Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2022-Q1

[Alberto López, executive]

Good morning, everyone. Thank you for joining us for our First Quarter Conference Call. Today, we have Pablo González, our Chief Financial Officer; and Juan Pablo Lopez, our Investor Relations Officer with me. They will be taking us through the presentation. Please remember that we will have a live Q&A session after the presentation. And now I leave it to Pablo.

[Pablo Gonzalez Martin, executive]

Thank you. Let's start with a summary of the main developments of the quarter in Slide 4. Business activity keeps showing good progress. We keep delivering very good results in the main focus areas of our strategic plan, retail lending, mutual funds and insurance. New mortgages lending was nearly EUR 1.3 billion in the quarter, 25% higher than last quarter. New consumer loans amounted EUR 171 million in the quarter, which is a 10% higher than last quarter. Also, mutual funds have performed very well, especially under the difficult market conditions that we have experienced in this period.

Gross inflows were 4% higher than last quarter after a very strong start. We have been able to maintain mutual funds' balances stable quarter-on-quarter, which is significantly better than the sector as a whole.

Finally, new insurance premiums were 18% higher than last year on the back of a strong lending activity. As you can see, all 4 business lines are doing very well. And we expect to maintain the good momentum in the coming months.

Now on profitability. Net interest income has stabilized this quarter despite a lower day count. New lending activity, re-pricing to higher Euribor and the fixed income reinvestment plan will be quite supportive for NII going forward. So we are optimistic here and expect a strong second quarter.

On fees, we had a very strong quarter as a result of a very positive commercial dynamics. Fees are up 14% versus last year. And we feel very confident with the development of fee income going forward as all of our main sources of fees are doing very well. And we are not very dependent on the wholesale business.

Operating expenses are down 8.5% year-on-year. Most of the savings come from personnel expenses. Personnel expenses start reflecting synergies from the merger. Some of them were already visible last quarter. But we keep making progress in this area.

On asset quality, cost of risk keeps the downward trend and it's getting closer to the normalized levels. We have not seen deterioration in the quarter. But we will be cautious until the ICO moratorium expires in the coming months, when we will have some more visibility also on the geopolitical and macro situation.

Given our coverage levels and loan book breakdown, we are in a good position to tackle potential market uncertainties. Finally about capital, CET 1 fully loaded ratio stands at 12.6% and has slightly increased in the quarter despite strong market volatility.

We have a very comfortable capital position for our risk profile. And we remain committed to generating capital organically. At the beginning of April, we distributed our first dividend after the merger, around 50% cash payout of 2021 pro forma net income in line with our current dividend guidance.

Now Juan Pablo is going to cover the business activity of the quarter in more detail.

[Juan Pablo Lopez Cobo, executive]

Thank you, Pablo. If we move now to Slide 6, you can see here retail customer funds saw a positive growth year-on-year regarding on balance sheet funds. And as we anticipated in the previous quarter, we had some outflows from institutional clients. This is after adjusting our pricing policy to market conditions in a context where we maintain a very strong liquidity position.

On the right, you can see most of our deposit base comes from the retail side. And then of balance sheet funds grew 7.5% year-on-year. When comparing on a quarterly basis, funds are slightly down due to market volatility, while mutual funds are performing significantly better than the sector.

In Slide 7, we take a closer look at our mutual fund business. AUMs remained stable in the quarter despite market turmoil. And if we take a step back, you can see we have achieved 20% annual growth in the last 3 years. This is very remarkable and supports our targets.

As Pablo commented, gross inflows stay very healthy, 4% higher quarter-on-quarter. Net inflows were slightly below previous quarters, but still significant given the volatility and this is actually a 14% market share in the quarter.

On the right at the bottom, you can see we are growing in a profitable way with mutual fund fees 29% higher than same quarter last year. So in addition to AUMs growth, we expect the positive performance in fees to continue as we integrate the mutual fund business and the mix becomes more profitable.

Moving now to lending on Slide 8, retail lending book is more than 3% up year-on-year. Both the residential mortgage and consumer lending book are growing at similar levels. As you know, these 2 books are the main focus for us for the next few years. And the corporate loan book decreased in the quarter after a strong 4Q when we had to meet the TLTRO III target.

In this business portfolio, we are more focused on offering existing clients a more comprehensive product portfolio and entering more profitable segments and not so much on loan growth. Overall, total performing loan book is 1.6% up year-on-year.

Next Slide on new lending and starting with corporate lending. It was a more quiet quarter after a strong end of the year linked to the TLTRO. Residential mortgages new lending keeps improving and is 25% higher than last quarter. And we will see in the next slide we are achieving a pickup of activity in important regions for us with a lot of upside potential like Andalucia, while regions like Madrid or Barcelona keep doing very well.

March actually was a record month in terms of new lending. And the second quarter has started on a very good pace again. Consumer lending keeps moving in the right direction, improving the service of our existing clients. This quarter 95% of new lending was granted to existing customers. And this is a very profitable business line for us with new yields of almost 7% and NPL ratio below 3%.

In Slide 10 and looking to our 2 biggest portfolios, on the left mortgages, you can see the main KPIs of the book, mostly first residence and with low LTVs. In terms of geographical exposure, we saw here the breakdown of new lending in the quarter. And I would like to highlight again the strong evolution in Andalucia, which had the best quarter ever 40%, 4-0, higher than last year. And this is a very relevant region in the residential housing in Spain and one of our home markets.

On the bottom left, the average loan size keeps improving as we are targeting a more affluent customer and mortgages help us to expand our relationship with clients through cross-selling. On the corporate portfolio on the right, a quick note on the ICO loans.

You can see that 40% of the book asked for a moratorium that matures basically in the second quarter. We are anticipating MPR recognition. NPL ratio stands at 7% out of which 72% are subjective NPLs. And as a reminder, 75% of this stock is backed by state guarantee. And if we include that guarantee, the current NPL coverage is 100%. So all in all, we believe we have a manageable impact here. But as Pablo commented, we prefer to be prudent. And we will wait until the second half to be more specific.

On Slide 11, we keep advancing on the digital business. 52% of our customers operate digitally and 40% of new clients in the quarter came through digital channels. We keep adding partners to our digital ecosystem as [ e-care ]. And we keep evolving our relationship with existing partners as Real Madrid and PlayStation with new products.

In Slide 12, we show here a summary of our current priorities, and some milestones. In terms of sustainability, we started the year focus on next-gen funds. At the same time, we keep adding sustainable products to our portfolio. And a good example is our target to have more than 75% of mutual funds balances under Article 8 in 2022.

Lastly, we also plan to approve our green bond framework in the short term.

Moving now to the next topic, financial results in Slide 14. We will comment here mainlines in more detail later. So let me highlight just a few things. NII is flattish with positive outlook in the coming quarters. On associates, we had one-off charges of around EUR 5 million from 2 different companies that will not repeat in the future. Fees performed very well, 14% up compared to the same quarter last year.

OpEx is down, personnel expenses already reflect savings. General expenses are higher than the fourth quarter which is always seasonally better. And this year we are having some impact from inflation. But this is offset by cost savings. We expect general expenses to be flattish year-on-year.

And finally, in other provisions, we had a couple of one-offs that took us slightly over our guidance.

Moving now to Slide 15 and going into a bit more detail in terms of NII on the left. You can see customer spread remained stable quarter-on-quarter after some pressure in 2021, while net interest margin starts to recover.

Customer spread will improve in the next few quarters once the Euribor re-pricing starts to kick-in. And on top of this, on the right, you can see that the front book stands above the back book and will also support NII.

In the Slide 16, NII remained stable in the quarter despite the negative impact for the headcount. Other than this, lending income is lower than last quarter explained by the mix with more mortgages on the book, in the loan book and the final re-pricing to lower Euribor.

We expect lending to increase contribution to NII in the next quarters. On the fixed income portfolio, we started to reinvest mostly towards the end of the quarter and still we have room to invest more. Rates also had a positive impact on the ALCO portfolio.

And finally, as we explained last quarter, we adjusted our pricing policy to market conditions on institutional deposits, obviously with raising interest rates. This didn't have the impact that we were anticipating but it's still a positive impact of EUR 2 million in the quarterly evolution.

Going forward, we are rather optimistic with NII given the higher deal on the ALCO book and the loan book re-pricing to higher Euribor together with larger volumes.

Moving now to fees in the Slide 17. Let's focus on the right. You can see banking fees. This is mainly cards, payments and current accounts are slightly down after the 4Q that is always with higher activity during the Christmas break.

When we compare year-on-year, you can see they are 13% up. Mutual funds performing very well quarter-on-quarter and year-on-year. And we expect this line to keep going up from both volumes are more profitable mix and then insurance fees are seasonally strong in the first Q from life insurance premiums.

But you can see that they are also up 7% year-on-year. All in all, fees are 14% up versus last year and almost flattish versus last quarter, which is seasonally very strong.

Moving now to OpEx in Slide 18. You can see total expenses down 9% versus last year. We are starting to see the synergies of after the agreed, we started in planning December. In this sense more than 400 people already left the bank. We expect around half of the 1,512 employees to have left by the end of the second quarter and around 80% before the year end.

You can also see that we are also restructuring the branch network. We closed almost 300 branches since we announced the merger. This is almost 20% reduction of the initial branch network.

And in the next slide, you can see cost of risk keeps falling to 36 basis points in the quarter. As we have said in the past, we want to be on the conservative side until equal loan payment holidays mature in the next month. And we have also some more visibility on the geopolitical situation.

We continue in the right direction to reach an average level of close to 25 basis points for 2022-24 according to the strategic plan. And here we will also like to highlight that our forward-looking provision scenario is more conservative than the latest forecast policy by Bank of Spain. And this leaves us in a good situation to tackle any downside risk in economic activity.

And with this now, I pass the word back to Pablo.

[Pablo Gonzalez Martin, executive]

Thank you, Juan Pablo. Let's move now to asset quality. On the top left hand side, you can see the quarterly evolution of the nonperforming loans, stock, which is flat quarter-on-quarter. We have had lower NPL entries of around EUR 140 million. Out of which around 70% are subjective. Coverage levels are also flat in the quarter.

Actually, if we include the guarantee from the ICO loans that are already classified as nonperforming loans, the coverage ratio stands at 75%. At the bottom, you can see half of our NPLs are mortgages, with a real and liquid collateral behind. Also, on the top right, you can see a bit more detail regarding the coverage ratio by portfolios.

We believe it explains by itself, especially in portfolios with a strong collateral and low loss given default like the mortgage book. On the bottom right, you can see something else important. The Stage 2 coverage is almost double the sector average and reflects a front-loading effort from our side.

Next slide, foreclosed assets are down EUR 116 million quarter-on-quarter. You can see we have had EUR 151 million of outflows in the quarter, which is a very healthy rate of almost 30% of initial stock at an annualized basis.

Coverage ratios increased slightly this quarter and stands at 63%, which should support the pace of disposals going forward. Looking now at NPAs. Altogether, NPA ratio improved slightly to 7% and coverage ratio slightly increased to 66%.

When we look at the NPAs net of coverage, which is a metric that we like to monitor, the ratio goes down to just 2.5%. We remain confident to achieve the NPA ratio below 5% by 2023 and 4% by 2024 as we have communicated in the past.

Moving now to solvency. CET 1 fully loaded has increased 4 basis points in the quarter, which is a very positive given the market volatility. Let me explain the main movements in the bridge. Organic capital generation was 17 basis points, which net of dividend accrual of 50% of net income and the AT1 coupon accrual at 8 basis points. Lower risk-weighted assets coming from the loan mix evolution in the quarter at 22 basis points.

And finally, valuation adjustments implied 27 basis points negative, mainly from the EDP stake, which has been recovering in the last few weeks and also the life insurance joint ventures.

CET1 fully loaded remains above 12.5%. That is in-line with the management target. We believe this is a comfortable level for a bank like us. And as we have communicated in the past, we expect to keep generating capital organically.

Very quickly, in the next slide, capital levels remained well above capital requirements. We have a very significant CET1 fully loaded buffer of EUR 1.6 billion and MDA buffer of over 430 basis points.

Moving to the next slide, the fixed income portfolio. As we have explained last quarter, we had room to reinvest after the portfolio restructuring post-merger. This quarter, we have started reinvesting mainly at the end of the quarter at attractive yields. And you can see the size of the portfolio has increased by around EUR 1 billion.

We have room to reinvest in the coming quarters. And given current government yields, this will have a positive impact on net interest income. We have started. But we are watching closely market conditions to complete this reinvestment. Average duration has slightly increased to 2.5 years in the quarter, while portfolio yield has gone up from around 80 basis points to 110 basis points. Also, keep in mind that over 99% of the portfolio is accounted as amortized cost.

Although we expect to -- the reinvestment we have just mentioned the size of the portfolio is expected to be lower than before the merger as we allocate part of the liquidity to a growing lending book and off-balance sheet products.

And finally, on liquidity. The message in the last slide of the presentation is the strong liquidity position we currently have with an 81% loan-to-deposit ratio. We plan to deploy this liquidity to increase the profitability of the bank. We tapped gained the market at the beginning of the quarter with the issuance of EUR 300 million of Tier 2. That allows us to call in March an expensive Tier 2 of the same amount the EUR 300 million.

You can see that our maturities are well spread over the next years and coupons are relatively high for 2023 and 2024.

And this is it from my side. And now we can start with the Q&A.

[Operator]

[Operator Instructions] The first question comes from Francisco Riquel from Alantra.

[Francisco Riquel, analyst]

My questions are related to the NII. First, I would like to ask about the institutional deposits. I see that the stock of these institutional deposits has fallen by EUR 6 billion quarter-on-quarter from '22 to around EUR 16 billion. You mentioned in the past that you would benefit in NII even if the deposits were lost because of the negative recovery.

But I just see EUR 2 million uplift to NII from the EUR 2 billion new institutional deposits that you're charging. So I wonder if you can update on the overall on distributional deposits. You also mentioned that you are changing the commercial strategy now that interest rates are starting to rise.

Second question on the ALCO strategy. I see that the current rate contribution increased EUR 6 million quarter-on-quarter with a stable bond portfolio on average, but with higher yields. So I wonder if you can give more color on the ALCO reinvestments. What are you doing in terms of duration? And overall, how do you see the size of the bond portfolio and duration coming quarters in the current market environment, given also the risk to capital ratios.

And lastly, I wonder if you can update on the NII guidance for '22 and on the sensitivity to interest rates? And how much of the uplift in NII of the higher rates will be felled already in '22 and then in '23.

[Pablo Gonzalez Martin, executive]

Okay. Thank you. A lot of questions probably, I will take the first one, Pablo, regarding institutional deposits. You are right. We were anticipating that we changed our policy, pricing policy for these customers. We were getting -- we are getting close to the market policy. And we were expecting outflows.

This is something that was already in our numbers probably. What is a bit different is that with raising interest rates, the impact was lower than what we were anticipating. We had a positive impact of EUR 2 million in NII in this quarter. We were expecting probably around EUR 5 million, EUR 6 million. On the other hand, obviously, the raising interest rates will have a more positive impact on the other parts of the balance sheet of the bank.

And this is something that we will see already in the second quarter. Just to give you some color on the institutional deposits. Right now at the end of March, total deposits are EUR 17.5 billion on these customers. And we are charging to EUR 5.5 billion, more or less 1/3. And we are charging on average 35 basis points.

So this is more or less the EUR 2.5 million we generated in the first Q. And going forward, as commented, probably this contribution will fade away. In relative terms, it's relatively small for us. And this will be more than offset by the re-pricing on the asset side, that probably Pablo can comment more in detail.

[Juan Pablo Lopez Cobo, executive]

Okay. I'll answer the ALCO strategy, the ALCO portfolio strategy. As we said, we have already started to reinvest mainly concentrated at the end of March. And you can see that the portfolio has increased by around EUR 1 billion in the quarter. And we also have taken a little bit more of duration still with a very prudent approach on duration due to the market conditions and our expected interest rate evolution. So we have taken a little bit of more duration to the 2.5. We still have room to reinvest as you can imagine.

And we have been prudent compared to our previous plan because we were expecting these market conditions to happen. So we -- if you look at the increase in yield in the portfolio, this is more due to the hedging of some positions. And when you review this hedging this usually, if the market goes up in rates, the portfolio goes up in rates.

And the other point I want to mention, Paco, is that most of the portfolio is not the carry trade. It's within the strategy of the whole portfolio. It's the amortized cost portfolio. And with this -- with our loan to deposit of 80%, we have the strategy of investing while we keep growing in the lending book and increasing our off-balance sheet product franchise.

We maintained some portfolio on the amortized cost, but its amortized cost. And it's -- all the investment has been done in government bonds in the quarter and very small sales have been done in the quarters around EUR 500 million or even less than that.

[Alberto López, executive]

Yes. Probably the next question, Paco, will cover probably with other analysts, so we can get as many through.

Operator, please get the next question and please try to keep it to 2 questions.

[Operator]

The next question comes from the line of Maksym Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have 2. The first one is on other provisions. I would appreciate if you could provide a little bit more color on why there was a one-off in other provision line in the quarter. And then, the second question is on cost. I was wondering if you could tell us how large is the share of employees that fall within collective agreements within Unicaja? And what kind of salary inflation should we think of given the high price growth in Spain? I was also wondering what initiatives do you implement the target increase in costs? And how much of additional savings you expect for 2022?

[Pablo Gonzalez Martin, executive]

Thank you, Maksym. I will take the first one regarding the provisions line that was EUR 27 million in the quarter. This is above the EUR 15 million - EUR 20 million guidance that we were providing. There were 2 -- basically 2 extraordinary charges there. There are around EUR 4 million. This is related to pension plan contributions for the employees that are leaving the bank already.

As we commented, there are 1,500 employees that will leave the bank, 400 already left. And the ones that -- some of them, there is the pension plan contribution charge that will not repeat in the next quarters. And then, there is another EUR 2 million that is related to an associate and this is a fiscal impact. Again, this is a one-off. So that explains the more or less the EUR 7 million above the guidance.

[Juan Pablo Lopez Cobo, executive]

And regarding employees, let us going back to you -- the specific question, the percentage of the number of employees that they are with the trade unions. And what we can tell you in terms of cost and in personnel. Starting by personnel expenses, first of all, probably we can comment on general in costs. Here, we maintained our guidance that we announced in the strategic plan. If you remember, this was EUR 210 million gross savings in 2024 versus 2020. This will be 170 million net of the inflation and investments that we were already incorporating there.

When we look to personnel costs, we do not see any deviation here. The restructuring plan is going as planned if any probably faster than expected. And as you know, there is a collective agreement that cap salaries increased at around 1%. So again, personnel expenses stick to the plan, nothing there, if any, going faster than expected, the exit of employees.

And regarding general expenses and inflation, here, basically, we have 2 impacts. One is the energy prices that has a cost of around EUR 8 million per year. And then, contracts and suppliers, this is another impact of around EUR 10 million per year. So this is the impact that we are having from inflation and energy.

But again, here, we plan to neutralize this inflation in 2022 with cost savings from the integration. And we expect to maintain general expenses flattish year-on-year. And then, in 2023, we expect to see additional cost savings in general expenses and that's the reason why we stick to our plan. So that will be for cost.

[Alberto López, executive]

Thank you, Maksym. Operator, can you get the next question, please?

[Operator]

Our next question comes from the line of Carlos Peixoto from Caixa Bank.

[Carlos Peixoto, analyst]

So first question was actually a bit of a follow-up on NII. So basically, well, serving all the moving parts with a stool pricing portfolio increases pickup in volumes that you expect throughout the year. But basically putting out everything together, what type of NII performance do you expect to see at year-end or in the full year '22? And then the second question on cost of risk. So cost of risk is now at 35 basis points, going in the direction of 25 basis points that you were mentioning.

But I was wondering with all the uncertainties that you see in the right and whether these 35 basis points could be a reference for the rest of the year or whether you see it going down further throughout the year.

[Pablo Gonzalez Martin, executive]

I'll take the first question. Thank you, Carlos. Okay. NII, I think the interest rate has moved faster than we originally expected. And this means that we will have a positive impact on NII going forward. Accordingly to -- we have raised our previous guidance. And now we expect the 2022 NII to be flattish compared to 2021. And this is coming from a lower NII. Although -- and this implies that we maintained the quarter-on-quarter NII. But for the following quarters, we expect this to go up in double-digit numbers.

So this increase comes from the interest rate. And the reasons from this and why we expect this to come from, we have a larger contribution from the lending book. Although this will be fully appreciated next year but it will start. It hasn't started in the first quarter.

But from second quarter, if you look at the Euribor 12 now, it's in positive territory and it used to be minus 50 last year. So we have these higher yields coming from our mortgage portfolio. And also, as we have mentioned, the lending yields will pick up as well in the coming quarters.

On customer deposit, we don't expect any negative impact. And as Juan Pablo mentioned, we don't have that excess liquidity going forward and minus 50 that we had in the past. And regarding the other major driver, which is the ALCO portfolio. As I said, we have most of the ALCO portfolio hedged on interest rate risk, and this reflects on the higher yields. And as long as the conditions maintained to where they are today, we expect a significant improvement and contribution from the ALCO portfolio.

Lastly, I think the other point is the wholesale funding. As I said, we won't have the positive impact from the TLTRO as we lose the extra 50 basis points in June and probably in the second half of the year, if the implied curve and what the market discount now that the ECB is going to raise rates in the second half of this year, 2, 3x, we will see.

And -- but obviously, we will have a negative impact from the ECB and the money market funds and in the second half of the year. But on the other side, we will have the positive impact of the negative impact of the excess liquidity that we had in the past.

So all in all, we expect a flattish NII for this year compared to last year. And we expect to have a significant improvement in NII just from the second quarter of this year. So it's not going to be something for the second half of the year. So the good numbers will start to show up in our NII from next quarter.

Regarding the other question, it was the cost of risk? Okay.

[Juan Pablo Lopez Cobo, executive]

Thank you, Pablo. Regarding cost of risk, what we can tell you right now is that we do not see anything. NPL entries remain under control. We have seen a lower GDP forecast. But something important here in our case is that in this forecast, the unemployment rate continues to improve in the next years.

This is the key indicator for mortgages, our largest portfolio. Actually, something interesting for us is that when we look and we compare the macro scenario, for instance, the latest one that was published by the Bank of Spain in April. And we compare that macro scenario with the one that we were applying in our forward-looking on our models; we are still in a much more negative scenario for our models and provision. For instance, we assume unemployment rate to remain above 15% or real estate prices to fall or GDP growth below 1% in 2023-2024.

And this is much more conservative than the latest Bank of Spain forecast. And also related to this, this is something that we follow very closely. And if we include also higher rates and inflation, and this is related to the affordability of our customers.

Our starting point is a very low affordability ratio. So the percentage of the income of our customers that they allocate to pay the loans, the mortgages, the installments is 25% of the total income. If we stress this affordability ratio by 300 basis points higher, and we do not assume any salaries increase. We continue to see affordability ratio below 35%. And even if we include inflation, this is quite manageable and well below the 50%, 60% affordability ratio that we saw in 1994 or 2008.

And maybe the last point here is that most of our new production during last year was done at fixed rate, so the movement of the rates is -- doesn't have the same impact on asset quality. So all in all, again, we maintained our guidance at the 25 basis points during the strategic plan.

And probably for the short term, we prefer to be a bit more prudent and wait and see, but again, so far, so good. We do not see any deterioration. We have also anticipated recognition of NPLs. Coverage ratios remains high. And the book, as you know, in our case is quite conservative with most of them are mortgages.

[Alberto López, executive]

Thank you, Carlos. Operator, please, next question.

[Operator]

The next question comes from the line of Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, analyst]

A couple of quick ones from me, both related to lending yields. So you're mentioning NII this quarter suffering a little bit from 12-month Euribor a negative asset mix. But then on Slide 15, you're showing that the front book back book in the quarter in terms of lending yield is positive. So if you can kind of help us reconcile actually both things. And then related to this, if you can give us the front book back book on the mortgage book as of March.

[Juan Pablo Lopez Cobo, executive]

Thank you, Ignacio. I will take this one. As you pointed, there are probably here to approach. First one is the evolution of the back book and then the front book. Regarding the back book, and as Pablo was commenting, we had the latest impact of the re-pricing to the lower Euribor at the beginning of this quarter.

We started at the end of the quarter, at the end of March to see a re-pricing upwards of the back book. So with the implicit rate, that's what we are expecting for the next quarters, the back book to improve the deal, thanks to the Euribor re-pricing. And then regarding the front book, we see here as well to continue to be accretive in terms of NII.

If we look to the mortgage book, front book continues to be accretive in a very competitive market, returns continues to be attractive. And here, as we have seen in other European countries, and we are starting to see here in Spain as well. We also see yields going up.

Then in consumer lending, front book, again, is accretive. It's a small book, but it makes a difference. Yields are around 7%. And as we commented, 95% of the new lending was with existing customers. So with a low risk profile, we are not in the open market.

And then corporates probably is the one where we are seeing front book doing much better than in the past. Probably the 4Q was the bottom affected by the TLTRO. So here, we already see front book well above what we have seen in the past and above the back book. So all in all, back book re-pricing with the Euribor and front book already accretive in all portfolios and we see the prospects pricing going up.

[Pablo Gonzalez Martin, executive]

Let me point the Euribor re-pricing for our mortgage book has 1 and 2 months lag because if you look at the 12 months of last year, probably we shouldn't have any negative impact. In January and February, we still had a slightly impact because we have some of our mortgage book has a 2-month lag in considering the mortgage as a reference for the re-pricing. So that's why we still had some impact.

But as Juan Pablo said, we expect to have an improvement. I think in Corporates that the market re-priced much faster the new interest rate environment and retail customers it takes a little longer. We maintain an ALCO on a monthly basis to review the market conditions and probably the competition do the same. And we have seen that it has taken a little bit longer than expected to re-price the pricing for the retail customer. But we are seeing good signs in -- for our competitors and from our side in terms of pricing. And we will see even better front book numbers going forward.

[Alberto López, executive]

Thank you. Thank you, Ignacio. Operator, please, next question.

[Operator]

The next question comes from the line of Ignacio Ulargui from BNP Paribas.

[Ignacio Ulargui, analyst]

We just have 2 questions. One is linked to the excess liquidity. And the fact that it has declined EUR 6 billion quarter-on-quarter, if I just look at the quarter figures in the balance sheet. And would you speak to the view that you have around EUR 6 billion of excess liquidity to invest in the ALCO book. So I just wanted to understand a bit better why that has changed, if excess liquidity has been used, why the need to reinvest in the ALCO book has not declined.

And the second question is on the fee income. I mean you have given a much more bullish guidance on NII. Definitely, there Ukraine was not part of the landscape when you defined the business plan. Don't you think that fees have a bit of a downside risk in terms of mix of changes of on balance sheet to off balance sheet funds and with enough balance sheet funds that is taking appetite from investors, from retail investors might be lower in the current context of volatility?

[Pablo Gonzalez Martin, executive]

Yes. Regarding the liquidity position and the reinvestment of the fixed income portfolio, what we had last year, if you look at year-on-year, the number on our retail deposit is 1.5% positive. So we still have a positive trend, although this quarter because of the new strategic decision and seasonal measures the evolution of deposit has been lower in the sector and especially in our case. And we will probably offset some of these with the negotiations that we have engaged with the large corporate and institutional investors in our depositors.

So I think you have to consider the overall liquidity. And we also have plans to issue around EUR 2 billion for MREL requirements and to balance our maturity in the portfolio of our liabilities. So we maintain our reinvestment strategy for the fixed income portfolio. And the liquidity, it's not coming from this deposit base. And this deposit base was interest rate sensitive. And it will change depending on the market conditions. So for the short term, we decided to reduce as you mentioned the deposit base from this type of customer.

But going forward probably will stabilize and even go up a little bit down the line and still maintain a very strong and excess liquidity to deploy. And on the second part, can you answer, Juan Pablo?

[Juan Pablo Lopez Cobo, executive]

Thank you, Pablo. Yes. Probably, we sounded a bit more optimistic in terms of NII. I guess this is the main change to the previous quarter and the evolution of rate make us to be -- to change to improve our guidance and to be more optimistic in that line.

But having said that fee income, we continue to be very, very positive. We maintained our guidance here. We expect a double-digit growth target for 2022 versus 2021. First Q was 14% up compared to the same quarter last year.

We almost repeat the 4Q that was a historical record high level. And the main drivers are basically mutual funds, insurance and payments. Mutual funds, we continue to see a good evolution in terms of gross inflows. We are merging the asset management business. And you will see in the second quarter that this is not going to be on the volumes, but also pricing.

We will review prospective pricing policy fees and that will be visible already in the second quarter. So far, the improvement of the fee income in mutual funds was due to volumes. But in the second Q, as said, it's going to be also profitability. Then, in insurance, the trend is very good with premiums going up almost 20% year-on-year.

As you all know, we are in the process to renegotiate our life insurance partners. And we expect to close that process soon. And we are expecting to improve recurring revenues in this line. And then payments, we see larger contribution as well going forward.

So fee income, we maintain guidance. And we see double-digit growth year-on-year.

[Alberto López, executive]

Thank you, Ignacio. Operator, please next question.

[Operator]

The next question comes from the line of Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, analyst]

A couple of questions on asset quality. One is the more specific and anyways more general. How -- when you think about future and NPL formation, you said I'm not seeing anything. But I guess you're planning, if you could indicate a little bit of how much of expected inflows you're going to have in your budget for the rest of the year? And how much of that is coming from ICO loans, how much is for the energy intensive sectors?

And secondly, this is a more general thought. You keep on booking provision charges above peers with similar loan mix that happened since COVID. But that reflects on your conservative approach to asset quality.

But could you please quantify how conservative you've been? And what is the real provision surplus that you have if you apply more normal standard provisioning practices or coverage levels. I mean just to understand how big of that buffer is and how much room for maneuver that could give you?

[Pablo Gonzalez Martin, executive]

I'll take the NPL formation. Thank you, Carlos. I think that the NPL formation, we already mentioned last quarter and we reiterate our cautious position with NPL. The reality is the number. And what we are seeing with the customers and the SMEs and corporates that we talk is that they still have in a good position. And we can see that from the credit lines, not drawn by the -- some of the customers and even the -- some of the echelons in the credit lines hasn't been drawn fully.

And -- but we still prefer to be cautious. And as we said, we have from April to June, most of the payment holiday ending. So the formation will probably come in the second half of the year. And the new problems regarding the energy price spike that we have seen lately and the purchasing price index that has gone above the 40%.

This will put pressure on corporates and SMEs to pass through the price hikes. And this will have an impact on the economy as a whole. But most of the analysis that we have run of our portfolio makes us comfortable because of the -- either they have purchasing pricing power or they are not in a position where the increases affect that much.

But most of them are thinking and are passing through the price increase. Obviously, we don't know how this is going to evolve. This is a very complex situation, the geopolitical situation and the price and the energy price evolution.

We forecast that we were going to have more inflation. And that's why we had lower out the duration on our portfolio. And this will imply higher rates.

But having said that we don't expect them to go as much to have an impact on a significant impact on NPL. So as Juan Pablo mentioned on the mortgage book, we have run the analysis on the affordability for our customers.

And on the SMEs, we are a little bit more cautious because we want to make sure they manage this very complex situation. And we don't want to be very specific and that's the reason. So the most likely is that the second half, I think for this second quarter, probably, we will maintain a good momentum.

And if you look at the NPL entries, it has come down 40% compared with the first quarter. So it's even better than the initial expectation. You have to think that we have 2 different situations in Spain. We still have the pent-up demand for the services. And the people are choosing services rather than goods, and this will have an impact in our economy.

So this positive tailwind will offset part of the negative headwinds of higher energy prices in the economy as a whole so cautious. And in that sense, I think our strategy of having higher cost of risk in the first half of the year until we see the final outcome of the COVID and now the geopolitical situation reaffirmed our cautious essence on cost of risk.

But we still think the level of provision that we have will allow us to achieve. And we haven't changed our strategic plan and our guidance for the 3-year period. But even within our plan, we already mentioned that it was going to come down gradually.

So the first year was going to be higher and then lower in the coming years. And this obviously will depend on the conditions. I think to quantify obviously, it's a hard thing to do because it depends on your assumptions.

And as Juan Pablo already mentioned, we have prudent approach to quantify the potential impact of any negative scenario on the economy. And we will maintain this prudent approach that we have had in the past and had proven right in previous crisis in Spain.

And this is part of our DNA. And we will maintain this over prudent approach on potential scenarios and provisioning. So I think quantifying depends on your assumptions and I don't think it's the right way to measure. I think it's more -- if you have for similar macroeconomic scenarios, we will have probably less need of cost of risk provisioning down the line.

But at the moment, as I said, we prefer to be prudent and maintain our cautious systems until we see how this crisis unfolds.

[Juan Pablo Lopez Cobo, executive]

Maybe just one comment from my side. Probably we take a different approach to other banks in terms of overlay provision as Pablo was commenting. And we touched before what we apply in our forward-looking models is a macro scenario that we believe is quite conservative.

You can see the details in our annual report. But at the end of the year, what we assumed there was unemployment rate above 15% in the next 3 years, GDP growth 0.6 in 2024, below 1 in 2023. Real estate prices are coming down by 2% in 2023-2024. So -- and we analyzed our portfolio loan-by-loan and portfolio-by- portfolio.

And based on this scenario, we allocated the provisions. So I guess this gives us comfort that in the new macro uncertainty, we have room to tackle. And as Pablo said, so far, we prefer to be to stand on the conservative side.

And as we commented in the past, if things evolve as expected, we expect a low cost of risk for longer, but we prefer to be prudent right now.

[Alberto López, executive]

Thank you, Carlos. We are running out of time. I think we have time for one more. Operator, if you can get it through.

[Operator]

The next question comes from the line of Borja Ramirez from Citi.

[Borja Ramirez Segura, analyst]

I have 2 quick questions, if I may. Firstly, just a clarification of the NII guidance. The new guidance of flat NII year-over-year, I would like to ask this is before the TLTRO benefit and also which volume growth assumption is embedded in your guidance? And my second question, if I may, is if you see any disposals of NPLs or foreclosed assets?

[Pablo Gonzalez Martin, executive]

Okay. Thank you, Borja. I'll take the NII. I think the point I made on the NII guidance is considering the forward interest rate curve and without any new measures from the ECB in terms of TLTRO. And our -- and the market assumption is that the ECB is not going to have a new bonus of minus 50.

So we think the TLTRO we won't have any -- even if there's a new TLTRO, we don't expect that to have any difference compared to the repo market and the funds market. So we will manage due to our positioning on NII sensitivity. As we mentioned in the past that we had for the first 50 basis points, we have above 50, and above 10% NII interest rate sensitivity of the balance sheet of the whole balance sheet and the impact in this first 50 basis point is significant.

And the reason is we have contract re-pricing of the loan book. And on the back -- on the liability side, we don't have to pay because we were already at 0% with most of our customer base. So we think this will only reflect some of that benefit because of the re-pricing and also because of the strategy that we took on the ALCO portfolio in the past.

So I maintained -- if you look at the numbers. And as I said, if we compare the EUR 235 million on an annualized basis, there will be an increase in high single-digit, almost 2 digits in NII. Compared the full year with full year, it will be flattish, as I said. And obviously, it will depend if we reinvest the portfolio fully or only partly and could be close to the same level as last year or even slightly higher if we do at a very good level. It will depend on market conditions. So take that with a pinch of salt because it's the market volatility and rates. It's very hard to have a so close guidance on that.

And the second question regarding the asset disposals. We had a very good quarter in the first quarter. We made EUR 151 million. And as I said, if you look at those numbers on an annualized basis, around EUR 600 million, it's around 30% of the NPAs, the real estate assets that we have.

So we are always looking at opportunities. And because of the level of provision that we have, we are always analyzing when is the right timing to make the disposals and retain shareholders' value and do it at the right time always.

I think the strategy that we have followed in the past is we have to have enough provision to be confident that it won't be hit down the line on the P&L. But the timing will depend on market conditions and the investor interest.

I think the right timing is when the investor demand is there and you get a reasonable price and you don't give up much of the value of our shareholders. So we will look at opportunities. At the moment, the market is a little bit shaky. But we will have to see if things come to more a stable situation and the demand will pick up against. And if that's the situation, we'll probably and obviously will consider some portfolio sales for the disposals. So thank you.

[Alberto López, executive]

Thank you, Borja. We've gone a little over time, so we're going to leave it here. We have a couple of questions that we will take from the Investor Relations team. Thank you, everyone, for joining. Have a good day.

[Pablo Gonzalez Martin, executive]

Thank you. Thank you very much.

[Juan Pablo Lopez Cobo, executive]

Thank you.