Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2024-Q1

[Jaime Hernández Marcos, executive]

Good morning, and thank you for attending Unicaja Banco first quarter results. Today, before market open, we have published this presentation and the rest of the quarterly financial information in the CNMV and our corporate website. We know that these are busy days with a lot of results coming out, so we will try to finish in no more than 1 hour. Pablo González, our Chief Financial Officer, will do a quick presentation. And afterwards, we will hold the usual Q&A. Pablo, whenever you want.

[Pablo Gonzalez Martin, executive]

Thank you, Jaime, and good morning to everyone. I will start in Slide 4 with the main highlights of the quarter. Regarding business activity, Total customer funds were very stable at the beginning of the year with private sector deposits growing 0.1% quarter-on-quarter and year-on-year. off balance sheet funds grew a bit more at 2.7% compared with the first quarter of '23. On the other hand, private sector loans continued to fall but at a slower pace compared with previous quarters. However, customer spread continues to grow one more quarter reaching 2.91% in March, which is 17 basis points above the previous quarter and 90 basis points higher than in the first quarter of '23.

In terms of profitability, the beginning of the year has confirmed the expected improvement that we announced last quarter. Net interest income grew 32% year-on-year and 2.7% quarter-on-quarter. The banking margin was 36% above the previous year, something that also was reflected in the cost-to-income ratio that remained slightly below 49% in March. All these trends led to a net income of EUR 111 million in the quarter, which is more than 3x the one in the first quarter of last year.

Asset quality trends were also very positive. Stage 3 loans fell an additional 7% in the quarter and 23% in the last 12 months. Foreclosed assets, also continued to fall in the quarter, leaving its gross balance 33% below the previous year and representing only 0.3% of total assets. NPAs coverage remained high at 70% and cost of risk fell to 25 basis points. Total provisions, including legal and real estate assets, fell 39% compared with 2023. All of them very positive trends that we will see in more details afterwards.

Finally, in terms of solvency and liquidity, it is worth noting that despite the negative impact in the quarter from the share buyback, our CET1 was 14.5% implying an MDA buffer close to 680 basis points. Total MREL grew above 28%. On liquidity, as you all know, we continue to have a very comfortable position with one of the highest LCR of the sector at 294% and a loan-to-deposit ratio of 74%. All in all, as you can see, first quarter '24 trends, are very positive and confirm the expected improvement that we anticipated at the end of last year.

In Slide 6, you have the customer funds trends. As you can see, total customer funds were very stable, above EUR 88 billion. Regarding on-balance sheet funds, public sector deposits continued to fall in the quarter. However, private sector trends were very stable. The mix between sight accounts and term deposits continued to grow this quarter, explaining the small increase in the cost of deposit that we will see later. Off balance sheet funds grew 1.6% in the quarter to EUR 21.4 billion, owing to a 3.7% increase in mutual funds.

If we move to lending on Slide 7, you can see how the Performing loan book continued to fall in the quarter, but at a much slower pace than in previous quarters. One more quarter, public sector loans were the ones decreasing relatively more. However, private sector trends despite still decreasing, we're falling just a bit more than 1% in the quarter. This compared with a quarterly drop above 2% in the fourth quarter of '23 and above 3% in the third quarter of '23. The mentioned drop despite improving it is partially explained by an active risk-reward commercial strategy to maximize offer spreads. It is worth noting that under current environment with more normalized rates, the profitability impact of negative commercial gap is not the same as the one we used to have with negative rates.

By segments, Corporate loans fell 2.4% in the quarter, still a bit more than loans to individuals that fell 1% in that same period. All in all, Total performing loans fell 1.6% in the quarter.

On the next slide, we show private sector, New lending trends. New lending volumes in corporate loans and mortgages were positive in the first quarter of this year. Total private sector new lending was very similar to the first quarter '23 but 18% above the previous quarter.

On Slide 9, a little bit of color on our digital business that continues to improve, partially supported by the new app that we launched [ some ] months ago with an increase in the percentage of digital customers and strong figures in overall digital activity. 43% of the customer new lending, the consumer new lending and almost 1/3 of our mutual funds come through remote channels.

Moving to Slide 10, we have an update on sustainability. We continue to make significant progress in the different areas. This is one of the priorities for the whole entity. Let me quickly enumerate some of the recent developments. On the governance front, as we anticipated last quarter, the renewal of the Board has now been completed and ratified at the AGM, an optimal structure aligned with best practices and a committed and united board. We are also committed to society as we have historically demonstrated. And we continue making progress, always pushing for financial inclusion, keeping our agreements but thinking about new engagements. On the environmental front, as part of our commitment with the future of our planet, we currently have EUR 1.3 billion in green bonds, representing 60% of the total outstanding senior and senior non-preferred bonds. In addition, we continue to develop and improve the way we incorporate sustainability issues with our clients and in our day-to-day credit risk management.

Moving now to Slide 13. We show the regular P&L details. Net interest income is up 32% and in the year and almost 3% in the quarter. As we will see later, the growth is driven by additional repricing of loans and the improved liquidity position, which, as I said before, it is now something profitable again, thanks to the normalized rate levels. Fees fell 2% in the quarter, in line with our current guidance and driven by the launch of commercial campaigns that have relaxed on part of the transactional fees to more loyal customers and more competitive mutual funds structures.

Other revenues include EUR 79 million charge from the banking sector tax. Total costs grew 3.4% in the quarter. The expected increase in personnel expenses was partially compensated by lower general costs and stable amortizations. Gross margins improved 4.5% in the quarter and almost 24% in the year. Loan loss charges improved more than 10% year-on-year and quarter-on-quarter with the cost of risk of only 25 basis points. Other provisions confirm the expected improvement announced last quarter, following the provision effort made in the -- in 2023 real estate provisions have become nonmaterial while other provisions fell in line with the expected guidance. All these led to a pretax profit of EUR 184 million and a net income that reached EUR 111 million, which is more than 3x higher than the first quarter of '23, confirming the improvement in profitability that we announced last quarter.

Now we will start reviewing even in more detail the P&L starting with the net interest income in Slide 13. As you can see on the slide, the ongoing repricing of the loan book and a contained cost of deposits improved the customer spread one more quarter. Loan yield grew 24 basis points in the quarter while the cost of deposits only grew 8 basis points. As a result, the customer spread improved by an additional 17 basis points in the quarter to 2.91%, which is 90 basis point above 1 year ago.

If we move to Slide 14, we have the main moving parts of the NII in the quarter. First, and driven by what we were explaining in the previous slide, lending contribution offset the higher cost of deposits. The fixed income portfolio contribution fell EUR 4 million in the quarter. However, this was more than offset by the positive impact of improved liquidity position of the bank. All these explain the almost 3% quarterly improvement.

In Slide 15, as you can see, total fees fell 2% quarter-on-quarter, mainly driven by two factors. On one side, as I mentioned before, we have implemented some commercial campaigns to adopt transactional fees to current interest rate environment. On the other hand, asset under management fees were lower because of the increased demand for mutual funds with a lower risk, but also relatively lower fees. These two factors were partially mitigated by the strong insurance fees that are usually higher at the beginning of each year.

If we move now to Slide 16, we have the breakdown of other income that includes income different to NII and fees. Here, I would like to clarify that income from associates presents a significant improvement compared with the previous year, and this is our -- this is mainly because of an extraordinary impact related to IFRS 17 in our main insurance affiliate, Unicorp Vida, which offset the higher banking tax paid that grew from EUR 64 million to EUR 79 million this year.

Moving to Slide 17. You have total cost details. while administrative costs fell in the quarter and amortization were stable. Personnel costs grew to EUR 135 million, reflecting the impact from the new collective agreement among others. Total operating expenses grew to EUR 225 million in the quarter, which is the run rate implied in our mid-single-digit growth guidance for 2024.

On the right-hand side, you have the evolution of our cost to income. It is worth noting that despite higher costs and the banking tax, the positive income trends enabled to improve the efficiency of the bank with a cost-to-income ratio slightly below 49% compared with 57% and of the first quarter of last year.

In the next slide, we show the evolution of the cost of risk and other provisions. Regarding loan loss provisions, it has improved further at the beginning of the year to EUR 31 million that represented 25 basis points of cost of risk.

This is even slightly below the low range of our guidance that was between 30 and 35 basis points for the whole year. Such a positive performance is explained by the low risk profile of our book and its coverage levels. In the right-hand side of the slide, we have included the evolution of total provisions. Here, the most important news is that we are also delivering to what we said last quarter. We expect real estate provision to become [ not ] material going forward.

Regarding the rest of provision, as you can see, they have also fell towards a level in line with our guidance. Total provisions should decrease significantly in 2024 being one of the main drivers of the expected improvement in our profitability from now onwards.

On Slide 19, we have included our quarterly net income evolution. As you can see, First quarter '24 shows a significant improvement despite the impact of the banking tax. The banking margin that includes NII plus fees plus total cost grew 36% in the first quarter '24 compared with the first quarter of '23.

On the right side, you can see that the return on tangible equity grew from around 4% last year to the current 5.4% or 6% when we adjust the excess capital over 12.5% CET1 fully loaded. It is important to take into consideration that we used the last 12 months net income to calculate the return on tangible equity. As you can see, this trend leaves us on the way of improving return on tangible equity above 9% and as we expect for the full year.

Let's move now to asset quality, where we have continued our progress during one more quarter. Starting with NPLs in Slide 21, you can see how Stage 3 balances fell an additional 7% this quarter.

The NPL ratio fell below 3% despite the drop in loans with a coverage growing from 64% to 66%, a very comfortable level, considering that the big bulk of our NPLs are residential mortgages.

In Page 22, we have the foreclosed assets and overall NPAs details. Foreclosed assets decreased further to EUR 314 million or EUR 1.2 billion in gross terms. Quarterly sales of EUR 66 million more than offset the EUR 15 million entries. The NPA exposure fell further this quarter, while we kept coverage at a relatively high level. As you can see on the right Total NPAs with a 70% coverage continue falling this quarter, another 6% and almost 30% when we compare them with the first quarter of '23. And gross NPA ratio fell to 5.3% or to 1.7% when considering net balances. All in all, the significant decrease in NPAs continued during one more quarter.

Let's move now to solvency in Page 24. A CET1 fully loaded fell 21 basis points in the quarter to 14.5%. On the positive side, retained earnings and lower risk-weighted assets had a combined positive impact of 46 basis points. However, the 34 basis point impact from the share buyback and the mark-to-market of EDP stake through Oppidum Left CET1 at 14.5%.

On Slide 25, you have our MREL position. As you can see, our MREL liabilities represented 28% of our risk-weighted assets, a level that includes a comfortable buffer of over our 24.9% requirement. In the right-hand side, you have some additional info including our MDA buffer that has gone to 679 basis points, a level that implies that we will continue to have comfortable buffers even if a kind of countercyclical buffer is finally requested in [ Spain ] in the future.

In the next slide, we have the fixed income portfolio details. As you can see in the slide, there are very small changes in the quarter. The size and the yield were very stable. However, we have increased a little bit the duration from 2.2 years to 2.4 years in order to preserve its contribution going forward.

Finally, in Slide 27, we update our liquidity position. As you can see, we continue to have a very strong liquidity position with a huge balance of liquid assets, a loan-to-deposit ratio of 74%. The NSFR at 157% and LCR once we have repaid -- fully repaid the TLTRO at a significant 294%. All of them, very strong liquidity metrics. So that's all from a side. As a final remark, I think it is worth to highlight that the first quarter '24 trends are very positive. Our structural Profitability is improving. We continue to reduce our NPAs at a very good pace. Our solvency position remains very strong despite the negative impacts of the quarter, and we have one of the strongest liquidity position on our peers. All in all, a good set of results that we expect to continue to improve in the coming quarters.

[Jaime Hernández Marcos, executive]

Thank you, Pablo. We will now move to the Q&A. Please remember to ask if it's possible only two questions each one. And also remember to mute your line after the questions. Operator, please open the line for the first question.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the Q&A session. [Operator Instructions] And our first question comes from the line of Maksym Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have two, the first one is on NII guidance. You previously guided for low single-digit growth in 2024 with outlook for higher rates for loan growth. I was wondering whether you consider to adjusting this guidance? And if so, what kind of outlook for loan book growth and customer spreads do you foresee for 2024.

And then the second question is on capital. You reported a strong capital position. And I have two questions here. The first one, whether the potential introduction of countercyclical buffer can change your internal target for CET1? And then the second, whether you can update us on the ways you could deploy this capital in the future.

[Pablo Gonzalez Martin, executive]

Thank you, Maksym. I think regarding NII guidance, it is true that the beginning of the year has been more positive than we initially thought, and this has been mainly due to higher rates and contain increase in the cost of deposits. However, we saw plenty of volatility during the last months in rates. And just to give you some color, the expected Euribor for this month, the Euribor 12 in September was 80 basis points higher than in December and March is 50 basis points higher than in December. So with this [indiscernible] environment of rates on other moving parts evolving, I thinks it's -- we want to see how this moving parts and interest rate evolution during the following months before we update our guidance if needed.

On top of this, it is fair to expect to see the NII falling a little bit from current levels in the coming quarters due to the Euribor level 1 year ago compared to this month. And so the repricing of loans is almost finished. And the cost of deposit at least within our models continue to grow a little bit more. So we will update our views on if it is the case, the guidance in the second quarter '24 results once we have a bit more color on '24 trends.

Regarding the customer spread, it's very similar. I think we have reached the probably the peak in the [ 291 ] and major driver as you can imagine is Euribor repricing that we expect, probably in April still positive and then decreasing in the coming quarters. So obviously it will depend on the new production compared to the back book, but the impact from the Euribor repricing is very significant, so we expect that to come down, but having said that we still expect the customer spread higher than the one that we have on average in '23. And I think the second question was regarding capital and potential impact of the counter-cyclical as I said in the presentation the level of capital that we, it's on the [ cushions ] on the buffers that we have allows us to withstand any potential counter-cyclical buffer, that could be put in place. So we already considered any potential headwind in -- from the regulatory front. So we are comfortable with the level of capital to maintain the strategy that we mentioned before.

[Operator]

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

[Ignacio Ulargui, analyst]

I have two, if I may. One on the loan book evolution, I mean, how do you see lending growth evolving from here, particularly focused on mortgages and corporate lending? And the second question is on other provisions. How do this both throughout the year, we have seen a very good performance quarter-on-quarter as well? Should we expect this trend to maintain over the coming quarters?

[Pablo Gonzalez Martin, executive]

Thank you, Ignacio. Regarding the loan book evolution as you saw in the presentation, loan continued to decrease, but as I said, at a lower, slower pace than previous quarters. This has been improving, although decreasing but improving in the last few quarters. Public sector, which is more volatile, fell relatively more in the quarter. But the private sector trend beginning of the year improved compared with the last quarter of 2023. And corporate loans that suffered relatively more last year, have started in 2024 in a better shape. In mortgage, production has also improved at the beginning of '24, mainly at the end of the quarter in March, which is the last month of the 3 months of the quarter, we formalized more than EUR 200 million of the total EUR 520 million in the first quarter. So little by little, the new lending trends have been improving. It is too soon to change our view for the rest of the year. So we feel comfortable with the guidance at this point. So we will obviously update our views in the next quarter when we have more information. And we are confident that there will be some recovery in the demand from our product offering and attractiveness of our offer to our customers is improving, and we're working hard on developing the tools to improve our production.

So having said this, obviously, it will take some time. And so we maintain the guidance that we gave of low to mid-single-digit decrease for the 2024 and then probably improve in the next year.

And regarding the other provision, your second question, we expect other provisions to continue to decrease going forward. In 2023, we booked around EUR 110 million for the 2024 as we said, and this is pretty much in line we expect to reduce that between 15% to 20%. Although this quarter has been slightly better. There are some one-off that happened this quarter. So we still maintain the guidance even with all the mortgage cost evolution that we monitor very closely, as you can imagine.

[Operator]

The next question comes from Filippo Munari from Bank of America.

[Filippo Munari, analyst]

So a couple of questions from my side, please. The first one on the fixed income portfolio. So the average yield has started to come slightly down in the quarter. I wonder if you could please tell us what are your latest expectations in terms of the contribution from the ALCO this year? And if you expect any material changes in terms of size and hedge strategy on the ALCO going forward?

And second question on capital distribution. So with organic generation and your order in payouts, CET1 should keep growing in the next quarters. Can you please maybe comment on your appetite for distributions? And also if you have any preference in terms of share buybacks or potentially adding some special dividends going forward?

[Pablo Gonzalez Martin, executive]

Thank you, Filippo. Regarding the ALCO portfolio, I think the size and -- but also the rate has been quite stable, a slight decrease. And the amount decreased only EUR 150 million in the quarter, and the yield is very similar, slightly lower. I think that the major difference is that the duration of the portfolio have gone up from 2.2 years to 2.4 and this -- and regarding your question on the hedging strategy is we are using like in the last few quarters, some restructuring of the hedges. And now we are locking fixed rates for the 2 to 4-year period. This has small impact on the contribution in the short term as long as the short-term rates are above 4%. And if you go and fix them for another period. So the contribution reduces now to improve the evolution in '25. So as you can imagine, we expect the overall contribution for the year to be above last year. But slightly decreasing in the coming quarters.

On a quarterly basis, slight reduction, to be completely clear, unless we have new opportunities to invest. And this is mainly due to the strategy of locking the fixed rates for the next 2 to 4 years and helping to reduce our interest rate sensitivity to lower rates in the coming year. And -- but having said that, with a slightly lower volumes, that will depend obviously on the opportunities and the liquidity evolution of the bank.

And regarding the second question, we maintain our aim to propose a 50% cash dividend payout which we are also accruing in our solvency ratios. And you know and obviously, if the Board decides to propose a difference in -- like increasing the dividend or share buyback. Obviously, this is on them to decide. What we can say is that we are currently executing a share buyback of EUR 100 million. So on up to now, we already have a measure that we announced in the last result presentation. So we will continue to manage our capital and trying to maximize the shareholders' return. But for now, we must finish the one before, we think on anything else.

[Operator]

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

[Borja Ramirez Segura, analyst]

Hello. Good morning. Can you hear me?

[Pablo Gonzalez Martin, executive]

Yes, Borja, go ahead.

[Borja Ramirez Segura, analyst]

I have two questions. Firstly is regarding the foreclosed assets, I see you have a high coverage. I would like to ask if you envisage any disposals and also given the expected decrease in interest rates, if you see an improvement in the demand from investors of foreclosed assets?

And then my second question would be, do you have a high level of capital -- excess capital and also a level of excess liquidity in the balance sheet. Given the fact that you -- the consensus expects a negative operating [ jaws ] next year I would like to ask if it would make sense to maybe utilize the excess capital and excess liquidity, for example, by inorganic growth or any additional restructuring.

[Pablo Gonzalez Martin, executive]

Thank you, Borja. Okay. Regarding the NPA disposals. We have been very active during the last quarters. Just to remember, in 2023, we sold different portfolios, Stage 3 portfolios and also EUR 200 million up and 2 different real estate portfolios that represented more than EUR 100 million in sales. In the first quarter, we have sold again almost EUR 100 million in Stage 3 loans, but we haven't done any portfolio disposal of foreclosed assets. We continue to march. I think, the appetite from institutional investor is not very high. But as you said, we have a high level of coverage, and we maintain the market appetite continuously. So we still -- to make our shareholders confident that you won't have any significant impact in the P&L going forward. And regarding the excess capital. I think having this excess capital, we think it's a strength of us that give us the opportunity to undergo different initiatives to generate value for our shareholders and the bank. The use of this excess capital, obviously, depend on different conditions. But we expect to continue to generate capital going forward. which will give us additional flexibility and optionality.

On the other hand, I think it's worth noting that our capital buffers also help us to maintain and absorb potential negative impact, like the ones that we have in this first quarter with EDP stake and the full deduction of the share buyback. So I think this level of capital is important to have this optionality and to a completion to take measures to benefit our shareholders value. Regarding what you said, the actual use. We -- as I said, we are undergoing this share buyback and we are always open and analyzing continuously new opportunities, organic and inorganic.

As I said, inorganic or growth. Obviously, the loan demand for companies, we expect once we have a more stable economic environment and less doubt on the evolution of the economy. We have seen some improvements in the PMIs in the leading indicators of the economy in Europe and in Spain as well. I think corporates and SMEs need to be more confident on the future to engage in long-term investment that will require lending, but we are confident this could come in the coming quarters if the evolution of the economy is as expected. And regarding -- but overall, as I said, we don't expect to have a significant demand from lending growth in organic basis for this year. And regarding organic, obviously, we will look at any opportunity in the market, but we will be very careful make sure that this value added any potential deal.

[Operator]

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

[Ignacio Cerezo Olmos, analyst]

I've got two. The first one is on NII. There's been as you suggested in the presentation, improvement on the excess liquidity, NII, if we can call it like this. So obviously, the amount of excess liquidity is up, but there's also significant reduction of the interbank costs in the quarter. So if you can explain and give a bit of color basically what drives that? And then the second thing would be more generically, one of the kind of initiatives that the new CEO mentioned at the beginning of his tenure was the possibility of investing more on the SME and corporate business. So if you can give us an update basically in terms of when can we expect more precise measures on this front?

[Pablo Gonzalez Martin, executive]

Thank you, Ignacio. As I said in NII, one thing that I mentioned is when we have this positive trend that the liquidity from asset resource gathering has improved and the lending is not picking up. So it gives us with more liquidity. And also, we have a very large fixed income portfolio that is not utilized. So it allows us to improve the management of the liquidity. It's a combination, as you said, the better liquidity position, but also the better management of the liquidity and the money market deals that we undertake.

And regarding the initiatives mentioned by the CEO by the CEO, by Isidro, on SMEs and corporates. I think he mentioned and I reiterate, these are medium-term initiatives. We are improving process tools and talent of the teams to increase the value proposition for SMEs and corporates. And you have to think Ignacio, this is a very challenging marketing spend. The lending yields in the corporate lending is very, very tight, regarding then the risk. So we have to be very careful to really tap on the really good value-added proposition for our customers. And so we keep working on the measures, and we will have more details once we deploy some of them. But it's mainly process, policies, tools, and talent. So it's a combination of -- and we are working in all of them. But this, as I said, and the CEO mentioned, this takes time.

[Operator]

The next question comes from the line of Hugo Cruz from KBW.

[Hugo Moniz Marques Da Cruz, analyst]

I just have one question, which is a bit high level, but you have a very liquid balance sheet your loan book is still shrinking a bit actually to recover but you will still continue to have a very liquid balance sheet and you're targeting still a single-digit return on equity. So why are you not paying less for deposits? And lose more deposits, but that should improve your RT. So why do you still pay more for deposits in Q1 than you were doing in Q4?

[Pablo Gonzalez Martin, executive]

Well, thank you, Hugo. I think we fully agree. We have a very, very liquid balance sheet, and this gives us optionality and a lot of potential. And as you can see, we have reduced our public sector deposits by more than EUR 1 billion this quarter. Because of the very competitive landscape on this deposit type. But we want to maintain the long-term relationship with most of our customers. So it's the most price-sensitive part. And the other thing that you mentioned is trying to push off balance sheet, some of the deposits from our customer base. And I think our position is we try to serve our customer and their needs and their risk appetite, the best that we can. And I think that the medium to long term is that we have to be enabled to have the kind of product that they want.

Obviously, we would like to improve even further. We have increased our net and gross mutual fund this quarter, as I said, EUR 800 million gross and more than EUR 300 million net in mutual funds. But obviously, as they are regarding the market environment and the risk appetite that they're looking more for low risk money market funds targeted return fund and the like, which are usually very low risk and obviously has a low fees attached. So we try to -- and we are doing as much training and we do webinars and things like that with our customer base and our sales team to improve the knowledge and the long-term investment of our customer base. But at the end of the day, it's there a choice. And we have to be enabled to deliver the best product that they want.

[Operator]

The next question comes from the line of Fernando Gil de Santivañes from Bestinver.

[Fernando Gil de Santivañes d´Ornellas, analyst]

Two quick questions, please. one, can you please tell us the sensitivity to 100 basis points increase to the [ CCIB ] and to the capital requirements of the bank fees. And the second one, if you can just provide an update on how are we -- have to collect the realized losses on the ALCO portfolio?

[Pablo Gonzalez Martin, executive]

Thank you. I think the first question was on the interest rate sensitivity. I think you mentioned the -- I think the sensitivity you mentioned on NII, but also on capital. I will mention both. I think regarding the NII the impact of rates moving on NII is a complicated estimate and has a lot of moving parts because this is also quite theoretical exercise. And I think it's extremely important to have an accurate assumptions in the behavior of the customer deposits that has a strong influence and hasn't move as the most of the models were in place a year ago.

So in our case, and with all this disclaimer, considering a constant balance sheet and a 100 basis point parallel downshift scenario. We could expect versus the last 12 months, a negative impact of around 3% in the [ year 2 ]. Once the whole balance sheet is fully repriced. Now that this is slightly higher than the guidance we provided last quarter because the NII that we are considering now as a reference is also higher. The sensitivity of the NII for interest rate movements is actually lower than the last quarter because of the strategy that I mentioned of going fixed for the 2 to 4 years adopted in this first quarter.

I think it's also worth noting to have the full picture that the scenario that we are assuming is that the cost of deposits for the second year remains at similar levels of the ones that we have in this first quarter, not the whole year, the last 12 months. And regarding the ALCO portfolio valuation, I think regarding this, we look at -- we consider that it's more accurate to analyze the valuation of all the items on the balance sheet. We don't manage the ALCO portfolio, at least the amortized cost portfolio, which is a stable and funded by the liabilities of the bank, the commercial liabilities. So we manage on a balance sheet level, not at a specific line. So you have to think that the value of any specific line could bring some misunderstanding of the position on interest rate of the bank.

I think in this sense, what I can tell you is the economic value of the bank has grown last year in a rising rates environment. And together, with the NII that has improved significantly, which is our main objective. And now what we are doing is trying to implement a strategy to defend this enterprise value -- the economic value of the bank in the scenario potential rates coming down and obviously, even more important to maintain our NII in a potential lower rate environment.

[Jaime Hernández Marcos, executive]

I think we've got time for two more questions. So please, operator, let's go for the next one.

[Operator]

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

[Carlos Peixoto, analyst]

So first question would actually be on fees in picking up a bit on what you were mentioning before on mutual funds. So basically, we see commissions and related mutual funds falling by 5% year-on-year, where as volumes are actually on mutual funds and volumes are actually growing. So is this really the mix effect you are mentioning and going to total fees amount. You are guiding before to small group this year. I was wondering whether you see that still achievable in the first Q -- sorry, whether you still see that achievable given the first evolution.

Then a second question would actually be on cost of risk. So you're trending well below the guidance that you had given for the full year? Do you see here at [ 5% ] to this guidance? Or should we expect cost of risk to pick up throughout the year?

And then finally, I'm sorry to put a further one, but you're guiding towards the number of 9% return on intangible equity. Of course, this is adjusted by the excess capital. But I was wondering if you could give us some color on how do you see the CET1 ratio evolving throughout the year and to what levels you expect it to be around year-end?

[Pablo Gonzalez Martin, executive]

Thank you, Carlos. I think on fees, you mentioned -- I think the -- as I said, this has come down $3 million in the quarter. I think the insurance has been very positive. And we have to consider on a quarterly basis, very high, but this is because of some seasonal in the first quarter. But even on a yearly basis, we have improved more than 10%, and this has contributed with more than EUR 6 million in the quarter. However, as we said, the lower transactional fees, our strategy with the new interest rate environment regarding our maintenance and other fees related to our retail customers. And also, as I said, the mutual funds appetite and trend that our customers are showing even with higher volumes and net subscription on growing in mutual funds because most of the new funds are, as I said, low risk. Obviously, when you have a lower risk type of product, usually has lower fees, and this has a net negative impact.

And having said that, we reiterate and we maintain our expectation. We still think insurance will perform in the year. and will offset the other two major headwinds on fees. So we maintain a decrease of low single digit for the year. Regarding the cost of risk, I think the cost of risk of 25%, which is even lower than the 27% than we have in the previous quarter and with the NPL entries, which seems to be under control. I think even if we have some restructurings in SMEs pickup in restructuring in SMEs overall. We already spotted and identified the potential ones. So on our NPL, it's already under control. And so we expect this not to have a very significant impact going forward. And because the economy and employment trends are still positive, and we have a slightly lower positive than -- slightly less positive than last year, but still positive GDP evolution unemployment evolution for the whole year, although we have some concern, obviously, but is already within our expected potential restructured deals in our portfolio, so we -- at this moment we prefer to maintain the 30 to 35 basis points, although the actual evolution is very positive. And regarding your last question?

[Jaime Hernández Marcos, executive]

This was second one. So I think, operator, we have time for one final question, please.

[Operator]

The next question comes from the line of Cecilia Romero from Barclays.

[Cecilia Romero Reyes, analyst]

I'm sorry to ask again about NII guidance, but you have had a growing cost of deposits in the quarter, but it's slowing down, your loan yield has performed really well. you gave us a loan -- to a low to low single-digit growth in NII with a new Euribor 12-month assumption of around 2.8%. If you look at your Euribor 12-month forward curve now, it's probably at the 3.4% mark. You haven't changed your expectations on volumes, which you told us that you expect them to be slightly down for that NII guidance. I'm just wondering, are you being extremely cautious not changing your guidance? Or is there anything in particular that has changed in your view of how NII evolve in a higher rate environment. Thank you.

[Pablo Gonzalez Martin, executive]

Thank you Cecilia. I think the reason, as I mentioned on the NII guidance is we -- obviously, when we gave the guidance, it was in a different interest rate environment, as you said, between 2.8% and 2.9% for the whole year of the Euribor. This has another impact. We have higher -- we have reduced our NII sensitivity, and this will depend obviously on the deposit cost evolution. And with higher rates, probably the move from sight to term deposit will go higher as well and the fixed rates we are doing in the last few quarters for the 2 to 4 years. So it's locking a little bit our expectation on going up the NII, but also going down if rates come down. So we have less interest rate sensitivity. And also, we have only 3 months. And as I said, if we go back to the Euribor that was discounted in September by the market. It was a lot higher than it was at the end of the year, 80 basis points then in this quarter, it has gone up 50 basis points. And still, we think this volatility is here to stay for some time. I think the uncertainty in the environment on the inflation front and the growth evolution at European and U.S. level, that drives our rates as well. It's extremely high, and we have to be open to different scenarios. And as well as we manage the different potential scenario of higher or at least less lower rates than we foresee now. We still have to consider the potential lower rates down the line.

So as I said, we are confident that we are going in the right direction and NII could be if everything stays as today, it could be better than our initial guidance, but we prefer to be prudent on when to come with a new update on. And I also don't think to be changing the guidance every quarter makes sense because the volatility of rates, as I said, is very high. So we will have more color in the second quarter. So I agree. I think that it looks better now, but I think still too much volatility and too many moving parts and the deposit costs that we were expecting could go up as well as the revenue coming from the loan book. So we have to see the evolution of both trends.

[Jaime Hernández Marcos, executive]

Thank you, Pablo, and thank you, Cecilia. Thank you all for attending the conference call. If you want additional info, please do not hesitate to contact the IR team. We are at your disposal. So thank you very much.