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Banco de Sabadell SA
Earnings Call Analysis
Q4-2023 Analysis
Banco de Sabadell SA
The company has delivered a commendable financial report, showcasing a significant growth in Net Interest Income (NII) by 24.3%, leading to robust core results with earnings reaching EUR 3.1 billion. Despite a fee income reduction of 7%, the decrease in provisions, indicative of improved asset quality, bolstered a record net profit of EUR 1,332 million for the year. Notably, return on tangible equity escalated to 11.5%, signaling strong profitability and capital ratio strengthened to 13.21%, reflecting a solid financial position.
The implementation of a strategic vision focused on sustainability as a core pillar, recognized through inclusion in the Dow Jones Sustainability Europe Index, has been instrumental. The results have been telling, with clear improvements in return on tangible equity and cost-to-income ratios across all business units. This proactive and strategic approach, coupled with favorable market conditions, has turned around the company's financial results and positioned it to capitalize on future growth opportunities.
Reflecting the strong performance and sound capital position, the company plans to distribute 50% of its net profit from 2023, amounting to EUR 666 million, which is a 55% increase from the previous year, resulting in a dividend yield above 10%. This remuneration strategy includes a combination of cash dividends and an enlarged share buyback program, signaling a vote of confidence in the company’s sustained growth and profitability.
In the last quarter of the year, the company recorded a net profit of EUR 304 million, contributing to the full year's profitability. Despite encountering certain non-recurring costs, such as tax on deposits and initiatives for improving efficiency, the organization reported a return on tangible equity aligning with the provided guidance. These results reiterate the company's capability to manage expenses effectively while maintaining profitability.
For the upcoming year, the company anticipates low single-digit growth in its NII. Management anticipates continued positive effects from the repricing of variable-rate loans and a substantial yield increase from EUR 8 billion of fixed-rate corporate loans due for repricing in 2024. Even though deposit costs in Spain are expected to rise, the projected increase will be moderate relative to 2023. Considering these factors, 2024 is viewed as a transitional year, with demand for loans improving, though not fully recovering, promising a healthy financial outlook for the company.
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Good morning, and welcome to Banco Sabadell's Fourth 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, as well as for the whole of 2023. The presentation will be followed by a Q&A session.With no further delay, let me now hand it over to our CEO, Cesar Gonzalez-Bueno.
Thank you, Gerardo. Good morning, everyone, and thank you for joining us for Sabadell's annual results presentation. I would like to start by going through the key messages of 2023 on Slide 4. First of all, Group's NII grew by more than 24% in the year. The yearly growth ex-TSB was even higher at 34%.Second, asset quality performance has been better than we initially anticipated. Total NPAs decreased by 3% in the year, while the coverage ratio increased by 3 percentage points and reached 56%. Group total costs of risk stand at 55 basis points, which represents a yearly improvement of 5 basis points.Third, Group net profits reached [ EUR 1,332 million ], an all-time high. TSB delivered a net profit of GBP 175 million stand-alone.Fourth, the board has decided to distribute a 50% payout, which represents a 55% increase in shareholder remuneration. The remuneration combines 2 elements: a cash dividend for a total of [ EUR 0.06 ] per share and a new share buyback program for a total amount of EUR 340 million. Finally, our return on tangible equity stands at 11.5%, while our core Tier 1 ratio reached 13.21 increasing by 67 basis points in the year.In Slide 5, we see the evolution of business volumes. The commercial gap of the Group improved by EUR 2 billion in the year since total performing loans decreased by 4.1% and on-balance sheet funds decreased by less by 2%. The 4.1% year-on-year decrease of performing loans was driven by a 4.8% decrease in Spain and a 4% decrease in the U.K.Total customer funds on the right-hand side of the slide remained flattish year-on-year. On-balance sheet funds declined by 2%, while off-balance sheet funds grew by more than 5%. When looking at the quarterly evolution, the trend is similar. Finally, our commercial gap improved by EUR 2 billion in the year, driving our loan-to-deposit ratio to 94%.On Slide 6, we see the lending origination in Spain. Mortgage origination volumes in 2023 fell by 34% compared with 2022 following the current market slowdown. On the other hand, consumer loan origination increased by 25% on a year-on-year basis. We are growing, and we are doing it in a healthy way from a risk perspective, thanks to more preapproved loans and more segmented pricing.Regarding Business Banking, loan origination and new credit facilities increased by 7% over the year. As I explained in previous quarters, a significant amount of eco-granted credit facilities expired in 2023, and they were renewed as regular facilities. This has no relevant impact on the stock. Although, it does have a relevant impact on repricing. Finally, working capital posted a slight increase of 1%.On Slide 7, payment services performed well in 2023. Cards turnover increased by 7% year-on-year, while point-of-sale turnover increased by 11%. In the lower half of the slide, we can see that customer funds in savings and investment products in Spain reached a total of EUR 56.6 billion. This represents an increase of EUR 9.1 billion in the year.Term deposits increased by EUR 4 billion. Other on-balance sheet products increased by EUR 3 billion, and off-balance sheet products increased by [ EUR 2.1 billion ].Moving to Slide 8, performing loan book by segments and products, excluding TSB. The stock of performing loans in Spain declined by 1.3% in the quarter and by 4.8% in the year. As I explained before, demand remained subdued during the year in mid- and long-term lending, mainly due to a higher interest rate environment. In contrast, the stock of consumer loans grew by 14.5% in 2023, strong growth in a healthy way, as I mentioned earlier. Moving to the international business, performing -- performance lending grew by 1.3% in the year.On Slide 9, the mortgage book at TSB decreased by 5.9% in the year in local currency. However, mortgage origination remained flat in the quarter and new mortgage applications increased slightly.Customer deposits on the right-hand side of the slide, decreased by 4.3% in the year. The gradual trend of customer funds switching from current accounts to savings accounts continued during the quarter. In September, we increased the remuneration of our savings products, taking their cost to 2.4%. After that increase, we saw no further material increases during the fourth quarter.Our loan-to-depo ratio remained broadly stable in the year, ending at 104%.On Slide 10, TSB delivered a remarkable net profit in the year and its contribution to the Group reached EUR 195 million. Going through the P&L, NII increased by 4.1% in the year, but decreased by 7.1% in the quarter. Mortgage pricing and margins are still under pressure in the U.K. market, and the positive contribution of the structural hedge at TSB is not fully offsetting this pressure yet.Fees decreased by 5.4% in the year. Total recurring costs increased by 2.8%, a figure well below the current British inflation rate. And finally, provisions declined by 26% year-on-year. All in all, net profit reached GBP 175 million, increasing by 70% versus 2022. These very positive results were delivered even though GBP 53 million were recorded in the year, as a one-off restructuring costs and write-offs. I will cover this in a minute.Return on tangible equity reached 8.9% or 10.9%, excluding one-offs. Core Tier 1 stands at 16.7%. If TSB had a more normalized core Tier 1 ratio, for instance, 14%, return on tangible equity would stand at 12.7%, excluding one-offs. Finally, TSB will distribute a dividend of GBP 120 million to Group, which implies a payout ratio of around 70%.On Slide 11, looking backwards, the turnaround of TSB is remarkable. Over the last 3 years, TSB has focused on its core business, mortgages. The mortgage stock increased by 10% since 2020, and it currently represents over 94% of its loan book. Its average cost of risk is below 2 basis points.Secondly, financial results have been completely turned around, going from recording a loss of GBP 160 million in 2020 to recording GBP 175 million of net profit this year.Thirdly, TSB is a well-capitalized bank, and its solvency is above the sector average despite its low risk profile. The core Tier 1 stands at 16.7%, more than 450 basis points above capital requirements even after distributing a dividend payout of almost 70% to Sabadell.And finally, efficiency. TSB has reduced its cost base by halving its number of branches in -- since 2020 and by reducing its workforce by almost 20%. Cost to income has improved by 27 -- sorry, percentage points in 3 years, but it is still above peers' average. We believe there is room to become more efficient by reducing the cost base further and converting -- and converging efficiency with U.K. peers.On Slide 12, TSB has specific levers to improve its profitability. Let me go into details about the outlook of the different lines of the P&L. 2024 will be a transitional year in terms of revenues, as the higher cost of deposits and tight front book mortgage margins will continue to offset the positive contribution from the structure of hedge. However, we are much more optimistic about 2025 and 2026 and onwards, as the cost of deposit stabilizes and mortgage margins begin to recover from extremely depressed level. But furthermore, and this is very relevant, we will start to see the full benefit of the structural hedge in 2025 and onwards. In the interest of prudence, we are not assuming any material loan growth in the coming years.Regarding costs, we have recorded GBP 53 million of restructuring charges, GBP 29 million as restructuring costs and GBP 24 million in write-offs of some unused assets. As a result, TSB will benefit from GBP 53 million of savings in recurring costs. 77% of those savings are due to materialize in 2024 and the rest will come through in 2025. This will represent gross cost savings of more than 6% compared to TSB's current cost base and a payback of period of 1.1 years. Therefore, taking into account the efficiency measures, we should see total costs continue to decline specifically by around 3% in 2024 and around 1% in 2025, including inflation impacts.In terms of provisions, cost of risk will remain stable, considering 2023 provisions, as the run rate going forward. Considering these dynamics in 2024, we expect TSB's return on tangible equity to reach a similar level than that of 2023, so it can be considered a transitional year. In 2025, return on tangible equity will improve clearly.Going back to group performance in Slide 13. NII grew by 24.3%; while fees reduced by 7%. Recurrent costs grew by 3.5%. Core results reached EUR 3.1 billion, which means a solid EUR 29.9 million increase year-on-year. Provisions decreased in the year, underpinned by improved asset quality. We recorded a net profit -- a record net profit of EUR 1,332 million. And return on tangible equity reached 11.5%, while our capital ratio stands at 13.21%, after improving by 67 basis points in the year.In Slide 14, we compare our performance against the financial targets we had set for this year. As you can see, we have exceeded most of the targets we set in '21. Due to the good evolution of NII, fees and costs, pre-provision profit over risk-weighted assets reached 363 basis points, well above the target we had set. Total cost of risk stood at 55 basis points at the end of 2023, while the NPA ratio stood at 4.1% in both cases, better than established -- than the established target.Core Tier 1 and MDA buffer have largely overcome the targets, while increasing our payout ratio. And finally, return on tangible equity has jumped from 0% in 2020 to 11.5% in 2023, which reflects the bank's consistent delivery during the last 3 years. And last but not least, sustainability has become one of the key pillars of our strategy. Our inclusion in the Dow Jones Sustainability Europe Index is a reflection of our positive evolution.In Slide 15, we are sharing the results of the execution of the strategy. In the interest of time, I won't go through all the details on the slide, but you can see a summary of the strategic priorities for each business on the left-hand side of the slide, followed by some examples of the results delivered by the strategy. On the right-hand side of the slide, you can clearly see the improvement on return on tangible equity and the cost-to-income ratio across all business units. The rapid and decisive execution of this strategy together with a more benign environment have been key in turning Group's financials results around.On Slide 16, we are now ready to leverage on all the efforts of the last 3 years to hopefully boost growth. It will depend also on the market evolution. We keep having very clear priorities for each business. In retail banking, radical growth in digital customer acquisition. Furthermore, we want to become the main bank for more customers. We will leverage on the digital capabilities we have in place, and we will intensify the use of data.In Business Banking, leapfrog -- leap forward in customer engagement. We have specific levers to reinforce our sound franchise such as the partnership with Nexi or the new relationship model for SMEs we have recently implemented. The second priority in Business Banking is a further reduction of cost of risk. We are implementing improved risk management processes and tools. These improvements are effective to reduce the cost of risk when we back-test their results.In Corporate & Investment Banking, RaRoC management on a customer-by-customer basis will continue to be key to drive further profitable growth. In TSB, we are going to significantly improve its cost-to-income ratio closing the gap with peers. I have already talked about this.Finally, in Mexico, growth in retail deposits over the coming years will allow this franchise to reduce the cost of funding in pesos. For that, a new digital proposition for individuals will be launched shortly. In summary, we have now the tools in place to boost growth in the market if the market shows momentum.Moving to shareholder remuneration on Slide 17. We will distribute 50% of our 2023 net profit. This translates into EUR 666 million to remunerate our shareholders, which is an increase of 55% in the year and implies a dividend yield above 10%. This capital distribution will combine a cash dividend and a new share buyback program. On the other hand, EUR 326 million will be allocated to cash dividend, which represents a total cash dividend of EUR 0.06 per share and an increase of 50% compared to last year.On the other hand, EUR 340 million will be used to carry out a new share buyback program, which is equivalent to EUR 0.06 per share or 6% of the current market cap. This represents an increase of 67% versus the buyback program executed last year out of '22 earnings.For non-recurrent remuneration, the Board has decided that capital access above the fully loaded core Tier 1 capital ratio of 13% post Basel IV will be considered as distributable. The Board will determine the timing and structure of this distribution.With this, I will hand over to Leo, which will cover the part of the presentation concerning the bank's financials in more detail.
Thank you, Cesar, and good morning, everyone. Moving on to the financial results. We recorded a net profit of EUR 304 million at the Group level in Q4, taking our full year earnings to a total of EUR 1,332 million. Our quarterly results were mainly impacted by 2 elements. Firstly, the tax on deposits of credit institutions, IDEC and the annual payment to the deposit guarantee scheme amounting to EUR 34 million and EUR 132 million, respectively.And secondly, the non-recurring costs related to the efficiency initiative been undertaken in TSB, as Cesar explained before, which amounted to EUR 33 million in gross terms. The EUR 1,332 million profits for the year allowed us to post a return on tangible equity of 11.5% within our guidance for the year. We'll now go through different items of the P&L in more detail.Starting with NII in Slide 20. NII dipped by 2.5% on a quarterly basis, driven basically by TSB's NII, as Cesar explained before, and by the impact of the minimum required reserves. We consider different removing parts of the NII bridge on the top right-hand side. So looking at the ex-TSB perimeter, we can see that overall, there was a positive contribution to the Group NII in the amount of EUR 3 million.Ex-TSB's customer NII had a negative contribution of EUR 10 million, as it was impacted by persistently low loan demand in the sector with volumes generating a reduction of EUR 16 million and the foreign currencies producing a reduction of EUR 4 million. On the other hand, the customer margin still grew and added EUR 10 million due to the repricing of loans, while the cost of deposits increased at a slower pace to the loans evolution, and more importantly, also to previous quarters.Moving along to the right, the ALCO portfolio made a positive contribution of EUR 8 million. This, together with higher wholesale funding costs related mainly to higher Euribor, produced a combined impact that was almost neutral.From the liquidity contribution side, the interest received on the excess liquidity deposited at the ECB made a positive contribution of EUR 16 million since the average balances for the quarter were higher than the previous one.TSB's NII, as Cesar explained earlier, was behind 80% of the NII contraction for the Group. This evolution was driven mainly by EUR 5 million of one-off items and by a step-up in saving products costs. Nevertheless, it is important to mention that the savings remuneration have remained mostly stable since the end of September. This is the cost of deposits front book has remained broadly stable throughout the quarter. Therefore, we do not expect this downward delta in TSB's NII to continue in the coming quarters. As a matter of fact, what we expect is that fourth quarter NII will represent the bottom for TSB.Finally, in Q4 '23, we saw a loss of the NII linked to the non-remuneration of the MRR, which deducted EUR 9 million of NII from the Group. Customer spread and NIM on that hand grew by 46 basis points and 37 basis points, respectively, remaining quite stable in the year.Moving on to following slide, we show you our guidance for the year. We expect NII to grow in the low single digits in 2024. And to explain this in further detail, we have split NII in 3 different repricing blocks. The first one covers the customer margin excluding TSB. The second, the contribution of capital markets, in other words, ALCO, wholesale funding and excess liquidity, while the third one relates to TSB's evolution.As per the ex-TSB customer margin, the repricing of loans linked to variable rates, mainly the 12-month Euribor, we will still see a positive pickup in the first months of the year. On top of that, we have EUR 8 billion of fixed rate loans, mainly to corporates, which have not yet been repriced in this cycle and we will do so in 2024, producing yields around 300 basis points higher. We expect deposit costs to increase in Spain during 2024, but at a much slower pace than in 2023, given the decrease in forward interest rates.With regards to volumes, we see 2024, as a transition year, in which demand will improve, but might not fully recover. All in all, we expect the average customer spread in 2024 to be similar to the one in Q4 '23. Therefore, all these moving parts should drive a positive contribution of this bucket.Within the second block, as per the ALCO, we have been gradually reinvesting our maturities at better rates, whilst at the same time, reducing the hedge portion, thus reducing our exposure to variable rates. On the other hand, we have also been shifting part of our wholesale funding towards variable rates, increasing the cost of funding to variable rates.Regarding the excess of liquidity, it's worth reminding that the deposit facility rate in 2023 was 3.3% on average, which is very similar to the average of the current forward curve for the year 2024. Moreover, as I explained before, we currently have more excess liquidity than we did on average in 2023. Therefore, these 2 tailwinds, the ALCO and the liquidity remuneration should be able to [ contract ] the effects of both the non-remuneration of MRR and the higher wholesale funding costs, producing a positive impact on the NII also from this bucket.And finally, as per TSB, in 4Q '23, the 4Q '23 figure should mark the bottom, as I previously mentioned, NII will gradually improve as the cost of deposit stabilizes because it's been pretty stable in the fourth quarter already, and the structural hedge contribution increases.Regarding the structural hedge, let me remind you that this is a EUR 21.5 billion portfolio of 5-year swaps on which we receive fixed rate, basically a 5-year swap distributed on a straight-line basis. The fixed rate of swaps that are due to mature in '24 is 0.4%. In contrast to the front book yield of the 5-year swap rate, which is around 3.7%. In other words, more than 300 basis points pick up. This will be a key factor supporting TSB's NII, but not only in '24, but more importantly, in 2025 and onwards.Putting all these drivers together, we estimate a low single-digit decline for TSB's NII in 2024. Therefore, all in all, we believe the Group NII should increase by the low single digits in 2024. Or in other words, we see first half NII '24 to be similar to second half NII in 2023, but second half NII in '24 to be above first half NII in 2023.Turning on to fees on Slide 22, the fees declined in the year by 7%, while we recorded a minus 3.2% in the quarter. This downward trend has been mainly driven by several factors. On the one hand, overall asset management fees have been materially impacted by 2 factors.The first and biggest one has been the insurance fees. As guided, we changed the commercialization of house insurance premium from upfront to annual premiums. This has represented an impact of circa EUR 30 million in the year or 2.2 percentage points in total fees. This is a one-off, and therefore, we will not see this negative delta in 2024. For the reminder of asset management fees, we have been subdued through the year and specifically in the quarter, as the success fees were almost [ 0 ].Services have been weighted down by current account maintenance fees with during the year, while credit risk and contingent risk fees have decreased in the quarter, as a result of subdued activity, but are positive in the year. Going forward, we expect fees to fall by the mid-single digits in 2024. But it's very important to mention that this is mainly because of the reclassification impact of the payment business disposal, which will already be accretive in 2024 P&L.Nevertheless, in the fee line, it will imply a reclassification of [ EUR 30 million ] fees. So fees will go down by EUR 30 million, which will be offset by lower costs. This is by cost savings and a reduction of impairments, plus a slightly positive contribution from the equity accounted income. In other words, after we do the deal, we will have at least the same, if not a higher profit before tax, but will have an impact on the fee line of minus 32%, as mentioned.For the reminder of the fee lines in '24, we expect to see a positive underlying trend in all fees, except for current account fees due to the changes in legislation that prevents banks to charge certain fees to [ claim ] customers, who are in arrears and because strategically, it makes sense to reduce rates or waive certain fees within a positive interest rate environment.Moving on to costs on the next slide. The recurring cost base remained broadly stable in the quarter with a slight improvement of minus 0.2%. In year-on-year terms, recurring costs rose by 3.5%, well in line with our guidance. And recurring -- non-recurring costs, as Cesar explained earlier, we recorded EUR 33 million in the quarter related to new efficiency initiatives in the U.K., aiming to further optimize TSB's cost-to-income ratio.As you can see on the right-hand side, the cost-to-income ratio was down by more than 4 percentage points in the year, even when considering the whole cost base in the ratio, this is the recurrent costs plus TSB restructuring costs. At the Group level, the cost-to-income ratio for '23 stands at 51.4%, while ex-TSB, it is 45.4%. For 2024, we expect our cost base to increase by 2.5% despite inflationary environment, thanks to, among other things, the launched cost-reducing initiatives in TSB.On Slide 24, we take a very brief look at core results calculated as NII plus fees minus recurring costs. As you can see in 2023, the Group's core results increased by 29.9%. On the right-hand side, we can see that the driver that led these wider jaws in the year was NII, more than offsetting the rest of the lines.Moving on to the lower part of the P&L on Slide 25, we cover credit cost of risk and other provisions. In 2023, the Group's credit cost of risk stood at 43 basis points. while total cost of risk amounted to 55 basis points. These numbers have performed better than our year-end guidance, which was initially 65 basis points, improved to below 60 basis points in second quarter '23. This evolution has been bolstered by better-than-expected evolution of NPAs, driven by the fact that delinquency continues to be at low levels, as we will see later.Taking a look at the breakdown of total provisions in the quarter on the top right-hand side, we booked EUR 174 million of loan loss provisions in the quarter. This is the 43 basis points that we mentioned before. EUR 9 million of foreclosed assets provisions; EUR 22 million of NPA management costs, which could be considered a run rate; and finally, other provisions, which are normally mainly associated with litigations and other assets impairments, stood at EUR 23 million.Moving on to the following slide and continuing with provisions. Expectations for the year, let me highlight that we believe that cost of risk will keep on improving in 2024. This is -- it should be lower than the 55 basis points recorded in 2023.Credit cost of risk weights the most with 43 basis points out of the total of 55 basis points. Going forward, we foresee a gradual improvement driven by a benign macro scenario, a diversified and sound balance sheet. For example, 60% of fixed mortgages in Spain and an already settled evolution on our cost of risk management actions.The rest of provisions, namely foreclosed assets, NPA management costs and other provisions, mainly litigations, amounted for 12 basis points in '23, and we expect them to remain broadly stable throughout 2024.Moving on -- on the next section, I will walk you through our asset quality, liquidity and solvency. Starting with the asset quality in the next 3 slides, we show the evolution of problematic assets. On Slide 28, you can see that the NPL ratio increased by 10 basis points during the year to 3.52%, but entirely due to the reduction of the loan book. Since in terms of NPLs, they decreased by EUR 37 million in the year, fostered by a reduction of [ EUR 114 ] million in the quarter.On the other hand, even though NPL volumes have decreased, it is worth noting that total coverage ratio improved during the last quarters, rising by 3 percentage points in the year to 58%. While our coverage on Stage 3 loans is 42.3% at Group level, also improving by 3 percentage points in the year and higher 45.5% excluding TSB.Looking at exposures by stages and coverage on the right-hand side, our stage 2 exposure dropped by EUR 2 billion. This evolution is mostly explained by repayments within the portfolio, as well as migration to stage 1 of some debtors from the hospitality sector, which is a sector that is clearly recovered since the COVID crisis.In terms of foreclosed assets, the stock declined by 16% in the year. Today, portfolio represents less than EUR 1 billion. 21% of the stock we held at the beginning of '23 has been sold during the last 12 months with an average premium of 5%, which shows that these assets are correctly marked to market on our balance sheet.Let me also highlight the coverage ratio for this portion increased by 2 percentage points in the year to 40% and that 95% of foreclosed assets are finished buildings. If we consider both NPLs and foreclosed assets, total NPAs have decreased in the year by 3%, while total coverage increased by more than 3 percentage points in the year to 56%.Gross NPA ratio remained stable at 4.1%, while the net NPA ratio stood at 1.8% with an improvement of 10 basis points in the year because of the increase of coverage.As we can see on Slide 30, in summary, the evolution of the key metrics in relation to asset quality and credit risk have been robust. Firstly, the level of Stage 2 loans. Usually, a consistent leading indicator to determine how delinquency levels might evolve, went down by 17% year-on-year, which gives a sense of the improved credit risk performance of our book. Moreover, our Stage 2 coverage ratio also increased by 54 basis points, meaning that we are reducing our Stage 2 loans, while at the same time, increasing their coverage.Secondly, total NPAs decreased by 3% over the year, with again an improvement in the NPA coverage ratio of 3 percentage points.And finally, cost of risk improved by 5 basis points when compared to 2022. This good evolution of asset quality and cost of risk has been supported by the conservative structure and well-diversified composition of the Group's loan book, and what's more by a strategical evolution of our risk management culture, which has been and is a core part of our strategic focus.To give some examples of this trend, mortgage in Spain over the last 7 years were mostly originated at fixed rates with low loan to values. We also have a very long-lasting relationship with our Business Banking customers of over 10 years on average or more than 80% of the new consumer loans have been originated as preapproved loans. Altogether, this good starting point makes us confident that our asset quality will keep on improving going forward, which should translate into a reduction of cost of risk, as we are guiding for 2024.Moving on to liquidity on the next slide. The Group ended the year with an ample liquidity position, which has further improved in the last quarter. This is reflected on the EUR 50 billion worth of high-quality liquid assets, as well as the LCR, which stood at 228% for the Group, 8 percentage points higher than in Q3. The loan-to-depo ratio ended the quarter at 94%, marginally better than in the previous quarter.In terms of European Central Bank funding, EUR 5 billion remain outstanding will be mature in the next March. In fact, at the end of the year, the liquidity deposited at the ECB was more than 4x the outstanding TLTRO balance.Finally, in the U.K., we currently have EUR 4 billion outstanding under TFSME, most of which will mature in the second half of 2025. And to end with this slide, I would like to share the improvements in credit ratings received through the year. Moody's upgraded their rating from Baa2 to Baa3 on a stable outlook based on the good evolution and experience in terms of asset quality and profitability. Fitch also [ assigned ] as a positive outlook on the back of expectations that Sabadell's profitability will continue to structurally improve. And finally, S&P also improved its outlook from stable to positive, reflecting the continued delivery of our strategic plan and improved profitability of our franchise.Turning on to the next slide, we can see our MREL position. We recently received the updated MREL and subordination requirements applicable to us on a consolidated basis, which come into force in 2024. It should be mentioned that we are comfortable in meeting MREL requirements in terms of both risk weighted assets and leverage ratio exposure, as well as we're also very compliant with both the absolute and subordinated requirements.On top of this, we have built a comfortable management buffer on all the requirements, which eases our funding plans net for 2024. The issuance plans will therefore focus on optimizing the cost and sources of funding, while maintaining capital buckets and the MREL management buffer. In 2023, we have printed a total of more than EUR 6 billion across the whole capital structure. Additionally, as [ per ] the schedule 2024 MREL issuances, which will be lower than in 2023, we have already issued EUR 750 million senior preferred debt deal in January.Finally, moving to the next slide. We see that we continue to generate capital organically as our profitability improves. Our fully loaded CET1 ratio stands at 13.21%, having increased by 8 basis points in the quarter and more importantly, by 67 basis points on a year-on-year basis.When we look at the quarterly evolution in more detail, first of all, we can see that organic capital generation of 19 basis points including accrual of 50% dividend payout. Secondly, the fair value reserves adjustments of our fixed income portfolio display a small positive contribution with a generation of 2 basis points. And finally, the operational risk update based on higher gross operating income implied an impact of 13 basis points in the quarter.From a regulatory perspective, the CET1 ratio also stood at 13.21% on a phase-in basis, which implies a solid MDA buffer of 428 basis points, including the new SREP requirement, which has increased the MDA buffer by 26 basis points in the year.Finally, I would like to remind you that we have already estimated the regulatory impact of implementing Basel IV, which is basically operational risk from January 25, and this stands around 50 basis points. No other regulatory headwinds are expected in the coming quarters.And with this, I hand over to Cesar, who will conclude our presentation today.
Thank you very much, Leo. Before starting the Q&A, I would like to sum up our financial performance in 2023. During the year, we have been updating our initial guidance for most of the key metrics and by the way, improving them, and we have met the vast majority of them. Looking ahead, we are focused on clear priorities.First, we are already -- we are ready to grow volumes as and if the market starts to pick up. That's what we think is a sound strategy. Second, we will focus on cost control and on the implementation of efficiency measures, particularly in the U.K. And third, we will continue improving our risk management processes and tools, especially in SMEs. Certainly, we won't forget about the relevance of managing margins.Finally, on Slide 36, our final guidance for '24. I think Leo has covered most of it. But basically, in a nutshell, we are guiding for a further improvement of NII growing at low single digit. Regarding fees and commissions, we expect a middle -- mid-single-digit decline in 2024. And as mentioned, this is mostly driven by the reclassification of fees related to payment services due to the disposal of the merchant acquiring business. By the way, a very good initiative in our view. Additionally, the single resolution fund and deposit guarantee fund payments should be residual almost inexistent, as these funds are now fully built up.Total recurring costs are expected to increase by 2.5%, while the total cost of risk will continue to improve, underpinned by a robust balance sheet and improved risk management actions, as a continuation of what we have been doing during the last few years. Adding all of the above together, we are targeting a return on tangible equity of over 11.5% and excluding the capital gain from the merchant acquiring business disposal.And with this, I will hand over to Gerardo to kick off our Q&A session. Thank you very much.
Thank you, Cesar. Thank you, Leo. We will now begin the Q&A session. [Operator Instructions]
First question is going to be from [ Maks Mishyn ] from JB Capital.
I have 3. The first one is on the outlook for loan book growth in Spain. I was wondering if you could just give us some guidance on what you expect per segment. You've mentioned you have EUR 8 billion worth of corporate loans that will reprice, and my question is whether you see any risk that part of them will be returned? And also, what was the reason for the decline in new mortgage production in the fourth quarter? Was it you being less aggressive or there is more competition?And the second question is just an update, if you could update us on the sensitivity of interest rates to -- of your net interest rates in Spain?And then the final one is on capital. What are your expectations for capital evolution over 2024? And what is the timing for potential extraordinary shareholder remuneration? Also, why is the threshold set at 13%.
Well...
That's more than 3 questions.
So let me start with the outlook for growth and then the repricing of the EUR 4 billion --of the EUR 8 billion. I'll leave to you, Leo. The sensitivity also, and we will share the fourth one, the capital and the timing for potential extraordinary share buybacks or whatever.Okay. Let me start with the volumes. The first thing, I would have to say is that this is probably one of the areas, where we have had more discussion during the MTP. Why? Because what we see is a very clear divergence between what the expert expect, as the evolution of the interest rates during the year and what the market -- the implicit rates dictate. And our strategy is very clear.We will grow in general, faster in markets that grow, meaning that we will always focus on trying to get at least marginal gains in market share when markets grow, and we will focus on maintaining market share when markets are flat. This is very clear because in a declining market, trying to gain market share usually leads to a war price that yields very little.So with that general statement, as you asked to break down by product, let me go through each one of them, mortgages. New lending declined by 15% this quarter. The market has been subdued, and we have been defending margins. In any case, the mortgage book fell by 1.4% quarter-on-quarter and 3.6% in the year in line with the sector average.The outlook for '24. -- basically, we expect some stabilization of the mortgage market. But we expect in our projections, we have a slight decline at low single digit. In any case, this might be different, and we have everything in place to boost our growth when mortgages -- market pick up. We have been working for this, and we have specialized relationship managers, much more efficient processes, and we are ready for growth if it comes, although it's not what we are prudently forecasting.Consumer lending, as you have seen, our consumer lending has grown by 14% year-on-year. And it's very important to stress that there is no asset quality deterioration. In fact, our new loans in arrears, more than 30 days, which is one of the quickest KPIs that you can follow is performing better than in the last 2 years.So we are doing very well. We are gaining market share. It's a very profitable product, and we are doing it in a very careful manner because, of course, intuitively, one could say, okay, if the economy weakens, does it make sense to gain market share and to grow so fast in consumer lending, we are perfectly aware, and we are doing it very consciously and very carefully. The outlook for '24 is to maintain this dynamism and we are targeting a double-digit growth.Corporate and SMEs, I mean long and midterm loan demand has been subdued all the year, while working capital and short-term financing grew at high single digit in the first half of the year and slowed down in the second half. That explains the 5% decline in the loan book in 2023, as companies have postponed basically their investment decisions and the deployment of next-generation EU funds has been slower than expected.For next year, we have projected, again, flattish growth in SMEs, supported by resilient economic activity. But if really there's a lower rate interest environment, that should -- we have the perception that there is a demand that is encapsulated and that should flourish in case this interest rate environment as projected by the markets happens. Again, we will be ready for a market reactivation, we are projecting prudently.On other international, the businesses declined by [ 1.5% ] in the quarter, impacted by the appreciation of the euro. As in FX constant, it would have grown by 1.1% with Miami outperforming the rest of the international businesses. In the year, Mexico clearly outperformed, growing at double digit at 7% basically in constant FX. And the rest of the geographies remain stable or negative. Again, the same strategy. If there is growth, we will be there and try to gain market share.TSB, it represents a significant reduction in the performing loan. We saw before that it was 4% in constant FX. But in pounds, it was 5.9%, almost a 6% decline, as a consequence of the reduction in mortgage origination caused by what we all know, the higher interest rate environment and the sensitivity to it.Average origination remains below last year's levels. But current levels of mortgage, and I think we said that during the presentation, current levels of mortgage application would imply stable volumes in '24. We talk to our U.K. colleagues, of course, they are expecting that the market might grow and that we might be able to catch some market share.
And now regarding the EUR 8 billion of loans that have to reprice this year, we are fairly confident that they will because these are normally rolled over loans that just not had the chance to reprice in this cycle yet. So we are fairly confident on that.As per the sensitivity on NII, I'm going to be a little bit shorter on the answer than the CEO. But we expect it to be...
Are you making fun of me, Leo.
No, not at all. We have been reducing our sensitivity to NII, as we have discussed in previous quarters. We've done that by reducing the hedged part of the ALCO portfolio that is linked to floating rates and by also increasing the hedge part of the wholesale funding that is floating. And with all those measures now our sensitivity to 100 basis points of decline in rates, parallel declining rates is 1% in euros. So it has declined significantly.And the remainder of the questions were regarding capital, I don't know, if you want to...
Yes. Let me give it a quick start and please complete my answer, Leo. So in 2023, as we mentioned during the presentation, we generated 67 basis points of core Tier 1 organically with an 11.5% return on tangible equity. And this was also on the back of a reduction of the loan book. In 2024, we expect better performance of volumes.And as I mentioned in my previous very extensive response by the way, Leo, on volumes because I think it's important, that will have an impact on how much excess capital we generate during '24. We are convinced that we are going to generate a significant capital increase, but it will depend, to a very large extent on the evolution of the volumes growth. As we projected them, it should be very relevant. But as I mentioned, we will use any opportunity of market growth to try to grow with the market and a bit -- and a bit more.So the 13% core Tier 1 objective, let me clarify that the 13% core Tier 1 is not an objective. It's what the Board considers when the Board considers that there's clearly an excess of capital and therefore, distributable -- and distributable capital. And as such, it's obvious that it holds a management buffer. As to when will we reach that number, it very much depends. It very much depends on the growth of the asset side, and it's very difficult to give -- given that variability to give a clear guidance around when what -- that will happen. Yes, that's basically -- Leo.
Yes. So I think -- in a nutshell, I think we are expecting capital to grow in 2024. It grew almost by 70 basis points in '23. In 2024, we're expecting higher profit after tax than in 2023, as Cesar explained before, in terms of return on tangible. So if return on tangible is going to grow, that means that profit, even excluding the capital gain from the merchant acquired business is going to grow in 2024. And therefore, we will generate [ quite ] some capital. How much will depend on volumes, as Cesar explained.
Thank you, [ Maks ]. Operator, let's please move on to the next caller.
Next question is coming from Francisco Riquel from Alantra.
First one is a follow-up on the NII sensitivity. Leo, I think you have been too short here. If you can please elaborate further on what type of deposit beta assumptions are you assuming in the sensitivities? What type of interest rates, if you can also update on the weight of fixed rate assets and liabilities in your balance sheet more in details, please? And then, also related to this, you have been bullish in the NII for TSB in '25. So I know it is a long shot, but if you can also comment on the ex-TSB for '25. I think the important issue for NII sensitivities in year 2 of the repricing. So how big uplift shall we expect for '25, just an indication qualitatively or whatever you can comment here.And my second question is on the Nexi gain, EUR 200 million you mentioned initially, how do you plan to allocate it. You are charging EUR 30 million close to that to restructure TSB, but you have also mentioned that you plan to narrow the -- to close the gap, the cost to income with the peer group. So obviously, EUR 30 million is not enough of an investment to do so. So what shall we expect for this EUR 200 million [ anything ] for further cost-cutting initiatives in TSB or in Spain or ultimately for shareholder returns?
Okay. So I shall take the first one, and I'll be -- I'll give you a longer answer, okay? So basically, that's the regulatory sensitivity, okay? What we are expecting in terms of management, if you wish. So on the one hand, as I explained, we have reduced our sensitivity or the part of our ALCO book, which is hedged. It used to be around 45%. Now it's well below -- also below 40%. On the other hand, we have increased, and therefore, this extends the duration of the portfolio, all right? So we are now above 2 years, while we were below 2 years, I don't know, 1 quarter ago, 2 quarters ago.On the wholesale funding, now we have around -- it's north of 60% of the wholesale funding, which is floating. -- while before, it was in the low [ 50s ]. So again, we are expanding here and therefore, reducing sensitivity because if rates start to go down, we will start to pay less.For the deposit beta, that's a difficult one. I can give you what we have in the budget, which is around an average of around 30% for 2024. But this, of course, takes into account that rates are going to go down. And therefore, deposit beta of 30% doesn't mean that deposits are going to grow a lot in 2024. I mean, the repricing of deposits. They are going to grow. But in my opinion, at a much lesser extent than what they've done in 2023.So with all that together, basically, what we're expecting in the ex-TSB part is that customer margin is going to remain flattish with regards to fourth quarter '23. In other words, it should be higher than the average for 2023. This together with volumes, which are going to be around 2023 or perhaps slightly lower, it's what gives us the confidence that, that part of the NII is going to grow in 2024, as I tried to explain before. On top of that, we have the ALCO plus liquidity minus wholesale funding, which will also be positive. And this too shall certainly net the negative impact of TSB, not only net it, but beat it, and that's why we're guiding for low single-digit growth for 2024.[ As for ] 2025, as you were mentioning, I mean, we've talked about TSB because it has a couple of specific issues. The first one on the income side is a structural hedge. Structural hedge in TSB weights a lot. So in 2024, there's 2 issues. On the one hand, we have tailwinds, which are -- which is the structural hedge, sorry.But this -- the weight of the delta of the structural hedge in 2024 will be lower than in 2025. And that's driven by the fact that the PCAs in the year have gone down, and therefore, the total volume of hedges have gone down. This has an impact in the first year, not in the second year. So we are expecting the contribution coming from the structural hedge to be much more material in 2025, 2026, 2027 and onwards, then compared to their impact in 2024.On top of that, in 2024, we have headwinds, which are the mortgage competition. And still, we will see a little bit of repricing on deposits. In my opinion, it will be, again, much, much lesser than in 2023. For example, we have the example of fourth quarter. Basically, the front book of deposits in TSB have remained stable. The fact that it has had the delta for NII has been bad, it was because these pricing of deposits was set at the end of September, and therefore, it had no impact in Q3, but it has had an impact in Q4. But we're not expecting this delta or this amount of delta going forward. That's on TSB is very specific.On the rest of the Group, it's much more -- I think it's early to give you a guidance on 2025. We need to see what volumes are going to do, and we need to see what the forward curve it's finally going to do in terms of rates. But as I said, we are fairly confident that NII is going to grow in '24. And as soon as, we have more visibility on '25, we'll be very happy to give you a more detailed and precise guidance.I think it's important to mention that well, we've been here in the job for 3 years already. And I think we try to give the guidance that we are very secure on. And I think in the last few years, we've been able to give you guidance on the different lines of the P&L, and we have been able to achieve the vast majority of them. So we would like to give you guidance when we have more reassurance, if you wish.And the third one was, I think, on the capital gain. Well, we still have to close this deal. Hopefully, it will be done at the end of Q1 or during the course of the second Q. And when we have the deal, we will give you some more details on this.The issue that you mentioned regarding the cost-to-income improvement in TSB, it's a mix of both things. So on the one hand, we are reducing costs and costs will go down 3% in '24 and a further 1% in '25, but also income is going to grow because of what I mentioned of the structural hedge in '25. Just think that the structural hedge is around EUR 4.2 billion per year, times 300 basis points. It's a big tailwind.
Thank you. Operator, let's please move on to the next question.
Next question is coming from Britta Schmidt from Autonomous Research.
Yes. Hi, there. I have a question on the cost of risk. You were mentioning as a driver of improvement in new risk management tool implemented. Are you just referring to your lending policies? Or is there anything else that's been going on in the machine?And with regard to the size of the improvement, am I right in then assuming that provisions should be less, or total impairment should be less than EUR 900 million? And how sustainable would that number be?The second one is just a follow-up on the NII. If you've reduced the NII sensitivity quite materially, what impact has that had on the [ EVE ] sensitivity? And then just basically, could you give us the rate assumption, are you assuming the current forward curve?And then just lastly on the raise capital target, do you expect there to be any further increases in the SREP, for example, due to an introduction of a positive neutral CCIB [ in SREP ]?
Let me start with the cost of risk, basically, you're asking, is this related to tools? Are we improving our management on -- from a risk perspective. I think the reduction of cost of risk has been due to 2 very clear factors. One, this first factor of having better tools; and the second one to a benign environment. But let me focus on the first one.I think our models have been updated very, very significantly in the course of the last 3 years. We started with consumer loans. And there, we have seen a dramatic improvement. Then we have done also improvements, although of not so much significance in mortgages. And in SMEs, the models that we are putting into play when we back play them, they show much better results than we have had historically.But also from a management perspective, I think there's a clear, clear focus because, as you know, the core of our cost is in SMEs of risk cost talking about Spain, there is a very, very clear focus from a commercial perspective of focusing in a proactive manner in the clients that hold better risk quality. And in that sense, we have turned from a more reactive historical response to the market to a more proactive by pre-identifying the customers with which we want to work and therefore, focusing on acquiring those customers, but furthermore or increasing our market share in the customers that we know more and that we like more.This might sound qualitative, but it's having an impact in the numbers, and that's why we are very confident provided that there's no major turmoil from a macro perspective or an outside shock that we cannot foresee that there is going to be a continued improvement in our performance from a risk perspective.
Sure. Regarding the EVA (sic) [ EVE ] sensitivity, of course, we are reducing the NII sensitivity, taking into account the constraints that we have on the other side, which is basically the EVA (sic) [ EVE ], and therefore, respecting all the [ IRPB ] metrics. So despite that the fact -- sorry, that the sensitivity to [ EVE ] has grown because of the reduction of the NII sensitivity is well within our range, if you wish, or risk assessment, if you wish.And as per your question regarding capital, I think you were referring -- I didn't hear it very well, but I think you were referring a potential -- to potential countercyclical buffer. I -- if I get it right, is that so, Britta?
Yes.
Okay.
Whether the additional management buffer for excess distribution has anything to do with potential risk of raising, for example, the CCIB.
I think what we have right now is it's a very solid MDA buffer, which is almost 430 basis points. And I think this in general, it should -- I mean, we need to see what happens if anything happens and to what amount. But we are fairly confident with the current MDA buffer, which is included within the guidance that we gave in terms of extraordinary capital.And I think you also mentioned something about the sustainability of the EUR 900 million in provisions Well, I think, of course, it depends on the macro. But with the outlook that we have for the macro for '24 and if nothing breaks, we are fairly confident. I think we're coming from a lot of work within the bank with regards Cesar was explaining with regards to the asset management risk, if you wish.We've been working very hard on consumer finance. We're working very hard on SMEs on the lending side, on the origination side. So we are fairly confident. And by the way, we've seen it quarter-on-quarter. We've had no bad surprises in the last 3 years in terms of asset quality. We have followed a very straightforward trend on this regard. And that is why we are confident giving out this guidance for '24. If nothing changes dramatically on the macro, I think this guidance is well on the spot for '25 also.I mean, I don't see very big things changing here unless the macro turns around -- because as I said, our balance sheet is pretty, pretty solid. We have a lot of fixed mortgages, very long relationship with clients. We are turning to the clients that are preapproved to do new lending. On the consumer side, we are doing a lot of preapproved loans, and we will be doing even more going forward. So I'm not worried about the vintages of the new productions materially. And therefore, I believe this trend of cost of risk should be sustainable if the market doesn't change.
Thank you. Let's please move on to the next question.
Next question is coming from Sofie Peterzens from JP Morgan.
Yes. This is Sofie from JP Morgan. Sorry to go back to the net interest income question. But could you just let us know what Euribor and what kind of rate assumptions you have assumed in your net interest income guidance for 2024. So that would be my first question?And then the second question, did I hear it correctly? Is the 100 basis point cut raise -- reduces your NII by 1%. So if you could also just give details on how we should think about the split in Spain and in TSB, so 100 basis points cut, what does it mean for Spain and what does it mean for TSB?And then my final question, if you could just comment on your thoughts about the potential [indiscernible] results that is TSB still core? Do you make [indiscernible] [ Umicore ] they start to be quite large? And how do you think about organic growth opportunities?
So I'll take the first one, if you wish, Cesar. So the -- basically, the -- sorry, the assumption that we have included in our budget regarding Euribor is fairly close to the markets right now. And also, we're talking about around an average of 3% to [ 3.3% ] for the year.As per the sensitivity that was given out minus 100 basis points parallel minus 1%. That's in euros. If we include all the other currencies, this is basically Mexican pesos or dollars or pounds. This sensitivity goes to 3%. Okay?And I think the one about TSB, do you want to cover it?
TSB, Miami, in general, our perimeter. I think we have been very clear all along that we -- and we continue to see it in the same way about stability around our perimeter. Stability around the perimeter concerning TSB, concerning Miami, which you also mentioned, Mexico and also a view that there is no clear M&A activity in Spain, also because peers present a healthy solvency liquidity and profitability situation, which makes them less inclined or makes the market less inclined. And as we have often mentioned, the market in Spain is more consolidated than other markets in Europe.So basically, TSB, we consider that it's still part of our core. It's contributing handsomely. As we showed in the results, if you adjust for the extraordinary costs of reducing costs in the future, and you adjust for the excess of capital, which is close to 17%, and you adjust it to close to 14%, which would be a market average. It would be yielding a return on tangible equity that would be even better than the current one of the rest of the group. So we are satisfied.It's a market that is going through difficulties, which means that we should see more upside in the future and that we are probably at the low level, as we mentioned during the presentation, where probably -- and Leo, also [ insided ] on that. We are probably from an NII perspective at the bottom in Q4 '23.Miami, Miami, we are extremely satisfied. It's returning between 15% and 20% return on tangible equity. It provides also a diversification. It allows us to serve clients abroad in the U.S. We are satisfied in general with our perimeter.
Thank you, Sofie. Let's please move on to the next call.
Next question is coming from Andrea Filtri from Mediobanca.
I just wanted to understand if you are using the forward curve in your guidance. And if you could give us the NII sensitivity, if beta stays the same, we use the forward curve, what would happen to the current balance sheet, so without volume changes 12 months into the future?And the second question is on Basel IV. I just wanted to ask is the 50 basis point impact you're giving is fully loaded or just as of 1st of January 2025?
Sorry, Andrea, I couldn't hear you very well because the line was a little bit faint. But I think you asked about the -- which forward curve we are using on the NII sensitivity. As I said...
Well, NII sensitivity in -- if you freeze the beta, where it is now, we use the forward curve and the current balance sheet, so no changes in volumes, what happens to NII 12 months later, so with the forward curve. The only thing meaning the difference is the forward curve to the current balance sheet.
Yes. Sure. It depends on the beta on what you do with not only the beta...
[indiscernible]
Pardon me.
No changes in deposit remuneration. What would happen to NII 12 months later.
So that's basically more or less a sensitivity we've given out with a [ minus 100 ]. So it depends on -- as I said, if we retain the deposits -- the payment of deposits at the same time -- at the same -- with the same beta or with the same cost.
With the same cost.
If it's with the same cost, probably the sensitivity would be slightly better than the one that I mentioned -- because you will not be reflecting so much of the downward curve. But I don't know. It will depend on the evolution of so many different topics, Andrea, that I think it's -- in my opinion, it's difficult to give you a clear number out of that one.And [ as per ] the 50 basis points that you were mentioning -- sorry, I didn't hear it very well.
If it was fully loaded or if it was first year for Basel IV...
That's fully loaded. That's the full impact in 1st January '25. And it's basically, as you -- as I've mentioned before, this is operational risk. And this has -- this is driven basically by the income since the operational income of the bank has grown and the risk weighted assets of the bank have gone down. This is the impact that we are foreseeing right now for 1st January. So it's a fully loaded impact.
Thanks, Andrea. Operator, let's, please move on to the next question.
Next question is from Carlos Peixoto from Caixabank.
Hello. You can hear me right? So the first question would be on the cost side. If I understood -- well, if I'm reading things correctly, [ I feel as though ] you're targeting or you're guiding towards 5% growth, excluding TSB. I'm assuming the [ 3% ] drop in TSB cost, you mentioned to be on a recurrent base. So running the numbers, we are 2.5% for the Group by -- I get to roughly 5% in [ TSB cost ] -- in Spain, Spain or including TSB, sorry. I was wondering what are the drivers behind that or whether you're leaving there is some scope for positive surprises?And then, sorry to go back on the NII sensitivity scene, but a follow-up on the previous question. So from what you mentioned, should I understand that the NII sensitivity of minus 1% drop in NII for 100 basis points drop is assuming that the deposit beta remains as it is at year end?
So for the second question, the sensitivity is correct. So we're assuming that the deposit for that sensitivity number, we're assuming the deposit beta to be stable, okay?And for the first one, I'm not sure, I fully understood Carlos, but I think you were saying what are the trends under the increase of costs in Spain given the guidance that we have given of 2.5% increase of costs for the Group. So basically, the trends in Spain, we are negotiating with the labor unions, the new labor agreement and also taking into account all the inflation in the remainder of the cost lines. We are trying to keep those inflation, as lower as possible, but this is our best estimate right now. So our best estimate would be for the Group costs to grow 2.5% in 2024.
Thank you. I see there is still 6 of you on the queue to ask questions. We're going to extend the call for another further 10 minutes, but I afraid that I might not be able to squeeze all of you. So I will ask to keep your questions to 2, if you don't mind. So operator, let's please give access to the next call.
Next question is coming from Carlos Cobo from Societe Generale.
Carlos, can you hear us? If not operator, let's please move on and we can bring Carlos back...
Sorry. I was on mute. Sorry, I was on mute. Can you hear me now?
Yes.
Yes. Okay. Sorry. The first one is very quickly, I think it's been asked, but I'm not sure, it seems to be clear. What is the -- how many rate cuts do you have in your forecast for NII in 2024, ECB cuts of 25 basis points each?And the second one is trying to -- so that just a clarification. So the 2 questions is, if you could clarify what the rationale behind this 13% Basel IV fully loaded capital target for extraordinary distributions because we are seeing some of your local peers also domestic banks distributing everything above 12% and that has been going on already for a few quarters or a few years, and you have one of the highest MDA buffers in the sector. So it's difficult to understand what's the rationale and why do you believe you have to keep such a high buffer?And the second one is, how do you think about loan growth dynamics in the long time from Spain because nominal GDP is already growing at 3.5%, 4%. Why shouldn't you be growing in line with nominal dynamics, if the deleveraging process have been completed already by 2019. I mean, what is preventing customers from taking more leverage? And how can GDP keep on growing, if the loans doesn't follow suit.
So first one, we've taken into account 4 rate cards in -- rate cuts in 2024. The -- I think you were asking about why we including our Basel IV impact within our capital number. Well, we have this number, I don't know what the rest half to be completely honest with you. So I don't know whether they're guiding for this or not? And how much is their impact. We think it's only fair to take the foreseeable regulatory impacts into account when we guide you for a capital -- for capital number.And the third one was...
No. The second one was the rationale for the 13%. I have to admit that there has been a lot of discussion at the Board because, of course -- and you're absolutely right. The Spanish peers have aimed for a lower target, but the European peers, the ones that we also compare with have aimed for higher targets. So it's a judgment call. And basically, what we are saying is that this is the rate at which the Board feels comfortable. It could be lower, that's for sure.But there's no reason, and let me guarantee that there's no reason that you can see behind that is malicious. It's just that it wants to have also the flexibility for facing different types of environments that might occur. And I insist, if you look at the European level, we are more in line with the European level than probably with the guidance that -- the guidances that have been given in Spain. I don't know if you want to add anything. No, no, that's right.
Okay, growing.
[indiscernible] if you want just the fact that we also have a business in the U.K., which has a countercyclical buffer of 2%. And that is also weighted in our MDA buffers.
But you're right that our MDA is super healthy. And we are very comfortable with having that. And furthermore, it allows us to absorb future potential changes in regulation that we will have to analyze if they happen, but that chances are that they wouldn't move this current expectation.In terms of growing, why don't we project more ambitions growth in terms of volumes, and I will not extend myself here very much because I might get again, Leo, calling on me for talking for too long. But basically, we hope that we have the ability to grow further. Our macro tells that despite the GDP growth, there will not be so much growth on the investment side. That depends on 2 factors. And that's the core because we have seen that the activity related to consumption, both consumer loans on the private sector and working capital on the professional sector in the enterprise sector have been very healthy during the year, and GDP has behaved well.But what has not behaved well has been investments, which are the mortgages, and which is the mid and long-term investment on the side of the enterprises. And that is the key factor for growing the book. And therefore, that GDP growth was already healthy in the past years. We hope that because the drivers are one, interest rates. And I think as it has been mentioned, we have several included in our forecast that because of that and hopefully also because of more confident environment, we hope to be wrong, and that the growth will be larger than the one that we have projected right now in a prudent manner.
Thank you. We're going to try to squeeze 2 more questions. Operator, let's please give access to the next question.
Next question is coming from Cecilia Romero from Barclays.
This is Cecilia from Barclays. I wanted to ask, so this commitment to distribute as a capital of 13% is the first. We see that you have finished the quarter at 13.2%. Could you discuss why not taking it -- why didn't the Board take the decision to distribute this capital now and announce a bigger share buyback? And is this because is there any headwinds that are coming next year that maybe we haven't discussed yet?
No, I think it's very clear. We are saying that it's 13% post Basel IV. And Basel IV, we expect an impact of 50 basis points. So after Basel IV, we are not above -- currently above the 13%.
Thank you, [ Cesar ]. Operator, let's please give access to the next question.
Next question is coming from Ignacio Cerezo from UBS.
Let's stick to one, basically. If you can give us your view about how quickly the deposit costs kind of start going down after rates start going down. So what is the lag between rates going down and deposit costs going down in your [ head ]?
Well, I think what we are aiming here is that deposits are going to grow much less in terms of delta in '24 versus '23. We've already seen this in the fourth quarter this year, both in terms of TSB and also in Spain, where the front books have remained fairly stable, and the growth has been because it has remained fairly stable to the numbers in September. And this is what we're seeing in Q1.I think we saw that banks were able to control the beta on deposits in '23. And I think it's going to be the case this year. Deposit beta will increase for certain, as I mentioned before, because the rates are going to go down. And therefore, we will see an increase in deposit costs because of the back books, if you wish, and the time the back books have been yielding. But I don't expect very large increases, if at all, more or less the other way around in the deposit repricing of the front books.
So maybe actually -- I don't know if I made myself clear is the question was around the lag between deposit costs starting to go down after rates have started to go down.
No, no, I understand, Ignacio. But it's difficult to give you a precise number in terms of months. It's just that I think -- we're already seeing that in Q4 by destabilization.
So you don't think there's a -- you don't think there's a significant lag basically. That's the end of message.
I think we can manage that lag to be small, yes.
Thank you. And with that, I think we will close the Q&A. Thank you all for your questions. Thank you, Cesar and Leo, for all your answers. To any of you, who might have been left out, apologies. We do not have any more time. Let me in any case, remind you that the full IR team is available for any further questions that you could have. We'll now wrap up the session. As always, we are available for you [ anyway ]. Thank you all for your participation and for joining us today.
Thank you.
Thank you very much. Bye.