Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2022-Q2

[Alberto López, executive]

Good morning, everyone. Thank you for joining us today for Unicaja Banco Second Quarter Earnings Conference Call. Today, I'm joined by Pablo Gonzalez, our Chief Financial Officer; and Juan Pablo Lopez, our Chief Investor Relations Officer, and they will guide us through the presentation. Please remember, we will hold a live Q&A session after the presentation. And now I leave you with Pablo.

[Pablo Gonzalez Martin, executive]

Thank you, Alberto. Let's start with a summary of the main developments of the quarter in Slide 4. First of all, we are very pleased with the completion of the IT integration at the end of May in less than a year since the merger was closed. Everything went as planned, and we are now fully integrated, working in one platform. Our main focus, as you know, is on retail lending and both books, mortgages and consumer, keep showing positive growth year-on-year of almost 2%. Customer resources have remained stable year-on-year despite strong market volatility. Another important milestone of the merger is that we closed the restructuring of the life insurance business, reaching an agreement with Santa Lucia, which was the partner of the former Unicaja Banco, as our sole partner for life insurance. We are delighted with the outcome of this process, and we expect an improved profitability going forward.

Now on profitability. Net interest income has increased by 14% quarter-on-quarter on the back of rising rates with positive impact, both on the lending book and the debt portfolio. Fee income maintains positive momentum, growing by 13% versus last year, the main improvement coming from mutual funds and insurance business. Operating expenses are down 9% year-on-year, and all 3 cost lines are actually decreasing. Personnel expenses, as we anticipated last quarter reflects synergies from the merger. At the end of June, more than 50% of the employees and their restructuring plan have already left the bank, and we expect to achieve 80% by the end of this year.

On asset quality, 2 important messages this quarter. The first one is that cost of risk continues to go down, reaching more normalized levels for a bank like us at 27 basis points in the quarter. And the second one is that we kept decreasing our foreclosed asset portfolio without doing large wholesale transaction and preserving shareholders' value in the process. And finally, about capital, CET1 fully loaded ratio stands at 12.8%, increasing by 20 basis points in the quarter despite market volatility and the migration of the equity portfolio to IRB. We have a very comfortable capital position for our risk profile, and we remain committed to generate capital organically. Just as a reminder, we deduct 50% of the net income from capital as it is our dividend payout target. Lastly, let me highlight the tangible book value increased by 5% quarter-on-quarter.

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

[Juan Pablo Lopez Cobo, executive]

Thank you, Pablo. Now moving to Slide 6. You can see retail customer funds are flattish year-on-year and 1% up in the quarter as the increase in on-balance sheet was larger than the decline in off-balance sheet funds. Regarding on-balance sheet funds, we have seen a recovery in institutional clients, while retail keeps growing. Off-balance sheet funds, our net subscription remain in positive territory, and they partially offset this strong market volatility during the quarter.

In the next slide, we take a closer look at our mutual fund business. As commented, we saw positive net inflows in the quarter, although AUMs decreased due to the market turmoil. But if we take a broader picture, you can see, we are still at a 14% annual growth rate over the last 3 years. This is something remarkable and supports our medium-term targets. On the right side of the slide, you can see, we are also growing in a profitable way with mutual fund fees, 34% higher versus last year. We expect the positive performance in fees to continue as we keep growing, integrating mutual funds and offering a more attractive asset mix for our customers.

Moving now to lending on Slide 8. Retail lending is 2% up year-on-year. Both residential mortgages and consumer are growing at similar levels. As you know, these books are the main focus for us over the next few years. In the quarter, mortgages and consumer are also slightly up. In this quarter, consumer and others is includes around EUR 700 million of pension seasonal advances. The corporate loan book decreased as we have experienced a pickup in early redemptions in the last couple of quarters. Some companies borrowed prudently taking advantage of good conditions linked to the TLTRO and the ICO program. A reminder here of our strategy in this business line is that we are more focused on offering existing clients a more comprehensive product portfolio and entering more profitable segments and not so on loan growth.

Next slide on new lending. Corporate is 12% up versus last quarter, and we see from book yields improved significantly during the last months. Residential mortgages new lending slowed down in this quarter on the back of pricing discipline as we believe the market was not reflecting the interest rates increase. And then the IT integration always implies one of the branch networks to start working in a new platform, and it had a small impact already soft out. In this case, the stock is up. Consumer lending, as you know, we do more than 90% of the business with existing customers using pre-approved loans. And in this case, the migration of the pre-approved models and IT integration also implied a slowdown in the quarter.

In Slide 10, looking at our 2 biggest portfolios. On the left, you can see the main KPIs of the residential mortgage book, mostly first residents and with low LTVs in terms of geographical exposure and Lucia had the highest weight of new lending this quarter, which is very important for us at is one of the top markets in Spain. And as you know, we have a very strong franchise there. On the corporate portfolio, a quick note on the ICO loans. During the quarter, 12% of the portfolio acquired, are leaving an outstanding balance of EUR 2.1 billion. As of June, 94% are already paid in principle with no signs of deterioration. The NPL remains pretty much in line with last quarter at 8%, of which 63% is subjective this NPLs. Lastly, let me remind you that if we include the ICO guarantee, current NPLs coverage is above 100% on this book.

On Slide 11, we keep advancing on the digital business, 59% of our customers operate digitally at close to 90% of operational activity is already digital. We keep adding partners to our digital ecosystems, especially in the Home segment as IKEA or Tyco for home alarms, and we keep evolving our relationship with existing partners.

Regarding ESG, in Slide 12. On the left, we show the main details of our Green Bond Framework approved in May and focused on green buildings and renewable energy. This is a key element on the migration towards a more sustainable balance sheet. Under this framework, we issued a Green Senior Preferred Bonds in June, very well received in the market, 2.5x subscribed in a volatile environment.

Moving now to the quarterly P&L in Slide 14, we will comment later more in detail the different lines. So let me highlight just a few things here. First one, net interest income shows a strong evolution in the quarter, growing by almost 14%, mainly explained by the rise of interest rates. On associates, second Q is a strong quarter for us due to the EDP dividend, which is added to the recurrent revenues from the insurance JVs. Likewise, dividends is also seasonally strong quarter with a dividend from Caser and other equity stakes. Fees performed well on a yearly basis, double-digit growth. OpEx includes synergies of the year and execution on personnel is going faster than planned. Cost of risk keeps its downward trend. And lastly, in a quarter with strong revenues and trading income, other profits or losses reflects a prudent approach that will support and accelerate the foreclosed asset disposals.

Now going into a bit more detail and starting with NII in the next slide. On the left, you can see how the increase in Euribor rates starts to reflect in the portfolio. The customer spread improved 5 basis points, while the net interest margin is 14 basis points up. We expect those spreads to continue improving over the next few quarters as the portfolio re-prices to higher Euribor. On the top of this, on the right-hand side, we show the front book that stands well above the back book and will also support NII going forward.

In Slide 16, NII has increased by EUR 32 million in the quarter, and we had a positive impact in most of the lines. Starting with lending book, slightly higher average volume, coupled with higher front book at the beginning of re-pricing to higher rates implies EUR 9 million delta to NII. On the fixed income portfolio, we have a short duration and interest rates increased reflect at a much quicker speed than the loan book. Delta here is EUR 18 million. And finally, on funding, we have a positive impact, both on retail from a slightly higher contribution from corporate deposits in the quarter and on wholesale funding, mainly due to the maturity of an expensive Tier 2 coming from Liberbank, together with the active management of the liquidity.

Moving now to the next slide on fees. Let's focus on the right-hand side, starting with banking fees that are mainly cards and payments and current accounts are 3% up year-on-year. In non-banking fees and starting with mutual funds, they are performing very well, although this quarter volumes have come down, fees have increased quarter-on-quarter and year-on-year, and this improvement is a consequence of the change on asset mix that we serve in our strategic plan. Then insurance fees remained flattish quarter-on-quarter after the first Q that is seasonally strong. All-in-all, fees are 11% up in the second Q compared to the same quarter last year.

Moving to OpEx on Slide 18. Total OpEx decreased by 9% versus last year and 1% quarter-on-quarter. Personnel expenses remained flattish quarter-on-quarter since the expected synergies for the year are accrued each quarter. An update here, more than 50% of the employees under the agreed restructuring plan have already left the bank. This is a bit quicker than expected, so we might have some room to slightly improve synergies for this year. It's also worth noting that the branch network has come down by 28% since we announced the merger and is getting closer to our initial branch network target size.

In the next slide, you can see cost of risk keeps falling to 27 basis points in the quarter. So we continue moving in the right direction. And we would also highlight that our forward-looking provisioning scenario is still more conservative than the latest forecast published by Bank of Spain, leaving us in a good situation to tackle any downside risk in economic activity.

On Slide 20, on the left-hand side, you can see the evolution of what we call the main banking margin. This is NII plus fees minus OpEx, which has shown a remarkable average growth of 23% per year on average over the last 3 years. On the right-side of the slide, you can see how the return on tangible equity is also improving at a good speed, of reaching 5.5% in the first half of 2022, which is obviously the right path to reach our strategic plan targets.

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 non-performing loan stock, which is almost flat quarter-on-quarter despite having booked EUR 111 million of subjective NPL entries in the quarter. Coverage ratio goes down to 65% due to the fact that the outflows of NPLs had high levels of provisions, while the inflows of NPLs are as we have already mentioned, mostly subjective and have a lower level of provision. If we include the guarantee from the ICO loans that are already classified as NPLs, coverage ratio stands at 72%. At the bottom, you can see that half of our NPLs are residential 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 strong collateral and low LGD like the mortgage book. On the bottom right, you can see the disclosure by stages. Stage 2 exposure is flattish quarter-on-quarter with a coverage ratio that remains clearly above the sector average.

Next slide, foreclosed assets are down EUR 150 million quarter-on-quarter. The trends are very positive. The level of outflows this quarter, EUR 164 million is the highest since second quarter 2021, while the level of entries remains low, just EUR 40 million in the quarter. Total outflows in the year are EUR 315 million, which is in annualized terms, almost 30% of the initial stock. Coverage ratio remains at 63%, which should continuously support the pace of disposal going forward. Looking now at NPAs altogether. NPA ratio keeps improving and stands now at 6.7% with a coverage ratio of 64%. When we look at NPAs net of coverage, which is a metric that we like to monitor, the ratio stands flattish at 2.5%.

Moving now to solvency. CET1 fully loaded has increased 20 basis points in the quarter. Let me explain the main movements in the bridge. Organic capital generation, net of dividend accrual of 50% and AT1 coupon at 20 basis points, higher risk-weighted assets coming from the migration of the equity portfolio to IRB, that is partially offset by a smaller corporate loan book and mortgages, new production under IRB model. Finally, lower deductions from DTAs and lower thresholds at 12 basis points. CET1 fully loaded remains above the 12.5% management target. These, together with our expectation that the bank will accelerate its ability to generate capital organically makes us very comfortable.

Very quickly in the next slide. Capital levels remain well above capital requirements. We have a very significant CET1 fully loaded buffer of EUR 1.6 billion and MDA buffer of 419 basis points. MREL stands at 20.1% as of June, so 200 basis points above the interim requirement for 2022.

Moving to the next slide, the fixed income portfolio. On one hand, we have continued reinvesting according to our expectations. As you know, we follow very closely market conditions. And this quarter, we have reinvested slightly more than EUR 1 billion. On the other hand, we have made some sales and had some maturities, which makes the end of the period stock to be slightly down quarter-on-quarter. Average duration has gone up slightly to 2.7 years, while the end of the period, yield has gone up from 110 basis points to 130 basis points. It is also important to highlight that almost the entire portfolio is accounted at amortized costs with no impact on capital.

And finally, on liquidity, the message in the last slide of the presentation is the strong liquidity position we currently have with 79 loan-to-deposit ratio. We plan to deploy this liquidity to increase the profitability of the bank as we already said in the past. In terms of capital markets activity, we had the maturity of an expensive Tier 2 coming from Liberbank, and we issued EUR 500 million of senior preferred. You can see that maturities are well spread over the next years and coupons are relatively high for 2023 and 2024 maturities especially.

And with this, this is it from my side. And now we can start with the [Technical difficulty].

[Juan Pablo Lopez Cobo, executive]

Thank you, Pablo. Operator, we're going to start now with the Q&A. Please -- everyone, please try to just make 2 questions each, so we can get as many of you through.

[Operator]

[Operator Instructions] Our first question is from Francisco Riquel from Alantra.

[Francisco Riquel, analyst]

The first one is about loan growth, which has come to a halt is flat year-on-year. So I wonder if you can comment on the impact on the disruptions that you mentioned from the IT integration. Do you expect a pickup in the second half of the year or not, if you can update the guidance for the year? And specifically, if you can comment on the mortgages, if you're seeing increased competition, if you are adjusting pricing accordingly, given the slowdown in the new lending in the second quarter and also on corporate is another quarter-on-quarter decline, if you can comment on this portfolio as well. The second question is about the ALCO, if you can comment on the reinvestments during the quarter, and you can update on the strategy for the rest of the year in terms of size and duration. And overall, what type of NII contribution shall we expect compared with the run rate seen in this second quarter?

[Juan Pablo Lopez Cobo, executive]

Okay. Thank you, Pablo -- Francisco sorry, thank you for your questions. I will take the first one regarding lending. I guess here, we believe that we have shown in the previous quarters that the commercial activity is doing well, almost from day 1 since the merger. So we have no doubt that the franchise is very strong, mainly in retail lending. And next quarter, we'll continue the good trend. Regarding the second quarter, we have to keep in mind that we underwent the IT migration in May. Everything is closed and doing well, but there is one of the branch networks that has to adapt during the quarter to a new system. But as said, this is already sorted out.

And if we look to the different portfolios, as you were asking, regarding mortgages, they are up -- slightly up quarter-on-quarter. And in terms of new production was pretty much in line with the 3Q and 4Q last year. If too, it's below the first Q 2022. And this quarter, as you pointed out, we also saw some challenging pricing from some of our competitors. So we decided to be a bit more selective. Right now, we are granting the new mortgages at around 2% yield plus another 100 basis points coming from the cross-selling for their products. So all-in-all, around 3% yield.

And going forward, for mortgages, we acknowledge the macro environment could be a bit more challenging, but we expect the stock to grow at around low-single-digit in 2022 and accelerate in '23-'24. And probably regarding corporates, new lending is up more than double digits quarter-on-quarter, but it's true that they were more down set by some early redemptions related to TLTRO and ICO lending that make stock to fall. If you remember, yields -- some of these loans were not too high. And part of these customers, they take it as a precautionary this lending. So we expect incorporates this trend to continue in the next quarters with lower volumes, but higher prices. And overall, all-in all, if we look to the 3 main portfolios, mortgages, consumer will perform well in the next quarters and accelerate in '23-'24. And corporates will decrease and stabilize in 2024.

Now probably if you can Pablo?

[Pablo Gonzalez Martin, executive]

We'll take the second one, first. Regarding the ALCO strategy and the reinvestments, we have been reinvesting part of the portfolio that we reduced in the second half of last year. We already did more and more than EUR 1 billion in this quarter, taking advantage of the good levels of some of the government bonds. And we also have lengthened the duration of the portfolio to take advantage of higher swap rates and to be more balanced in terms of interest rate going forward once the new re-pricing on rates it's done. And in terms of the strategy going forward, obviously, we still have room to reinvest in the portfolio from our liquidity position. But the idea is to have a lower ALCO portfolio than the combined entities would have had. But still, there's room to increase the size of the portfolio. And in terms of the contribution on a quarterly basis, we still with the investments that we have done at the end of last quarter and at the beginning of this quarter, we think the contribution will increase at least by more than EUR 10 million per quarter and then would probably be more stable going forward.

[Operator]

Our next question is from Ignacio Ulargui from BNP Paribas.

[Ignacio Ulargui, analyst]

I just have 2 questions. One on the picture of the overall NII, I mean, with the strength that we have seen this quarter, how do you see NII going forward in the year, if I remember correctly, I think that your guidance was for a flattish to low single-digit growth. Just to get a bit of color on what should we expect on NII going forward? And then a second question on the foreclosed asset disposal on your capital position. I mean, don't you think that there could be sort of like a good opportunity to accelerate investments through portfolio disposals, given the good performance on capital that you have had, specifically to a bit of capital to get fully clean and so the lower cost of risk that the business model deserves in the long-term?

[Pablo Gonzalez Martin, executive]

Thank you, Ignacio. I'll take both questions. On NII guidance, interest rates have moved quite significantly in the last couple of quarters and much faster than initially expected and a lot higher than what in our strategic plan that we presented in December last year we had, and the profile of that is the NII increase that we have seen in this quarter. And we had a previous guidance in -- at the end of last quarter to be around flattish for NII. And now we feel even more confident that it's going to be improved. And we think that the most likely is to be around 3% increase in the year. And this compares with the decrease that we have when we presented the strategic plan.

So this is the really good news, and we have been positioned for benefiting from this interest rate increase. And the drivers of this increase will be -- we already have some increase in the ALCO portfolio, as I mentioned, that will maintain and even increase in the coming quarters, as I said, but also the contribution from the lending book will pick up, it will be slightly more flattish in the third quarter, slightly better and then improve more significantly in the fourth quarter. Because the lending portfolio takes longer to benefit from higher rates and also the delay on 2 months that we also have in the mortgage re-pricing. We will have some slightly negative impact in this year from the retail funding and also from the wholesale funding, but not enough to offset the benefits that I already mentioned.

So this is the -- as we see, we think net-net slightly better in the third quarter and stronger in the fourth quarter after re-pricing of the loan book kicks in. And obviously, this end up with a much better guidance, as I said, probably around 3% for the whole year compared to the pro forma numbers of last year.

[Juan Pablo Lopez Cobo, executive]

And going to your second question, Ignacio, you said, the foreclosed strategy if we are planning to any disposal. We already mentioned in our strategy that we have a clear commitment to reduce our NPAs. And in that sense, we reiterate our guidance from the presentation. And our target is to be below 5% by the end of 2023 and below 4% by 2024. And in that sense, what we have seen is a strong performance of our servicer, which is internal. And it's doing a very good job, protecting shareholders' value and selling asset by asset. But obviously, as we have said in the past, we are always looking at market opportunities. And because of our strong provision level and position, we are looking at also portfolio disposals in the future.

[Pablo Gonzalez Martin, executive]

Maybe just to add, in any case -- in case of this portfolio, we do not see any impact on capital.

[Operator]

Our next question is from Maksym Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have 2, if I may. The first one is on capital. And it has improved and is likely to improve further and faster loan book growth seems to be somewhat lower than expected. Could you share some light on how you could use the excess capital in the coming years? And also, is there any update on the timing of the IRB models for the Liberbank mortgage portfolio? And then the second question is on the potential banking tax in Spain. I was just wondering if you could share your view and how likely you think it tends to be implemented.

[Pablo Gonzalez Martin, executive]

Thank you, Maksym. I'll take the both questions. In terms of capital, I think the performance is quite good, and we maintain our target for the plan that we forecast that we were going to be above 14% at the end of 2024 without including any benefit from the Liberbank mortgage back book migration to IRB models that I'll comment later on. And having said that, capital probably is performing better because of the interest rate path that we now foresee is much better than the one that we had when we announced our strategic plan. And this will probably allow us to have even better capital going forward. And in terms of the use of the excess capital, we are above our target, which is 12.5%, as you know. And we expect to continue and even improve the capital -- organic capital generation going forward.

So -- and the trend is already in this quarter, as we have seen, but this is going to improve even further down the line, and we expect that to improve even further. And we need to decide on what to do with the excess capital, and this is obviously something for the Board to decide. But obviously, we have the 2 major options is to increase the shareholder remuneration because the target was set up with a 50% payout -- dividend payout. And obviously, we have other options as share buybacks. And in the past, both Boards approved that. So we understand the benefit of that situation. But obviously, this is more something for the coming quarters, probably next year when we will have also the IRB impact on capital and the capital -- organic capital generation will speed up as well. So -- and the other obvious option that we have is to invest in our own business and profitable and with good return on equity and make the bank even more profitable than the line.

In terms of the IRB, I think the process is evolving well. Let me give you some more color on this. And regarding the latest steps, we presented the application package at the beginning of this second quarter. And after that, the regulator started the on-site inspection in June. As commented before, the equity portfolio migrated to IRB in the second quarter, which has implied an increase in risk-weighted assets as we already mentioned. And our plan was to migrate the Liberbank mortgage portfolio and the equity portfolio at the same time, but this hasn't been possible. So the only -- the good thing is after that, the only impact that we expect from this IRB process, comes from the retail portfolio migration from the Liberbank portfolio for which we expect the approval at the end of this year or the beginning of the first half of 2023.

Obviously, this doesn't depend only on us and we cannot be too specific on this. So we want to be careful on timing, but we are confident, we are on time on the process, and we have done this in the past. So we shouldn't have any significant delay in this sense. And in terms of quantification of the IRB impact, we prefer to be prudent and not to preannounce anything, but it should be probably in line with other portfolios, individual portfolios and mortgage portfolios.

[Alberto López, executive]

Pablo, we had one more on the banking tax. Your views?

[Pablo Gonzalez Martin, executive]

Sorry. I think -- regarding the banking tax, we don't have any details or insight about this new tax. So it's hard to make very meaningful comments on this. I think what I would like to comment is that the banking industry is one of the industries paying more taxes in Spain. We're heavily taxed. We pay taxes for deposits. We pay for DTAs. We have the corporate tax at the highest rate of 30% and we pay other levies like the DGF or the resolution fund, the Deposit Guarantee Fund or the resolution fund. We pay VAT, and we cannot deduct the same way that as other corporates do. We pay taxes on transactions. We pay stamp duty on mortgages. So we think we are already heavily taxed as a business, and this is something it's worth remembering when considering new taxes. We don't agree on the rationale on rates.

I think, we're talking now the implied curve or the power shows us that rates would be probably between 1% or 2%. And this looks more the normal situation rather than any extraordinary event. And I think, what was extraordinary, was to have negative rates in the past, and we have been going through this negative rates for quite some time in the very extraordinary situation. And we think that the new rate path is more the normal situation rather than any extraordinary. But we cannot give much more because we don't know anything about the -- how this is going to be implemented.

[Operator]

Our next question is from Borja Ramirez from Citi.

[Borja Ramirez Segura, analyst]

2 quick questions, if I may. The first one, regarding the NII guidance for '23 of 3% growth year-on-year, could you please provide us on what path assumptions you are assuming for retail deposits? And then my second question would be regarding the issuance, which showed a strong growth in the second quarter, around 20% quarter-over-quarter. I would like to ask any one-off here or if you could please provide more details?

[Juan Pablo Lopez Cobo, executive]

I will take the second question. If I got it right, it was regarding fees. On fees, you can see mutual funds, they did very well in the quarter. AUMs, the average AUMs were relatively flattish quarter-on-quarter. But as we anticipated in the previous quarter and during the strategic plan, one of the levers and synergies, let's say, from the merger is that we were changing also the mix of the funds of our customers. We are adding more volume to our customers, and they are asking for different funds allocated to the different profile. And that explains the increase in mutual fund fees that we expect will continue in the next quarters. In terms of insurance, it's relatively flattish quarter-on-quarter, but you have to bear in mind that the first Q is seasonally stronger. The 4Q as well as seasonally stronger, and then regarding banking fees, there is a small decrease quarter-on-quarter, but we expect this to continue growing in the next quarters. So there is no -- all-in-all, in fees, the trend is positive. You can see the double digit growth and the guidance going forward is that we expect high single-digit growth for 2022.

[Pablo Gonzalez Martin, executive]

I'll take the second -- on the first one. Regarding the NII guidance and the assumptions that we have embedded in that and what we consider on retail. As I said, the drivers of this guidance are basically the better contribution from lending on the ALCO portfolio. And this will partially be offset by higher retail funding costs. And -- but let me say something about the retail deposits and the deposits as a whole. I think we have a strong belief that the sector, the financial sector and the retail banks, especially compared to the past has a much better liquidity position, much stronger. If we compare the loan to deposit position on average for the sector was in the previous crisis around 170 now. We're talking about close to 100. So it's a very sound liquidity position for the sector as a whole. And also I think we have, in our case, we have a wide customer base with very granular and a lot of customers would maintain some balance, foreign transactional purposes.

And on top of that, I think for this year guidance, what we have considered is that the -- and it's also implied when we mentioned our NII sensitivity to interest rate, the first 50 basis points that the ECB has done on rates has a strong performance in terms of NII because we coming from minus 50% to 50% to 0%. And obviously, it doesn't mean that you have to increase your funding cost for the retail deposit because we didn't charge negative rates to the retail deposits. So that's basically our view. Obviously, we have some increase in retail funding this year. And obviously, next year and the year after is when the impact will be more significant.

[Operator]

Our next question is from Carlos Peixoto from Caixa Bank.

[Carlos Peixoto, analyst]

The first one would be on NII and a little bit of a follow-up on previous questions, but I was wondering and I apologize if you might have answered and I missed it, but if you could give us your sensitivity to interest rates to a 100 basis point movement, let's put it that way. If you could just update us on that. And also within NII, how much was the TLTRO contribution in the first half of this year for NII? And where should it be during the second half? And then a second question on cost of risk. Your views on the outlook for the second half of the year given the second was particularly, haptically low levels on cost of risk, whether we should see this as recurring throughout the year? And also within that context, how should we think a lot of the provisions given that this quarter, they were a bit higher than usual. Thank you.

[Juan Pablo Lopez Cobo, executive]

Thank you, Carlos. I will take the last 2 questions. Pablo, if you want to take the ones regarding NII. First one regarding cost of risk, we saw the downward trend in the quarter, 27 basis points in the quarter, 32 in the first half. Regarding guidance, we can tell you that right now, we do not see any deterioration. NPL entries remain under control. And despite lower GDP forecast, the unemployment in Spain is showing resilience, and this is a key indicator for mortgages for us, the unemployment. As we commented in the past, sensitivity to higher rates and affordability rate of our customers is something manageable and corporates almost 20% is protected by ICO Guarantees. This was one of the question marks the maturity of the ICO loans, and they are performing as we were expecting. So no news there.

So all-in-all, again, we do not see any deterioration so far. And for the time being, we prefer to be cautious and expect the cost of risk in the second half to be around 30 basis points and not more than the top will be 32 basis points over the first half, but I said around 30 basis points in the second half. And regarding other provisions that you were asking us, these are provisions related more to real estate assets. We commented during the presentation that the quarter was a good quarter in terms of revenues. Trading income was a bit higher than expected, and we prefer to take a prudent approach on real estate assets and to reinforce coverage here to continue accelerating the disposals.

The disposals were good in the second Q, in the first half as a whole. And we want to continue in that trend and to accelerate as much as possible. We are going ahead the budget in terms of disposals, and this obviously has an impact on lower risk-weighted assets and capital, lower cost going forward. But as said, we do not foresee any more provisions going forward for this portfolio. And we will try, as Pablo commented before in one of the previous questions to analyze if there is an opportunity to continue doing some portfolios.

[Pablo Gonzalez Martin, executive]

Carlos, regarding NII interest rate sensitivity, I think we maintain a similar position, taking the starting point of a static balance sheet, a 50 basis point increase in the rates could have a positive impact of around 10% on NII once the full mortgage portfolio is re-priced after one year. So I think as I said, the interest rate sensitivity is obviously managed within the limits set up by the -- our risk appetite framework. And we have been a skew towards higher rates, but we will probably -- will be more balanced once rates goes closer to the 2% if they ever reach there. So this sensitivity is for the first 50 basis points move. But obviously, we will be more balanced once we have a higher NII contribution. So I think it's important, obviously, in terms also -- in terms of the liquidity and the TLTRO and the whole position, regarding our guidance for the 3%, we have considered the whole situation and the impact from the treasury position obviously will be -- have some impact in the third quarter compared to the second quarter, but it has been considered when I said that we expect it to be around 3%.

[Operator]

We have our final question from Carlos Cobo from Societe General.

[Carlos Cobo Catena, analyst]

Some of my answers have been answered, but sorry, some of my questions have been answered, but maybe one quick follow-up on fees and loan growth. On loan growth, you have a very demanding business plan. Are you considering to revisit that and lower your expectations on the back of a weakening macro momentum? Or are you confident with that and on fees, if you could add a little bit of color on what drove the decline of 5% in banking fees, because, in theory, the second quarter tends to be stronger in terms of activity. So what costs that drop? And if you reiterate your double-digit fee income growth target for the year.

[Juan Pablo Lopez Cobo, executive]

Thank you, Carlos. I will take these 2 questions. First one regarding lending, as we were commenting before, I think we have no doubts about our franchise, and they sold our branch network and commercial teams from day 1 since the merger that they can deliver. And there was no disruptions in terms of new production in the second half of last year just after the merger. And the second Q is just a slowdown in which we preferred in some of the portfolios like mortgages, we felt that the pricing was a bit challenging from some of our competitors, and we prefer to be a bit more selective and slowdown a little bit. But even after that, the stock is up quarter-on-quarter, and the new production is around EUR 1 billion. So we are happy with that.

And then the IT migration as well, there is some small impact in one of the networks that has to adapt and that is sorted out. So the branch is ready for the next quarters to be again at full speed. Probably incorporates, as we were commenting before, the redemptions has been a bit higher than what we were expecting, mainly related to the TLTRO and ICO loans. But again, the TLTRO, loans related to TLTRO, the yields, as you know, were not great. So it's not a problem, those maturities in terms of revenues going forward. And for 2022, probably what we see overall, the net-net, if we take into consideration the growth in the retail lending and the decrease in the corporate lending is overall loan book around flattish 2022. And for '23 and '24, we stick there to our plan in terms of new production, and we expect to deliver with the plan that we presented. But yes, we acknowledge that in 2022 is a bit lower than what we were expecting, as I explained before, the reason I explained before.

And maybe the second question regarding fees, we do not see -- we see banking fees that at the end of the day as well, they are related to some extent to the commercial activity. And what we feel is that next quarter, they will recover. The current account fees were a bit lower the second Q, but this is something that we think will, again, we will recover in the next quarters. So that's why we maintain the guidance a bit lower than what we said in the past. We expect now high single-digit growth. We see some of the levers like mutual funds and insurance doing even a bit better than expected. But we expect that high single-digit growth guidance for 2022.

[Alberto López, executive]

Thank you, Carlos. This was the final question. Thank you, everyone, for joining. IR team remains fully available rest of the day. Thank you very much.

[Pablo Gonzalez Martin, executive]

Thank you.

[Juan Pablo Lopez Cobo, executive]

Thank you. Take care.

[Operator]

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.