Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2023-Q2

[Alberto López, executive]

Good morning, everyone. Thank you for joining us today for Unicaja Banco Second Quarter Earnings Conference Call. Pablo Gonzalez, our CFO and Juan Pablo Lopez, our Head of Investor Relations, will go through the details of the presentation in a moment. And please remember, we will hold a live Q&A session after the presentation.

[Pablo Gonzalez Martin, executive]

Thank you, Alberto. We are going to start with a summary of the quarter in this first slide. Starting with lending, the deleveraging continues and the loan book at the sector level keeps going down. In our case, the retail portfolio, which is our main one is performing better than the sector where we are decreasing 0.9% year-on-year, less than half of the sector decrease.Customer deposits keep performing well and they remained very stable in the quarter with a very low deposit cost of just 37 basis points. Off-balance sheet balances improved mainly on the back of savings insurance. The main profitability metrics keep improving and all 3 lines of our core banking margin keep delivering positive trends.Net interest income improved 8.6% quarter-on-quarter and 21% in the year. Lending and ALCO repricing more than offset the increase in funding costs and the impact from the TLTRO and with still a lot of repricing left in the loan book. Fee income is flattish in the quarter and grows by 2.1% year-over-year with all the main lines showing very resilient, as we have a very recurrent fee structure.Operating expenses are down by nearly 2% year-on-year, which helps improve our cost-to-income ratio to 48%, which is 5 percent points better than last year. Adding these 3 together, our core banking margin has improved by 35% compared with the first half of last year. And net income, excluding the banking tax has improved by 25% 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 is down by EUR 135 million in the year with around EUR 200 million of sales. NPLs, stock and coverage ratio are both stable in the quarter. Cost of risk is 30 basis points in the quarter and 28 basis points in the year, in the low range of our guidance. Asset quality continues to perform well. And although we like to be prudent, we are not seeing any signs of deterioration in asset quality.Finally, capital ratios and liquidity have, again, delivered a strong performance in the quarter. CET 1 Fully Loaded ratio went up by 31 basis points in the quarter and stands at 13.8%. This is a very comfortable capital position, well above our higher than 12.5% management target. And we expect to keep generating capital organically going forward while maintaining our 50% payout policy.Finally, the liquidity coverage ratio has settled at 284% after the repayment of most of the TLTROs, which is much higher than our peers and among the highest in Spain and Europe.Now, Juan Pablo will cover the business activity of the quarter in more detail.

[Juan Pablo Lopez Cobo, executive]

Okay. Thank you, Pablo. Let's start with customer funds in Slide 6. You can see private sector remained flattish in the quarter. And the year-on-year decrease is pretty much in line with the sector. To put this into context, we keep seeing early amortizations of loans, both in residential and corporates. Then you can see public sector deposits stable, and you can see probably some interesting data on the right regarding our franchise.Here, you can see 76% are private sector in the U.S. deposits with low average balance, and then 80% of them are covered by the deposit guarantee fund. Regarding off-balance sheet evolution, we have seen some inflows coming from retail, mainly into saving insurance and fixed-income securities.Now moving to the next slide, and regarding our asset management balances have grown steadily over the last year despite customer deposits becoming very profitable for us.As you can see, growth comes mainly from savings insurance, where we give a guaranteed profitability for our customers, but also with a life insurance associated to it, which in our opinion, is a more value-added product this time for our customers. Altogether, we are managing more than EUR 21 billion. And here, we still have a lot of room to keep growing, but we already have a very valuable franchise. In terms of profitability, on the right, you can see very stable versus last year despite lower mutual funds, which gave the highest yield for us.Now moving to the next slide on lending. We continue to see some slowdown at the sector level in Spain with all major books decreasing both year-to-date and year-on-year. In our case, retail lending book is 1% down, which is half the decrease of the sector. In residential mortgages, our key product, we keep increasing our market share and consumer lending keeps growing.Corporate loan book deleveraging continues as we anticipated in previous quarters. Early amortizations are still coming from extra liquidity granted to companies during COVID. Some of these amortizations were granted at low fixed interest rate in the past. So, when we look to economic terms, the early amortizations actually generate value and capital for the bank.In corporate, as we commented in the past, our focus in the short term is to target the right clients and improve our product offering. Together with front book pricing much higher than the back book, as we are seeing over the last few quarters.Next slide, on new lending. On corporate, new lending is coming very accretive with better pricing. Residential mortgages have slowed down after a few strong years. And this quarter, new lending improved quarter-on-quarter with some positive seasonality. On consumer, the portfolio is holding up well, so we expect this to keep evolving positively in the next quarters. All in all, we expect a lower year in terms of new lending than in recent years, but at much better pricing.In Slide 10, looking at our 2 biggest portfolios, everything relatively stable versus previous quarter. On the left, you can see the main KPIs of the residential mortgage book, a low-risk portfolio, as we commented in the past, mainly first residents and low LTVs. On the bottom right, let me highlight something relevant. It's the speed at which the ICO loans book is decreasing. It is 16% down in the quarter and more than 30% down since 2021. We have to keep in mind that this portfolio was granted at low fixed rates with a good return on allocated capital, but low yield.On Slide 11, you can see our customers are becoming more and more digital and 1/3 of them -- of the new customers are coming through digital channels. In terms of product and channels, similar story. We keep investing and everything is becoming more digital every quarter. In consumer lending for instance, almost 50% of the sales are through remote channels.Moving now to Slide 13 regarding ESG. On the left, we already set our decarbonization targets last quarter and maintain a comfortable level of collateral to continue issuing green bonds. On the social front, we are clearly committed to financial inclusion. An example of that is that we have recently signed an agreement with the post office and the Spanish Blind Association among other initiatives. On governance, we keep advancing. And the Board, as you know, recently appointed the 4 independent members that we were missing.Now, moving to the quarterly P&L in Slide 14. We will comment the main lines in more detail later. So, just some highlights. NII is up 21% in the year and almost 9% in the quarter. The repricing of both the loan book and the securities more than offset the higher funding cost.In terms of fees, saw resilience coming from our core business. Associates and dividends, strong performance this quarter. This is usually the seasonally best quarter in the year, and this is due to the dividends coming from CASER and our stake on EDP. Other revenues include EUR 44 million contribution to the Single Resolution Fund. This is EUR 20 million higher than last year when we didn't pay for Liberbank's balance sheet after the merger.OpEx remained under control, showing slight increase in personnel cost this quarter, as we booked and paid some variable payments. Loan loss provision, cost of risk remained contained at 30 basis points in the quarter. Other provisions, mainly related to mortgage expenses and floor clauses are in line with expectations. And finally, other profits or losses, we continue reinforcing coverage on real estate assets. All in all, the core business is doing well and profitability is improving. Net income, excluding the banking tax would have increased by 25% in the first half '23 versus first half previous year.Now, going into a bit more detail, and starting with net interest income. Customer spread increased by 25 basis points in the quarter, thanks to strong performance of the loan yield that improved 46 basis points, while the deposit cost increases, but at a lesser extent to 37 basis points, remaining below the sector average. On the right-hand side, you can see the latest figures on lending yields at the end of the quarter that continue improving. Front book yields are 26 basis points higher than the previous quarter and well above back book.Now, in the next slide, we want to show the main moving parts of the NII in the quarterly comparison. First, lending contribution increases EUR 58 million, both thanks to the repricing and higher new lending yields that more than offset lower volumes. On retail funding, the cost of deposits increased by EUR 36 million, still a very low cost. The fixed income portfolio contribution improved by EUR 12 million as some bonds are at variable rates or hedged.Wholesale funding costs increased due to the fact that around 70% of the issuance are swapped. And in the second Q, we have the full impact of the latest issuance. And finally, on interbank funding, we have a positive delta of EUR 10 million in the quarter, basically explained by the fact that we have generated some positive liquidity versus last quarter, and this is remunerated at a higher ECB rate. It's important to keep in mind that we have paid back almost all the TLTRO funding.Now moving to fees. Total fees are quite resilient despite some lending demand slowdown and some pressure on more profitable mutual funds, for example, as interest rates are attractive enough for some customers. In the first half of 2023, fees are up 2% versus last year. That compares very well. Most of the main lines are doing good, but especially payments as both credit card and merchant acquiring business improved and also mutual funds that grows 5%. All in all, very sound fee income evolution in the year.Moving to Slide 18. Total operating expenses increased by almost 2% in the quarter, explained by personnel expenses as we book and pay variable payments to the staff in the second Q. On a yearly basis, the downward trend remains as expected, with close to 2% decline in the first half '23 compared to the first half '22. And this allows us to improve our cost-to-income ratio.And as you can see on the right-hand side, the number of employees keeps coming down as we keep advancing on our restructuring plan, and the number of branches is also slightly down in the quarter, but we should not expect further decreases in the near term.Next slide, cost of risk stands at 30 basis points in the second Q, in the low part of our guidance, the 30 basis points, 35 basis points guidance. And although the asset quality is performing well and we do not anticipate a deterioration in the second -- severe deterioration in the second half of the year, we should expect a cost of risk in line with initial guidance.On Slide 20, on the left, you can see what we call the banking margin, growing at 35% versus first half 2022. All 3 lines, NII, fees and OpEx have improved in the year, which is the best foundation for future profitability growth. On the right side, you can see that net income adjusted for the bank tax have increased by 25% compared to same period of last year.And now I pass back the word to you, Pablo.

[Pablo Gonzalez Martin, executive]

Okay. Let's move now to asset quality. On the top left-hand side, you can see NPL stock evolution. A very slight increase this quarter on the back of a higher recognition of subjective NPL, up to 60% that are either performing or past due below 90 days. The level of gross entries has remained pretty in line with the average of the last 4, 5 quarters. So far, we are not seeing any signs of deterioration.NPL coverage level remain very strong at 66%. And if we include the guarantee from the ICO loans on NPLs, this coverage ratio increases to 76% and above 100% for corporate NPLs. We are actively managing the stocks of NPLs, and very recently, in July, we have closed the sale of a portfolio of mortgage NPLs of around EUR 220 million, that would take the NPL ratio down from 3.6% to 3.2%. We'd recall that we have a defensive loan book with more than 75% individuals and public sector exposures.Next slide. Foreclosed assets are down EUR 92 million in the quarter and EUR 135 million in the year. In terms of disposals, another good quarter. We have sold EUR 116 million in all kind of assets, 24% finished buildings, 46% land and 30% under construction with 4 million positive results on these sales. In the year, we have accumulated EUR 200 million in sales.We continue reducing the stock of our closed assets. As you know, this is one of the main focus of the Bank. Coverage ratio of foreclosed assets remain at 65% in the quarter. Looking at NPAs. If we consider the ratio of net of provision, it remains stable at 2.4%. This is already a low and manageable exposure, although as we said, we plan to continue reducing it.Now moving to solvency. CET 1 Fully Loaded improves 31 basis points in the quarter to 13.78%. The main variations in the quarter are explained by, 19 basis points from retained earnings, net of dividends accrual and AT1 coupons; 44 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 the new production in mortgages is under IRB models and the prepayments is -- of the former Liberbank portfolio is under standard, and lower NPAs and equity stake valuations also added to these risk-weighted asset reduction.And finally, we have minus 30 basis points coming from valuation adjustments and other minor impacts. And this is mainly due to the EDP valuation. All in all, CET 1 Fully Loaded stands well above our 12% -- higher than 12.5% management target, and we expect to keep generating capital organically in the coming quarters.Very quickly, in the next slide, capital levels remain well above capital requirements. And this quarter, we have increased an already very strong buffers. CET 1 Fully Loaded buffer reaches EUR 1.8 billion, and MDA buffer stands at 500 basis points. MREL fully loaded stands at EUR 24.2 million as June, getting very close to the 2024 requirement of 24.5%.Now moving to the next slide on the fixed income portfolio. This quarter, the size of the portfolio has decreased a little bit to EUR 26 billion, after selling -- well, advancing the maturity of EUR 1 billion portfolio -- over EUR 1 billion portfolio of bonds that were maturing in the third and fourth quarter with a relatively low yield. The composition of the portfolio maintains a very similar structure of 80% public debt. The average duration stands at 2.5 years, and the average yield continues improving; in this case, 30 basis points in the quarter to 2.4 at the end of the period.This is explained by mainly the hedging and some selective reinvestment over the last few quarters, so -- because a big part of the portfolio is hedged to interest rates. I think it's also important to highlight that almost the entire portfolio is accounted at amortized cost with no impact on P&L or capital.Now on wholesale funding. After the latest issuance, we are very close to the MREL requirement, while the maturities calendar is well spread. And also, it's important that you can see the funding rates are in line with the current interest rate scenario.Finally, on liquidity. We maintain a leadership position on liquidity with a loan-to-deposit standing at 79%, NSFR at 143% and LCR at 284%. In this quarter, we have repaid around EUR 4.4 billion of the TLTRO funding at the end of June. And we have left around EUR 900 million maturing in next year, in 2024. We have EUR 21.5 billion of high-quality liquid assets and insurance capacity of almost EUR 15 billion. These, together with our strong deposit franchise allows us to maintain a very strong liquidity position, which is very comfortable quarter after quarter.This is from our side. And Alberto, I think we're ready for the Q&A.

[Alberto López, executive]

Thank you, Pablo and Juan Pablo for the presentation. Operator, we are now ready for the Q&A.

[Operator]

And our first question comes from the line of Maksym Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have a couple. The first one is on net interest income and you've guided for an increase of 5% in the second quarter of 2023, but NII has actually increased 9%. And -- so, banks are improving their guidance for 2023, and I was wondering if we can expect a higher increase than 20% you guided previously?The second question is on the customer spread. I was wondering if you could guide us on what kind of customer spread do you expect beyond 2023 in normalized and repriced situation?And then the last one is on capital. You keep on building capital. You still have to include IRB models. I was wondering what kind of impact should we expect, and if there is any update on the timing of the inclusion?

[Pablo Gonzalez Martin, executive]

Okay. Thank you, Maksym. Let me start with NII. As you said, we had presented in the previous quarter that we were expecting around 5% growth in NII for the quarter. I think we took this seriously, but as you can imagine, it's almost impossible to have to the 1% accuracy on the guideline, and basically because of a couple of things that you may imagine. The beta is something that depends a lot on the behavior of our customers, their investment attitudes and the competition in the market.The interest rate evolution is something that we cannot control. We may have our forecast, our view on rates, but obviously, it's always something hard to get to a final number. And we -- as you can imagine, when we draw those numbers, we were rounding. We were expecting something above the 5%. And maybe in another quarters, it was closer to the level that we show.So, in terms of the -- if this improvement makes us change our guidance, I think we expect, as we said, the NII to grow above 20% for the year. As always, as I said, this guidance will depend on the beta of deposits mainly, but also on volumes and on interest rates. And regarding the betas, I think so far, the pass-through to retail deposits, it's been slightly slower than we were anticipating.But we think and we have already started to pay so -- to part of our customers. So this may change in the future. So we prefer to be and to maintain this guideline and to be more short-term guiding, I think, in terms of NII. So, I think NII, the good news is NII, it's going to be better for the coming quarters. And this is the main message.How much? I think, this is something that you have to work out thinking on the betas, on the interest rates because now we have a high level of Euribor for the next quarter. So we can be very sure that this quarter is going to be very positive, but for next year, it's coming down. So, on the forward, but maybe it's not what really happened. So there's a lot of moving parts as you can imagine.And regarding IRB, I think the process is not finished yet. As you know, this is something that does not depend -- the final resolution in this does not depend on us. We have done the work from our side. And regarding the potential impact, let me take one step back and put our capital position into context.As you have seen, in the first half of the year, this has been very strong in terms of organic capital generation. We have generated more than 80 basis points in this first half of the year, reaching a CET 1 of 13.8%; well above our expectations. This means that our capital planning does not consider, and I think this is important when we do the capital planning, we haven't considered any impact from the IRB approval because this does not -- is not under our control.And right now, our CET 1 is 130 basis points above the threshold that we have in our target. So, this is more than EUR 400 million. And we expect in the coming quarters, keep generating more capital organically in the remaining part of the year and going forward.What I'm trying to say is that, we'd rather be careful regarding the quantification of the impact, and we are very careful on this. And as I said, we don't consider in our capital planning. The initial impact will probably be lower than initially expected, but organic capital generation has been higher so far and offsetting partly this benefit.And this higher capital generation is due to the -- all new mortgage production comes from already under IRB models, and the level of prepayments of the portfolio that is going to be included in the IRB model has increased, so that the reduction of the impact is also coming from that. And -- so we have to expect a lower level of the impact of the IRB models, because we are already getting the benefits from the IRB models before it's approved.The other good news is that whatever the outcome is, we will already be under IRB models. And this means that we can improve the models in the future and we will keep working on the internal models as a risk management tool for our credit origination and credit risk management. I think it's been a bit long, but I think it was important to be clear on this.

[Alberto López, executive]

I think we have one more question Maks asked on customer spread, when do we expect that to peak?

[Pablo Gonzalez Martin, executive]

Okay. Sorry. I think on customer spread, I said, I think last quarter, that we were expecting it to keep improving. I maintain that, I think it will keep improving. Obviously, it will reach a plateau probably in, not in next quarter, but in the coming quarters. And I said it was going to be between 220 and 250. Now, if I have to have a view, I think it's going to be in the upper part of that range and maybe even slightly higher than that. But, as we said, this is very similar to the NII. It will depend a lot on the deposit beta.

[Alberto López, executive]

Thank you, Pablo and Maks. Operator, please next question.

[Operator]

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

[Ignacio Ulargui, analyst]

I have 2 questions. The first one is, if you could update a bit on what is your strategy on MREL issuance? So, I just only see a way to free up capital when you have a buffer over the MREL and I just wanted to get, I mean your views on that, what should we expect in terms of capital usage, whether we could have additional cost-cutting measures? And if so, when we could have an update on that?And the second question on -- coming back on NII and on the ALCO book. Just wanted to understand a bit better what is your strategy going forward after you have anticipated that for now the -- that bond maturing in the next couple of quarters. Could it be possible that you reinvest it? Will it make a big difference or you would prefer to keep it in cash just in case there is an opportunity to invest at a higher rate?

[Pablo Gonzalez Martin, executive]

Let me -- thank you, Ulargui. I'm going to try to answer as clear as I can the question. I think on MREL, I think the good news is, we have been suffering in our NII evolution, the increase in the MREL issuance that we have done in the last 2.5, 3 years. And this had obviously a negative impact in our profitability because we -- after the merger, we changed the MREL requirement. And obviously, we have to do the catch-up on this.The good news, as I said, is we're very close. And if you consider our internal capital generation, the organic capital generation that we are expecting, we could be even saying that we are already there. Obviously, we want to manage the bank as we do with capital. We will do also with MREL with some buffer. And maybe this will imply that we may use and we may issue one more on top of the MREL requirement that we have on top of renewing the future redemptions on the future MREL issuance.But if -- obviously, this will depend on market conditions, the organic capital generation and a lot of moving parts. But to give you some color, I think we consider to have some MREL issuance on top of the level of MREL that we have to build some buffer and also to release some capital from the level that we have. And in terms of the -- this capital generation or organic capital generation on top of this MREL issuance that we will probably do will allow us to use the excess capital, as we said, for either increased shareholder remuneration through share buybacks or improve our profitability, as we said in the past.And going to the other question, the ALCO and the NII, I think the -- something that is really key, our ALCO portfolio apart from the tactical trade that we did because we didn't need the liquidity from the TLTRO. We use that liquidity of the TLTRO to invest in a short-term portfolio with the same maturity and with some spread. But because the rules change when we didn't -- weren't expecting that change, it had a negative impact in the last quarters on our NII.But going forward, I think we don't have to focus on, if we are going to reinvest the ALCO portfolio or if we are going to maintain excess liquidity because I think it's key now. I think liquidity now pays off. I think this is a major shift in the interest rate risk management. But we haven't changed much. I think we are fine-tuning our deposit duration, but we maintain quite a sound balance between the interest rate risk that we take.We have a very similar duration on the asset side and the liability, and the ALCO portfolio has always been the place to do the hedging and the managing the duration of the bank to allow us to have some benefit on the higher rates on higher NII as we have seen, and we will keep seeing in the coming quarters, but also to have some room of maneuver. And the reinvestment on shorter fixed income maturity or longer will depend, obviously, on our view on rates and the room that our -- the evolution on the duration of the liabilities and the assets from the banking book because now the banking book, we have lower fixed income mortgage portfolio generation.So this allows us to have more duration on the fixed income portfolio. And this, together with our view on rates will result on how we use that. I think -- but on top of this, you have to consider that our ALCO portfolio is very large compared to the peers, and we don't want to increase the ALCO portfolio, just within our plan, is to reduce these over the years because of the size of the portfolio. So we have to combine all that. So, I understand it's very hard, but don't expect a very large increase in the ALCO portfolio. In more, I would think that it will be -- the size will come down and we will manage interest rate through the hedging that we do on the portfolio.

[Alberto López, executive]

Thank you, Pablo. Thank you, Ignacio. Operator, we are ready for the next question.

[Operator]

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

[Carlos Peixoto, analyst]

Carlos Peixoto from CaixaBank. For the first question, sorry to go back to the NII, but -- well, the deposit beta this quarter was around 10%, if I'm doing the math right. And basically before you were guiding towards or you're expecting something towards 15%.My question here is, do you still expect deposit beta to catch up throughout the year vis-a-vis the slide you had on the previous -- on the first quarter presentation, I think it was Slide 19 at the time. So we basically still expect deposit beta to evolve to levels around 25% by the fourth quarter or do you think that there could be some upside from that or is that the uncertainty that leads you not to guide towards a higher NII growth this year?Then the second question would be on the cost of risk. So, basically, you're sticking to the 30 basis points to 35 basis points cost of risk guidance for the year? Or could we expect a bit of an improvement there. And within that context, also legal risks and other provisions, how should we see that evolving throughout the year?

[Pablo Gonzalez Martin, executive]

Thank you very much Carlos. Let's go a little bit to the NII on the betas. We were expecting a slightly higher betas by this quarter, as you said. But I think the trend and evolution makes us to be slightly positive on the evolution. And if you consider that -- I think this is important. We have a lot of our customer base, and I think Juan Pablo already mentioned in the presentation, 80% of our private customers are covered by the deposit guarantee.So, it means most of the customer deposits that we have is transactional. So, it's a service-driven rather than an investment driven. And this will be maintained, a very low level of deposit, even paying to all the deposits that is maintained by our customer as a saving or investment.And because we also have many other product offering to our customer base, I think the beta at the end of this period and this process will probably be lower than in the past. And the liquidity position of the system is also a lot better.But having said that, I think it's -- the trend is there and we have been maintaining the view that betas are going to go up. probably slightly below what we were expecting. And if we were expecting, on average, more than 15%, now it could -- probably will be below 15% more close to low-high teens, probably around between 10% and 15% probably.And this doesn't change our NII view because we prefer to maintain a prudent view. And I think volumes in the lending are coming down. So, you have different moving parts and we have to be prudent on that. Obviously, we are more confident than we are going to be above 20% that we were 1 quarter before. But not enough to -- and I don't think it's good to keep changing the guidance every quarter, we will see. Obviously, we had a good evolution in that sense.

[Juan Pablo Lopez Cobo, executive]

Yes, maybe I give you a break, Pablo, and I take the next 2 questions. The first one regarding the cost of risk. Here, what we can tell you is that we do not see any deterioration on asset quality, quite the opposite. NPL entries remain under control. When we look to the outflows, there is a good recovery mix, a high percentage in cash and loans becoming performing. NPL entries continue to be below our budget.A high percentage of the NPL entries are what we call subjective NPLs. So if we look to the different books, same story; mortgages, low LTVs, low affordability ratio, corporates as well, so far so good with the protection of the ICO guarantees. So all this picture make us confident, but it's true that we prefer to maintain our 30 basis points, 35 basis points cost of risk guidance for 2023. And if needed, we will update in the following quarters.Maybe something to highlight as well here is that we also got the post-model adjustment provision, PMA provisions that give us some flexibility. So, all in all, again, good prospects in terms of asset quality and we maintain a probably low range of our guidance so far.And regarding your second question, the provisions related to litigation. Maybe here -- going back to your question on cost of risk, this is the structural, let's say, impairments of the bank. This is the credit risk of the bank. This is structural. You know that our portfolio has low risk profile. So this is what really is important for us.And then, as you pointed, we got this provision for litigation. We think this is something temporary that we need to continue dealing with that. What we can tell you is that you should expect a similar amount for the next quarters are the ones that we have seen in the second Q.

[Alberto López, executive]

Thank you, Carlos. Operator, we are ready for the next one.

[Operator]

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

[Borja Ramirez Segura, analyst]

I have 2. Firstly, on the IRB potential approval. If I understood well, the impact may be lower than previously expected. I would like to ask, if you could please provide more details on the potential impact and also on the potential uses of this excess capital?And then, my second question would be on the mortgages. Firstly, if you could please provide details on the new mortgage production into the rest of the year? And also, regarding the mortgage customer affordability, how do you see this going forward?

[Pablo Gonzalez Martin, executive]

Okay. Thank you, Borja. I think in terms of IRB, yes, I said we are expecting lower impact on the approval. But obviously, until we have the final decision, we cannot be more specific on that. And in terms of the usage of the excess capital, I maintain what I said, I think this is something that will be decided by the Board. And obviously, we maintained that the 2 major uses are, increase the shareholder remuneration and improve the profitability of the Bank. I cannot -- I'm sorry, I cannot be more specific on either one. And I think in terms of mortgage,Juan Pablo, can you give more color?

[Juan Pablo Lopez Cobo, executive]

Yes. Sure. Thank you, Borja. Okay, starting with the affordability ratio. I guess the starting point in our case, a couple of quarters ago, was 25%. That was the average affordability for our customers. Here, we obviously -- this is something that we monitor very closely. And we were doing different scenarios that, in reality so far is in line with those scenarios.And taking into consideration, obviously, the higher rates. And I'm talking here for the most sensitive part of the mortgage book, that is the floating mortgage book. If we assume the higher rates that we are seeing right now, if we include as well inflation and even if we assume that the salaries remain flattish for our customers, the affordability ratio will go up from the 25% to something around 35%, 40% range with these assumptions I was commenting before.So this is the trend that we are seeing. But again, we think this affordability is well below the historical highs that we saw in previous crisis, in 1992, in 2008. So here, we feel comfortable. And something really important for us to take into consideration is that, again, this is the floating rate mortgage book that most of the new production during the last 4, 5 years was fixed rate mortgages.So these floating rate mortgages, they have already low LTV, a lot of equity already for the customers. And the last part is that, as you know, the real estate market in Spain and the value of the collateral has actually improved during the last 5, 6 years. So, all this together make us confident that the mortgage book will continue to perform relatively well. And this is what we are seeing actually.And then, regarding volumes and new production, probably for mortgages, we should expect a low-single-digit decrease for the stock year-on-year. Here, we got lower new production. Probably for the second half of the year, we should expect something similar to the first half, probably a bit more around EUR 1.5 billion new production, more or less. But we continue to see the amortizations at higher levels above the historical average.So, altogether, lower new production compared to previous years, still high yearly amortizations. This is what make us think that the stock of the mortgages will decrease low single digit year-on-year, but still something that we prefer to compare is the stock with the sector, we continue to get market share. Actually, as of June, our book is decreasing around half of what we are seeing to the sector.

[Alberto López, executive]

Thank you, Borja. Operator, we are ready for the next question.

[Operator]

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

[Ignacio Cerezo Olmos, analyst]

I've got one on the interbank NII. You have mentioned that you want to be careful in terms of deployment of that liquidity, but just trying to understand quantitatively, if you want the tailwind you're going to have as a result of this in the second half of the year? I mean is it as simple as thinking that you're going to recover the entire loss basically, you're still booking, which is around EUR 27 million, if my maths are correct, in Q2 or there's more nuances and layers basically on the discussion.Second one is on the corporate book. I mean we have seen a very sustained heavy contraction of that book. Obviously, you've mentioned the ECO loans. Just trying to understand when the trend is going to at least slow down and when can you kind of stabilize actually that book if it's this year or you need to wait actually until next year?And the third one is, if you can give us any news flow or update basically on CEO appointment, when can that happen? If you have any information.

[Pablo Gonzalez Martin, executive]

Thank you, Ignacio. I'll try to explain a little bit. I think that the NII evolution, as you can imagine, it's already improving, and we will have some benefit from that. In the -- but we already also paid the EUR 4 billion of the TLTRO. And we basically pay that with excess liquidity that was already getting the benefit from the interbank rates.So, I think in the interbank rate, obviously, goes a lot of different moving parts, and I think it's -- it will be -- take too long to go into the details, but I agree with you, we will have some tailwind coming from the evolution of the interbank position. And depending on the final liquidity position of the Bank, if we reinvest, if the deposit goes up or comes down as we were expecting, but a little bit less than we were expecting. So -- and the loan production recovers or maintain the deleverage that we are seeing and the low demand.If we look at the numbers from the European survey for banks, it's not only asked that we are not seeing a significant demand. We have seen a very significant decrease on loan demand. So -- and this will benefit the interbank position and the liquidity position. So I agree with you. We will have some benefit on the -- offsetting some of the negative impact from that line in the P&L, but the final number depends on a lot of moving parts.And I think you answer the second and I'll take the third.

[Juan Pablo Lopez Cobo, executive]

Okay. Yes, Ignacio, regarding -- thank you for your question. Regarding the corporate loan book, as we were commenting, this is a book, especially some of the names that probably they don't provide the profitability that we are asking for. If we look in terms of yields, some of these loans were granted in the past linked to the ECO loans, but also to the TLTRO benchmark. So the yields were relatively low.Obviously, when we compare front book to the back book, front book is more than twice the back book on this type of customers. Here, we also acknowledge that probably we do not have the products to get all the dues from this type of customers. We do not have the same cross-selling as we got for individuals, household or mortgages or even for SMEs or self-employees.And then, I guess the best proof of this is that even -- or despite the decrease in this corporate loan book, fee income is not affected. So, very small impact on profitability coming from the reduction of these type of customers. And third, as you know, the density in terms of risk-weighted assets on these loans is relatively high for us. We are talking between 75% to 100% density for this type of loans and customers. So, the return on capital, again, is relatively low, and we prefer to focus on the customers like households, but also in SMEs, medium corporates in our regions with better pricing as we are doing right now.So, all in all, relatively limited impact on P&L, some benefits on capital, thanks to this. I guess you should expect still some decrease on this portfolio during the next quarters. But this is basically the rationale behind the decrease that we are seeing on this book that is on purpose.

[Pablo Gonzalez Martin, executive]

I think just to sum up a little bit what -- Ignacio, I think the driver for the coming quarters and in the past few quarter is, margin is a lot more important now than volumes. And we have to improve the profitability of the different business lines. And as Juan Pablo said, this is the major driver. We're improving the products that we have, and we have some work to do there as well, but we are a work-in-progress, and we will deliver on that. But with a key driver, which is improving pricing and profitability of the different business lines.And going to the last question, what we can tell you is that the appointment committee and the Board are working in the search of the new CEO. And as you can imagine, we cannot comment anything regarding the timing. It's all we can say regarding the CEO appointment.And I think it's worth mentioning that they have been taking steps in corporate governance, as I think we already mentioned. So, the Board already appointed the 4 new independent members. So now the Board has the 15 members that is the statutory requirement that we have. So we keep working on this line.

[Alberto López, executive]

Thank you. Thank you, Ignacio. I think we have one more question in line. So operator, we are ready for the last one.

[Operator]

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

[Carlos Cobo Catena, analyst]

3 quick questions for me. One is a bit of qualitative color on your guidance update, which obviously, you haven't changed. But just wanted to get some feeling on to what extent the fact of not changing the guidance is influenced by the management transition? Or you are comfortable that you're not changing because you don't feel it's necessary and the context for that is because peers have been way more bullish, especially on NII. So probably this color could help us to think better about your thinking.Second, is, if you could at least share the stock of the mortgage portfolio that is to be migrated to IRB and how that compare to the initial book to -- for us to get a better estimate. And lastly, if you could discuss or comment on the 25% quarterly increase in the consumer loan book. I don't know if you've mentioned something during the presentation, but that was surprising. Could you elaborate where is that coming from? Is it cars? Is it personnel finance? Is it a change in the strategy on pricing?

[Pablo Gonzalez Martin, executive]

Thank you, Carlos. I'll try to go a little bit on NII. I think the guidance is obviously based on our best guess of what the future will bring. And we made a thorough review last quarter to express the evolution that we were expecting. And we already said that the third quarter was going to be a very good quarter in NII. I think maybe some of our peers did an update last quarter in their NII view. What I can say is it has nothing to do with any management change.It's simply we want to maintain -- I think just once a year changing the guidance is good enough because the future, no one knows. And obviously, we are confident that we will deliver on the guidance, but what's the point of increasing a little bit the guidance. I don't think it will make a lot of difference.The only thing I can say is we have improved the -- what we were expecting in this quarter and we will probably be slightly better as well in the next quarter, but the fourth quarter will depend on the evolution of the betas, and I think to change and to forecast next year will depend a lot different moving parts, and this is up to you to have your view. We prefer to maintain the guidance.And on IRB, I think we can come back to you with the details. We don't have the numbers. I think the important part and the message I wanted to get through is, we don't consider the IRB models in our capital planning. We are expecting -- I think the trend is that the IRB and the feeling that we got is, the impact is going to be lower than we were expecting and partly because of this, but partly because of the environment and the evolution on the analysis of the process.So, just consider that we have increased our capital generation, our organic capital generation significantly above, and we still expect to generate more capital in the coming quarters. So I think let's don't put a lot of weight on the IRB. I think the key driver from our side is that we are generating very good capital with our business, and that will -- allow us to improve either shareholder remuneration or profitability of the Bank or both.And the latest question, I think it's very simple. And just to finish, it's the consumer, we have double pension at the end of the second quarter, and because we have a small size of consumer business, the increase looks, in percentage point, very significant.

[Juan Pablo Lopez Cobo, executive]

Yes. But you should take out around EUR 700 million due to the double payment from the social security.

[Alberto López, executive]

Okay. Thank you, Pablo, Juan Pablo. Thank you, everyone, for joining us. Investor Relations team is obviously available the remaining of the week. We wish you good vacations, and thank you.

[Pablo Gonzalez Martin, executive]

Thank you.

[Juan Pablo Lopez Cobo, executive]

Thank you.

[Pablo Gonzalez Martin, executive]

Have a good holidays.