Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2023-Q1

[Alberto López, executive]

Good morning, everyone. Thank you for joining us for Unicaja Banco First Quarter of 2023 Earnings Conference Call. We have Pablo González, our CFO; and Juan Pablo Lopez, our Head of IR, that will guide us through the presentation. And please remember that we will hold a live Q&A session after the presentation. And now I leave it to Paolo.

[Pablo Gonzalez Martin, executive]

Thank you, Alberto. Good morning, everyone. Before we get into the details, I would like to say that this quarter, we have seen a strong evolution in liquidity and solvency, some of the main strengths of Unicaja that will help us become more profitable and generate more value for our shareholders going forward.

Now getting into the key aspects of the quarter. The beginning of the year has been a bit slower than expected at the sector level on the lending side, but we have been able to perform well on the retail side with an almost flat book year-over-year. This quarter, we have seen the strength of our deposit franchise, with customer deposits from the private sector falling by only 0.4% versus last quarter, while maintaining a very low deposit cost of just 16 basis points. If we include off balance sheet funds, total customer funds from the private sector have remained stable in the quarter.

We keep moving forward on improving profitability and all 3 lines of our core banking margin keep delivering positive results. Net interest income is flat quarter-on-quarter and 11% up, excluding the TLTRO impact. Lending and ALCO repricing offset the increase in funding costs and the impact from the TLTRO. On a yearly basis, NII is up by nearly 25% with still a lot of repricing left in the loan book. Fee income grows by 3.1% in the quarter and by 1.3% year-over-year with both banking fees and asset management fees evolving positively.

Operating expenses are down by nearly 3% year-over-year and 2% up in the quarter after some seasonality last quarter in general expenses. Personnel expenses keeps capturing synergies as the restructuring plan keeps moving forward. Adding these 3 together, our core banking margin has improved by 44% versus the same quarter last year; and also net income, excluding the banking tax, has improved by 63% versus last year.

At the same time, we keep reducing our stock of NPAs, which, as you know, is a key target for the bank. The stock of foreclosed assets went down by EUR 43 million in the quarter, with EUR 84 million of sales. NPLs are slightly down in the quarter again, and we have seen very limited NPL entries with high-quality recoveries. Cost of risk is 26 basis points below our guidance. We have seen a positive start of the year in asset quality, and we are seeing no signs of deterioration so far.

Finally, capital ratios and liquidity have delivered a strong performance in the quarter. CET1 fully loaded ratio went up by 49 basis points in the quarter, and it stands at 13.5%. This is a very comfortable capital position, well above our 12.5% management target, and we expect to keep generating capital going forward while maintaining our 50% payout policy. We have a CET1 fully loaded excess capital of EUR 1.7 billion and 457 basis points of MDA buffer.

Finally, the liquidity coverage ratio has improved by 14 percentage points, and it now stands at 298%, which is much higher than the average for our peers and one of the best ratio amongst all European banks.

And now, Juan Pablo will cover the business activity of the quarter in more detail.

[Juan Pablo Lopez Cobo, executive]

Thank you, Pablo, and good morning, everyone. Let's start with customer funds. As you know, this is something differential in our franchise with a lot of value in the current environment. You can see private sector that are the most stable and sticky deposits are almost flattish, while we saw some decrease in the public sector deposits. And we believe this is showing a good performance, especially if we take into consideration that some deposits were used to repay loans and some just moved to other products or balance sheet, so they continue to be in the radar or ecosystem of Unicaja. Regarding off-balance sheet evolution. As mentioned, we have seen some inflows coming from retail customers into mutual funds and savings insurance. Next slide.

We would like to spend a couple of minutes looking at our customer deposit base. You can see we have 76% coming from individuals, 80% of the private sector deposits are secured by the guarantee fund. When we look at regulatory definition, 79% are considered stable, which is some of the highest within European banks. So I guess these metrics already speak by themselves. And all this, it's a consequence of the structure of our deposits and customer base, customers with a long relationship with Unicaja that use the services of the bank for savings and in their day-to-day business for transactional purposes.

This structure and customer base also explains the granularity and lower cost compared to peers. You can see on the right-hand side that the last few quarters, we have increased the deposit cost at a slower pace. And basically, we believe the value of our deposit franchise will continue showing in the coming quarters.

Now looking at mutual funds, which is one of our main fee income business. AUMs decreased year-on-year on the back of lower market valuation, but are 1% up in the quarter. We have also seen some customers diversifying their savings and allocating also part to insurance. And our strategy here, as you know, is an open platform, where we continue offering value-added products that generate return to customers, and at the same time, improving the profitability of the business, as you can see on the right.

Moving now to lending on Slide 9. As Pablo commented, we have seen a slow start of the year at sector level, in our case, retail lending book is 1% down in the quarter and flattish compared to last year. In residential mortgages, we keep growing our market share, and consumer is the other priority where we see growth.

Corporate loan book deleveraging continues as we anticipated in previous quarters, early amortizations are still coming from extra liquidity granted to companies during previous years. And some of the amortizations were granted at lower fixed rates. So in economic terms, the early amortization actually generates value and capital for the bank. In corporates, our main focus in the short term is to target the right clients and improve our product offering together with higher pricing, as we have seen over the last few quarters.

Next slide on new lending. Corporate new lending is stabilizing on the retail side. Consumer lending, where, as you know, we work mainly with existing customers, has been a bit quieter than we expected at the beginning of the year, but we are positive for the remaining of 2023. Residential mortgages slowed down a bit after a few strong years. This is something that we could expect when rates move up so fast, it takes some time for customers to adapt to new pricing, and therefore, new lending activity reduces. All in all, we expect a lower year in terms of new lending compared to recent years, but at much better pricing.

In Slide 11, looking at our 2 biggest portfolios. On the left, you can see the main KPIs of the residential mortgage book, very stable from last quarter, mainly, first residential mortgages with a defensive loan-to-value in the portfolios and at an origination level. In terms of geographic exposure, Andalusia and Madrid are our 2 main markets, and they are the top housing markets in Spain. And on the bottom left, the average loan remains stable, and we continue to be able to attract new customers, expanding also the relationship through cross-selling and higher share of wallet.

On Slide 12, we keep advancing our digital business, the weight of digital customers keep increasing above 60% in the first quarter of the year. Out of the 17,000 new customers captured in the first quarter, 1/3 came from digital channels. And payments also keep going more digital, together with the remote channels, that help us in the sale of consumer loans and mutual funds.

In ESG, in Slide 13, we have made great progress in our action plan and reached some milestones, important milestones. First, starting with the environmental pillar. We have already started to report not only Scope 1 and 2 emissions, but also Scope 3, and this allow us to define the decarbonization targets in order to reach the net zero by 2050. And it's also important to highlight that the stock of green eligible projects keep growing.

On the social front, in Slide 14, we continue supporting financial educational programs. We also reached an agreement with Correos, that is the largest postal company in Spain, to bring financial services closer to people at risk of exclusion. For instance, allowing cash withdrawals wherever there is a post office. And in the governance, as we anticipated last quarter, we created a Sustainability Committee within the Board of Directors that is already working since the beginning of the year.

Moving now to the financial results and the P&L. In Slide 16, we will comment the main lines in more detail later. So here are just some highlights. NII is up 25% in the year and flattish in the quarter. More visible loan repricing is supporting customer spread and offsets the lower day count and higher funding, mainly TLTRO. Fees saw a positive performance, delivering good results in most business. Associates is mainly recurrent revenues from the insurance JVs that are doing well.

Other revenues here, we include the EUR 64 million temporary banking tax and also our agent cost, that increase in number. OpEx, very good news here as well. Personnel expenses are reflecting incoming synergies, while general expenses are higher this quarter because the 4Q is seasonally lower for us. Loan loss provision, cost of risk of 26 basis points without making use of any overlay provision, no use. Other provisions include here legal charges, mainly related to mortgage expenses and floor closes.

Finally, other profit or losses of EUR 20 million in the quarter. We continue reinforcing coverage and real assets to allow accelerating disposals. All in all, the core business and recurrent revenues are doing well. The structural revenues are doing well and profitability is improving. Net income, excluding the banking tax, would have increased by 63% versus first quarter last year.

Now going into a bit more detail, and starting with net interest income. Customer spread increased by almost 50 basis points in the quarter, 47 basis points, thanks to the strong performance of the loan yield while customer deposits remain under control. Repricing of the loan portfolio is gaining speed. However, there is still a large part of the repricing, especially from the mortgage book still to come in the coming quarters.

As you know, the benchmark rate for our mortgages is mainly Euribor 12 months. And the benchmark rate that we applied on average in this first Q was less than 1.4%. That means there is a lot of repricing still coming from that 1.4% to the current 3.9% Euribor. This is 250 basis points left of repricing. Deposit cost remained quite low at 16 basis points, but it was also very low in March at just 22 basis points. On the right-hand side, you can see the latest figures on lending yields at the end of the quarter that continue improving. Back book, for instance, is 22 basis points above the average of the quarter.

Now we want to show in Slide 18, the main moving parts of the NII compared to previous quarters. First, on the retail side, lending increases EUR 65 million, mainly mortgages, and still a lot of repricing coming. On retail, EUR 17 million, increase in customer deposits, and this is very contained. And the fixed income portfolio, sorry. Sorry, the fixed income portfolio improves by EUR 14 million as some bonds are at variable rates. Then we had the impact from TLTRO. This is EUR 33 million. The average cost is 2.3%. Wholesale funding increased due to the fact that around 2/3 of the issuance are swap, and there are -- we already completed almost the MREL funding.

Next slide. Let's see if we can explain the guidance that we are expecting for NII. The chart on the left, the starting point is EUR 293 million in the first Q. This is the base 100 million on the graph. And then basically, you can easily calculate the evolution for the next quarters. We expect in the second Q NII to improve around 5%. What we are trying to say here in this chart is that NII should gradually increase on a quarterly basis but at much faster pace in the second half of the year.

The 2 main assumptions that we are taking here is first one, the Euribor. Average Euribor 12 months is 3.5%. As you know, now it's higher than that. And then the second main assumption is the beta. You can see the beta at the bottom of the chart. The starting point is actually below 5%. Beginning of April is around 7%, 8%. And the average for the year is 16%. I guess these 2 assumptions give us additional comfort to our guidance.

And then on the right, we explain the other drivers, some of them we already commented. Basically, the significant repricing left on the loan book. That's the main one, the first one. There's still some repricing in the ALCO portfolio, but at a slower pace than we have seen in the last quarters. Then the impact from the TLTRO that will fade away in the second half of the year.

Then some repricing in the wholesale funding and potentially one more issuance, but again, MREL is almost completed. So this is almost done. And then the gradual increase in deposit cost that, again, I would like to highlight average beta of 16% for 2023, very low starting point, and the second Q is starting very low as well. All in all, what we see is the NII growing above 20% year-on-year, thanks to the core banking business, while TLTRO fades away and wholesale funding and ALCO plateau stabilize basically.

Moving now to the next slide on fees. Total fees, they are 3% up in the quarter and 1% up in the year, which is very remarkable given the market volatility that we have seen in the year. We still enjoy some of the synergies coming from the merger also on the revenue side. Mutual funds are flattish quarter-on-quarter, but they are 20% up compared to the same quarter last year. Insurance is also performing well. The Q is a seasonally good quarter for the life insurance business. So all in all, very sound fee income delivery, especially given the market volatility. And we expect, going forward, the fees to continue delivering growth during the year.

Moving now to Slide 21. Total OpEx increased by 2% quarter-on-quarter explained, again, by the seasonally lower general expenses in the 4Q. Personnel expenses maintained the downward trend, 3% decrease quarter-on-quarter. We have executed 87% of the restructuring plan exit so far. On a yearly basis, total OpEx is 3% -- almost 3% down. For the full year, we still expect to see a decrease in the cost base.

On personnel costs, we expect around 5% decline as synergies will continue to flow into the P&L in the next quarters. And on general expenses, we see some increase versus 2022 due to inflation that will more than offset some synergies coming from the merger. All in all, we expect total OpEx decreasing at low single digit in the year.

Next slide. Cost of risk stands at 26 basis points in the first Q, having made, again, no use of any overlay provision. This figure is below our guidance for the year. And asset quality has behaved very well so far, better than we were expecting as we will see later in more detail.

And on Slide 23, on the left, I guess this is the most important thing for us. The banking business, the structural business, is doing well. Banking margin is growing at 44% versus last year. All 3 lines are delivering positive results. NII, fees, OpEx year-on-year, which is the best foundation for increasing profitability going forward.

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

[Pablo Gonzalez Martin, executive]

Thank you, Juan Pablo. Let's move now to asset quality. On Page 25, on the top left-hand side, you can see that NPL stock decreases again this quarter. The trend is quite positive, and NPL entries in the quarter were 30% below the average of the last 12 months, where 55% of them were subjective NPLs. These are NPLs that are either performing or past due below 90 days.

NPL coverage level is very strong at 66%. If we include the guarantee from the ICO loans on NPLs, coverage ratio stands at almost 77% and the corporate NPLs coverage level would be over 100%. What is most important is that coverage level by portfolio put us in a good situation to manage these nonperforming loans. In addition, we have a very defensive loan book with more than 75% individuals and public sector exposures with very low NPL ratios, now and historically.

Next slide, foreclosed assets are down EUR 43 million in the quarter. After the strong fourth quarter last year in terms of disposals, we have been able to sell another EUR 84 million this quarter. Last quarter, we sold a wholesale portfolio, while this quarter, we have done it more on a retail side. As you can see, we stick to our strategy of combining granular disposals with some portfolio sales. This is the way in which we expect to continue selling our assets and it is also the way that we believe will allow us to maximize the value going forward.

Coverage ratio of foreclosed assets stands at 64%, flattish in the quarter. And finally, looking at NPAs altogether, the NPA ratio net of provision amounts to 2.4%, which is already a low exposure. But as I have just said, we remain committed to keep decreasing the NPAs and reach our targets.

Now moving to solvency. CET1 fully loaded improves almost 50 basis points in the quarter to 13.47%. We have 3 main positive impacts in the quarter: 2 basis points from retained earnings, net of dividend accrual and AT1 coupons; 40 basis points from lower risk-weighted assets, mainly explained by the decrease in the lending book, mainly corporates, but also lower densities in some portfolios. Keep in mind that all new production in mortgages is under IRB models and also lower NPAs.

And 5 basis points of valuation adjustments and other minor impacts. All in all, CET1 fully loaded stands well above our 12.5% management target. These, together with our expectation that the bank will accelerate its ability to generate capital organically, puts us in a very comfortable solvency position.

Very quickly in the next slide, 29. Capital levels remain well above the capital requirements. We have a very significant CET1 fully loaded buffer of EUR 1.7 billion and an MDA buffer of 457 basis points. MREL fully loaded stands now at 23.6% (sic) [ 23.8% ] as of March after the latest issuance carried out, so very close to our 2024 requirements of 24.8%.

Moving to the next slide on the fixed income portfolio. The composition of the portfolio remains unchanged, and the size is quite flattish quarter-on-quarter at EUR 27 billion. The average duration has also remained stable at 2.6 years in the quarter, while the yield continues to improve from 1.9% at the end of last quarter to 2.1% at the end of this period. There is still some room for yield improvement in the coming quarters, but obviously, this will depend on grades evolution. It is also important to highlight that almost the entire portfolio is accounted at amortized cost with no impact on capital.

Moving on wholesale funding. As we have commented before, we have issued EUR 500 million of senior preferred in February, which leave us closer to reaching our MREL requirement. You can see, maturities are well spread with no refinancing needs for 2023. Also, and very important, you can see funding rates are rather high as over 70% of the wholesale funding is swapped to variable rates, which reflects the current interest rate environment in our wholesale funding already.

Finally, on liquidity, we maintain a leadership position. Our loan to deposit stands at 79%. NSFR at 144%. LCR 298%, almost 300%, which is up by 14% in the quarter. LCR, after TLTRO repayment, could still be among the highest in Europe around 250%. Actually, you can see on the right-hand side, an LCR ratio comparison with some European peers, and we are clear leaders in this liquidity, the most important liquidity metrics.

Finally, we have EUR 25 billion of high-quality liquid assets and our issuance capacity of almost EUR 15 billion. This, together with our strong deposit franchise, leaves us in a very favorable position in terms of liquidity, which we believe is extremely valuable in the current scenario.

This is from our side. Alberto, we're ready for Q&A.

[Alberto López, executive]

Thank you, Pablo. We will now hold a Q&A session. [Operator Instructions] Now operator, we are ready to get the first question.

[Operator]

[Operator Instructions] Our first question comes from the line of Maksym Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have 2. The first one is on loan book growth outlook for 2023. If you could give more color on your view per segment, that would be very helpful. And the second one is on capital. You've been generating excess capital for several quarters now, and I was wondering if you have a little bit more visibility or guide us to what we could think of potential deployment of it. And also if there is any update on IRB models approval for Liberbank's mortgage portfolio.

[Juan Pablo Lopez Cobo, executive]

Okay. Thank you, Max. I will take the first one regarding lending volumes, giving a bit more color regarding the different portfolios. In mortgages, what we are expecting is a slight decrease. The main reason is early amortizations. They are at a historical level, and we expect early amortizations to remain high in the next quarters. At the same time, new production slowed down due to rates and macro environment, and probably the new housing law will not help. So all in all, probably a slight decrease in mortgages this year, these 2 things combined.

In consumer, we see high single-digit growth Again, here, we are working with existing customers. And thanks to sharing some of the best practices in all the network, we see this growth coming in the year. And lastly, on corporates and SMEs, this book keeps falling, as we have seen. And this is something we have anticipated and is expected due to the early amortizations related to loans, and also loans associated to meeting the TLTRO threshold in the past.

What we can say is the pace of decrease is slowing down, although still, you should expect some deleveraging coming in the next quarters. We commented in the presentation from an economic point, this is positive and we also generate capital. And all in all, for the whole loan book, what we expect this year is a decrease at around mid-single digit.

[Pablo Gonzalez Martin, executive]

Thank you, Max. I'll take the excess capital question. As you know, we have already above 100 basis points above our capital target and we expect to continue generating capital going forward. Actually, the trend is even better than what we were expecting so far. As we discussed in the past, we could expect 2 things in the short to medium term on the use of this excess capital. As you can imagine, the 2 major uses are either increased shareholder remuneration, and I can say that the Board is already studying proposals in the form of share buybacks that makes sense at this very low valuation.

This is something that, as you all know, the former Unicaja and also Liberbank have done in the past, so shareholders are used to this type of remuneration. And then the second option would be to invest in our own business to make it more profitable down the line and investing in some business, where we see room to grow with our existing customer base, as it is the case for consumer or other -- or private banking or other type of banking that we can do and improve our profitability.

Another option also is to improve profitability by reducing costs. And in this case, also the Board is also studying the potential reduction in cost with new [ personnel ] reduction. But obviously, this only would carry forward with an agreement with the legal representation of the workers and the trade unions that we have done in the past.

[Juan Pablo Lopez Cobo, executive]

And I don't know if you want to comment on IRB, Pablo?

[Pablo Gonzalez Martin, executive]

Okay. On IRB, I think the evolution, I think it's -- the process is evolving as we were expecting. So let me give you some color on the steps we have taken. We presented the application package at the end of the first half of last year.

And after that, the supervisor started the review, the inspection. And we have already had the exit meeting and closing the on-site inspection. So after that, we -- as we said, we expect the capital ratios to have the -- to fully recognize this -- the impact of the IRB models for the retail portfolios of the former Liberbank to be reflected in the third quarter, as we said, with a positive impact also in capital.

And as we did in the past, I think we have to be very careful on the impact of this IRB model implementation due to a couple of reasons. I think the portfolio, as we have seen in our capital evolution, is shrinking. So the original impact is it will be lower because the portfolio is smaller. But even though I think the -- just to give you some numbers, the back book coming from Liberbank at standard model, it's around [ EUR 14 billion ], and this could migrate from around 36 risk-weighted asset density at the moment to the low 20s after the process. For the other major portfolios, the consumer lending and cards, we expect a smaller impact.

[Alberto López, executive]

Thank you. Thank you, Pablo. Thank you, Max.

[Operator]

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

[Ignacio Ulargui, analyst]

I have 2 questions and a small follow-up on the IRB. I mean the first one is on the mortgage portfolio. If I just look to the decline in the new production in the first quarter, it's like 47%, 48% year-on-year. That looks to me like a bit harder or bigger decline than in the sector average. I mean, which I think last data point, up to February year-to-date, was down 13%. What are the reasons behind that? I don't think the competitive landscape has changed materially in the last 6 months, so if you could just elaborate a bit more on why you see your production in mortgages going down so much in 2023.

The second question is linked to the TLTRO. I just struggle a bit to understand why you are not repaying the TLTRO with the liquidity that you have. These ones that are carrying or kind of maturing at the time of the TLTRO, I mean, couldn't be sold. There couldn't be liquidity generated in some way to reduce the headwind of EUR 35 million a quarter? And just a very final question on the IRB. I mean if I remember correctly, last time, you said that it will be like before the summer, the approval of the IRB, and I have understood that is now in the third quarter. Can you just confirm that, please?

[Juan Pablo Lopez Cobo, executive]

Thank you, Ignacio. I'll probably will take the first one regarding the mortgage portfolio. Probably we should take into account here that in the last years, we were coming from a strong production during the last 3, 4 years. When we look to the market shares and the stock evolution in our case, we were showing that the stock is almost flattish year-on-year. This is 0.7% down year-on-year. And when we look to the stock, we continue to see that we continue to gain market share.

For us, that's the most important metric to continue to analyze in terms of production, it's the market share. Prices are going up as we're commenting. Probably the market and the customers, when the rates go up so quickly, they need to also to adapt. But we do not see no signs -- no change in our commercial strategy. Probably, it's true that the base was very strong in the last years. And maybe that explains what you were commenting, the decrease. But it was because our base, strong starting point. When we look to the stock, we believe we are doing better than sector.

[Pablo Gonzalez Martin, executive]

I think regarding the TLTRO in the first quarter, the cost of the funding coming from the ECB in the TLTRO was EUR 31 million, which is the EUR 5.5 billion at around 2.3%. In the fourth quarter, we accrued around EUR 2 million in revenue. And you have to consider that during October and November, it had a positive impact due to the changes in the computation of the TLTRO cost, and how the ECB changed the rules in the middle of the game.

And we had our planning. And so we have been building up as the process with the amortization and some sales that we were expecting and the new issuance in the process, as we have seen in November and February, EUR 1 billion issuance. And we have this year, another EUR 1.6 billion amortization coming from our fixed income portfolio, and also the commercial GAAP evolution that we were expecting. So with the liquidity that we have at the moment, plus the fixed income portfolio amortization, we -- allows us to repay fully the TLTRO, but we maintain our timetable to do it in June.

And regarding the IRB, what we said in the previous call is that we are expecting to have the announcement in our second quarter result presentation. But the impact on the capital numbers, as you can imagine, if it's the presentation, it usually is at the end of July. So we expect to have that. So the impact will be in the third quarter. So we haven't changed our guideline in IRB. It's only confirming, as you said, that the impact on capital, we expect that to be in the third quarter. But the announcement will be probably be done in the second quarter result presentation.

[Alberto López, executive]

Thank you. Thank you, Ignacio.

[Operator]

Next question comes from the line of Borja Ramirez from Citi.

[Borja Ramirez Segura, analyst]

I have 2 quick questions. Firstly, on the excess capital, I understand the potential uses of excess capital. I would like to ask if you could also envisage ex capital, for example, for doing an accelerated sell-down of the foreclosed assets, also given if funding costs are increasing and this generally do not generate interest income.

And then my second question will be on customer spread outlook, the guidance you provided for 2023 NII is very helpful. I would like to ask, when I look at your customer spread evolution throughout the year and compare versus peers, I understand that it's going to be better than domestic peers because of the skew towards the mortgages, which tend to have a slower repricing throughout the year. If you could please provide details on this. And if I may, a follow-up on the mortgages, if you could provide expectations of new lending per quarter in mortgages.

[Pablo Gonzalez Martin, executive]

I'll take the first one, Juan Pablo. When I said that the potential uses of excess capital, one of them is to invest in our own business to make it more profitable. And obviously, one of the uses could be to accelerate the reduction of foreclosed assets. Although this has to go through the P&L, unfortunately. But we have a strong commitment to reduce our foreclosed assets in the coming quarters. And this obviously has an impact on the P&L. And this quarter has been very, very good in capital, so we maintain a strong provisioning on foreclosed assets to allow us to accelerate this process.

On customer spread, then on customer spread, we always believe that our model of having a lot of customer with transactional business with us with small average position on deposits and a low risk business on the loan side gives a good, comfortable customer spread on a more normal interest rate environment. Obviously, this takes longer than other peers to realize because the mortgage portfolio is not like the working capital lending or the short-term lending of other -- or corporate lending of other peers have, but it will show up in the numbers as we have started to see in this quarter.

And now the spread is above 200, the customer spread. And we expect that, in a more normal environment, obviously, maybe between 2% and 3.5% or 4%. I think the spread should be above 200 basis points, between 250 or -- this obviously will depend a lot on the beta and in our assumptions. And the new production, this customer spread probably will be between 220 and 250 in the coming quarters. So but that's with our actual assumptions and the new production pricing that we are expecting. On mortgages, can you answer?

[Juan Pablo Lopez Cobo, executive]

Yes, I can take that one. Yes, I guess, we provide a lot of detail regarding our guidance for the next quarters. And regarding new mortgages, the second Q and the 4Q, they are the quarters that are the strongest in the year. First Q and third Q, in our case, usually are more seasonally weaker, because we focus mainly on first residents. So for the whole year, probably we will do more than the annualized run rate that you are seeing right now in the first Q. What we are envisaging is around between EUR 3 million, EUR 3.5 billion. That's the new production for mortgages for the year. And yes, forgive us, Borja, we do not provide a quarterly guidance on this one.

[Alberto López, executive]

Thank you. Thank you, Borja.

[Operator]

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

[Ignacio Cerezo Olmos, analyst]

I've got 3, if I may. First one is on the deposit beta. You have provided the blended deposit beta expectations for the coming quarters, if you can break that down between household and corporate in your case. The second one would be on the noncredit impairments. So both legal and real estate obviously has been -- only 2 lines actually have been persistently worse than expectations for a few quarters already.

So do we need to assume that those 2 lines actually are going to be recurring in the current size in coming quarters? Or do you think there's going to be a deceleration basically in terms of the drag going forward? And then the third thing, obviously, new news, but if you can give us your view about the implications of the housing law that was approved yesterday.

[Juan Pablo Lopez Cobo, executive]

Okay. Thank you, Ignacio. I will take probably the first one, deposit beta, and I can give my personal view on the new housing law as well. Regarding deposit beta, I guess that in our case, as we were commenting in one of the slides in a very detailed manner, our main focus is individuals. Around 80% of our deposit base are individuals. So I guess this explains why our structural beta and cost of deposits should be lower than peers and supports our customer spread.

Probably in the first Q, when we look to the whole beta, it was around 4.6%, slightly below 5%. Probably if we analyze the mix by individuals, obviously, it's even lower than that, probably below 4%. And in the case of the corporates and public sector, that obviously they are the most sensitive to big corporates and large corporates and public sector, they are more sensitive to rates, probably beta around 2/3, 60% to 70%.

And regarding the housing law, well, I guess that the main impact could be in terms of -- for us in terms of new lending for investments. But again, this is not our main focus. We are basically a bank focused on first residents. Our customers, they don't buy second residence. They don't do buy to let. They do not invest in real estate probably as other customers. So I guess that could be the main impact.

As you know, the new law is limiting the prices on rent, putting some pressure on landlords and making the investment probably less profitable until the rents adapt. I guess the other consequence would be that the supply will decrease in terms of rental properties. And in our case, again, this is not our business. So I guess, no real impact on this, but obviously uncertainty for the market.

[Pablo Gonzalez Martin, executive]

Thank you, Ignacio. On impairments, I think on real estate impairments, we continue to reinforce the coverage for future disposals. As you have seen this quarter, EUR 27 million that were partially offset by some positive results on the disposals of around EUR 7 million. So the net has been EUR 20 million, which is a high number. But I want to emphasize that we have a strong commitment to keep reinforcing the provision in order to allow us to accelerate the disposals.

We have a strong capital position. We have a strong capital generation in this quarter, and we took advantage of that. And we believe it's important to continue reducing our NPAs. So our organic capital generation in exchange of temporary lower organic capital generation, it's a good proposition. And even though we still, in this, maintain the view that we will increase our capital generation.

So this design, we don't have clear view how much it's going to be on this line, but we will maintain strong. We have to see how the market behaves, and if the higher rates has an impact on the potential demand from investors and on the real estate assets, and if this new law has also an impact or not. So there's too many uncertainties. But what -- the only thing I can say, Ignacio, is that we have a strong commitment to reduce our NPAs, and we will do down the line.

And in terms of the legal cost, we still have some high level. We expect this to come down, but obviously from a high level. So going forward, we are more in line between EUR 25 million, EUR 30 million per quarter for the remaining of this year and then coming down in the following years, once most of the mortgage floor and cost -- on mortgage cost also is already reduced. And that's our view at the moment. Obviously, this is uncertain because there's a lot of moving parts in this. But unfortunately, we have a new industry in the legal firms, which is suing the banks.

[Alberto López, executive]

Thank you. Thank you, Ignacio.

[Operator]

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

[Carlos Peixoto, analyst]

So the first one would actually be a follow-up on the previous question. And sorry, if I missed a bit. But basically, when you think about the provisions, the run rate for upcoming quarters should be below these levels, around these levels? How do you see it and how do you attach that with the goal that you mentioned of continuing to reduce foreclosed assets? Also on the provisioning front, you were previously guiding towards 30 to 35 basis points cost of risk for the year. Do you stick to that guidance? And then finally, on fee income, I believe the previous guidance was also around 5% growth. I was wondering if you confirm it as well.

[Pablo Gonzalez Martin, executive]

Thank you. On provision, I've been as clear as I can be. I think on real estate impairment, we don't have a clear view. But the only thing is we have a strong commitment to maintain the trend on reduction in the NPAs, and this will depend on market conditions, the -- what we need to still apply. But obviously, this will be more something in the coming quarters and then coming down going forward.

And on legal provisions as well, very similar. We -- I have stated what we think should be at least in the near term coming quarters. But obviously, we have a trend because some of the risks that are actually -- are coming down. And you can see that the number of mortgage floors is very low now, but we still have some backlog that we'll have to resolve in the coming quarters and then coming down. So I think still not good news in a few quarters, but then a positive impact on the net income down the line.

[Juan Pablo Lopez Cobo, executive]

Okay. Maybe I would take the other 2 questions. The other 2 questions are more structural regarding the business. They are not temporary as the ones that Pablo was commenting before. The first one, the cost of risk. In the first Q was 26 bps. This is below our guidance, as you pointed, that was between 30 to 35 basis points. Again, I would like to highlight that we are not using any overlay provision this quarter. So things are doing better than expected.

And behind this performance is basically the asset quality. If we look to the first Q NPL entries, they are 30% below the average over the last 12 months. So they are coming down, NPL entries. More than half of the NPL entries are subjective NPLs. And actually, when we look to the NPL entries, so far, they are almost half of what we were expecting in our budget and in the guidance of the 30, 35 bps I just commented. So NPLs -- again, NPL entry is half of what we were expecting. So probably we prefer to be cautious here in the guidance, but probably we see, in the following quarters, comfort regarding the low range of our guidance so far.

And probably the third one was regarding fee income. Here, we reiterate our guidance. There are no news. Things are going as we were expecting 3 months ago, and we reiterate that mid-single-digit growth. The main business, AUMs, not only mutual funds but also savings and insurance are doing well. They are recovering, AUMs. In terms of non-life insurance and life insurance, they are already doing well. And payment and transactions, they're also doing well. So we are comfortable with that guidance of mid-single digit for the year.

[Alberto López, executive]

Thank you, Carlos.

[Operator]

The next question comes from the line of Benjie Creelan-Sandford from Jefferies.

[Benjie Creelan-Sandford, analyst]

My first question was just if I look at the balance sheet, there's obviously quite a step-up in interbank borrowing this quarter, with a corresponding increase in cash on hand on the asset side of the balance sheet. I was just wondering if you could talk us through a little bit more the strategy there and the impact that, that is having on net interest income.

The second question was just another follow-up on the foreclosed asset portfolio. Appreciate you don't have full visibility on the potential cost going forward, but could you perhaps give us any color on the average write-down levels at which you're completing sales in the past couple of quarters?

[Pablo Gonzalez Martin, executive]

Thank you, Benjie. On the pickup -- on interbank liability, if you look at the asset side, as you said, we have also a pickup. We -- in the money market desk, we tend to -- due to the large size of our fixed income portfolio, we take advantage when there's an opportunity to make a spread on the repo market and versus the deposits, the ECB deposit facility, the marginal facility. So we make around 10, 12, 15 basis point. Not very significant, but it's a good profit on top of our fixed income portfolio revenue. And in terms of the...

[Juan Pablo Lopez Cobo, executive]

Okay. I will take the second one is regarding the disposal of the foreclosed assets. What we can tell you here is that we continue to combine the 2 strategies, both granular and portfolios disposals. In terms of granular portfolios -- granular disposals, sorry, we generate profit on these sales. In the portfolios, the one that we completed in the 4Q last year, we sold around EUR 170 million asset and the impact was around EUR 8 million.

Probably what we are doing here in this first Q is trying to front load part of that impact. We plan, in 2023, to continue with this strategy. So we will continue selling through granular and, let's say, retail channel. But also the intention is to carry out some portfolio during the year, and that also explains the impairments during this first Q 2023.

[Alberto López, executive]

Thank you, Benjie. I think we'll have one more question in queue. Operator, please?

[Operator]

The next question comes from the line of Francisco Riquel from Alantra Equities.

[Francisco Riquel, analyst]

Most of my questions have been already answered, just have one. Regarding MREL, you're still short of the targets, what are your plans to get there? Do you think you need to issue in the market? Or you will get there through deleveraging the balance sheet? And then in connection with this, how shall we see the excess CET1 that you currently have? Will you be able to use it without issuing debt to reach the MREL? Or where -- or do you think that you can already use it or not?

[Pablo Gonzalez Martin, executive]

Thank you. I think what's important is the catch-up that we have done in the last couple of years on MREL requirement. We were with a requirement of 18%, and now we have almost 24%. So very close to our actual requirement at the end of this year, the beginning of next year. And in terms of -- we are very close. Obviously, we will have some as we are expecting the lending demand coming down in the year. And on top of that as we have built a lot of capital in this quarter, we expect this capital to generate organic capital generation to grow again throughout the year.

So just to give you some color, we are expecting to be around 14%. So even without any IRB model impact, and as I said, we expect that to be on the third quarter. So I think combining everything and the actual level that we have, we are probably short one more MREL issuance. And then we will be in a more level playing field compared to other banks that has only to renew existing MREL.

I think that was one of the major difference in the last few quarters is that we have been building our MREL from scratch. We are not -- we don't really believe very much that we have the same level of risk than other banks, but I don't want to talk about the supervisors and regulators, but we have to comply with a very high level of [ bail-in-able ] liabilities even in our case, and the change has been significant.

So we have been building. I think the conclusion is we have already -- we are almost there, only one more transaction probably or maybe the deleverage and the usage of the excess capital. We could fulfill the level even without any transaction. But as you said, we are thinking on using the excess capital through other means. So maybe we have to do another transaction and also to have some buffer on MREL. And I hope I've been clear, Paco, and thank you for your question.

[Alberto López, executive]

Thank you, everyone. I think we don't have any more questions. So thank you, Pablo, and Juan Pablo. Thank you, everyone, for joining. And the IR team remains available the rest of the day. Thank you very much.

[Pablo Gonzalez Martin, executive]

Thank you.

[Juan Pablo Lopez Cobo, executive]

Thank you. Take care. Bye.