Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2021-Q2

[Gerardo Artiach Morenes]

[Audio Gap][ Cesar Gonzalez-Bueno ]; and our CFO, Leopoldo Alvear, will present the main highlights and details of the commercial and financial performance of the bank in the quarter. The presentation will be followed up by a Q&A session. We have scheduled around 30 minutes for the Q&A session. Let me now hand it over to Cesar Gonzalez-Bueno.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Thank you, Gerardo, and good morning to everyone. Moving to Slide 4, I would like to start by going through the key events of the quarter, which I will explore in more detail during my presentation. The first one is the positive commercial momentum that we are experiencing across all segments with higher volumes across most of the product range in Spain. Secondly, I would like to point out the acceleration of TSB's good performance, posting a net result of GBP 41 million in the quarter. Finally, net profit of the group reached EUR 147 million in the second quarter, with a fully loaded Core Tier Equity 1 ratio standing slightly above 12%. As I said, I will now go through each topic in more detail. Moving on to the evolution of business volumes in Slide 5. Performing loans grew both in Spain and the U.K. as a result of an improving economic environment and also due to the good commercial performance of our teams. Regarding our international businesses, performing loans decreased in the quarter. This is in line with our strategy as it was presented during our Investor Day. We intend to optimize the deployment of capital and deleverage in these geographies. As a matter of fact, this strategy is the rationale supporting the recent agreements we reached to sell BancSabadell d´Andorra to a local player, a transaction that is expected to be closed by year-end. Finally, on the right-hand side of the slide, you can see that customer funds increased in the quarter and year-on-year. This growth was driven by both on-balance and off-balance sheet funds as customers continue to increase their savings and liquidity. In Slide #6, we take a closer look at our commercial performance. Starting with Spain, I would like to highlight that this quarter we recorded the best quarterly mortgage lending performance in Sabadell's history. As you can see on the year-to-date bar chart, mortgages production has recovered and even surpassed pre-COVID levels. This performance demonstrates that the Spanish real estate market has proven to be resilient through the pandemic. Simultaneously, consumer loans grew in the quarter as a result of the gradual economic recovery, although new production remained subdued compared to pre-COVID levels. We have been prudent during the last few quarters, and our appetite for consumer lending will gradually increase as economic recovery consolidates. This positive commercial momentum can also be observed in our new production market shares, which are ahead of our stock market shares, both in mortgages and consumer loans. Moving on to Slide #7. We can observe that new production of protection insurance continues to perform well. Growth here is mainly driven by our good performance in mortgage origination, which drives life insurance growth and by health care insurance following our recent partnership with Sanitas. Regarding mutual funds, we can see that the stock of mutual funds held by our customers shows a positive growth trend as we build from our partnership with Amundi. Our mutual funds market share increased by 9 basis points year-to-date. Moving on to the quarterly performance of Payment Services in Slide 8. It is worth noting that along with the economic recovery and the easing of restriction measures, transaction-related services are recovering and are close to or above pre-COVID levels. However, despite this positive performance, our market share in both cards and point of sale turnover decreased in the quarter. In terms of credit cards, our market share was affected by lower migration to card usage among our customers. And this is because before the pandemic, the use of cards among our customer's base was already higher than the market average, and therefore, their migration from cash to cards has been lower in relative terms. Regarding our retailer payment services at point of sale, the decrease in market share was partially due to our above-average exposure to point-of-sale turnover in the hospitality, restaurants and other tourist-related sectors, which remain subdued. Let's now turn to Business Banking in Slide 9. As you can observe in the upper part of the slide, new lending is normalizing in 2021, although at slightly lower levels than those in 2019. This was somehow expected after the peak in new lending that was reached in 2020 due to the deployment of ICO loans. Our volumes of lending origination are normalizing, but our lending stock keeps growing and our market share is also performing well. We expect business banking lending demand to rise over the coming years, when lower demand for ICO loans will be partially offset by higher working capital funding and standard loans. This should be significantly boosted by the deployment of the next-generation European Union Fund over the next few years, which will increase both private investment and bank financing as we show on Slide #10. The next-generation EU Fund is the latest response from the European Union to the COVID-19 outbreak, and we think it will be a game-changer for European economies. However, the impact of the next-generation EU Fund in each member state is different. There is a big disproportion in the share of funds to be received by each country. Spain will receive EUR 140 billion, which account for almost 19% of the total funds, while, for example, Germany will receive EUR 27 billion less than 4% of the total funds. From this point of view, Spain will benefit more from the next EU funds than most other countries. On top of the deployment of EUR 140 billion for the next-generation EU funds in Spain over the '21-'26 period, we expect over EUR 320 billion of private investment. EUR 120 billion of those will be financed by the banking sector. These are obviously high figures. So a key element is the ability of the authorities to make sure that the available funds are mobilized to companies and projects properly and in an effective manner. We offer our reach and knowledge of the Spanish SMEs and corporates to the authorities in order to help in this regard. In summary, the impact of the next-generation EU funds in the Spanish companies will be sizable. Since Banco Sabadell is a relevant banking partner for Spanish SMEs and corporates, we believe we are well positioned to benefit from these funds. Now let's move to Slide 11. TSB, our British franchise continues to display very good commercial momentum. In fact, TSB recorded its best-ever mortgage lending origination in June, which was partially due to the stamp duty cut-off in June. I would also like to highlight that even though TSB is relatively small compared to its peers, the British franchise keeps gaining market share. And as you can see on the slide, the market share of the new lending stands at 3%, which is clearly higher than the stock. As you can see at the bottom of the slide, I would like to mention that TSB's restructuring plan is on track to meet our 2023 cost base target of GBP 730 million on a stand-alone basis. In Slide 12, looking at TSB's financials in greater detail, our British franchise showed a remarkable performance across all P&L lines, as you can see on the slide. If we look at the evolution of TSB's results before impairments and provisions, performance is improving significantly. Its core results increased from GBP 24 million in the first quarter to GBP 44 million in Q2. Furthermore, the improved macroeconomic scenario in the U.K. contributed to modest provisions in the quarter, which once again indicates the low-risk profile of the franchise. As a result, TSB's profit before taxes increased from GBP 13 million in Q1 to GBP 30 million in Q2. Finally, in Slide 13, I would like to summarize the good financial performance that Leo will explain in more detail in a few minutes. First of all, core banking revenue continued to rise this quarter, supported by volume growth, both in Spain and TSB, coupled with a strong evolution of fees. In terms of costs, the efficiency plans that we have undertaken in previous quarters are yielding positive results and cost savings are starting to come through. The evolution of our core results is very positive, as a consequence of the good performance in core banking revenues and costs. Provisions maintained a positive trend, and the quarterly net profit of the group stands at EUR 147 million. Furthermore, we have a comfortable solvency position with a fully loaded Core Equity Tier 1 ratio of 12% and our return on tangible equity reached 3.9% with a significant increase quarter-on-quarter. At this point, I would like to announce that our Board has the intention of establishing a 30% cash payout ratio for our 2021 annual results after completing the ongoing supervisory dialogue. And with this, I will hand over to Leo, which will discuss our financial results. Thank you.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Thank you, Cesar, and good morning, everyone. Moving on to the financial results, I would like to start by going through our quarter and half year's P&L, which we believe constitute a solid set of results and perhaps more importantly, are well within our guidance in every line. We can see positive evolution on all main lines, as I just mentioned, with a significant improvement of over 17% in the quarter in the core results due to, well, as we will review later, a good evolution in all lines. This is increases in NII and fees, while reductions in costs. It is also worth mentioning that due to the good evolution of the asset quality, the cost of risk decreases in the quarter. As Cesar mentioned before, I believe it is important to highlight also that TSB constitutes -- continues to improve its profitability significantly, making a positive contribution to the group of EUR 36 million in this Q2 coming from EUR 2 million in the first quarter. These numbers include a rise in the U.K.'s corporate tax rate, where TSB recorded a tax reduction of EUR 23 million due to a revaluation of deferred tax assets in the quarter. However, this impact is neutral on capital. All in all, we have recorded a net profit of EUR 147 million at group level, while the net profit for the first half of the year reached EUR 220 million. These quarterly results include, as ever Q2, the single resolution fund payment, which amounted to EUR 88 million this time, recorded, as always, in the other income and expense line. And also the capital gain on the final disposal, this is the closing, of our depository business amounting to EUR 83 million. We shall now go through the different items of the P&L in more detail. Starting on Slide 16. Group NII shows a positive evolution in the quarter with an increase of 2.3% versus Q1. On the top right-hand side, you can see the bridge of NII evolution in the quarter. The main positive impacts have been the additional 1-day calendar; the higher contribution of TLTRO III, as we drew an additional EUR 5 billion at the end of March; lower wholesale funding costs, mainly due to expenses sub-debt called in May at TSB; as well as the full accrual in the quarter of the savings on covered bonds that matured in March. Regarding the loan book, the overall additional contribution of the quarter on NII has been mainly flattish, and that is explained by minus EUR 13 million related to yields, as a result of negative repricing of EURIBOR and lower back book yields, which has been offset by EUR 9 million due to higher volumes and EUR 3 million due to the appreciation of the sterling. All in all, notwithstanding a decrease of 4 basis points in the customer spread, the group's NII increased by EUR 19 million in the quarter. Now despite the fact that H1's NII it's 1.1% below 2020's, driven mainly by the minus 5.8% decrease of Q1 '21 versus Q1 '20, NII for this quarter is already 3.9% up when compared to Q2 2020. In this context and as explained in our Investor Day, we believe that NII will evolve positively year-on-year, driven by lower wholesale and funding costs, higher volumes and an increasing contribution from corporate deposits, all tailwinds to the NII, that shall offset the lower yields, which will be the headwinds to the same line. Let's move on to fees. This quarter fees has increased by more than 7%, which implies a remarkable acceleration. In H1, group fees grew north of 5%, very much in line with our guidance of mid-single-digit growth for the year. The growth has been mainly driven by service fees. This evolution is explained by higher economic activity in the quarter and also by the implementation of new commercial strategies. In this respect, we have raised tariffs and conditions for nonlinked customers in order to increase their loyalty or share of wallet. Growing lending volumes also have a reflection on fees, obviously, on the credit and contingent risk line, which is growing at 4% on a quarterly basis and almost at 5% rate on a yearly basis. So pretty good news on fees altogether. Moving on to Slide 18. Total costs declined Q-on-Q by minus 3.3% and by minus 3.2% in the year, as the cost savings from the efficiency plan in Spain begin to come through this quarter. Thanks to this lower cost base, we have improved the efficiency ratios. For instance, we have reduced the ratio of total group costs as a percentage of business volumes from 0.95% to 0.86%, a reduction of 9 basis points year-on-year, bringing it closer in line with their peers. As you can see on the left-hand side of the slide, the ongoing efficiency plan at TSB is also positively contributing to the reduction of group costs. In Slide 19, we take a look at the core results. This is the recurrent margin or NII plus fees minus costs. This quarter, the group core results have increased by more than 17% and by more than 8% in the quarter -- in the year, sorry. This positive trend is driven by wider [ jaws ] as we are seeing both NII and fees growing, while, at the same time, costs are decreasing, as savings from the [ fishing ] plan materialize. On the top right-hand side, you can see the bridge of the core results evolution in the quarter. As explained before, the increase of this metric is supported by a positive contribution from all lines almost distributed in thirds. We can see EUR 19 million coming from NII, EUR 26 million coming from fees and finally, EUR 25 million coming from cost savings. In Slide 20, we see that the group's credit cost of risk for the first half of the year stands at 53 basis points. This is halfway between the 32 basis points for 2019 and the 86 basis points reported for 2020, as it was guided for the year. The group's total cost of risk, which includes all the provisions, reached 74 basis points for H1, a level which is also halfway between the 50 basis points for 2019 and the 116 basis points reported for 2020. On a quarterly basis, group credit provisions were down by roughly EUR 120 million, mainly the result of lower credit provisions ex-TSB due to the lower NPL entries in this quarter. It is also important to note that TSB's provisions were positively impacted in the quarter by a better macroeconomic outlook for the U.K. Looking at the top right-hand side, you will see the breakdown of total provisions, which amounted to EUR 267 million in the quarter. Starting from the left, we recognized EUR 160 million of loan loss provisions, EUR 32 million for charges on foreclosed assets, whereas costs related to the management of NPAs were booked at EUR 45 million. And finally, EUR 30 million were recognized for other provisions. This confirms the downward trend in provisions that we expect for the rest of the year, which will allow us to end the year with a total cost of risk in line with the guidance given in May at the Investors Day. This is an expected level between the ones reported in 2019 and in 2020. In the following section of the presentation, we will review asset quality dynamics as well as liquidity and solvency. Beginning with the loan portfolio benefiting from the payment holidays in Spain, it is worth mentioning that 83% has already expired, up from 40% at the end of Q1. Also, more than 40% had expired with more than 90 days ago. All in all, we believe these numbers can be a good proxy to determine the potential performance of this portfolio in the future. Of expired permanent holidays, amounting EUR 2.7 billion, 12% are recorded in Stage 3, down from the 16% that we had for this same portfolio at the end of Q1. Moreover, 85% of these are considered and likely to pay. This is they're not 90 days past due. In any case, this overall Stage 3 exposure accounts for less than 1% of the total mortgage and consumer book. In terms of ICO-guaranteed loans, to date, we've granted over EUR 13.2 billion, out of which EUR 9 billion have been drawn, from which the state provides with a guarantee of over 75% on average. Maybe worth mentioning that around 40% of the balances drawn have had their maturities or grace periods extended. In any case, the vast majority of the existing ICO loans will mature beyond 2023. Finally, in Q2, we granted north of EUR 700 million in the course of our business. In Slide 23, you can see that NPLs decreased by EUR 133 million in the quarter. As a result, the NPL ratio decreased by 13 basis points Q-on-Q at group level towards a 3.58% ratio, while the total coverage on NPLs remained stable at 56%. Looking at the breakdown of the NPL inflows, the NPL entries have been lower this quarter, as we had some reclassifications in TSB for EUR 190 million in Q1, as you might remember. Regarding exposures by stages and coverage, we've seen a reasonably stable quarter, therefore, with no deterioration in asset quality. Finally, it is worth mentioning that half of our current NPLs are classified as unlikely to pay. In Slide 24, on the left-hand side, you can see the progressive reduction of foreclosed assets, while our coverage ratio remained stable at 37%. Moreover, it is important to highlight that 95% of our foreclosed assets are finished buildings. Consequently, adding these foreclosed assets reduction to the decrease in NPLs, the NPA exposure has decreased more than EUR 450 million or 6% on a year-on-year basis, while the coverage ratio has improved from 52% to 53%. In the bottom part of the slide, you can see that the gross NPA ratio stands at 4.5%. While in net terms, this is after provisions. It stands at 2.1%. Both ratios have improved year-on-year and have remained stable quarter-on-quarter. On Slide 25, we can see that the group ended the quarter with a liquidity position at an all high time. This is reflected in an LCR of 220% and NSFR of 136% as well as EUR 52 billion of high-quality liquid assets, while the loan-to-depo ratio ended the quarter at 98%. After drawing EUR 5 billion from the TLTRO-III in March, we have EUR 32 billion outstanding in this facility. Once again, we confirm that we are fully confident that we will meet the TLTRO-III net lending targets. In fact, as we speak right now, we are north of EUR 1.5 billion above it. In terms of the TFS, we currently have GBP 1.9 billion outstanding and GBP 0 point billion in TFSME facilities. Moving on to capital. On the following slide, we show the evolution of the group CET1 ratio in the last quarter. The fully loaded CET1 stands at 12%, having increased by 4 basis points Q-on-Q, as the organic capital generation was partially offset by some RWA inflation, leaving -- led by loan increases. The main positive impact is the organic capital generation, which added 7 basis points to the ratio. It is worth mentioning that this is already net from the accrual of the 30% cash payout dividend that Cesar mentioned before. On top of this, we had fair value adjustments from the fixed income portfolio that added 2 basis points, and RWA inflation driven by volume growth in the quarter, which reduced the ratio by 5 basis points. After adding 31 basis points from IFRS 9 transitional adjustment, the phase-in CET1 ratio stands at 12.31%. All these elements together with the Tier 2 bonds and AT1s bring our total fully loaded capital ratio to 16.6%. And finally, our MDA buffer, which is becoming more and more important for benchmarking purposes, in my opinion, stands at a solid 379 basis points with an increase of 13 basis points in the quarter. Finally, regarding our MREL requirement, it is worth highlighting that we are compliant with the final requirements for 2024 that are now based, as you know, on both risk-weighted assets and leverage ratio exposure. Additionally, this quarter, we issued EUR 500 million of a green senior bond preferred in June with a 0.75 coupon and a maturity of 7 years. And with this, I will hand over to Cesar, who will conclude our presentation today.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Thank you, Leo. To finish our results presentation today, I would like to highlight that we are on track to meet our strategic plan year-end targets. Our net interest income grew by 2.3% in the quarter, supported by solid volumes growth. Fees and commissions grew by 7.7% in the quarter as the economic recovery gains traction. In both cases, the growth when compared with the second quarter of 2020 was very significant, showing the severity of the impacts in 2020, but also the accelerating speed of recovery in 2021. Credit cost of risk stands at 53 basis points, well below the 86 basis points we had in 2020. And our fully loaded Core Equity Tier 1 ratio improves a bit in the quarter and stands at 12%. Finally, I would like to state once again that the Board has the intention of establishing a cash payout ratio for 2021 annual results after completing the ongoing supervisory dialogue. And with that, I will hand over to Gerardo for the Q&A section. Thank you.

[Gerardo Artiach Morenes]

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

[Operator]

Your first question comes from the line of Ignacio Ulargui from Exane BNP Paribas.

[Ignacio Ulargui, Analyst]

Just have 2 questions. One is on NII. I mean looking to the numbers that you have posted today based on the target of low single-digit growth, I mean what are the main drivers that we should see in the second half to meet that guidance? I mean, if I calculate it correctly, I'm assuming a 1% growth in 2021 versus 2020, you should grow your second half NII by 4% versus the first half. Just wanted to see a bit what are the main drivers of that growth? And second question, again, on guidance for fees. I mean, you have posted a very strong result in 2Q, growing 13.6% quarter-on-quarter. I mean, why are you are not upgrading a bit more the guidance? I mean, it looks like it's going to be an easy target in the quarter. Maybe just if you could give us some color on what are the impacts of the businesses that are being disposed, if you have good impact a bit into the second half? Just to get a bit of a sense why you have not upgraded a bit guidance today.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

I will take the one on the fees, leave the NII and the disposal of businesses to Leo. And -- but I will start with the guidance. I think there's always uncertainty, and I think we've given a guidance that was solid demanding, but at the same time, realizable in May. And therefore, I think we should sustain the course. I think our intention is to deliver quarter-on-quarter. And I don't think you should anticipate early revisions of our guidance, certainly not as early as less than a quarter after the announcement. In terms of the fees, yes, indeed, the performance was good in the quarter. And we are optimistic here that the trend will continue to be positive. Now as activity picks up, our service fees should also behave accordingly. Our engagement strategy is working well. We want customers that have a significant share of wallet with us. And therefore, we are increasing the current account maintenance fees and other elements to those that are less engaged. Also, we should see some tailwinds from mutual funds because, well, the relationship with Amundi is good, the motivation of the branch network is high because they feel they have a product to serve and we see overall that the trend in fees is positive, and we are optimistic about the guidance that we gave initially. This I pass the NII question and the disposals to Leo.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Sure. Well, in any case, it's very good to have these kind of discussions, right, Cesar. Thank you very much sorry, Ignacio for the question.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Yes. The opposite would be much why we're not downgrading our guidance?

[Leopoldo Alvear Trenor, Chief Financial Officer]

No, absolutely. But it's true that we just guided 1.5 months ago, and we need to deliver. And when we explained the plan, as I said at the end of May, we wanted to highlight that this was not a backloaded plan and that we wanted to deliver from day 1. This is from Q2, and I think we have managed to do so. So we are happy to haven't been able to do that. But now we need to keep on delivering quarter-on-quarter. So going to your question on NII, I think there's a number of things that are going to have an impact in Q2. So starting by the negative ones, if you wish. What we have is that EURIBOR will still be a drag in the coming 2 quarters because it is still at -- especially, I would say, in the third Q because in the fourth Q, EURIBOR it remains where it is, we'll probably be at the same level as it was last year, but not in Q3. Also, we will have a little bit less of contribution coming from the ALCO book as we execute the forward sales that we explained at the Strategic Day that are driven to fund the efficiency plan, the new efficiency plan. And all of that will be, in our opinion, more than offset by basically increasing volumes, where we're expecting positive volumes throughout the second half of the year, particularly in the U.K. as we are seeing, and they're coming through. So we are confident that we should be able to keep this rhythm. Also, we will have 1 -- this is very technical, but 1 more day per quarter in both the third and the fourth quarter. So that does increase the numbers, as you know. Fees related to lending activity and overdrafts are growing, and we believe that this will be the trend also for the second half. And also the variable maintenance fees where we're charging fees to corporates and SMEs related to their excess of liquidity in our current accounts. And this -- well, we started from scratch at the beginning of the year, and we are growing volumes, as we speak, and we expect to increase those volumes materially in the second half of this year. So with the charges that we're doing on this, this also should be contributing to NII. As per the impact of the business disposals, I don't think we're going to see anything material. As we have been explaining on each and every transaction, the impacts are not material in terms of income. And certainly for 2021, they will be very residual because it will come through basically at the end of the year.

[Operator]

Your next question comes from the line of Carlos Peixoto from CaixaBank.

[Carlos Joaquim Peixoto, Analyst]

Two questions from my side as well. The first one would be on the provisioning guidance. So you mentioned the 32 to 86 basis points guidance for the year, which is a quite wide range, I would say so basically, that means that either the second half could be better than the first half or it could be the other way around. I was wondering if you wanted to narrow in a bit on that and then tell us a bit what expectations do you have for the second half of the year? And then on the capital front, I was wondering if you could give us some color on potential regulatory headwinds as well as potential positive impacts coming from disposals that you may have? And also, if you could give a bit of color on the 7 bps impact from retained earnings because I was running the numbers here and even considering the adjustment in the payout ratio? And also assuming that the tax relief [indiscernible] coming from the U.K. is not eligible for Common Equity Tier 1, I would still be getting to a higher impact in terms of retained earnings impact on capital, if you could give us some color on that as well I would appreciate it.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Sorry, I didn't quite get the last part regarding capital. You mentioned 7 basis points, but I didn't get what you were referring to?

[Carlos Joaquim Peixoto, Analyst]

Okay. So basically, so in the slide, you're mentioning a 7 basis points impact on the capital ratio in the quarter from organic capital generation. What I was running here the numbers with retained earnings and even considering the 30% payout level that you're accruing for and also assuming that the tax effect in the U.K. is not eligible for Common Equity Tier 1, I was actually getting to something more in the area of 12 basis points in terms of potential impacts from earnings. So I was wondering what are the pieces that I would be missing here?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Okay. Thank you.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Shall I go for both?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Yes.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Okay. So on the provisioning guidance, well, I think in general terms, what we're seeing is that provisions are developing -- well, in general terms, asset quality, it's developing better than what we expected at the beginning of the year. I think this has been a trend for the last few quarters in general for the sector and specifically for the bank. We discussed this at length at both Q1 and the strategic day. The macro scenario is evolving positively. And we've seen that in Q2. In any case, I think it's still too soon to have the full picture because as I mentioned before, well, so far, is good, but let's see how, for example, these 40% of moratorias, which have expired this quarter evolve in the coming months. It looks like they're going to evolve in a reasonable way, but we need a little bit more time. So we're still committed to the target and the guidance that we mentioned to be between 2020 and 2019, which is basically where we are in the first half of the year. So I would assume that all things being equal, which never are, we should be more or less in these terms throughout the second half of the year also. As per capital, in terms of regulatory headwinds, I think we explained this also in Q1 and Strategic Day. There's not much. Basically, we are expecting a little bit of an impact in -- coming out of the EBA guidelines in 2022, but that's roughly 15 basis points, so pretty immaterial. And then from 2023 onwards, if we are to respect the current calendar with Basel IV, we will have an impact, but it's still a little bit uncertain because it's not closed and for Spanish banks and specifically for Sabadell, the issue is about the operational risk, as you all know. But in any case, those are included in our numbers and our guidance and our capital plan. and our focus, our aim is to remain always above 12% CET1 fully loaded, including all the capital -- regulatory capital headwinds. So this means that the guidance that we gave for 2023, which was to remain above 12% and above 350 basis points in terms of MDA buffer, include all the capital headwinds -- regulatory capital headwinds that we may be seeing, and we don't expect anything for 2021, okay? And as per the 7 basis points on organic growth, that's basically the retained earnings, and that includes what we've done on the year. And of course, as I explained before, it does not include those EUR 23 million coming of the revaluation of the deferred tax assets in TSB. Why? Because basically, you have an increase in P&L, of course, less income tax. So your P&L goes up, your net profit goes up. But on the other hand, you have more deferred tax assets, which are deducted to the capital. That's why I mentioned before that the impact is neutral on capital.

[Operator]

Your next question comes from the line of Mario Ropero from Bestinver Securities.

[Mario Ropero]

Just a few follow-up questions on the NII. On consumer activity is -- I mean, it's very obvious that it's recovering very strongly. But I would like to know a little bit more about pricing? Could you please tell us about the pricing and how this compares to the back book levels? Also, you mentioned higher contribution from corporate deposits in the second half of the year. Could you please tell us how much of the corporate SME book is being subject to this kind of fees for the time being or as of June? And then finally, if you could give us an update on the contribution to NII from TLTROs?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

So the NII or the interest rate in the back book is marginally higher than the one of the front book. The one of the front book of Q2 is in line with Q1. This, of course, is driven, as was mentioned before by Leo, to a large extent by the evolution of the EURIBOR. In terms of the amount that is in the corporate world, the deposits that are being charged it's around EUR 7.7 billion at a rate of around 40 basis points, and we see that figure growing over time.

[Leopoldo Alvear Trenor, Chief Financial Officer]

That's right.

[Gerardo Artiach Morenes]

I think we did have another question on TLTRO, could it be?

[Leopoldo Alvear Trenor, Chief Financial Officer]

Yes. Sorry, yes. On TLTRO, we have EUR 32 billion, which is maximum allotted. This shall have a contribution of about EUR 150 million in the whole year in 2021.

[Operator]

Your next question comes from the line of Stefan Nedialkov from Citigroup.

[Stefan Rosenov Nedialkov, Director]

It's Stefan from Citi. A couple of questions on my side. When you look at the next-gen fund, this is obviously an interesting opportunity for you. I appreciate that it's still a little bit further out. But could you give us some color? Is that new lending going to mirror your existing book in terms of split by industries? And what kind of margins are we looking at here compared to the existing book? The second question is on consumer lending. This is one area where you're quite significantly below your natural market share. Do you see this as an opportunity or more as a risk going forward?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Yes. On the EU funds, I think that, as you very well mentioned, Stefan, it's a bit early. But we are going to give it a lot of focus, and we're going to verticalize by industry sector and provide all our expertise to help our customers to access to those funds, and we're going to support them not only in the knowledge and accessing of those funds, but also in line, supporting them with financing. So we are quite optimistic. I think in consumer lending, I think we see an opportunity. I think we are below our levels of market share. We are working very actively on improving that as in line with the strategic plan. It's one of the lines that has focus and that I think we will be, over time, growing our market share in this area in line with our market share of clients. So -- and yes, I think there's something positive in the medium term to be expected from there.

[Stefan Rosenov Nedialkov, Director]

So more of a medium-term opportunity for you. If I can just follow up on the next-gen, again, very uncertain right now, but would you expect margins to be below or above your existing SME and corporate book?

[Leopoldo Alvear Trenor, Chief Financial Officer]

We don't have any expectation. We don't have any reason to believe that they would be higher or lower.

[Operator]

Your next question comes from the line of Alvaro Serrano from Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

I've got 2 questions on asset spreads. First of all, on kind of a follow-up, but not exactly the same to Stefan's question on corporate asset spreads. I mean, you're growing -- it looks like you're growing your loan book, but if we look at the system level, corporate loans are now negative year-on-year. And as we approach the December deadline where the benchmark to account for TLTRO bonus coupon is going to be sort of measured. Do you see there's a risk that corporate spreads start to come down? I don't know if you can sort of share your thoughts here on this risk? And what are you seeing at the moment in Q2 and anything so far in Q3? And then the second question is on TSB on mortgage spreads there. I'm sure you haven't had time to see it, but the guidance from Lloyds this morning, although the margin is expected to be stable, they are calling for margins in the total mortgage book to come down in the second half, mainly SCR, the fixed rate portion is stable, but the clearly margins and new business is getting more difficult. So maybe you can share what you're underwriting at, at the moment versus what's rolling over and what your expectations for mortgage spreads in the U.K. are?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Yes. I'll let afterwards Leo to complete. But right now, in terms of -- for Sabadell, in terms of volumes versus the TLTRO targets, we are EUR 1.5 billion above, and we expect that there will be a general growth in the market. So we don't anticipate a major pressure on margins, but the future is always harder to predict. But at this point in time, we are confident both in reaching the level and that they shouldn't have a tremendous impact. The mortgage in the U.K. and the pricing, and the margins are healthy, the growth is very strong at the current point in time. Of course, there have been regulatory, the tax break, which is ending in June might have an impact on the demand. And we might see some pressure, but we don't anticipate anything significant. It could happen, but we are not anticipating in our projections a major reduction in margins.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Sure. If I may add, if you wish, regarding the businesses in Spain, basically, what we're seeing is that the spreads in the quarter, if anything, they have gone slightly up, not materially, but up, not down. I believe that as we have this position regarding the TLTRO net lending, this positive position, I think this is more -- this must have been more or less the case for the rest of the market because we're not seeing any kind of pressure. Well, it's always, as Cesar mentioned, very difficult to predict what's going to happen. But so far in Q2, we haven't seen this kind of movement. If anything, the spreads are slightly going up or are reasonably stable, if you wish, but certainly not going down. And as per your question regarding TSB, well, in our case, what we've seen is pretty stable spreads all through the quarter. We are lending at around 220 basis points. This was the case for Q1, and this has been the case for Q2. In the future, we will see. But as we've seen in the numbers, the generation -- the origination of mortgages has been pretty solid in terms of volumes, almost as much as Q1, which was all-time record. Actually, June was all-time record. Very, very close in terms of volumes and the same spreads. So we haven't seen that kind of pressure yet. But of course, this is something that may happen in the future.

[Operator]

Your next question comes from the line of Marta Sánchez Romero from Bank of America.

[Marta Sánchez Romero, Director and Analyst]

Got a couple of questions. The first one is that whether you have now a better sense of the restructuring costs that you will be booking in order to achieve the EUR 100 million cost savings you announced on the Investor Day? The second question is that in euro terms, what's the total level of impairments you expect for this year? Because I still struggle to reconcile your cost of risk definition a bit. And then for TSB, what's the volume of write-backs we've seen in the quarter? And where do you see the underlying cost of risk?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

I'll take the cost one, and I'll leave you the impairment one, Leo...

[Leopoldo Alvear Trenor, Chief Financial Officer]

The easy ones, as always, yes.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

That's my way of doing. So in terms of costs, we have, at this point in time, no news versus what we shared in the previous quarter and in the Strategy Day. So the next phase of efficiency plan is to begin next quarter. It will be fully funded with ALCO portfolio capital gains. The savings of EUR 100 million per annum will come from 2Q '22 onwards. And that's basically it for the restructuring. I would like to add that we have, from a governance perspective, and this is no guidance, but from a governance perspective, we have created a unit to manage costs directly and exclusively and across the board that will report directly to me and that will review in full all the costs of the bank, and I insist this governance, not any type of backdoor with numbers initiative at this point in time. And that will also, for example, address many of the elements of the new budget from 0 cost basing budgeting perspective. So no news on the efficiency plan, some news on the governance and no further guidance at this point in time.

[Leopoldo Alvear Trenor, Chief Financial Officer]

And regarding cost of risk. Let me start by -- with TSB, if you wish, which is easier somehow. We've seen a release of EUR 12 million in the quarter, okay? The -- what we expect out of the second half is that if nothing breaks down, which doesn't look like, we probably may be seeing a slightly smaller cost of risk in euros at TSB in the second half of the year compared to the first half of the year, but not radically different, if you wish. But probably it looks good, looks good. No, I'm not expecting further -- or material releases, but I think the cost of risk will remain low. So the second half of the year may be a little bit smaller than the first half of the year for TSB. Now for the rest of the business, that's a little bit more difficult. But let me try to explain, as you mentioned, the kind of numbers that we disclosed and the guidance. So I think we're -- or at least we're trying to be quite transparent in this regard. And that's why we are basically disclosing 2 kind of numbers. So the first one, it's the credit cost of risk that is exclusively the number -- the amount of provisions on our loan book, if you wish. That for the first half of the year amounted to 52 basis points, okay? These for 2019 was around 30 basis points; for 2020, it was around 86 basis points, okay? So we are in the middle of basically the 2 previous years. And well, as I tried to guide before, I think this could be a number that we would be aiming for at year-end, all right? Now I can be more precise because there's always bumps in the road and better achievements sometimes. As I said, the asset quality evolution looks reasonable given the context. We are ahead of schedule and ahead of budget in terms of the NPAs reductions. So the macro is showing well, but let's -- it's a little bit -- I'm sorry, Marta, but it's a little bit soon to be more precise. I really want to see what happens with this payment holiday -- I mean, with the moratory portfolio, which has already expired 80%, but let's give you a few months. Things are going well in that regard. But I think we need a little bit more time. In any case, I think if you ask me now, I am more confident and more optimistic than I was at the beginning of the year, okay? Because I think the macro is evolving in the right direction. And then the second number that we disclosed and we guide is the total cost of risk. And this includes all the provisions that we do on our balance sheet, including the loans, including the foreclosed assets, including the NPA management, which we show on the slide or including other provisions, which are mainly due to litigation provisions. And that number amounts to -- goes up from 53 basis points to 74 basis points, okay, in the first half of the year. And again, it's more or less in the middle of 50 basis points for 2019 and around 115 basis points for 2020. And again, as I mentioned for the credit cost of risk, I believe, well, this is a number that could be a good number for year-end. But we cannot be more precise in this regard because it's very difficult, given the context. But in general, the message I'd like to convey is that things are a little bit better than what we expected. The contract is going towards the right direction in terms of asset quality. And well, the numbers that we made in H1, I think there could be more or less the numbers for -- give us some range, please, but more or less the numbers for year-end.

[Operator]

Your next question comes from the line of Britta Schmidt from Autonomous Research.

[Britta Schmidt, Senior Analyst of Spanish & Italian Banks]

I've got 2 questions, please. The first 1 is whether you could share with us any insight on the asset quality trends in sensitive sectors outside of moratoria or do you still expect 6% NPLs that you guided to for next year at the Investor Day? And maybe you can also provide some commentary regarding commercial real estate, which seems to be a focus area for the Bank of Spain? My second question is regarding the stress test. I know that you've been through the stress test process, what is your assessment of the quality of the exercise? Can you provide any sort of color on the discussions that you've had and expectations of any implications from the disclosure on Friday?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Thank you so much. I'll take the stress test and leave you the easy one.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Sure.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

So in terms of the quality of the stress test, I think -- or any results related to Banco Sabadell, I think I'm not -- it's not appropriate to make any comments at this point in time given the fact that they will be published tomorrow. We all know that it has a very specific methodology. It's quite static. It has some elements of assumptions that are very strong, but those are all known issues and my comments don't carry any major comment. The only thing I would like to say here in anticipation of any further results is that the reflection that both the Board and the dialogue with the supervisor has taken on around dividends has included all the necessary elements. It has been thorough and well thought-out decision to start this dividend payout of 30%. It has included the current capital ratio, the forecast on organic capital generation in the upcoming years, the MDA buffers and their projections, and of course, also the stress test. And -- but as I said before, we're not qualified to make any qualitative comments or quantitative comments on the stress test that will be published tomorrow.

[Leopoldo Alvear Trenor, Chief Financial Officer]

And regarding asset quality, well, we still have the view that the peak of NPLs should happen in Spain in 2022. Basically, we still have the bulk of payment holidays of the ICO loans to mature between this year and the following, depending on whether they ask for extension, as I mentioned before. And also the furlough, which should expire on September. Although the furlough now it's not, in my opinion, so material, given that it included around up to north of 4 million people at the beginning of the crisis, and now it's around -- it's down to around 350,000 people. So the trends are good. I think as we've been explaining both in Q1, at the Strategic Day and today, things seem to go in the right direction. We have not been surprised by any negative movement, if you wish. And what we've seen so far in the real economy, it's pretty good as we try share with you, both in terms of commercial activity and certainly in terms of asset quality evolution. And we haven't seen anything on -- I think you mentioned specifically commercial real estate. We haven't seen any particular movement there that could raise any worries from our side. So no -- nothing particular there. I think the overall division is similar to what we had a couple of months ago. We're not seeing the peak this year. As a matter of fact, as you've seen, NPLs are coming down still or were -- or came down in Q2. And the peak should happen next year, in my opinion. And the level of that peak is still a little bit uncertain because it will depend very much on the evolution of the ICO loans but well, as I said, so far, reasonably so good.

[Gerardo Artiach Morenes]

Thank you, Britta. We're getting close to the time that we scheduled for the Q&A session. So we'll give access to 1 last call, if you don't mind.

[Operator]

Your last question comes from the line of Carlos Cobo Catena from Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

Two final questions. One is a little bit of detail on the 7 basis point capital impact from the RWA inflation. Is that driven by currency effect in the U.K.? Because when I just rework out the last quarter NPA ratios with Q2 RWAs, I only get a 2 basis point impact. So I was wondering if you could explain how you reached those 7 basis points in liberty of detail? And secondly, this is a question that we'll probably continue to ask you. But if you could provide a little bit of more color on the ECO loans portfolio, what is the total exposure to those corporates, not only the ECO loans, the expected default ratio that you anticipate in that book? And how do you expect NPL formation should work in general in that portfolio? And also, sorry, just to conclude, what's the percentage of that book that has been refinanced, so extended the grace period and the maturity?

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

So I'll leave the questions to Leo. I just wanted to mention because I'm especially proud of it that we have managed to increase EUR 5.5 billion in performing loans while keeping our Core Tier 1 stable. So this in terms of capital management seems to indicate that we are having much more discipline as per the intentions that were disclosed during the strategic day of having a more capital-efficient allocation. And Leo, please.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Sure. So basically, the RWA inflation had an impact of 5 basis points on the quarterly evolution of the CET1. So that's around 0.4% Q-on-Q, if you wish. While we had a loan growth in the quarter, which was about 1.5%. In any case, there is a very small impact of around -- well, a very small impact of about 2 basis points in this minus 5 which is driven by the implementation of the counter-party risk. Okay? So there is a one small -- I didn't mention because it was completely material but it is within this 5 basis points. Okay? As per the ICO loans what we have is that what we showed the EUR 13.2 billion granted of which EUR 9 billion have been drawn. As we mentioned, 40% of this amounts -- 25% of the contracts and 40% of the amount has extended either maturity or grace period, well, normally it's both I would say about 33% is both and the rest is just maturity extension. The maturities for the portfolio are very long term, they start basically in 2023 about 33% of the portfolio expires in 2023 as of today, they may extend. And then it's onwards okay, over -- I mean from 2024 onwards it represents around 65% of the portfolio.And right now, almost everything is still performing so it's very little at Stage 3 recognition yet because well, they are paying so there is no issues now. We don't have the full visibility, as we mentioned. And I think as I tried to explain before, we need to wait a little bit for this towards -- I mean, for the coming months to see how this book may evolve. Thank you, Carlos.

[Cesar Gonzalez-Bueno Mayer Wittgenstein]

Thank you very much. I think I would like to wish everybody a good summer.

[Leopoldo Alvear Trenor, Chief Financial Officer]

Yes. Me too.

[Gerardo Artiach Morenes]

Thank you all for your questions. We now wrap up the Q&A session. But as you know, the full IR team is available for any further questions that could not be answered or that may raise. Once again, thank you all for your participation, and thank you for joining us today, and have a good summer.