business Banking. The strategic priorities are different to retail banking. Verticalization of our value proposition for businesses, deployment of enhanced risk renting processes and offering a better day-to-day experience to customers leveraging on technology. I will not expand for the sake of time into the details of this, but I can assure you that here again, we are seeing good progress to-date and clear initiatives to be delivered in the upcoming future. In short, the results of our transformation, I firmly believe that they are already visible and having an impact, but we still have a clear road map, looking forward.

Moving on to Slide 11. Well, but the question is, how have we been able to accelerate the delivery of our transformation initiatives without increasing IT CapEx? The solution is relatively simple. As you can see in the slide, we have transformed our IT model and reduced unit costs of IT projects by 38%. Furthermore, we have upgraded our data centers and implemented a new infrastructure architecture, which delivered a 10% cost avoidance in the total cost of our IT infrastructures and data centers. As a result, we have been able to double our capacity to invest in digital customer solutions, while maintaining the total IT CapEx broadly stable. On top of that, we have also organized our teams to work in a more productive way with a higher degree of integration between IT and the business units, which results in faster and more efficient time-to-market in our transformation initiatives.

Moving on to Slide 12. In January, we announced the disposal of our merchant acquiring business. This took place in the framework of a long-term strategic partnership with Nexi, a leading industrial partner. This has been certainly an industrial transaction, and that has been the rationale. The perimeter sold includes 80% of Sabadell's merchant acquiring assets, and the transaction includes entering into a 10-year distribution agreement. This transaction will allow us to further build on our position in the payment business in Spain, where we had already acquired a 20% market share in Point of Sale devices. Moreover, it will reduce our investment needs, and it will provide cost savings in the future. It will also help us accelerate growth by providing our clients access to more advanced payment systems. The total value of the transaction amounts to EUR350 million, adding 14 basis points to our core Tier 1. Additionally, it is expected to be P&L accretive from the first year of the agreement.

On Slide 13, performing loan book by segment ex-TSB. Consumer loans grew by 3.6% in the quarter. Mortgages as well as SMEs and corporate lending remained slightly subdued in the quarter, because of seasonality and lower demand for loans in the current macroeconomic scenario. Performance of leading -- of lending to the public sector in the quarter was impacted by the maturity of EUR1.4 billion in the Spanish treasury loan. Excluding this effect, it would have posted positive growth. Looking at the year-on-year dynamics, we have managed to grow both mortgages and consumer loans. Lending to SMEs and corporates declined slightly as companies are still delaying long-term investments. Regarding our international business, we delivered quarterly negative growth in all geographies, although we still see a robust growth in Miami and Mexico on a year-on-year basis.

Let's move now to the U.K., in Slide 14. New lending volumes in TSB in the first quarter of 2023 were impacted by low levels of mortgage applications in Q4 '22, in line with market dynamics. TSB's mortgage book declined by 3.5% in the quarter, driven by a weaker market. However, mortgage applications have started to recover in Q1, and the volume of applications in March is close to the average monthly volume of the first months of 2022.Moving to TSB's financial performance in Slide 15. TSB posted a net profit of GBP54 million in the quarter, which represents the highest quarterly net profit since 2017. NII grew by 18% year-on-year and benefited from a higher customer spread, as well as a higher contribution of the structural hedge. Core results increased by 59% year-on-year, thanks to NII performance that offsets lower contribution of fees and slightly higher costs, as you can see on the right-hand side. In Slide 16, financials on a Group basis. We recorded a net profit of EUR205 million or EUR361 million, excluding the payment of the new Spanish banking tax. These results entailed a return on tangible equity of 9.9%, 11.4% if we isolate the impact of the new Spanish banking tax. In addition, our core results, which include NII plus fees minus total costs, grew by more than 46% year-on-year on the back of the NII performance. In terms of solvency, our capital ratio stands at 12.78%, which implies a solid increase of 33 basis points year-on-year.

With this, let me hand over to Leo, who will cover the financials of the bank in more detail.

[Leopoldo Alvear, CFO]

Thank you, Cesar, and good morning, everyone. Now moving on to the financial results. Net profit reached EUR205 million, posting a quarterly increase of 37% and 4% below Q1 '22 figures. Nevertheless, it is important to take into account that these quarterly results include the full impact of the Spanish banking tax, which in our case amounts to EUR157 million and is non-tax deductible. In other words, without this extraordinary impact, our net profit would have increased by more than 140% and by 70% on a quarterly and annual basis, respectively. Now the aforementioned profit represents a return on tangible equity of 9.9% or 11.4% when the Spanish banking tax is excluded, and this is well ahead of our guidance. In terms of P&L, we will take a closer look at the figures in a minute. But before we do so, I would like to say that overall, the quarterly evolution was healthy, which reflects the good momentum that the business is undergoing. NII grew by 2.2% Q-on-Q, mainly driven by the current positive interest rate landscape, while on a year-on-year basis, the increase is north of 28%. Fees were down 5.9% in the quarter, driven by seasonality in decline of both service and asset management fees, as we will see later. And from a year-on-year perspective, the evolution has been minus 2.4%, in line with our low-single digit decline. Costs increased slightly in the quarter by 1.4%, which is actually below our budget. And this, combined with a downward trend in provisions, consistent with an asset quality backdrop that is holding up very well, boosted the aforementioned net profit figure.

Let's go through the different P&L items in more detail. Starting with NII, Slide 19, Group NII increased as mentioned before, by 2.2% in the quarter and by 28.3% year-on-year. On the top right-hand side, we can see the drivers that explain the quarterly evolution. Moving from left to right, customer NII contributed with EUR71 million within it. Customer margin added EUR107 million, underpinned by a faster increase of interest rates on the loan book than on the cost of deposits, mostly due to the fact that Euribor pricing is coming through. On the other hand, as you can see, volumes had a negative impact of EUR30 million as new lending volumes remained subdued in the quarter, as Cesar has just explained. The higher ALCO contribution driven by the repricing of the hedged portion of the portfolio and more expensive wholesale funding broadly offset each other, producing a combined impact of minus EUR5 million. Additionally, TLTRO was the main headwind in this quarter. And at the end of the related income, represented a negative impact of EUR58 million Q-on-Q. As you can see, part of this impact was offset by the excess of liquidity deposited at the ECB. And finally, day count represented an impact of minus EUR13 million.

Now when we exclude the impact of TLTRO and the current days difference, NII would have grown by 9.2% in the quarter. The good evolution of the customer margin can be seen in the performance of our customer spread, which by definition excludes TLTRO, that increased by 20 basis points to 2.73% in the quarter. This is driven, as mentioned before, by the repricing of a variable rate portfolio with a higher yield on new originations and by a contained evolution of our customer funds costs. On the other hand, NIM, which does include TLTRO impact, grew 15 basis points in the quarter, up to 1.79%.

Moving on to fees. This posted a quarterly decrease of 5.9% Q-on-Q and 2.4% on an annual basis. This underperformance was driven by both service and asset management fees. Regarding service fees, this declined due to the usual first quarter lower seasonality and lower revenues from forex transactions, while asset management fees were impacted by the fact that, as we've already announced, we now sell regular premium insurance instead of single premium insurance, meaning that this fee stream will now be recorded more broadly. Additionally, the quarterly comparison is affected by the fact that Q4 includes the positive contribution of insurance success fees that are recorded at year-end. In any case, we had already anticipated this performance in a low-single digit decline guidance for the year, and therefore, we are confident that we are within budget. Leaving the revenue lines to one side and moving on to costs. This quarter, total costs increased by 1.4%. On a year-on-year terms, costs increased by roughly 0.7%.

Finally, as you can see on the right, compared with the situation one year ago, efficiency has improved significantly, thanks to different restructuring plans undertaken both in Spain and the U.K., and also supported by the solid evolution of gross margin elements, and now stands at Group level at 53.6%, while it's 48% ex-TSB. At this point, four months down the road, we feel confident to revisit our guidance for the year and to reduce the expected increase in the cost line from a plus 4% to a plus 3.5% year-on-year.

On the next slide, we take a look at our core results, which include NII plus fees, minus costs. As you can see on the left, the year-on-year performance of recent quarters is very substantial, as core results continue to grow at a high speed quarter-after-quarter. On the top right-hand side, you can see the bridge of this year's evolution. The increase of this metric is supported by NII, which added EUR242 million. The contention of costs made possible that we only must deduct EUR5 million from this line, while fees had a minor negative impact of EUR8 million in the year. Going forward, we expect NII to be the main contributor to the further improvement in core results.

Moving to the bottom line of the P&L. We cover cost of risk and other P&L items between pre-provision profit and profit before taxes. The Group's credit cost of risk for the quarter stood at 45 basis points, as you can see, very much in line with 2022's average at 44 basis points. The stability in credit cost of risk is related to the low levels of delinquency that we are observing, and therefore, to the good evolution of asset quality. Total cost of risk reached 57 basis points, posting a quarterly decrease. Taking a look at the breakdown of total provisions on the top right-hand side, from left to right, we can see that we booked EUR186 million of loan loss provisions in the quarter, equivalent to the 45 basis points of credit cost of risk that I've just mentioned. There were no provisions related to foreclosed assets, as some foreclosed assets were sold at a premium in the quarter, and the sale proceeds offset the related provisions. NPA management costs amounted to EUR36 million. And finally, other provisions, which are mainly related to litigations stood at EUR14 million.

Now moving on to the next section, I will walk you through asset quality, liquidity and solvency. In the first line of the section, we can look at the Group's nonperforming loans, which showed a slight increase in the quarter, while on a year-over-year basis, the stock has nonetheless been reduced by over 5%. Gross net entries were very much in line with previous quarters, and we're not seeing any deterioration of advanced credit risk indicators. As a matter of fact, the final numbers for the quarters exceed our budget, this is the total NPL portfolio is lower than what we were expecting at this time through the year.

NPL ratio advanced 12 basis points in the quarter, of these 5 basis points are related to the above-mentioned increase in Stage 3 exposures, while 7 basis points are explained by the loan book reduction. Finally, it is worth noting that coverage ratios remained stable, standing at 55% when considering total provisions over Stage 3. Furthermore, although you do not have Q4 '22 information on the screen, Stage 3 coverage increased slightly in the quarter. Moving on in terms of foreclosed assets. It is worth noting that the stock continued to decline both quarterly and on an annual basis. As a matter of fact, year-on-year, we see a reduction of 14% of the stock in foreclosed assets. The portfolio still benefits from having a sound risk profile, as 95% of total foreclosed assets are finished buildings, while coverage remains unchanged at 38%. Overall, total NPIs, which include both NPLs and foreclosed assets were down 7% year-on-year. Gross and net NPA ratios stand at 4.2% and 2%, respectively, while total coverage remains stable at 52%.

Turning now to liquidity. As you can see, we are operating with substantial liquidity buffers over both the short and long-term, which can be seen in the LCR ratio, which stands at 220% or the NSFR ratio, which reached 141%. Loan-to-depo ratio improved 0.6% in the quarter to 95%, while total liquid assets amount to EUR58 billion, of which EUR52 billion are high-quality liquid assets.In terms of Central Bank funding, let me elaborate a bit on the different geographies, which you can see in the bottom right-hand side of the slide. As per TLTRO-III, of the EUR32 billion that we drew down as of today, EUR13.5 billion are outstanding, EUR8.5 billion mature this June, while the remaining EUR5 billion mature in March 2024. In other words, we have already repaid close to 70% of the borrowing due to be matured this year. Our LCR hasn't undergone major fluctuations as a result of the TLTRO repayments, and this is due to the fact that when we repaid the facility, the collateral back in this lending was returned to us and these collaterals are high liquid assets. Furthermore, at the end of Q1, the liquidity deposited at the ECB is equivalent to 2.2x the outstanding TLTRO.

Finally, in the U.K., we prepaid EUR1 billion of TFSME, leaving EUR4 billion outstanding, most of which will mature in the second half of 2025. To end with this slide, I would like to highlight the recent improvement in the outlook assigned to our rating by S&P, which has been revised to positive from stable. This action reflects the view of the agency that Banco Sabadell will continue delivering and gradually improving the strength of profitability of our franchise over the next 12 to 24 months.

Turning to the next slide, we can see our current MREL position. Sabadell is already compliant with the requirements that need to be met from 1 or 1st January 2024 onwards, in line with our funding plans. And we comply both in terms of total RWAs, leverage ratios, subordinated RWAs or subordinated leverage ratios. It is important to highlight that the funding plan for the year has been mostly deployed in this first quarter. As a matter of fact, the vast majority of the MREL subordinated issuances have already been executed. We have no need to issue any further AT1 or Tier 2 in the medium-term. In fact, the next AT1 call date is not due until September 2026. Finally, moving to the next slide and to end my part of the presentation, let me share with you our solvency situation. At the end of Q1, our CET1 fully-loaded ratio reached 12.78%, having increased 24 basis points in the quarter or 33 basis points year-on-year. When we look at the quarter's evolution in more detail, we can see that the organic capital generation was 13 basis points, even assuming a 10 basis point impact linked to the Spanish banking tax and after accruing a dividend payout of 50%. Fair value reserve adjustments had a positive impact of 7 basis points. And finally, lower RWAs derived from lower volumes and better risk profile in the quarter as well as other deductions such as the IFRS 17 added 4 basis points to our CET1 fully-loaded ratio. From a regulatory perspective, the CET1 ratio phase-in ratio stood also at 12.78%, which implies an MDA buffer of 413 basis points, which comfortably beats our target of maintaining a buffer above 350 basis points. Finally, in terms of shareholder value creation, tangible book value per share increased by 5% year-on-year, including the distribution of a final dividend of $0.02 per share that was paid to shareholders in March.

And with this, I conclude my part and hand over to Cesar.

[Cesar Gonzalez-Bueno, CEO]

Thank you, Leo. And now to finish our presentation and before opening the Q&A session, I would like to recap on the quarter's development. And you can follow the details in Slide 31. I think, it's important to stress that the results of our transformation are already visible, and that we still have a clear road map. So the transformation is not done, but it's progressing very well. Looking at our financial performance, NII grew by more than 28% year-on-year. This makes us more confident that we will meet our now very high-teens growth target for the year. Fees decreased by 2.4% on an annual basis as anticipated and in line with our low-single digit decline guidance. We reported a total cost of EUR730 million, which means that we are even more comfortably on track to meet our target. And as Leo just mentioned, stating it at 3.5% increase for the year. Total cost of risk reached 57 basis points, which is below our target of less than 65 basis points, which again gives us comfort. All these has brought our return on tangible equity to up to 9.9% or 11.4%, if we exclude the banking tax. In both cases, pre or after banking tax, this metric is aligned. This new metric is aligned with our year-end profitability target. And with this, I hand over to Gerardo to kick-off the Q&A.

[Gerardo Artiach Morenes, IR]

Thank you, Cesar, and thank you, Leo. We will now begin the Q&A session [Operator Instructions]. Operator, could you please open the line for the first question?

[Operator]

First question is coming from Maksym Mishyn from JB Capital.

[Maksym Mishyn, JB Capital]

The first one is on outlook for loan book growth. And I was wondering if you still expect loan book to grow slightly in 2023. The second one is on NII in Spain. And if we move beyond 2023, what kind of normalized customer spread should we expect for Sabadell going forward after rates were fully repriced? And the last one is on capital. I was wondering if you factor in any additional headwinds this year. And if not, would you consider distributing excess that you are currently generating?

[Cesar Gonzalez-Bueno, CEO]

In volumes, yes, we maintain our view for the year. And the evolution of performing loans is slightly below our guidance, which was flattish. But you have to take into account, as we mentioned, that there was -- and this was expected in our budget, that is slight decline in the quarter, because there is a maturity of a EUR1.4 billion loan to the Spanish treasury. In the case of TSB, yes, it is below expectations. But as we mentioned, we -- let's see if it materializes or not, but we see the applications recovering in the first quarter, which could mean an improved performance of the volumes towards the future. Nevertheless, as we've mentioned several times, from a strategic perspective, we believe that in times when the markets are not that strong and the volumes are not growing strongly, it is much better to focus on returns. The yield that you obtain by focusing on returns instead of trying to gain market share aggressively in times of softer markets, I think, leads us to follow that that strategy very clear. And a good sign also is that the commercial activity continues healthy with a number of transactions in cards and point of sale growing very, very, very handsomely. I don't know if you want to add anything to this question, Leo?

[Leopoldo Alvear, CFO]

No, I think it's…

[Cesar Gonzalez-Bueno, CEO]

I think the second question was around NII?

[Leopoldo Alvear, CFO]

Yes. I think -- well, NII for the quarter is going to be the bottom of the year. So, from now onwards, we shall see Q-on-Q that NII will be higher. And this is actually driven by the customer spread, which will also be the lowest of the year. And therefore, we see that it will keep on improving throughout the year towards probably something above 3%.

[Cesar Gonzalez-Bueno, CEO]

And I think, just to complete only a third, 30% of the credit book has repriced of the EUR70 million. And of course, we expect the [beta] to increase over time. It's quite low. The first quarter has behaved very well. So, we have increased to around 15% ex TSB coming from 10%. So, we remain with our expectation of 20%, 25% for the year in the guidance. So we expect -- I mean, we are even more confident at the behavior of the NII.I think there was a question also on the capital. I think, any decision, we believe that the capital is going to behave in a healthy manner. You've seen a significant decrease during the year to [1,278] and we expect a continued increase supported by the results in the course of the year. As to what would then happen, I think I have to be very clear on this one. This is Board reserved material, the decision around payouts, around the structure, both the volume and the structure of the payouts, and the Board makes its decision much more towards the end of the year, or even with the books closed. So we should not expect any guidance on this respect until much, much later in the year.

[Leopoldo Alvear, CFO]

And just about whether we have any headwind in capital regulatory headwind going forward? No, the answer is no. We're not expecting any in due course.

[Gerardo Artiach Morenes, IR]

Operator, let's please move on to the next question.

[Operator]

Next question is coming from Ignacio Ulargui from BNP Paribas.

[Ignacio Ulargui, BNP Paribas]

I have two questions coming back a bit on NII and capital. I mean, in terms of deposit betas, you have said that the performance has been much better. Could you give us some sense on how deposit beta evolved in March? Is there a significant change between the first quarter and the evolution in March? Linked to the NII, I mean, I just wanted to get a bit of a sense on the deployment of the ALCO portfolio, whether you have invested partially on [ROPs] and whether the plans remain to continue increasing the size of the ALCO book?

And then, on the capital front, I just have one question about whether there is any chance to do any other decision rather than shareholder remuneration like, for instance, potentially buying back part of any of your JVs? I mean, I was thinking particularly whether there is a chance to buy from Intrum, the servicer, which stands around EUR130 million of costs every year, if that could happen or because of the contract that cannot take place?

[Cesar Gonzalez-Bueno, CEO]

I'll just take the last one. No, there's no -- that's not on the table, any analysis or negotiation to purchase back any of the JVs, they are working fine.

[Leopoldo Alvear, CFO]

On the betas, what we saw is, from January, an increase in the three months. Has it been exponential in March? No. And it's not been neither in April. So, I think it's been -- as Cesar was mentioning before, it's actually below what we budgeted. Therefore, we remain pretty confident at this stage and given the trends that we have seen in the first 4 months of the year. With our guidance for NII, I think all things being equal, our NII should grow in the very high teens this 2023.As per the ALCO, no, we have not invested -- reinvested. We had around EUR3 billion to reinvest in the year. And as you can see in the numbers in Q1, the ALCO book was almost the same. I think it grew EUR300 million. So, we have not gone through that yet. And there is a chance, yes, that we will do it through the year.

[Gerardo Artiach Morenes, IR]

Let's please move on to the next call.

[Operator]

Next question is coming from Borja Ramirez from Citi.

[Borja Ramirez Segura]

I have two questions. One on wholesale funding, the NII guidance that you provided in January, which offer high teens growth. Since then, you've seen a lot of front-loading in February of wholesale funding at low spreads. Was this better than expected in your original NII guidance?

And then, my second question is on the U.K. It seems that TSB has recently lowered rates for new fixed mortgages. Could you please provide more details on the competitive environment in the U.K. as well as volume and market share outlook? And one quick follow-up, if I may. When you define deposit beta, could you please explain how this is calculated? Is it the final cost of deposit derived by the final Euribor? And also, what is the Euribor expectation in the deposit beta?

[Leopoldo Alvear, CFO]

Shall I take the first and the third? So, in terms of wholesale funding, yes, the truth is that we anticipated -- I think we were -- we made a good strategic decision, and we anticipated most of the MREL issuances of the year in the first couple of months of the year. And we did so because that was a good market. There was a lot of appetite, and we were able to print at lower yields. So, it is a little bit better than expected, although -- I mean, in terms of yields, although it was earlier than expected also in terms of the funding plan. So, it's positive for '23, and it's more positive for '24, if you wish, because the yields were lower than the budget. And as per the third -- yes, it's precisely as you mentioned. So, the way we are defining the beta, it's the final cost of deposits on the current Euribor -- on the Euribor, that is on the market right now.

[Cesar Gonzalez-Bueno, CEO]

On the U.K., I think the market has been very soft, very soft because the last quarter of the last year of '22, the demand was very low. And when the market is very low, it's also very low in terms of pricing in general. In general, I think we are defending reasonably well the margins there. But it is certainly a market that probably should not remain in the same situation as it has been recently. It adjusted downwards very quickly. We see the demand growing in the first quarter as we covered during the presentation. And it's very hard to make a prediction, but we think it's going to go to more normalized levels in the course of the year and certainly in the years to come.

[Gerardo Artiach Morenes, IR]

Let's move on to the next question, please.

[Operator]

Next question is coming from Carlos Peixoto from CaixaBank BPI.

[Carlos Peixoto, CaixaBank BPI]

Just a question on cost of risk. So, you mentioned -- first, you've been below your guidance [Technical Difficulty]. So, as I was saying, the cost of risk in the first quarter came below the guidance for the full year, as you already mentioned. I was wondering here what -- if you see your scope for upgrading this guidance, whether you think that the upcoming quarters could be a bit tougher or basically, what type of insights do you have in terms of how vintages have been evolving in overall asset quality indications? And then, the second question, a bit of a follow-up on the NII, very high-teens growth. If you could split it between your expectations for Spain and TSB, I would appreciate it.

[Cesar Gonzalez-Bueno, CEO]

In the cost of risk, I think we mentioned already, both Leo and myself, that the cost of risk at 45 basis points in credit and 57 for [Indiscernible] is slightly below our original expectations for the year, which gives us confidence for the rest of the year. We are seeing no signs of credit deterioration. That doesn't mean that they will happen or not happen in the course of the year, but we are not seeing them in all the events and early indicators, both on retail and in SMEs and even in corporate. So, we are confident that our guidance is achievable, and we are even more comfortable than we were with our guidance, and it could be slightly better.

[Leopoldo Alvear, CFO]

And regarding NII, yes, so the guidance is, as you mentioned, very high teens. And this is going to be driven mainly, obviously, by Spain because of all the repricing that we've mentioned several times. On the asset side, I think the repricing in Spain will be well over 20%. While the evolution of NII in TSB is obviously going to be more [molded] because we already saw quite a lot of it in the last couple of years. So, it's going to be in the region of the mid-single digit.

[Gerardo Artiach Morenes, IR]

Let's please, operator, move on to the next caller.

[Operator]

Next question is coming from Sofie Peterzens from JPMorgan.

[Sofie Peterzens, JPMorgan]

It's Sofie from JPMorgan. So, I was just wondering if you could kind of give details around what Euribor levels you would still meet at the high teen net interest income guidance for 2023. And also, kind of the very high teen net interest income guidance that you now have, what Euribor are you basing that on? Is it the forward curve or is it a lower level than that? And yes, that's it.

[Leopoldo Alvear, CFO]

So we budgeted on the basis of 3% Euribor, so it is below the current curve. It was well below the curve that we saw in February. And now, although the curve has gone down, it is still below. I think this will not print a major difference for -- I mean, it will be positive for certain, all things being equal, this is -- if we reach the deposit beta that we are aiming for in '23. But I think it should have a further impact in 2024 because of the average of the repricing of all the asset side, no, which doesn't happen from 1st of January. As we said, we are only 30% done with the repricing. And therefore, this better Euribor than the 1 that was included in the budget will be positive for '23, but moreover for 2024.

[Gerardo Artiach Morenes, IR]

Let's please move on to the next question.

[Operator]

Next question is coming from Ignacio Cerezo from UBS.

[Ignacio Cerezo, UBS]

I've got three, if I may. The first one is on NII, following up on Leo's comment right now around '24. In Q4, actually, you said that you were expecting NII growing as well in '24. Are you still confident that, that is going to be the case, or do you think there's a bit of front-loading of that growth in '23? Second question is on the buyback of the results of last year, if you have already applied for the ECB authorization and how long can it take? And the third one is, if you can give us a little bit of color on the deposit cost per segment in Spain, breaking it down between retail, corporate and institutional large corporate CIB?

[Leopoldo Alvear, CFO]

Let me start with our view of 2024. Now, I think it's a little bit early, but we are four months closer than what we were in December. I think we are still seeing NII growing in 2024, moreover, because of the rates that is just mentioned. There's a bunch of a variety of reasons why we think this should happen if we meet the deposit beta guidance that we have shared with you. So on the one hand, there's a part of the loan book, which will still reprice next year. We have to take into account that most likely the rates will end up or the end of the year rates will be the highest of the year. And therefore, there is a space for repricing the book in 2024 towards those higher rates.

I think, the ALCO book will have a higher contribution because of the rates also, 40%. Remember, 40% of the book is hedged, and therefore it's floating. So, this shall give us some good news also in '24. If we are able to make the replenishment of the ALCO book, which was basically EUR3 billion, EUR3.5 billion. Also, the contribution of this replenishment will be higher, obviously, in '24 than in '23, because of when we buy it. The structural hedge results in TSB shall also be positive given that the back book of the hedge is around 1.2%, and the five year swap is, I don't know, 3.7, 3.8 something like that in the current standards. And then, the negatives would be the deposit beta, which we believe that it will increase in 2024, obviously, and potentially the wholesale funding -- a little bit of wholesale funding. All in all, we are still positive with 2024.

[Cesar Gonzalez-Bueno, CEO]

In terms of the payback, we have already -- of course, we did so immediately after the announcement of the results or soon after. And the response should come between the end of the second quarter or the beginning of the third quarter, and therefore, we will implement soon after. As per the cost per segment, allow me here to be qualitative. I don't think we would like to disclose with all the color and the detail that insider information. But from a qualitative perspective, and this only makes common sense, so you could have deducted this yourself. Retail is moving slower, although we are there, as we said, offering alternative products. SME is marginally in line with retail; private banking, a little bit more aggressive, a little bit more aggressive, a little conversion into fixed-term deposits, more alternative products; and wholesale, very scattered, some much more demanding, others more scattered. And certainly, the public sector, and there the payments are mainly due in current accounts have been among the most aggressive. And if you allow me, I would leave it at that.

[Leopoldo Alvear, CFO]

In any case, I think it's worth remembering our structure of deposits, because we are mostly retail and as a means, but we have very little of CIB deposits. Now it only represents 2% of our deposit base, and that's where the broadest sensitivity is, if you wish. For the remainder segment of deposits, what we are trying to do is offering alternative products because the world doesn't end with savings. And therefore, we've been able to commercialize over EUR2.5 billion or more of different alternatives to our clients based in mutual funds, guaranteed mutual funds, structured deposits, insurance savings, commercial paper, treasury bills, et cetera, et cetera, et cetera. So that's while still offering profitability and profitable products to our clients, the beta is still managing better than what we expected. And then finally, I think you asked about the buyback process. Yes, we did start it. We started after the submission of our ICAAP therefore, about a month -- basically a month ago -- not even a month ago, a few weeks ago. And everything is going as it did.

[Gerardo Artiach Morenes, IR]

Let's please, operator, move on to the next call.

[Operator]

Next question is coming from Britta Schmidt from Autonomous Research.

[Britta Schmidt, Autonomous Research]

Two questions, please. One is, could you give us a little bit of detail on your commercial real estate exposure? What is the total volume? What are the LTVs? And what's the issue of office and retail, please?And the second one would be a little bit more conceptual. Do you think that there's going to be any impact from the new housing loan rent controls on the Spanish mortgage market?

[Leopoldo Alvear, CFO]

Shall I take the first one? So, our exposure in CRE, it's fairly small, around EUR2.5 billion out of a total loan book of [EUR155 billion]. And of which in the U.S. it's extremely small, 0.3% -- sorry, EUR0.3 billion. The breakdown by sector is split evenly among logistics, industrial, offices, retail, very low exposure to shopping centers and as well as hospitals, [Indiscernible], et cetera, now. So it's a very atomized portfolio, very well distributed in the sectors, nonconcentrated and very little in the U.S., as I mentioned.

[Cesar Gonzalez-Bueno, CEO]

And the impact of the new law. First, it's still not final. Second, it's hard to predict. Certainly, it could have a little bit more impact on the buy to let, but that's not the core of the Spanish market. So, we don't think it will have an impact.

[Gerardo Artiach Morenes, IR]

Let's please move on to the next question.

[Operator]

Next question is coming from Carlos Cobo from Societe Generale.

[Carlos Cobo, Societe Generale]

Just a couple of follow-ups. One is on the payments sale, if you could elaborate on your [Indiscernible] that being net accretive from year 1, how are the maths working? And secondly, if you could elaborate a little bit more on the structural hedge in the U.K. If you basically think on the symptoms of U.K. banks and [stop] everything to floating, and then you have this fixed leg of the swaps, are repricing [Indiscernible] the average duration of the swap, how long does it reprice? And what would be the remaining contribution to NII [Indiscernible]?

[Cesar Gonzalez-Bueno, CEO]

On the -- why is it net accretive, the next transaction is basically because the cost reduction, which is slightly below the EUR100 million will be compensated by the more or less similar amount in fees, which means -- and that's for the first year. So we got the proceeds -- from a financial perspective, we got the proceeds of the sale plus we will be more or less neutral or marginally positive during the first year. And from then on, it should be positive.

But let me remind, and I will always stress it that this is mainly industrial transaction. We have grown to a 20% market share with that segment with the point-of-sale -- in the point-of-sale market. And we think -- and we have done it with worse solutions than the ones we will have next year, thanks to this agreement.

[Leopoldo Alvear, CFO]

And if I may add, I mean, the match between behind being able to make this agreement net accretive in year 1, it's basically driven by the fact that I just mentioned is industrial, and therefore, we're not seeking for a capital upfront. What we're seeking is for higher fees and commissions going forward next year. So, we have -- that's a big part of what we have negotiated. And on the other hand, it's a reduction of costs. Doing this on our own is very expensive when you look at the amortization that you have to put through the P&L because of the machines, if you wish.

[Cesar Gonzalez-Bueno, CEO]

Yes, indeed. Leo, you're absolutely right. And the thing further is that going forward, it would have required level of investments to keep up with the caliber of evolution, technological and others, of this element that -- I mean, we are delighted with the transaction. Makes all the sense in the world.

[Leopoldo Alvear, CFO]

And for the second one, the structural hedge, basically, is a hedge over EUR25 billion of deposits. It's a five year hedge. It's a caterpillar hedge. The back book is around 1.2%, and the front book is basically the five year swap, which today is at 3.6%. In other words, [1/60] of this EUR25 billion of deposits reprice every month, okay, or EUR5 billion per year, and we are changing this 1.2% for these 3.6%. In other words, we shall see good news coming out of this hedge, not only this year, but also in the following -- in the years to come.

[Gerardo Artiach Morenes, IR]

Let's please move on to the next question.

[Operator]

Next question is coming from Fernando Gil de Santivanes from Bestinver Securities.

[Fernando Gil de Santivanes, Bestinver Securities]

A question on costs, please. I think that the cost guidance is EUR3 billion for the year. And I think I heard that you improved a little bit the guidance on cost from growing 4% to 3.5%. So, any comment on that would help a lot. Following up on cost, I still see that on Spain, the cost/income ratio is still at around 48%, which takes a little bit higher compared to peers. I am wondering if you are looking at this and thinking maybe this is an issue for next business plan potentially coming next year? And finally, would be -- well, your targets are pretty much on track or exceeded in this actual business plan, are we going to see an Investor Day or something at the end of this year for the next two, three years, please?

[Cesar Gonzalez-Bueno, CEO]

No, I think what we are showing to ourselves is that despite the fact that we continue to invest in digital solutions, and I think during the presentation, it was more or less clear that we have doubled our investments there or our cashouts there that nevertheless we are maintaining the cost of technology flat. And in all the rest of the costs, I think we are confirming with this guidance that we are giving of 3.5% instead of the 4% that we gave at the beginning of the year that we are being very careful on the cost side, despite this higher investment in development of client solutions. And this is a myriad of things. It's not in one place. It's just being careful everywhere.

The 48% is not bad, we think, at -- in Spanish level. And we hope to continue to increase it or improve, rather to increase it, which would mean to decrease it, I'm sorry, and it will come mainly from low growth on the cost base, which we will continue very focused on, and higher based on the income. And that's where we would expect it to come.

The other question was Investor Day. No Investor Day. No Investor Day, and let me be very clear here. When we did the Investor Day at the beginning of 2022, it was under very special circumstances. The bank had just come out of the expectation of a merger that didn't happen. And I think [Indiscernible] for the good reasons. It had a very, very low market cap. That doesn't mean that the one that we have now is higher that we are satisfied with it, but it's a completely different one. And there was major changes in strategy.

I don't think it is sufficiently visible, but the change in the organizational structure, the change in metrics, the forward-looking in terms of digitalization. As I mentioned before, 50% of our customers are now acquired digitally from zero, two years ago. So, it's a very major change of strategy and we are pursuing that strategy, and we are going to continue pursuing that strategy. There's also no change in the perimeter. We are happy having in our books and in our perimeter TSB. We are happy having Mexico, and we are happy with the structure that we have in all fronts.

And the thing that we also did 2.5 years ago or something like -- no, two years ago, was to establish a forward view of three years. And that made sense at that point in time. It made sense at that point in time because there were, I would say, more doubts about the visibility. There was a new team, and we wanted to share that we saw a clear future for banks [audit]. We were wrong, not by not seeing a clear future, which we continue to see, but by projecting a return on tangible equity of 6%. And as you heard today, we are projecting now 10%. It is true also that the market conditions have improved. It's not only because of a better management of the bank, which I think is also there. So, no, we have no plan. And from now on, we would continue to give guidance as we are doing it lately, which is, with a year of advance during the year, we will fine-tune the guidance that we give for the year. And let me say that the strategy in the stricter sense of the word is to continue executing, and you saw it before in the slides that we are in the process and on our way.

[Leopoldo Alvear, CFO]

If I may add?

[Cesar Gonzalez-Bueno, CEO]

Of course, always.

[Leopoldo Alvear, CFO]

I think on [Indiscernible] was mentioning guidance, we've given you guidance every year end, but also every quarter. So, for example, this quarter, we have revisited a little bit our guidance. And we have made a point that NII would be in the very high teens. Fees and commissions should be around our guidance. This is in the low single-digit decline. Costs will be -- or should be better than what expected at the beginning of the year. So, 3.5% increase instead of 4%. Provisions probably at or better than our guidance in Q1. And therefore, we are seeing that our return on tangible equity, which in Q1 stands at 10%, should be more or less the level for year-end. This is well above our north of 9% guidance that we gave you 1 quarter ago.

I think things have changed a lot in the last couple of years. Now we had a return on tangible equity of 0 and now we have 10. We were not distributing dividends. Now we are accruing 50% of payout. We had a capital CET1 of 12%, now we stand at 12.78 despite accruing 50% of payout. And the valuation of the bank has improved, but we are still trading at 0.5x tangible book value. When I look at these numbers and I take into account this return on tangible of 10%, this payout of 50% and the 0.5x book value, well, we are offering the market a dividend yield in the range of 10%, which I think it's an interesting proposition from my point of view.

[Cesar Gonzalez-Bueno, CEO]

That's used to say to that type of numbers, it could have been worse.

[Leopoldo Alvear, CFO]

And also to emphasize that we are very comfortable with the strategy that we defined it is and the organizational structure. The bank is reacting very well, and it's very aligned and these are, again, intangibles. But we are all aligned behind the main lines of development, which is the strategy that we defined two years ago, and we just want to pursue here.

[Gerardo Artiach Morenes, IR]

I believe we have 1 more question. Operator, could you please give access to the last call of the day.

[Operator]

Next question is coming from Jacques-Henri Gaulard from Kepler Cheuvreux.

[Jacques-Henri Gaulard, Kepler Cheuvreux]

Yes. Jacques-Henri here. Just following up, gentlemen, it would be a shame if you didn't do another Investor Day, considering -- and I was browsing through your presentation, how much things have changed, how much you have evolved, you've disposed of a lot of things. You've partnered with a lot of people. You could consider that you may want to actually reinvest somewhere else. And just, I don't know, try to, I would say, put in stone further progress from indeed your book value, which has already been multiplied by 2.5 and just not be simply another interest rate play. Just challenging you a little bit on that.

[Cesar Gonzalez-Bueno, CEO]

Thank you.

[Gerardo Artiach Morenes, IR]

Thank you very much.