Banco de Sabadell SA

MAD:SAB

Earnings Call Analysis

Banco Sabadell Boosts Net Interest Income and Dividend

In its Q3 2023 report, Banco Sabadell announced a 6% increase in Net Interest Income (NII) and a 14 basis points rise in Net Interest Margin (NIM). Net profit soared to EUR 1,028 million, and the bank approved a 50% dividend hike to EUR 0.03 per share. Despite a 1.4% dip in loan volumes due to less credit demand, there was an overall 3.6% uptick in international business. Aiming for more primary account holders, Sabadell's cost base has shrunk with a 20% staff and 30% branch reduction, while boosting digital services like a new account with 2% interest and 3% utility bill cashback. Origination for mortgages shrank by 29% over nine months, aligned with the market, but consumer loan originations rose by 27% year-on-year. Payment services also performed well, contributing to a EUR 7.1 billion year-on-year increase in customer funds.

Company Navigates Mixed Economic Terrain with Robust Growth and Strategic Cost Management

The company has delivered robust quarterly growth, especially noted in Miami and Mexico, though experiencing a slight decline in foreign branches. This led to flat performance in international loans year-on-year, impacted by currency fluctuations. The U.K. division, TSB, witnessed signs of recovery with a significant 31% quarter-on-quarter increase in mortgage origination, although figures remain 38% below last year's. Deposits have shown resilience with a year-on-year increase despite a recent decline.

Positive Financial Performance Fuels Shareholder Remuneration

The group's financials reflect a strong performance with an all-time high net profit of EUR 1,028 million in the first nine months of the year, bolstered by net interest income (NII). Strong results also come from controlled expense growth, below the core inflation rate in the U.K., with TSB contributing a 73% rise to the group profit. Shareholder remuneration benefits from this upsurge, evident in a 65% increase in earnings per share (EPS) and a 50% uptick in the interim dividend. Additionally, a share buyback program is nearing completion, enhancing the tangible book value, which has grown by 10.2% over the past 12 months. The return on tangible equity (ROTE) guidance has been revised upwards to around 11.5% for 2023.

Improved Cost Discipline and Asset Quality

The company has maintained cost discipline, with a 3.2% year-on-year rise aligned with expectations. Marketing and salary increases contributed to cost inflation, offset by lower amortization expenses. Cost-to-income ratio reflected efficiency improvements, standing at 48.7% overall and 43.1% excluding TSB. Further, core banking results grew by almost 39% at group level, driven by favorable interest rates and controlled costs. Asset quality remains robust with a steady cost of risk at 55 basis points, outperforming the guidance of 60 basis points. Notably, capital generation has strengthened, with the fully loaded CET1 ratio rising by 59 basis points in nine months and solvency indicators like MREL compliance demonstrating financial resilience.

Guidance Grounded in Caution Amidst Market Softness

Despite strengths, the company is taking a cautious approach, projecting a mid-single-digit decline due to macroeconomic concerns. The aim is to strategically navigate market conditions while maintaining solid returns and capital generation. This prudent stance is reflective of a deep understanding of the volatility and uncertainties inherent in the current economic landscape.

Earnings Call Transcript 2023-Q3

[Gerardo Artiach, executive]

Good morning, and welcome to Banco Sabadell's Third Quarter 2023 Results Presentation Audio Webcast. Thank you for joining. Our CEO, 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 follow-up by a Q&A session. We have a schedule around 1 hour for the whole session. Let me now hand it over to Cesar González-Bueno.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Thank you, Gerardo. Let's start the presentation with the key messages on Slide 4. First of all, NII grew by 6% in the quarter, while our NIM improved by 14 basis points quarter-on-quarter.

Second, Asset quality remains stable. Group's total cost of risk stands at 55 basis points, improving by 1 basis points compared to the first half of the year. Third, group net profit reached EUR 1,028 million in the first 9 months of the year. TSB delivered a net profit of GBP 152 million.

Fourth, the Board has approved the distribution of an interim cash dividend of EUR 0.03 per share to be paid at the end of December, which represents a 50% increase on last year's interim dividend. Finally, our return on tangible equity stands at 11.6%, and our core Tier 1 reached 13.13%, increasing by 59 basis points year-to-date.

On Slide 5, you can see the evolution of volumes. Starting with the quarterly evolution of performing loans, volumes decreased by 1.4% quarter-on-quarter, both in euros and constant FX. This was mostly driven by a reduced demand for credit, both in Spain and in the U.K., but also by the seasonal effect of the EUR 650 million, social security advanced payment in Spain booked in the previous quarter.

Our other international businesses recorded a quarterly growth of 3.6% or 2.2% at the constant FX. When looking at the year-on-year evolution of our lending book, same trends apply and the book is decreasing by 3.3%.

Moving now to customer funds on the right-hand side of the slide. We can see that on-balance sheet funds decreased slightly by 0.5% in the quarter. Off-balance sheet funds decreased by 0.9% quarter-on-quarter, largely explained by the mark-to-market effect on mutual funds.

Looking at the year-on-year evolution of customer funds, we can observe that on-balance sheet funds decreased by 0.8%, but this reduction was offset by the 3.4% increase in off-balance sheet funds. Our commercial gap improved by EUR 1 billion in the quarter as a result of the evolution of our lending and customer funds volume, driving our loan-to-deposit ratio below 95%.

In Slide 6, we can see the transformation in retail banking. Let me quickly recap on our strategy for retail banking, which we announced in 2021. First, we intended to reduce our cost base. In 2-years, we have reduced our workforce in Spain by close to 20% and our branch network by 30%.

Second, we intended to improve our value proposition in mortgages, insurance and investment products by offering more personal and expert support to our customers. By September 2023, we have deployed 800 specialized relationship managers and mortgage specialists, for example -- and these, for example, already originated 48%, close to 50% of our new mortgage lending.

And third, we intended to digitalize our value proposition for 3 products: current accounts, unsecured lending and cards. You can see some examples of what we have achieved. 55% of our customer acquisition is currently digital, coming from 0. And 75% of the origination of consumer loan, takes place digitally or through remote channels.

In other words, we have significantly reduced our cost base while improving our capabilities as a traditional bank and building up new direct banking capabilities. At this point, the next step in our strategy is to become the main bank for more customers.

And this brings us to the new digital account. As you might recall, in the second quarter of 2022, we launched our digital account. We are satisfied with its commercial performance as it has allowed us to acquire new customers with a more digital profile. 55% of the new customers acquisition takes place digitally. The new customers we are acquiring are more digital, of course, than our existing customers, and they are younger, as you can see in the chart.

Furthermore, we are growing our customer acquisition more aggressively in those regions where our branch network is present but has a lower density. This good commercial performance has been achieved without impacting deposit beta.

As you can see in the lower left-hand side of the slide, our cost of customer funds in Spain remains marginally lower than the one of the sector. What we are aiming with the revamped digital account we presented this week is to continue attracting new customers and to become their main bank. We have enhanced the value proposition of the new account to increase the engagement of the customers we attract.

We are offering a current account. This is not the savings account, the current account with a 2% interest rate for the customer on their average monthly balance capped at EUR 20,000 and with a 3% cash back on utility bills. We are convinced that this is an attractive value proposition for customers to use Sabadell as their main bank. That is not a promotion, but a way to attract engaged customers.

In Slide 8, we can see the evolution of lending origination in Spain. Mortgage origination in Q3 decreased by 19% quarter-on-quarter, driven by seasonality and lower demand. In the first 9-months of the month of -- the first 9-months of 2023, it decreased by 29% compared with 2022, broadly in line with the market slowdown.

On the other hand, consumer lending origination increased by 5% quarter-on-quarter and by 27% year-on-year. This strong growth is being delivered in a healthy manner due to improved credit granting processes and policies such as more pre-approved loans or more segmented pricing.

Regarding Business Banking, new loans and credit facilities decreased by 32% quarter-on-quarter. There is lower demand for new loans as companies are holding their investment decisions in the current macroeconomic context, and this translates into lower origination volumes. Our credit facilities, the situation is different. As the quarterly evolution is heavily impacted by seasonality and the third quarter decline in the renewal of ICO, ECO granted credit facilities.

As I explained in the previous quarter, a significant amount of ECO granted credit facilities were due in the second quarter of '23 and they were renewed into regular credit facilities. On a year-on-year basis, total origination of new loans and credit facilities in Business Banking grew by 26%.

Finally, on the lower right-hand side of the slide, working capital financing posted a slight decrease, both quarter-on-quarter and year-on-year. In the first 9-months of the year, nevertheless, we posted a 3% growth.

On Slide 9, payment-related services continued to perform well for another quarter. Cards turnover increased by 6% quarter-on-quarter and year-on-year, while point-of-sale turnover increased by 9% quarter-on-quarter and 12% year-on-year. In the lower part of the slide, you can see that customer funds in savings and investment products in Spain increased by EUR 7.1 billion year-on-year, reaching a total of EUR 54.5 billion.

You can also see the breakdown of the EUR 7.1 billion year-on-year increase. Term deposits increased by EUR 2.1 billion, other on-balance sheet products increased by EUR 3.6 billion and off-balance sheet products increased by EUR 1.4 billion.

Slide 10 shows the performing loan book ex-TSB broken down by segments and products. On the left-hand side of the slide, you can see the detailed evolution of credit in Spain. The stock of mortgage declined in the quarter as lower origination volumes were not able to offset the amortization of the book. This trend is in line with the market.

Consumer loans grew by 4.1% in the quarter and by 14.3% year-on-year. This includes consumer lending, both in the bank and in Sabadell consumer finance, our subsidiary specialized in lending at point of sale.

As I explained before, we are performing well in the origination and the consumer lending book is growing in a healthy manner in terms of credit quality. Growing this book has a material impact on NII and is partially offsetting the impact of the slight decline in the mortgage book, where volumes are higher but margins are lower.

SMEs and corporates. 2.1% decline quarter-on-quarter and 3.8% decline year-on-year. As you know, companies continue to postpone long-term investment. They are deleveraging and shrinking their balance sheet, which is the effect pursued by the monetary policy of the central banks. All in all, performing loans declined by 2% in the quarter and by 4.1% in year-on-year.

On the right-hand side of the slide, you have our main international businesses. We delivered robust quarterly growth in Miami and Mexico and a slight decline in our foreign branches, while total international performing loans remained flattish on a year-on-year basis, somewhat affected by the evolution of local currencies.

Now let's move to the U.K. and TSB on Slide 11. New mortgage lending at TSB showed some signs of recovery in the quarter as origination increased by 31% quarter-on-quarter. But origination volumes are still 38% below those of 1 year ago. In terms of stock, TSB's mortgage book declined by 1% in the quarter. Customer deposits. at the right-hand side of the slide, decreased in the quarter by 1.6%. Customer funds continued to slowly flow from PCAs to savings accounts as customers seek to earn higher interest.

However, this effect is less pronounced in TSB as our deposit base is very granular and sticky. On a year-on-year basis, customer deposits increased by [ 1.09% ]. The loan-to-deposit ratio currently stands at 104%, improving 3 percentage points year-on-year.

Now TSB financials on Slide 12. The contribution of TSB to the group increased by 73% in the first 9 months of the year. Over the first 9 months, NII grew by 9% year-on-year, supported by structural hedge income. This instrument is replacing with a substantial spread, which partially offsets lower mortgage margins and balances. Total expenses increased by 3.7% in the quarter -- in the first 9 months of the year, sorry. This is a positive figure, well below core inflation in the U.K.

The core results in the first 9-months of 2023 increased by 15.4% year-on-year, mostly driven by positive NII performance. The net profit of TSB reached GBP 152 million in the first 9-months of the year, which is a 48% increase versus 2022 and return on tangible equity reached 10.5%. So overall, good financial performance at TSB.

In Slide 13, we are presenting the financial performance of the group. We recorded net profit of EUR 464 million in the quarter and EUR 1,028 million in the first 9-months of the year. This figure is already an all-time high net profit on a full year basis for us. Return on tangible equity reached 11.6%. Our core results, which include NII fees, minus total cost, drove this positive evolution and grew by more than 38% year-on-year on the back of the NII performance.

Additionally, provisions decreased in the quarter, underpinned by resilient credit quality. In terms of solvency, our capital ratio stands at the peculiar figure of 13.13%, which implies a solid increase of 61 basis points year-on-year. Therefore, very positive sets of results. And Leo, please -- yes -- and Leo, yes, you will go into more detail into this all these set of results.

Moving to shareholder remuneration and value creation on Slide 14. As we have explained, the profitability of the group keeps increasing. Earnings per share increased by 65% year-on-year, reaching EUR 0.22 per share in the first 9-months of the year. The Board has approved a dividend distribution of EUR 0.03 per share as an interim cash dividend to be paid at the end of December. As I mentioned before, this is a 50% increase of the interim dividend versus 2022.

We are also about to complete the execution of our first share buyback program with progress of 89% as the 20th of October of this year. At the right-hand side of the slide, you can see the tangible book value per share has grown at a rate of 10.2% over the last 12-months. This percentage includes the distribution of a cash dividend of EUR 0.04 per share paid in the last 12 months and the benefit of EUR 0.04 per share related to the share buyback program launched at the beginning of July.

Finally, in light of the recurring good evolution of our results, we have once again improved our year-end return on tangible equity guidance, which is now around 11.5% for 2023. With this, now yes, I will hand it to Leo, who will cover the bank's financials for the quarter in much more detail. Thank you, Leo.

[Leopoldo Alvear Trenor, executive]

Thank you, Cesar, and good morning, everyone. Moving now on to the financial results, we've had another quarter of positive results, underpinned by NII, which remains pretty strong and supported by resilient asset quality and controlled costs.

NII showed a strong growth in the quarter with an increase of 6.2% Q-on-Q. This, together with a flat evolution of fees, resulted in a growth of 5% during the quarter for the core banking revenues. This is NII plus fees.

In terms of costs, this posted a margin increase of 0.7% in the quarter. When we take the year-on-year increase, this adds to 3.2%. This evolution is well in line with our expectation that costs will have increased by a total of 3.5% at year-end. The combination of core revenues and costs drove our core results upwards by more than 9% in the quarter, delivering an increase of almost 40% year-on-year. These elements, combined with the reduction of cost of risk, were the main driving forces of the quarter. This quarter, there were no extraordinary contributions, payments or taxes, and therefore, our P&L is clear in terms of one-offs.

As a result of all this, net profit in Q3 reached EUR 464 million. When adding this figure to the results of the first half of the year, the net profit for the first 9 months comes to EUR 1,028 million, almost 45% higher than last year's figure. In spite of the EUR 157 million accrued in Q1 for the payment of the Spanish banking tax. The aforementioned net profit represents a return on tangible of 11.6% for the first 9 months of the year.

Let's go now through the different P&L items in more detail, starting with NII on Slide 16. As mentioned, group NII grew by more than 6% on a quarterly basis and 29% in annual terms, almost 40% in Spain ex-TSB. On the top right-hand side, you can see the drivers that explain the quarterly evolution.

Moving from left to right, customer NII contributed EUR 37 million. Within this item, customer margin added EUR 44 million, underpinned by the fact that the loan book appreciated higher interest rates, while the cost of deposits almost all increased, but remained at contained levels in all geographies. On the other hand, volumes had a negative impact of EUR 15 million as loan demand remained subdued in the quarter, as Cesar just mentioned.

Moving along to the right, the ALCO contribution, which was pushed up by the repricing of the hedge portion of the portfolio, a 44%. Along with the interest received on the excess liquidity deposit at ECB was more than enough to offset the higher wholesale funding costs related to some issuances, producing a combined net positive impact of EUR 30 million.

Finally, the others category, which includes some hedging and other miscellaneous items, had a negative impact of EUR 1 million, while the additional day count for the period, the quarter explains an impact of plus EUR 6 million. Our customer margin increased by 10 basis points in the quarter to almost 3%, driven by the repricing of our variable rate portfolio as well as by the higher yield on new originations and as we just mentioned, by a contained cost of customer funds with deposit beta progressing marginally better than our expectations.

Loan yield is increasing as Euribor is repricing. And moreover, in our case for 2024, we have more than EUR 8 billion of fixed rate loans, mainly corporate loans, which will be repriced. This repricing to higher rates ensures that with the current forward curve, our loan yield will keep improving until next summer.

On the other hand, NIM is currently above 2%, having grown by 14 basis points in the quarter at an even faster pace than the customer margin underpinned by the ALCO and the liquidity contribution.

With all this in mind and with the first 9 months of the year behind us, we have revised our guidance upwards once again, and we believe that NII in 2023 will grow close to 25% on a year-on-year basis. Leaving now the NII line to one side and moving on to fees. Fees remained broadly stable in the quarter, posting an increase of 0.9%, while on an annual basis, they decreased by 6.3%. The movements are mainly attributable to the improved performance of credit risk fees, both in the quarter and the year.

Services fees also recorded positive growth in the quarter, supported by fees related to cards, which saw higher levels of turnover during the summer season. In terms of the year-on-year variation, the underperformance of service fees is partly explained by lower revenues from current accounts as we reduce maintenance fees to reflect the positive interest rate environment.

Within asset management fees, insurance brokerage fees were impacted in the quarter by higher remuneration paid to customers on certain savings insurance products.

Moving now from revenues to cost. This is Slide 19. This quarter, total costs remained broadly stable with slight growth of 0.7%. In a year-on-year basis, costs rose by 3.2%, in line with our expectations as we had already anticipated that they would increase gradually through the year. The evolution of this line is explained by higher marketing expenses and salaries at Sabadell ex-TSB. This was partially offset by amortizations that were EUR 10 million lower this quarter, as the amortization period for TSB's intangibles core deposits have come to an end. In other words, this reduction will be recurrent.

As you can see on the right, the effect of these contained cost growth combined with the improvement in revenue sources have brought the cost-to-income ratio down by approximately 5 percentage points over the last 12 months. With this, at group level, the cost-to-income ratio for the third quarter now stands at 48.7%. While if we exclude TSB, the cost-to-income ratio is down to 43.1%.

On the following slide, we take a look at our core results calculated as NII plus fees minus costs. A metric that it is our understanding, shows how our core banking business is doing. This quarter, core results have increased by 9.1%, bringing the total annual variation to almost 39% at group level. This positive trend is driven by wider jaws, as we are seeing core revenues, especially NII, supported by positive interest rates, which comfortably offsets the above-mentioned limited cost inflation.

On the right-hand side, you can see the year-on-year evolution of core results. The increase of this metric is underpinned, obviously, by a remarkable contribution of NII, which added EUR 790 million. Costs explains a deduction of EUR 69 million, while fees have a negative impact of EUR 71 million in the year.

On the following slide, we cover cost of risk and the other P&L items between pre-provision income and profit before taxes. The group total cost of risk improved slightly in the quarter to stand at 55 basis points, which is better than our year-end guidance, a sign that the resilience of our asset quality is there as we will later review. Credit cost of risk stood at 43 basis points at the end of September, decreasing by 3 basis points in the quarter. This reduction is related to the fact that delinquency continues to be at low levels.

Looking at the breakdown of total provisions. On the top right-hand side from left to right, we can see that, first, we booked EUR 160 million for loan loss provisions in the quarter, equivalent to the 43 basis points of credit cost of risk that I just mentioned. Next, we booked EUR 7 million for foreclosed assets provisions. We also had EUR 35 million of NPA management costs, which could be considered a run rate. And finally, other provisions, which have more volatility and mainly related to litigations, stood at EUR 6 million. All in all, total cost of risk is performing well, bolstered by instable NPA levels and robust asset quality.

Moving now to the next section, I will walk you through, as always, through asset quality, liquidity and solvency. Let's start by the evolution of the problematic assets. Let's -- and starting with NPLs on Slide 23.

NPLs remained flattish during the quarter, even though this period is typically characterized by negative seasonality in terms of recovery activity in August, which tends to be reflected in the slightly higher net NPL inflows. Therefore, with stable levels of NPLs, the increase of NPL ratio during the quarter is explained not by increase of NPLs but by a reduction of the loan book.

Looking at exposure by stages on the right-hand side, it is worth mentioning that our Stage 2 exposure as a percentage of total book dropped by 68 basis points in the quarter or EUR 600 million, a similar reduction to the one that we saw in Q2. And this evolution is mostly explained by migration to Stage 1, which confirms robust levels of asset quality.

Currently, our Stage 3 coverage is 40.8% at the group level or 43.8% ex-TSB, which is due to the fact that TSB's portfolio, mostly comprised by mortgages, requires less coverage as they hold real estate guarantees.

Finally, it is worth noting that the amount of total provisions compared to Stage 3 portfolio rose by 1% in the quarter towards 57%. Moving on in terms of foreclosed assets. The stock declined by EUR 44 million in the quarter or 14% year-on-year to just slightly over EUR 1 billion. 20% of the stock has been sold during the last 12 months with an average premium of 6%, which, in my opinion, shows that these assets are correctly mark-to-market on our balance sheet.

The coverage ratio for this portfolio remained broadly stable at 39%, and 95% of foreclosed assets are finished buildings. Overall, total NPAs, this is NPLs and foreclosed assets were slightly down Q-on-Q and year-on-year. Gross and net NPA ratios remained stable at 4.1% and 1.9%, respectively. While total coverage increased 2 percentage points year-on-year towards 54%.

Moving now to liquidity on the following slide. The group position improved further in the quarter and remains at very comfortable levels. This can be seen in the EUR 50 billion of high-quality liquid assets, which increased by EUR 3 billion during the quarter.

Also in the LCR, which stood at 220% for the group, this is 20 percentage points higher than in Q2 having already repaid 84% of the TLTRO. Loan-to-depo ended the quarter below 95%, marginally better than the previous quarter. In terms of European Central Bank funding, EUR 5 billion remain outstanding, and this will mature in March 2024. In fact, at the end of the third quarter, the liquidity deposited at the ECB was more than 5x the outstanding TLTRO balance, while ECB Minimum Reserve Requirements reached EUR 1.1 billion.

Finally, in the U.K., we currently have EUR 4 billion outstanding under the TFSME, which will mature in the second half of 2025.

26 Slide, I would like to highlight that we keep holding a positive outlook for the both Fitch, S&P and Moody's. Turning now to Slide 26. we can see our current MREL position. As of today, we are already compliant with the MREL requirements for 2024 in terms of both risk-weighted assets and leverage ratio exposure.

Moreover, we're also compliant with both the absolute and subordinated requirements, and we have built a management buffer that is amply above all those requirements. It is important to note that we have completed the execution of the funding plan for 2023, having printed a total of more than EUR 6 billion in the first 9 months of the year. The senior non-preferred debt issued this quarter was the last of the MREL issuances scheduled for 2023.

Let me remind you that our AT1 and Tier 2 buckets as well as the senior preferred and senior non-preferred are already completed. So we do not need to issue AT1 or Tier 2 in the medium term. Or in other words, from now on, we have no need for new net issuances to be made.

In the next slide, we can see that we continue to generate capital organically as our profitability improves. Our fully loaded CET1 ratio starts at this weird number of 13.13%, having increased by 26 basis points in the quarter or 59 basis points during the first 9 months.

When we look at the breakdown of the quarterly evolution, first of all, we see an organic capital generation of 31 basis points, including the accrual of 50% dividend payout as this is the percentage that we distributed last year.

Secondly, the fair value reserve adjustments of our fixed income portfolio had a small negative impact of minus 1 basis points. And finally, the evolution of RWAs was marginally negative in the quarter, reducing by 4 basis points as the volume mix has tilted towards higher density loans in the quarter.

From a regulatory perspective, the CET1 ratio also stood at 13.13% on a phase-in basis, which implies an MDA buffer of 428 basis points with an increase of 6 basis points Q-on-Q. The MDA buffer was impacted by the increase in the countercyclical buffer in the U.K. from 1% to 2% and consequently, the requirement for Sabadell Group rose by 20 basis points.

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

[Cesar Gonzalez-Bueno Wittgenstein, executive]

So, thank you very much, Leo. And to finish our presentation, let's recap on the guidance for 2023 on Slide 29.

Last quarter, we updated our initial 2023 guidance for most of key metrics. We are now improving the guidance for some of those. Firstly, for NII, we raised our initial 2023 guidance from the high teens growth to above 20%. Now we are raising our NII guidance for the year, even further to a growth rate close to 25%. NII grew in the first 9 months of the year by 29% year-on-year. As Leo explained before, our loan book is repricing at higher rates, and we'll keep this upward trend for longer.

Secondly, with regards to fees, we are still applying a prudent approach with a mid-single-digit decline. Thirdly, we reported a total cost of EUR 2,231 million in the first 9 months of the year, on track to meet our year-end target of around 3.5% growth. Fourthly, total cost of risk dropped slightly in the first 9 months of the year to 55 basis points. So we are maintaining our latest guidance of less than 60 basis points year-on-year.

All this has brought our return on tangible equity up to 11.6% year-to-date, which is already above our updated year-end profitability. Now the return on tangible equity guidance for the year has been increased to around 11.5%. This updated year-end guidance does not consider any capital gains from the alliance with Nexi in our merchant acquiring business, which we expect to book in the first half of 2024. And with this, I will hand over to Gerardo to kick off our Q&A session. Thank you.

[Gerardo Artiach, executive]

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]

First question is coming from Maks Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have three. The first one is on customer spreads. You've mentioned you expect the loan book yield to keep increasing until summer next year in Spain. And what about deposit costs? How do you see them evolving in the coming quarters? And when do you expect customer spreads to reach their peak?

The second is on the proposal to reduce weekly labor hours in Spain. I was wondering if the reduction -- potential reduction could have an impact on your cost base? And finally, on capital, you again added to your excess in the quarter. And I was wondering if you could provide us with some color on when we should expect an update on potential deployment and which options could you consider?

[Leopoldo Alvear Trenor, executive]

So the first -- sorry, the first one on NII, yes, we are expecting yields to continue growing through the course of the following quarters, certainly in this coming fourth quarter, but also in the first -- at least the first half of the year, if we take into account the forward curve, which indicates that rates will be more or less at this level until the summer and then they might come down.

So taking that into account, we will still be repricing mortgages until well into the summer next year. On top of that, we have around EUR 8 billion of fixed SME loans, which will mature next year and have not matured -- have not been repriced in the latest 2 years. So that will be quite a boost. So we are confident with the increase of the yields on our loan books for the coming quarters.

Deposits, I think it's clear that they will keep on growing. They've been growing all through the year, despite the fact that the beta that we are now giving away, it's slightly lower than the one that we budgeted. We believe that the trend will continue, but I think it will be manageable. It's very difficult to determine a beta for 2024.

Actually, we're budgeting right now so I don't have the numbers. But I am fairly comfortable with the idea that the percentage -- the overall percentage of deposits are that will have a yield will be lower than those numbers that we have seen in previous cycles, which got to be up to 55%. I think that's clear, in my opinion. I think we will be lower than those numbers.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Thank you, Leo. On the potential labor weekly hours reduction change, first of all, that's not set in stone. It's a proposal that still we have to see if it goes through or not. And we don't think with our initial estimates that it will have any material impact on the costs of the bank. In terms of shareholder remuneration, and of course, we understand the relevance of this question, let me make some statements here.

So the first one is that it's clear that we continue to generate capital organically. In fact, we have generated 26 basis points in the quarter, and I think it's 59% basis points year-to-date. So -- and we expect to continue generating capital in the year, and we see, as Leo mentioned, no regulatory headwinds in the coming quarters. So we see our capital levels and capital buffers comfortably in line with our peers.

As you all know, we are currently accruing a 50% payout of our net profits, which is exactly the same level of payout distributed in 2022. What -- from a governance perspective, the group has decided is that any decision on shareholder remuneration or final payout will take place later on, on the back of our year-end results, and this is the responsibility of the Board of Directors.

So it's also worth mentioning that if you look at it on the back of our current return on tangible equity, which is around 11.5% and current share price, this payout level would represent a dividend yield or a total remuneration to shareholders of above 10%.

And because the Board of Directors is very conscious of the relevance in the back of the very good evolution of the first 9 months, the Board of Directors has approved that increase that we've mentioned already of 50% interim cash dividend. Therefore, these EUR 0.03 will be paid in December out of the 2023 results of the first 9 months.

And as I mentioned before, once we close the year, the Board of Directors will decide on the rest of the shareholder remuneration elements. At that point in time, it will take into account into consideration, the same elements that they did last year: the sustainability of capital, the capacity to grow funds, funds growth, the nature of our shareholder base, which you know that it's more or less, in simplified terms, 50-50 retail and institution -- institutional, the practices of peers, the financial impacts of any decisions and so forth.

In terms of -- to cover in full the question, as the potential excess of capital, as it is the case with shareholder remuneration, any decision on the topic will be taken by the Board of Directors later on, on the back of year-end results and as we have further visibility on our budget for next year and our prospects for the medium term.

[Leopoldo Alvear Trenor, executive]

Sorry, just picking up because I think I forgot one of your questions, Maks. Your question, when was going to be the peak of customer spread?

As mentioned before, driven by the repricing of the yields on the loan books, we are comfortable with the idea that these customer spread will keep on growing at least until the second quarter of next year, 2024.

[Operator]

Next question is coming from Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, analyst]

Thank you very much for the presentation. A question -- a couple of questions for me. One is on loan demand and fee income. I mean results are obviously sound and strong. But if we're going to focus on the weakest area, which is obviously loan demand and fee income, that's not only for Sabadell, it's most of the Spanish banks. So I would like to understand how do you think about this because -- we saw a continuation of the deleveraging process in the private sector that obviously, this higher rate environment is not going to help with.

So when you think about the longer term, how do you see loan demand? When do you think it could recover? Is it -- so my point is, are your customers waiting to have more visibility on rates and the cost of those loans or simply the deleveraging process continues? And obviously, linked to that, what is the prospect for fee income as well because it's also one of the weakest spot?

And secondly, about your EUR 8 billion loans -- corporate loans repricing. Could you elaborate a little bit on how that compares to peers, in terms of how is the structure of your corporate loan book compared to peers? And whether that implies a strong repricing into 2024 versus the average? Or it's simply that you have more corporates than peers, and that should help? It will be good to understand that angle as well.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Thank you very much. Let me start with the volumes. I think very clearly at the beginning of the year, we said that this was a year to focus on margins rather than on volumes. And this is for a very simple matter, and it's a very strategic -- simple strategic thinking. It does not make sense to compete for volumes in a declining market.

When will that trend reverse? Well, I think that's highly related to monetary policy and to macroeconomic -- to the macroeconomic situation, and it's very difficult to make projections. We don't see a strong demand as we stand now. But if you look at it a little bit on a per product basis, it is true that in mortgages, the origination, for example, is falling quarter-on-quarter by 19%. But nevertheless, in the quarter, it was much smaller at -- and this is -- the volumes -- the absolute volumes because if you look at the year-to-date mortgage, the book only fell by 1.9.

And that is because -- which is not that significant, and that is because there is -- the prepayments are declining very strongly. I think it's also important to note that consumer lending, which is growing in the market, we are growing faster than the market. So this is very much in line with the strategy. You don't fight for market share in declining markets. But yes, you do when the markets are growing. And on a year-on-year basis, our consumer book. And in absolute amounts, it's less relevant that the margins are much more significant.

As you know, our year-on-year consumer book grows by 14%. And the good news is that the new loans in arrears for more than 30 days. And this product is very sensitive because this is a product in which you identify the weakness. If you're not being careful with your risk strategy, that's where you see them the earliest. It's performing better than in the last 2 years and at a very healthy -- very, very healthy levels.

So in absolute volume, they contribute little. But in margin, they contribute handsomely. And the key is to have good risk metrics, and we are doing that very well. And this is back to the strategy of digitalization because before we didn't have this product on a digital basis, and now we do and we have improved significantly our models.

In corporate and SMEs, the demand is low. And in public sector, the yearly evolution is also affected by the amortization, as we said before, of the EUR 2.1 billion loans in the treasury. And in other lending, as we mentioned also, there is the seasonal impact of the advanced payment from the social security. So the volumes are weaker, mainly in terms of new production, less so in terms of the book because there is a little bit less turnover. And we -- it's very difficult to know when this trend will return.

What I can assure is that we are ready. We are ready for growth when the market takes off again. But as I mentioned before, this will be in the back of the monetary policy that we see that could be starting to ease in not too distant future. And on the macroeconomic situation of Spain, which is in relative terms, better than the one-off of Europe as we stand.

In fee income, we have very often explained and Leo, please feel free to complete on anything. But on fee income, you have to understand also that there was a major shift from -- in our insurance products from one-time payment to annual payments on our insurance products related to mortgages and also that the new production of mortgages is subdued. So yes, we have had and we foresee that although in the fourth quarter, we could see a slight improvement of the fee income for the year, and we remain with our mid-single-digit decline.

[Leopoldo Alvear Trenor, executive]

Sure, just to complement, if we wish for 2024, we do expect a much better evolution of the fee line, driven by the fact -- I mean, risk transactions. This is the ones that are related to volumes. They're up higher -- sorry, up year-on-year, despite the fact that volumes are coming down. So we shouldn't expect something very different from that next year.

On the service commissions, I think the very good news is that everything related to payments is still pretty good. We can see this on the number of transactions, which are still growing both in cards and points of sales, both Q-on-Q.

This is versus second Q and also year-on-year. So there's a lot of -- the economy is very dynamic. And the impact that we had this year was driven by the fact that we have now positive interest rates, and therefore, we're charging less for maintenance fees. But a big chunk of this will probably already happen in 2023.

And then there's another big impact, which is the one that Cesar was referring to on the asset under management fees, which is one related to this change in shift from selling insurance with an upfront -- sorry, for -- with an annual premium, which is what we have right now, instead of an upfront payment, which is what we had before. This is for the life of the mortgage.

And this will have an impact in 2023 of around EUR 30 million, which obviously we do not expect in 2024 or 2023 because the products that we're going to be selling are the same. This is annual premium insurances.

As per your second question regarding the EUR 8 billion repricing, I'm afraid I'm going to fail at giving you any sense of how does this compare with our peers. I would imagine that we have more fixed loans than our peers because of the structure of our balance sheet and probably more SME and corporate exposure in Spain than our peers. What I know is that these EUR 8 billion, they are maturing with a yield of around 2%.

And if we look at the origination numbers that we're doing for these kind of products, SME and corporates in the quarter is around 5%. So this is a 300 basis point spread x EUR 8 billion. if you consider just 6 months because I don't know when they are maturing, so for the average of the year, but that's quite a lot of money for NII next year. Thank you.

[Operator]

Next question is coming from Andrea Filtri from Mediobanca.

[Andrea Filtri, analyst]

Two questions, one on M&A and one on the digital euro. On M&A, given the ongoing transformation that you are undergoing, can we rule out Sabadell looking for acquisitions of other banking networks in its domestic markets? And on the digital euro, what do you see as risks and opportunities of the digital euro implementation? Have you budgeted the impact to your business model? And could you share it with us?

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Okay. I think in general, and I think we are going to be boring on this one once again. I think we are satisfied with our strategy of stable perimeter. It has given us focus, and all our business lines and geographies have benefited from it and all are profitable today.

In terms of M&A in Spain, I think peers present a healthy capital liquidity and profitability situation. So there's also less incentive to look for M&A activity. And we are focused on the increase of profitability organically, as I have shared with you.

So no change in our perimeter inside of -- or outside of Spain. Clear map in terms of improving profitability, and that's our focus. And believe me, to have an organization that has clear its perimeter, that has clear its strategy, that is focused, has an impact on the results, I understand that this is not quantitative, but it's certainly true, and I think we are seeing it in practice.

In terms of -- I don't know if you want to add anything, Leo?

[Leopoldo Alvear Trenor, executive]

No.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

In terms of the digital euro, I mean, it's clear that we have to accept that the digital euro will be a reality. And in that sense, we have created a project team with people from IT, operations, digital regulation, macro payments, current accounts and private banking to assess potential opportunities and also risks as we -- as well as to determine -- to start determining because it's still not immediate, the strategy about digital assets.

And we have participated in exercise as proof of concept to assess possible impacts on a digital euro deployment. But it is too early at this point in time, to give you any quantification. And certainly, in terms of budgeting at this point in time, it's not relevant. And it's too early to quantify the impact that we will see forward. But certainly, a very relevant subject, which is coming to reality, as I mentioned before, but not immediate to the point of requiring significant budgeting changes at this point in time to be mentioned.

[Operator]

Next question is coming from Carlos Peixoto from CaixaBank BPI.

[Carlos Peixoto, analyst]

This is Carlos from CaixaBank. I would focus a bit on capital and the potential for additional -- add-ons on distribution for the extraordinary capital.

My question here would be, well, now whether [indiscernible] of 14.1%, I guess this could be a point of discussion in the future and to be more and more precise, what would be the triggers for an extraordinary share buyback or dividends to be announced? Is that a certain threshold of CET1? Is it being able to reallocate part of the capital from the U.K. into Spain because excess capital in [ TSB dividends ] higher than the average of the group?

What could be the triggers there? Then on the second question, if you could update us on Sabadell's balance sheet sensitivity to 100 basis point movement either upward or downward in interest rates, it would be helpful?

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Okay. On the capital question, I don't think I can or should or add anything to what I've said before. This is reserved -- Board reserved material. There will be their conversations, their discussions and we will have more clarity around everything in principle with the year-end results once we know exactly how we have closed the books, we have the budget, et cetera. On the balance sheet sensitivity, Leo?

[Leopoldo Alvear Trenor, executive]

Sure. Just to point out on capital that you mentioned about our U.K. franchise, just to remind everyone that last year, TSB made a payout of 50% of the profits to the group. And obviously, this year, we are aiming for something similar, at least something similar. So the capital is also flowing from the U.K. to the group as it should as the capital is flowing to shareholders. And coming back to sensitivity...

[Cesar Gonzalez-Bueno Wittgenstein, executive]

And just to mention on that, it has nevertheless originated 200 basis points of core Tier 1 in the last 2 years.

[Leopoldo Alvear Trenor, executive]

Yes, despite the dividend, absolutely, yes. So it's a big franchise. And in terms of NII sensitivity, well, we have the regulatory sensitivities, which are driven by some assumptions that are imposed by regulators. With that one for 100 basis points of increase of rates, our NII will grow 6.4% in the year or 14.1% in 2 years. And for the decline is more or less the same in the first year and in the second year is minus 12.9%.

Nevertheless, as you've probably heard from this from me before, I -- this gives you a sense of direction. It's not precise because it depends on the assumptions. For example, the deposit beta that we're seeing right now, it's been better than what we even expected and much better than what is included in the regulatory assumptions. So for me, perhaps another way of looking at this, it's -- well, the sensitivity that we have given out to the market, which is real. And it's -- for every 4% increase of NII, we increase 1% of return on tangible equity.

So for example, is this -- is this true? Is this happening? When we look at the evolution for the first 9 months of the year, NII has grown 29% year-on-year. And if we exclude the banking tax because, obviously, this translation from increase of NII to return on tangible, it's with the rest of the P&L being the same. We would see that our return on tangible equity has increased by 5 percentage points or over 5 percentage points in the same period. So this, in my opinion, gives you quite a good proxy. 4% of NII, 1% return on tangible, all things being equal.

[Operator]

Next question is coming from Ignacio Ulargui from BNP Paribas.

[Ignacio Ulargui, analyst]

I have two. The first one is a bit on -- what should we expect in terms of trends for NII and TSB have been delivering a very good performance on the structural hedge. Should we as kind of get that going forward into '24 and '25?

And the second question is on the competitive landscape in Spain, particularly in the SME lending. I mean the lack of lending demand do you see for now that is translating to price competition or the market is kind of not that competitive at this stage?

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Okay. The trends in NII at TSB are, I think, kind of flattish for '24 because the support from the caterpillar is cumulative. So it will have some impact that will offset the pressures on the margin in '24. And it might be -- I mean, not the best year in terms of NII in the U.K. market. But as it is cumulative, we see that the impact of that caterpillar will improve in '25.

And furthermore -- but Leo will cover more. Furthermore, what we would expect is that the beta will be more -- will continue, but will not accelerate or on the contrary as we advance forward because most of it or a big part of it is done.

[Leopoldo Alvear Trenor, executive]

Sure. If I may add. I mean in '23, I think in U.K. banks and TSB is not -- it's different. We saw the peak of NII in Q1. so we've seen that NII is stable to coming down in the following quarters. I think TSB is performing better than other big banks, probably driven by the fact that we have a very, very atomized deposit franchise, where 90% of the deposits are below GBP 10,000 and the average deposit per client is GBP 7,000.

So this has allowed us to be -- to provide for a lower beta perhaps than other peers, and this is translating in the evolution of NII. Nevertheless, in '23, NII is going to grow versus '24 -- 2022, sorry. So probably in the mid-single-digit space or just below that.

For 2024, we are budgeting, so we don't have the final numbers. We've seen different trends in the market. So on the one hand, there's a lot of competition in mortgages, both especially in prices and lower demand from customers. That's what we're seeing on the outstanding balances that are coming down.

On the other hand, obviously, the deposits are being repriced as we have seen through 2023. And this will probably go on in '24, given that rates might not have reached the peak, although they're very close to the peak in '24. Against all these headwinds, we have the structural hedge that Cesar was mentioning, is a 5-year caterpillar. In other words, we have around EUR 4 billion, EUR 5 billion repricing every single year. And that would be the case in '24. But against this tailwind, we have the headwinds of the mortgage volumes and the prices of deposits.

So all in all, if I take a very, very, very high view, probably '24 will be somewhere flattish. I need to finish the budget and see the volumes and so on and so forth. But nevertheless, this gives me -- I'm reasonably comfortable with the fact that '25 should be much better because the structural hedge will come in again. And probably at that time, the rates will have been -- we have reached the peak for some time and will be at least stable. And therefore, the deposit repricing will probably have come to an end or most of it. So I'm more comfortable with '25 -- with a positive view on '25.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

On the -- if there's pressure on the demand price, on SMEs and on working capital and so forth, the [ rate works ] here are very healthy. This is a business that we do very well. We know how to compete. And furthermore, the market, the pressures are allowing to build a good book. I think on the contrary, the pressure is a little bit higher on the mortgages. Mortgages pricing is where we are seeing that, and that's why the growth we are not opting for any growth there .

[Operator]

Question is coming from Borja Ramirez from Citi.

[Borja Ramirez Segura, analyst]

I have two questions. Firstly, on the 2% current account that was announced this week. We would like to ask what is the budget for growth in deposits? What is the potential risk of migration with internal customers? And also, why are you announcing this -- why now? And then the second question would be on U.K. If you could please provide your expectations for loan and deposit growth in TFSME? And also how do you expect to refinance the TFSME?

[Cesar Gonzalez-Bueno Wittgenstein, executive]

And let me take the first one. These current account -- and let me start with why now. The why now makes lots of sense from a strategic perspective. I mean, as I mentioned before, our cost to income was not ideal in retail, and we had a very traditional value proposition. This very traditional value proposition need to be reviewed. And what we did is we reduced costs very handsomely. And then we have digitalized our offer. Now we are a completely different bank than we were 2.5 years ago.

And we have considered that it's the time to attract more clients that will be engaged new clients with us. So the timing is perfect from a strategic perspective. If you look at it, the new digital account that we already launched in the second quarter of 2022, has given us very satisfactory results, and it hasn't made a material impact on our cost of funding, as we mentioned before.

Our customer funds are at 38%. And cost, and they are marginally lower than the ones of the sector, as we mentioned before, 0.39%, which is the sector one. So -- and this is a new account. If you compare it with the previous value proposition, the previous value proposition was at 2.5%. Now it's at 2%.

The new value proposition has a cap at EUR 20,000, the previous one had a cap of EUR 30,000. So it's less of a promotional account, but it's very attractive because it's not a promotion. It's a current account and it allows the clients to obtain some returns while they have their account, their direct debits, their payroll and so forth. And on top of that, we are offering a 3% cash back on utility bills.

For the rest of our customers, what are we doing -- what we have been doing with the previous period and the previous digital account. These clients are more traditional. And for these clients, we understand the situation and offer best products on a case-by-case situation. So just to be clear, this is a new digital account for new customers. And for the existing customers, it's through our network that we satisfy their needs.

It's important to stress that the amount in the existing customers of funds in investment products stand at EUR 54.5 billion, and they have grown by EUR 7.1 billion in the last 12 months. So we are taking care of them.

But they have a different profile, they have different needs, and we attend them through our network. And finally, if this makes sense or not, well, attracting customers at 2% cost, it allows us also to replace more expensive and volatile funding that we already have at higher cost, for example, wholesale or institutional funding that is usually based on auctions, and it's much closer to ECB rates.

So we think it makes lots of sense. We don't see the downside potential risk or we see them very controlled. And as your question of budgeting, we are not disclosing those also from competitive -- for competitive reasons at this point in time. So Leo on the U.K. deposit .

[Leopoldo Alvear Trenor, executive]

Sure. On the U.K., as I mentioned before, we're budgeting, so I don't have the numbers, and we will provide you with these precise numbers at year-end. But looking at the trends, loans are coming down and deposits are coming down, but less. So for example, we are improving our loan-to-depo, which stands at 104%. This is 3 percentage points less than last year. When I look at the evolution of the mortgages, the production has been subdued for certain in the year, but we've seen in the last quarter, an increase of both production and applications. So -- and the trend of new applications has gone for 3 quarters already.

If I look at the number of applications today, this would imply stable volumes going forward, but we need to see whether this remains being the case or not. We'll see 4Q, and then we will decide upon this. And -- but in any case, what we've seen is that deposits are very sticky, and this is what, in my opinion, is driving the fact that our NII is evolving perhaps better than other banks.

Regarding your question on TFSME, we have EUR 4 billion pending. We had EUR 5.5 billion. We've already given back EUR 1.5 billion. I think as a percentage of total assets, our TFSME position, it's probably lower than other institutions, at least some that come to mind.

How will we tackle this? We will tackle it through commercial gap, as we've done now, and also through basically printing Covered bonds, which is something that TSB is already doing. By the way, TFSME is -- cost is not cheap. So this should not imply an impact on our NII.

[Gerardo Artiach, executive]

Thank you. I believe we have lost connection with the operator. So I'll be keeping access to the next question. I think it comes from Britta Schmidt from Autonomous.

[Britta Schmidt, analyst]

On the net interest income, I know you said you can't be precise about when the EUR 8 billion fixed rate portfolio reprices but are there any specific concentrations in the quarter? And considering the slowdown in the loan yield pickup in Q3, do you expect there to be potential for a quarter to accelerate again?

The other question on NII would be your guidance implies a flattish NII in Q4. What are the pluses and minuses here? And what year-end beta assumption do you expect?

And then a question on TSB. The TSB cost income ratio is 70%, even excluding the amortization, which will fall away and that at likely peak profitability or peak revenue generation. Is there any further scope of improvement that you see? And what form could that be?

[Leopoldo Alvear Trenor, executive]

Cesar , I'll take the first two. So the first one, it's very difficult to give you more -- I mean, precise numbers. I would take the assumption that it's 6 months on this portfolio through the year. As per the evolution Q-on-Q, honestly, we're going to have to be seeing it. Well, we're budgeting now, and we will have a more clear view by the end of the year. It will depend on the curves. If the rates start to go down in the second half of the year, there is a chance that the second half of the year is lower than the first half of the year in terms of NII.

In any case, the way I see it is that even that second half of the year should be higher than any first or second half in '23. That's why we believe that NII, all things being equal, MRR being the one that we have right now. For example, should grow, I wouldn't understand why it wouldn't grow in '24. But it's difficult to give you a more precise idea on a Q-by-Q basis. Sorry about that.

As per the flattish quarter in Q4, that's -- that can be a possibility. We need to remind that the repricing of mortgages, it's still going on for a few quarters, but the spreads at which we are repricing versus the previous one -- the fixed previous one, it's obviously lower. I mean Euribor at the end of last year was already around 2.5%, 3%, and we are repricing to 4%, but it's not from minus 50 to 4, which was the case at the beginning of the year.

On top of this, we have some higher costs coming from wholesale funding as we printed some bonds in Q3, and they didn't have a full impact in Q3, just about more or less half of the quarter or even a little bit less. And this will have full impact in Q4. And there's also the fact of the MRR that I mentioned before, the minimum reserve requirement, which was imposed at the end of September. So it basically didn't have an impact in third quarter, but will have an impact in Q4 of around EUR 10 million. So these are more or less the different moving parts.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

In respect to the question around TSB, it is true that the return on tangible equity has improved considerably. But it is also true, and you're spot on that the cost-to-income ratio of TSB is not the best. Looking forward, I think we are quite optimistic with less optimism for the very short term, but more optimism for the longer term. And it is under consideration certainly to address this shortcoming of having high cost-to-income ratio at TSB. And let me leave it at that for now.

[Gerardo Artiach, executive]

Thank you, and thank you, Britta, for the question. I'm afraid we are already about 15 minutes ahead of the scheduled time. So we will give answers to the last question, please. Operator, let's give access to the last question.

[Operator]

Last question is coming from Fernando Gil de Santivanes from Bestinver.

[Fernando Gil de Santivañes d´Ornellas, analyst]

A very quick one just to end up. So during Q2, you said that the profitability in 2024 would be higher than 2023, if I recall well. Do you maintain this given that you have these new online accounts and the new updated ROTE targets?

[Cesar Gonzalez-Bueno Wittgenstein, executive]

For sure. And that's -- the key issue, and I think Leo has been mentioning quite a bit, it's around all the elements of the P&L. All the elements of P&L, NII, costs, cost of risk, we see an improvement in the topline, and we see solid cooperation from the rest of the lines, but I'm sure that Leo will give us some more light.

The question that surprises me is that you think that the new account is going to have any impact on the P&L and on our projections for '24. I think it's on the contrary. I think it's going to be a positive contribution. We are going to see growth in customers, and we are going to see growth in engaged new customers, and we are going to see a substitution of higher cost funding for lower cost funding because we are going to substitute costs of funding at around 4% by cost of funding at around 2%.

Of course, there are acquisition costs, but that should not have anything but a positive impact in '24. In terms of -- yes, the question on cannibalization, we don't see it. We had a much more promotional offer before. Instead of 2%, it was 2.5%. Instead of 20,000, it was 30,000, and we have seen no cannibalization. This is for new customers. And for our existing customers, which are far more traditional, the trend will continue in terms of serving them with alternative products, more oriented to their more traditional background. And therefore, we don't see any impact or any significant impact on the beta from this product. But on the trends of '24, Leo?

[Leopoldo Alvear Trenor, executive]

Sure. For '24, I mean, we are fairly optimistic. We were in Q2, and we remain being optimistic in Q3. There's a number of moving things in the budget. But -- and we are budgeting, so I don't have final numbers So for example, I don't have numbers on volumes. But NII, I really say that it's very difficult that it doesn't grow unless we see changes in, I don't know, MRRs or things like that, which obviously I'm not taking into account. I'm taking just into account the 1% that is now in place.

But with that, taking into account that the customer spread is going to keep on growing at least until the second quarter next year, I believe that first half of next year is going to be higher than either first or second half of '23. And the second half is probably if rates start to come down, going to be lower than first half '24, but probably also higher than first and second of '23. So I don't see -- I think I'm optimistic here. I think it will grow.

On -- there's also one thing that is absolutely clear to me. Next year, we have EUR 150 million less of contributions to SRB and deposit guarantee scheme. This is written in stone. This is a number. This is it. So that's for certain. And then we are budgeting, so I don't have final numbers. But as I tried to explain before, we are not seeing not even early warning indicators in terms of Asset quality. This may change. But for the time being, we're not seeing anything getting worse there.

So I expect that cost of risk would not have a play in '24. In other words, I think it should be where we end in '23, if not slightly better. But for this, we need to go deeper into budget. So with all these moving parts in -- taking into account, we certainly see that net profits will keep on improving next year and therefore, the return on tangible equity also.

[Gerardo Artiach, executive]

Thank you. And thank you all for your questions. Thank you, Cesar and Leo, for the answers. To any of you who might have been left out, apologies, but we have to leave the call at this point. Let me in any case, remind you that the full IR team is available for any further questions that you could have. With that...

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Super IR team. By the way, congratulations.

[Gerardo Artiach, executive]

Let's wrap up the call. Let's wrap up the call. Thank you all for your participation and for joining us today. Have a good day.

[Cesar Gonzalez-Bueno Wittgenstein, executive]

Thank you very much.

[Leopoldo Alvear Trenor, executive]

Thank you very much. Bye.