Unicaja Banco SA

MAD:UNI

Earnings Call Analysis

Strong Profitability and Liquidity Growth with Positive Trends

In the first half of 2024, the company saw a significant improvement in performance. Net income nearly doubled from last year, reaching €432 million. The banking margin grew 27%, which lowered the cost-to-income ratio to 45%. Asset quality remained strong, with NPAs and foreclosed assets decreasing notably. CET1 capital improved by 58 basis points to 15.1%, and the liquidity coverage ratio is above 300%. Revenue is expected to grow close to 10% by the year's end. The company has also raised its return on tangible equity target to above 10% for 2024. Shareholder returns are projected to reach 13% this year through dividends and share buybacks.

Strong Earnings Growth Reflects Strategic Improvements

The company reported impressive financial results for the first half of the year, with net income almost doubling to EUR 432 million, compared to the previous year. This growth can be attributed to a remarkable 21% increase in revenues, arising mainly from improved net interest income (NII) and a significant reduction in provisions by 30%. These results underscore the effectiveness of the company's strategic initiatives aimed at boosting profitability and operational efficiency.

Robust Net Interest Income Performance

Net interest income saw growth of about 25.7% year-over-year, although it decreased by 1.3% sequentially due to rising deposit costs. The company emphasized that, despite the pressure on margins, its customer spread remains significantly higher than the previous year's levels. The guidance for NII was improved to close to 10% for the year, marking an upgrade from initial low single-digit growth expectations. Higher wholesale income helped offset some declines in lending contributions, primarily driven by a favorable liquidity situation.

Decrease in Fees and Its Strategic Impact

Total fees fell by 3.5% in the most recent quarter and approximately 5% year-on-year, mainly due to a reduction in transactional fees as a result of new customer-centric strategies. The company is focused on enhancing customer loyalty and service value, which is expected to yield positive long-term results despite the short-term impact of decreased fee income. Going forward, a mid-single-digit reduction in total net fees is anticipated for 2024 as these strategies take shape.

Improved Asset Quality and Provisions

The company's proactive measures to strengthen asset quality were clearly demonstrated, with non-performing assets (NPAs) decreasing substantially year-to-date by around 11%. The overall provisions were significantly reduced, resulting in a healthier asset coverage ratio. The company's cost of risk improved to 23 basis points, showcasing a stable and cautious underwriting approach amidst a conducive economic environment that bodes well for future loan performance.

Solvent and Liquid Financial Position

The company reported a strong capital position, with a Common Equity Tier 1 (CET1) ratio of 15.1%, reflecting a 58 basis point increase. This robust capitalization not only strengthens its buffer against market fluctuations but also enhances prospects for returning value to shareholders. A dividend payout ratio is expected to rise to approximately 13% when factoring in cash dividends and share buybacks, significantly higher than last year's 5%.

Positive Outlook Amid Market Uncertainties

Looking forward, the company remains optimistic as macroeconomic indicators such as GDP growth in Spain are trending positively. However, management highlighted the necessity for cautious forecasting in light of potential interest rate movements in 2025. Continued strong performance in mortgages and the ongoing stabilization of the corporate loan book provide constructive guidance for future earnings, although challenges may persist in certain segments.

Strategic Initiatives in Payment Services

The company is currently in talks with various partners concerning its payment services, aimed at expanding service offerings and enhancing customer engagement. While specifics were reserved, these discussions signal a strategic direction focused on leveraging technology partnerships to improve service delivery and potentially enhance profitability.

Earnings Call Transcript 2024-Q2

[Jaime Hernandez Marcos, executive]

Good morning, and thank you for attending Unicaja Second Quarter Results Presentation. First, as we usually do, let me confirm you that today before market opened, we have published this presentation and the rest of the quarterly financial information in the CNMV and our corporate website. Pablo Gonzalez, our Chief Financial Officer, will explain you the main trends of the quarter, and we will then move to the Q&A afterwards.

So in the interest of time, 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, I am glad to confirm that recent trends are confirming a gradual improvement. As an example, total customer funds grew 2.7% year-on-year and off-balance sheet funds were up 2%. Performing loans grew in the quarter, helped by the improvement of new lending, which is 14% up in the quarter, but also owing to the seasonal higher advances of the second quarter. Excluding the seasonal advances effect, performing loans remained flat quarter-on-quarter, reversing the downward trend of previous quarters. In terms of profitability, the first half of the year has confirmed the expected improvement that we have been anticipating. Banking margin grows by 27% year-on-year, taking the cost-to-income ratio to 45% in the year. Half year net income has almost doubled versus last year. We will see the details in the presentation.

On asset quality, trends have remained very positive one more quarter. NPAs balances continued to fall in the quarter with Stage 3 loans down 10% year-to-date and foreclosed assets, 13%, while total NPA coverage grew from 68% at the end of 2023 to the current 70%. Total provisions also contribute to the bottom line improvement as they are 30% below 2023, a very positive asset quality trend one more quarter. Finally, in terms of solvency and liquidity, our CET1 improved 58 basis points in the quarter to 15.1%, supported by net income improvement, which leads the MDA buffer at 743 basis points. On liquidity, as you all know, we have a very comfortable position with our LCR ratio above 300% and the loan-to-deposit at 73%. So as you can see, quarterly trends remain positive and support the expected improvement in profitability.

In Slide 5, we want to show where the increase in net income comes from. Net income almost doubled versus last year with a 21% improvement in revenues together with much lower provision falling 30%, which altogether more than offset the 5% increase in total expenses, boosting net income to EUR 432 million in the first half of 2024, almost 2x the previous year. Such positive trend allows us to improve the expected return on tangible equity target from the previous above 9% to above 10%. As you can see on the right-hand side, the adjusted return on tangible equity for a 12.5% CET1 calculated with the last 12-month earnings remained below 5% during the last 2 years. However, we now expect it to go above 10% in 2024.

In Slide 7, you have the customer funds trends. As you can see, total customer funds grew by 1.7% in the quarter, a bit more than 1% in the year. Regarding on-balance sheet funds, public sector deposits grew 1.5% in the quarter, although still falling compared with the previous year. On the other hand, private sector trends are very positive, growing 2.7% year-on-year and 2.3% in the quarter. Off-balance sheet funds were stable in the quarter, but growing 2% year-on-year, supported by a 7% growth in mutual funds where we are improving our customer offering.

Moving to lending on Slide 8. You can see that the performing loan book grew by 1.5% in the quarter. As you know, in the second quarter, we have a seasonal increase in consumer loans, owing to short-term pension advances. Excluding the effect of such advances, total performing loans were flat in the quarter, reverting the downward trend of previous quarters and supported mainly by increase on new loan productions as well as some lower amortization. By segments, corporate loans fell 3% in the quarter, while loans to individuals grew almost 2%. All in all, total performing loans, including pension advances, grew 1.5% in the quarter, that despite some seasonality is a positive change in the latest trends.

On the next slide, we show private sector new lending trends. New private sector lending volumes improved in the quarter in all segments, increasing from EUR 1.6 billion to almost EUR 1.8 billion, which is 14% improvement that helped to stabilize the lending book this quarter. We have improved lending activity but being very responsible on lending at the right prices for current environment.

If we move on to Slide 10, we have a summary of our digital business, where I would like to highlight that 70% of our customers are digital clients, something which allows us to have more than 40% of the new production on consumer loans and almost 30% of investment funds activity done through remote channels. Obviously, something we did not show in the slide is daily banking activities like transfer. These are done more than 90% on a remote basis as well.

Moving to Slide 11, we have an update on sustainability. First, we have adhered to the principles of responsible banking, although our strategy was already aligned with the sustainable development goals, we maintain our strong environmental commitment. Our green bonds have allowed to avoid 57% more C02 emissions in 2023 compared with previous year, and we continue to develop the ESG business, as you can see in the slide in more detail. We also maintain our commitment with society, promoting financial inclusion and bringing finance closer to people through education and digitalization.

Moving now to Slide 13, we start with the P&L review. Net interest income is down 1.3% (sic) [ 1.8% ] in the quarter, but 25.7%, up in the year, owing to a small increase in customer deposits this quarter. As we will see later in more detail, there was also a decrease from the contribution from lending, mainly owing to the volume effect. However, this was offset by the higher wholesale income mainly from the improved liquidity. Fees fell 3.5% in the quarter and 5% year-on-year, owing to lower transactional fees because of the implementation of commercial campaigns that relaxed one part of these fees to more loyal clients. Other revenues improved by the lower regulatory charges and seasonal dividends contribution. Total costs were flat in the quarter and growing mid-single-digit when compared with the first half of 2023, in line with our guidance.

Pre-provision profit improved 35% quarter-on-quarter and almost 39% compared with the first half of the previous year. Total provisions fell 30% in the first half of the year, driven by much lower foreclosed asset provisions and a lower cost of risk. All this has led to a pretax profit of EUR 432 million and a net income that reached EUR 294 million in the first 6 months of the year, which is almost 2x the one in 2023.

Now we will start reviewing in more detail the P&L, starting with the net interest income in Slide 14. As you can see on the slide, the quarterly small increase in the cost of deposits as well as some lending mix impact on the lending yield pushed down the customer spread 8 basis points. However, it was still 57 basis points above the previous year.

If we move to Slide 15, we have the main moving parts of the NII in the quarter. As you can see, the main driver of the quarterly drop was the 4 basis point increase in the cost of deposits. On the other hand, the lower lending contribution, mainly explained by volume effect as well as some lending mix was compensated by the wholesale margin, mainly from the higher liquidity that was generated in the quarter.

In Slide 16, as you can see, total fees fell 3.5% quarter-on-quarter, mainly driven by lower transactional fees from payments, accounts and credit cards. For the first 6 months of the year, total fees fell by 5%. This decrease is mainly explained by commercial campaigns to adopt fees to the new strategy for more loyal customers. We are focusing on offering value-added service and customer experience -- and improve the customer experience of our customers. We believe this is the right thing to do, and it will be positive for the bank in the medium term. This strategy will probably reduce total net fees to a mid-single-digit for 2024.

If we now move to Slide 17, we have the breakdown of other income that is made up by income different to NII and fees. Here, the most relevant effect is the reduction in regulatory charges related to the Resolution Fund. As you can see in the slide, we paid EUR 44 million in 2023. And from now onwards, the contribution won't be material if everything remains the same. I would also highlight the seasonal increase in dividend contribution, that is mainly concentrated in the second quarter. All in all, that total other income and charging had a negative net impact of EUR 24 million in the first 6 months of the year compared with EUR 54 million in 2023.

Moving to Slide 18, we show total cost details. Total cost remained very stable in the quarter, but growing almost 5% in the first half of the year. This is in line with our mid-single-digit growth guidance for the full year and explained by higher personnel costs on the back of mainly the new unions agreement. On the right-hand side, you have the evolution of our cost-to-income ratio. It is worth noting that despite higher costs, the positive income contribution has enabled us to improve the efficiency of the bank with the cost-to-income ratio at 45% compared with the 52% of the previous 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 this quarter to EUR 29 million that represented 23 basis points of cost of risk. When we look at total provisions, as you can see in the right-hand side, the trend remains also positive, decreasing 30% year-on-year, mainly explained by the much lower provisions from real estate assets, a small decrease in loan loss charges and a stable other provision that include mainly the legal provisions.

On Slide 20, we have included a summary in terms of profitability. As you can see on the left-hand side, we have reached EUR 294 million of net income in the year. This is a historical high that has been supported by the banking margin growth together with the lower provisions mentioned before. On the right-hand side, you can see that the adjusted return on tangible equity has grown from around 4% in 2022 and close to 5% in 2023 to the current 8% adjusted of the excess capital over 12.5% CET1. We calculate this return on tangible equity, considering the last 12 months net income, something that explains the gradual improvement that we expect to finish 2024 above 10%, higher than our previous 9% guidance.

Let's start now with asset quality from Slide 22. As you can see, we have continued our positive evolution one more quarter. NPLs fell 3% quarter-on-quarter and 26% year-on-year. The NPL ratio fell by 2.9%, with the coverage ratio stable in the quarter at 66%. This is very healthy level considering that more than half of our Stage 3 loans are residential mortgages.

In Page 13 (sic) [ Page 23 ], we have the foreclosed assets and overall NPA details. Net foreclosed assets decreased from EUR 314 million in March to EUR 276 million in June. In gross terms, balances continue to fall as well to below EUR 1.1 billion. Year-to-date, we have had EUR 205 million exits and only [ EUR 36 million ] entries. An important thing to highlight is that we have had very relevant sales in the year, very limited impact on profit and losses with a very limited impact. The already discussed decrease of Stage 3 loans and foreclosed assets have brought total gross NPA exposure down to EUR 2.5 billion, below the EUR 2.7 billion of the previous quarter and EUR 3.7 billion of the previous year with a stable coverage at 70%. Gross NPA ratio fell to 4.9% and net NPA represents 1.5%. This is a significant improvement of NPAs in the last 12 months. As we have shared with you, this was a clear goal for us, and we are getting closer to our targeted levels.

Let's move now to solvency in Page 25. CET1 fully loaded increased by 58 basis points in the quarter to 15.1%. The evolution of the quarter is pretty business as usual. The big bulk of the improvements was explained by quarterly results, net of dividend accrual and AT1 coupons, also helped by a small reduction of risk-weighted assets in the quarter.

In Slide 26, we have our total MREL position. As you can see, our MREL liabilities represented 27% of our risk-weighted assets, demonstrating a comfortable buffer over our requirement. In the right-hand side, you have some additional info, including our MDA buffer that has grown to 743 basis points. 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 further the duration from 2.4 years to 2.5 years, with the idea of stabilizing the fixed income contribution to the P&L going forward.

In Slide 28, we update our liquidity position. We continue to have a very strong liquidity position with a huge balance of high liquid assets, a loan-to-deposit ratio of 73%, the NSFR at 157% and the LCR at 312%, all of them very strong liquidity metrics.

Finally, let me finish in Slide 30 with a brief closing remarks. The first 6 months of the year have confirmed the expected improvement of our structural profitability, which has allowed us to increase our adjusted return on tangible equity target to above 10% in 2024. We have reduced further the NPAs gross exposure by a total of 11% year-to-date, and we have further strengthened our solvency with CET1 fully loaded above 15%. All these trends are very positive and allow us to offer an attractive shareholder remuneration. Last year, in 2023, we paid a cash dividend that represented 5% of our market cap. For this year 2024, we expect to offer close to 13% when considering the cash dividend and the share buyback together. This is a significant increase of shareholders' returns that is possible, thanks to the financial improvements that we have tried to explain to you today.

And that's all from my side.

[Jaime Hernandez Marcos, executive]

Thank you, Pablo. We will now move to the Q&A. Please remember to ask only 2 questions each and also remember to mute your line after the questions. Operator, please open the line for the first question.

[Operator]

[Operator Instructions] The first question comes from [ Maks ] Mishyn from JB Capital.

[Maksym Mishyn, analyst]

Thank you very much for the presentation and taking our questions. I have 2. The first one is on provisions. Could you please explain what was the reason for an increase in other provisions and whether we should consider it as a new run rate? And then what prevents you from improving guidance for the cost of risk for 2024? And the second is on the customer spread. I was wondering what are your expectations after the decline in the second quarter for the rest of the year? And could you please update us on the NII guidance for 2024?

[Pablo Gonzalez Martin, executive]

Thank you, Maks. I'm going to take the first one, the provision. I think in the other provisions line, as you know, we have included among other, the provisions for legal risks. In the first half of 2024, it has been in line with what we had last year. Initially, we were expecting to have a lower level of provision of around 15% for this year. But in the first half of the year, the provisions has been similar to the last year as we have seen some increase in customer claims. And for the full year, they will probably not fall as much as we were initially expecting, but we need to wait and see how this evolves. And we think there was some concentration in the first half of the year on some issues regarding the claims. But in any case, we don't expect this change in provision to change our profitability expectation for the year that, as you saw, we have improved in this quarter.

Regarding the cost of risk, it has been also good news in this quarter. It has been 23 basis points and 24 basis points for the first half of the year. NPL entries continue to be low in the quarter, and recoveries has been of good quality. So recovering very good. So at this point, we see the economy behaving better than initially expected. And even if you look at the IMF has recently increased the GDP growth expectation for Spain to 2.4%. And we still -- and now we think it's going to perform better in the Spanish economy and employment.

So we think the cost of risk guidance that we gave between [ 30 basis points ] and [ 35 basis points ] probably will be in the low range -- in the low part of the range, if not better. So we didn't want to be ahead of ourselves in reducing our guidance, but I agree with you that the level of entries and the expectation that we have on the economy at this moment allows us to be more positive on the final outcome of cost of risk. So probably it will be slightly lower. And finally, on the customer spread, we closed the quarter at 2.83%, which is 8 basis points below the first quarter. However, this is still almost 60 basis points above the last year level.

The loan yield fell 4 basis points, mainly owing to some mix and some repricing and the seasonal advances that we have at 0 cost. On the other hand, as we were expecting, the customer deposit grew 4 basis points. I think I explained in the past that we were expecting some lag effect, although rates are coming down at the moment, and we have 20 basis points lower on average for the Euribor 12 months in this quarter. We think there will be some lag on deposit, especially for household deposits because public sector and corporates are coming down actually.

The front book is lower than the back book. But because we are focusing on engaging with our customer base, we think there's still some lag. Obviously, the latest numbers at the end of the quarter, at the beginning of this quarter makes us more comfortable than maybe our initial expectation of cost of deposits keep going up even with rates coming down might not be the final outcome, but we want to be prudent and still have been forecasting and guiding even for the NII with the rising deposit cost.

[Jaime Hernandez Marcos, executive]

There was another, Pablo, a final one on NII guidance.

[Pablo Gonzalez Martin, executive]

I'm going to cover all in the first part.

[Jaime Hernandez Marcos, executive]

[ All ] in the first question. Yes.

[Pablo Gonzalez Martin, executive]

Okay. Regarding the NII guidance, as you can see, we have had the first 6 months better than what we were expecting. And this trend looks like it's going to be continuing through the year. So we now have changed our expectation. And now we think we're going to be close to 10% for the year instead of the single -- the low single-digit that we have at the beginning of the year. So this is good news. The NII is improving even more than we were expecting. And so now we have a clearer picture of the year. And although we still expect to see rates coming down, so the loan contribution might come down a little bit in the year, the deposit might go up a little bit still. This is something that we will have to double check, but we have been doing some hedges on the fixed income portfolio that will offset some of the decrease in variable rates. So going forward and for the year, we think that the good news is that the NII is going to be close to 10% rather than low single-digit growth that we were expecting.

[Jaime Hernandez Marcos, executive]

Thank you, Pablo. Operator, please let's move to the following question.

[Operator]

Question comes from Ignacio Ulargui from BNP Paribas Exane.

[Ignacio Ulargui, analyst]

I have 2, if I may. I mean the first one is on fees. So what should we expect for fees into 2024? And I just wanted to get a bit better understanding of these commercial campaigns that you have launched that have resulted in lower transactional fees and whether the impact has been already absorbed and the rebasing of the fee income has been completed or we should expect more pressure in coming quarters? And the second one is on lending growth. And if I just strip out the pension advances, your loan book is flat, which has been underperforming other peers in Spain that have reported so far. So what should we expect in terms of loan growth into 2024? And what initial campaigns or commercial campaigns have you launched? When do you think that all these campaigns will result in an acceleration of loan growth?

[Pablo Gonzalez Martin, executive]

Thank you, Nacho. Okay, regarding fees, at the beginning of the year, we were expecting fees to decrease in -- by low single-digit on the back of our strategic priorities moving to become more customer-focused on value-added services. As we believe this is something that will add a lot of value in the future for the bank. We have extended our commercial campaigns with the [ Zero-Fee ] for more customers, for more loyal customers, which will have a negative and is having a negative impact on current accounts and cards fees in the short run. This will be offset by volumes. We start to see some pickup in volumes in deposit gathering and in customer attrition. So we are positive for the medium term of this strategy. But in the short-term, obviously, this will have some impact on fees. But net-net on overall income because of the high NII that we are going to get, we are upgrading our NII guidance and our fee guidance will be slightly lower than we were saying at the beginning of the year.

And now we expect to maintain this around mid-single-digit lower fees for the year. But this is something that we think these campaigns will be positive for the medium term and the relationship with our customers. Your second question, Nacho, was on volumes, on lending volumes, so far this year is evolving more or less as we were expecting at the beginning of the year, where we thought to have a low to mid-single-digit decrease in the year. We are seeing a bit of a different mix with mortgages a bit lower than we were anticipating. And this is due mainly to the fierce competition that we have in the market and the volumes peaking only slightly and prepayments still remaining higher than we were expecting, but we are seeing good trends in the late months and we're picking up in mortgages in this quarter. Compared to the previous quarter, we are up significantly.

So we are getting back in track on mortgages. In corporates loan book, this has been influenced by the heavy production that we have with the ICO loans. And -- but now it's stabilizing and the new production is picking up. So we are stabilizing the levels. And in public sector, we were decreasing at higher rates, and now we are stabilizing the book as well. So we are seeing also in corporates and public sector, lower prepayments and new lending growth. So we are positive on the commercial dynamics. And the first thing is we come from lower levels and decrease in our loan book, and now we're stabilizing the books. So this is good news, and we expect to maintain this trend going forward.

[Jaime Hernandez Marcos, executive]

Thank you, Pablo. Let's move for the next one, please.

[Operator]

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

[Filippo Munari, analyst]

So the first one is, I was wondering if in light of your ROTE upgrade for this year and also the NII guidance upgrade, you can maybe give us some hints on how to think about your profits evolution in 2025. I think consensus has a pretty decent drop in 2025. So I was wondering whether you have -- what are your high-level expectations for earnings next year? And then the second point, I mean, of course, we saw the headlines yesterday on the Unicaja being in talks with Indra and Fiserv on the payment side. So I was wondering whether you could please give us some more color on this? What type of partnership you're looking to establish and potentially any preliminary indication on incremental contribution from that?

[Pablo Gonzalez Martin, executive]

Thank you, Filippo. Regarding the upgrade on return on tangible equity, the ROTE upgrade and the NII upgrade that we have done, I think we have visibility on this year. And in 2025, it's harder. You have to be aware of the -- and we don't want to be ahead of ourselves in this. And you have to think that the volatility in rates. We think we have quite uncertain. We now are forecasting for this NII with 2 more interest rate cuts from the ECB. So the implied forward curve at the end of June. And that allows us to have this NII around 10% in -- for the 2024. Obviously, for 2025, I think there's more uncertainty. The landing level of the ECB and the inflation dynamics now looks positive, but I think inflate -- service inflation is still 4.1%. We think it may kind -- come down to 4%. Still too high. A very low level of rates down the line. And this will have a significant impact for 2025. So I think it's too soon to have a clear view on 2025, and we will update you in the coming result presentation on our view.

I'm not going to comment on if the market has a very low level or not. I think we are working on improving our structural profitability and having a better evolution for the bank, and we are positive on the trends we're seeing at the moment. But I don't want to be too specific on 2025. And regarding the payments analysis that we are doing, we already said, we are getting close to the final decision on this, but let me not to comment on the potential partners that we are going to have. We are in discussions with different potential partners. But let me be clear, what we are looking is to improve the value for our customers. I think we have to -- we have a clear view that we have to improve the level of the service that we have for SMEs and for households, and we're trying to improve in every single line of our strategy. I think the execution has to be the best possible, and we want to have all the possible payment means with the best-in-class in terms of quality, speed and usability, customer experience. So these are the drivers of this discussion. We're not looking, as you can imagine, with the level of capital that we have. We want to have the best products to improve our run rate profitability.

[Jaime Hernandez Marcos, executive]

Thanks, Pablo. Please, operator, let's move to the following question.

[Operator]

The next question comes from Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, analyst]

One is on NII. If you can give us a bit of information on front book, back book yields on mortgages and corporates? And the second one is on capital return in the CET1 at 15.1%, probably some growth of capital in the rest of the year. Normally, a capital return top up or announcement happens with full year results, but do we need to consider that the base case this year is similar to last year in terms of an increased payout actually with a buyback incorporation? What do you see other kind of excess capital deployment options at hand to improve the profitability for the future?

[Pablo Gonzalez Martin, executive]

Okay, Ignacio, thank your for your question. I think the first one is the dynamics on pricing for corporates, public sector mortgages and consumer. I think as you know, on corporates, we have a good level of rates above the back book, 1.5%, more or less above the back book. So I think the dynamics are positive on new lending. And because we have some -- still some fixed rates, corporate lending that were done when rates were very low, and this is maturing. And so we still have a positive view on the impact from corporate. I think in public sector, it's a very similar picture. We have still more than 1.5%, almost 2% better front book compared to back book levels. And in terms of mortgages, I think that the strategy we're running is a different one.

The floating part is at higher level and it's prepayment faster than the fixed part. Now we have almost half, half of the portfolio in fixed and floating. But in this, we're following a strategy to lock and to have fixed rates for 3 years to 5 years. We are using more of fix for the next 3 years and then floating. And this strategy will stabilize even in a lower interest rate environment in the coming years. And -- but here, the lending mix and the front book compared to the back books due to these floating rate mortgages, which are now in the production, the consumer wants less than they used to have, has a negative impact on -- compared to the back book, because the new production is almost 90% fixed, either short-term fix or long-term fix.

In our case, it's more short-term fix and only around 10%, 20%, it's long-term fix. And this obviously has some impact, but I think it prepares us better down the line. And regarding the payout and the excess capital uses, I think this is something for the Board to propose to the general. But just looking at the numbers, what we have said, if we maintain our strategy so far of 50% dividend -- cash dividend payout that we have in the past, and on top of that, you have the share buyback, it will adapt as we show in the presentation at around 13%, which we think is a good level of shareholder remuneration. I think we have 2 good things. We have improving profitability. We keep going up in our expectation of our profitability -- our structural profitability. Once we get rid of some legacies in foreclosed assets in the last past years, we're improving our service level, our commercial activity, and this will improve our medium term structural profitability with a low level of risk.

And this will mean lower provisioning down the line, and this all will help us our profitability. And on top of that, we have a strong capital position that allows us to enter into new business, to have optionality and to remunerate our shareholder. And this is the idea. We will keep looking at opportunities to improve profitability. And at the same time, we can maintain a high level of shareholder remuneration.

[Jaime Hernandez Marcos, executive]

Thank you, Pablo. Please operator, let's move to the following question.

[Operator]

The next question comes from Borja Ramirez Segura from Citi.

[Borja Ramirez Segura, analyst]

I have 2. Firstly, on the NII, could you please give a bit more details on the cost of deposits outlook for the second half of the year? And also on NII, if you could update on the NII sensitivity? And also, if you could elaborate on the hedges? I think there was a comment before on the hedges on the fixed income portfolio. And then my second question would be a follow-up on capital return. So you continue to accumulate capital excess CET1 above your target is around 20% of your market cap. I would like to ask if you have any plans to utilize this excess capital? And linked to the earlier question on 2025 profitability, given the expected decrease in rates, maybe it could be worth using this excess capital position to improve your future profitability in line of lower rates?

[Pablo Gonzalez Martin, executive]

Thank you, Borja. I'll try to the 3 lines of your NII question. I think on cost of deposit outlook, as I said, when we have improved our guidance, we haven't changed our original expectation of an average of 75 basis points cost of deposit for the year. And this -- although it's -- we are seeing better news in the last few months, on June and even this month July, the trend is slightly better than we were expecting for this 75 basis points guidance, 75 basis points for the whole year. So this could be a positive down the line. In terms of NII sensitivity, I think it's important to understand that in rates, there are a lot of moving parts. And this is quite a theoretical as we have seen in the past, especially because of the cost of deposit sensitivity.

One of the main impacts in the short-term is how this customer deposit behavior goes. And this hasn't worked well with the models that we have in the past. But even with that, I'll try, and I think the assumptions are important. And if we consider a constant balance sheet, which means this is the usual methodology that we use for interest rate sensitivity analysis, and we have 100 basis points parallel down-shift scenario, and I think this is the important part with a stable customer deposit, not with any model. If we maintain and you take whatever you think it's what's going to happen, we could expect compared to the last 12-month NII, a negative impact of around low mid-single-digit in the second year once the full mortgage floating portfolio has been repriced.

Let me say, it's not the full reprice of the book because we have some repricing on fixed rate corporates and public sector loans, and also now we have short-term fixed rates in some of the mortgage production. So this is always something complex, and there's a lot of moving parts. But I think the idea is we enter in 2021 with a higher sensitivity to rates, and now, we are slowly, but every quarter, reducing our sensitivity. And this link with your third part, the hedging of the fixed income portfolio and the hedges in general that we are doing for interest rate.

In this year, we have done more than [ EUR 5 billion ] swaps in the 3-year, 4-year area. So we are receiving fix for the 3-year to 4-year, and we are paying floating. And this means in the short-term, this has a negative impact in NII, but for the next few years, we'll have a positive impact if rates comes down as we expect. We haven't gone longer on duration and the reason is we expect to land in a higher inflation and interest rate environment. We then expect this to go back to the very low levels that we have after the GFC. So that's why we think it's best to have more in the 3-year to 5-year tenure rather than longer than that. I think this more or less explained. You have also the question on the uses of excess capital. I think we are using our excess capital at the moment. We are currently in a share buyback program, which is actually at the moment half of the level. We have EUR 100 million to be bought in the market, and it's almost EUR 50 million at the moment.

So we still have some use of this excess capital in place and also actively searching for opportunities to deploy. I think lending is picking up. We're stabilizing the portfolio, and we are ready to grow in our lending business and open to any opportunities. I think the excess capital gives us strong optionality to tap any potential business opportunity growth that we foresee. I think with the deleverage process that we have seen in Spain is coming to an end, I think we're starting to see growth in lending, very small yet, but I think we have to be prepared to any opportunity in lending growth. And we have a loan-to-deposit of 73%.

So our potential is quite significant in that level, and we want to have the capital, although we are building a lot of capital because we are improving our profitability and the structure of our capital position allows us to improve significantly. So we are confident that we can improve the profitability and to find proper uses for our shareholder, and on top of that, maintain a high level of remuneration with share buyback as we are currently doing.

[Jaime Hernandez Marcos, executive]

Thank you, Pablo. Please, operator, let's move to the following question.

[Operator]

The next question comes from Carlos Peixoto from CaixaBank.

[Carlos Peixoto, analyst]

Yes. So most of questions -- my questions have already been answered, with just a couple of follow-ups on my side. So well, the first one was actually -- is actually on other provisions. This quarter, we had a bit of a quarter-on-quarter jump on this line. I was wondering if you could give us some color on what levels of other provisions this year is sustainable? And also what was behind this increase, so with foreclosed real estate? Because I also had the impression that with the payment that was done in the [ portfolio ] in the last year, that was already a bit behind it.

[Jaime Hernandez Marcos, executive]

Carlos, excuse me, can you hear -- can you hear me, Carlos?

[Carlos Peixoto, analyst]

Yes.

[Jaime Hernandez Marcos, executive]

We don't hear you. The sound -- the line is quite bad. Can you please repeat the question because we are not -- we haven't understood what you were saying.

[Carlos Peixoto, analyst]

Sorry, Jaime. Can you hear me better now?

[Jaime Hernandez Marcos, executive]

A bit better, yes, now. Please Carlos, go ahead.

[Carlos Peixoto, analyst]

Yes, better. Okay. So -- sorry. So as I was saying basically on other provisions, whether you can elaborate on the rationale and the reasons behind the quarter-on-quarter increase? So was this related with proposed assets? And mainly what should we expect from this line going forward? Then on costs, I was -- I believe you kept the guidance of a mid-single-digit increase, if I'm correct. And then a final question would actually be on your outlook for volume growth, whether you see already demand picking up, and whether you think the second half of the year, you could already start to recover on this front?

[Jaime Hernandez Marcos, executive]

Okay. Carlos, I think you were asking just in case to be sure that we have understood you on other provisions, to provide a bit more color on other provisions and also regarding volumes that we have already answered. But Pablo, maybe you can make a follow-up.

[Pablo Gonzalez Martin, executive]

Okay, I'll take. On other provision, as I said, we have seen some pickup, and we have done some work with our customer service. And this is mainly due -- the increase in claims that we have seen is mainly due to the mortgage cost. And we are confident -- well, we don't know actually how the level. That's why we don't want to give a guidance. I think this -- for the whole year probably will be similar to last year as we have seen in the first half of the year because we had another legal issues that are coming down slowly but surely. And this will offset this increase on the mortgage cost claims that we have. So net-net, I think we expect this without a lot of doubt on -- because we don't know. This is coming down. This provision had a peak in the -- in March, April, and now it's coming down.

So it allows us to be confident that we could be at similar level of last year, but we don't know. This is always some unknown. And in terms of volumes, as I said, we are expecting mortgages to maintain some growth as we have seen in this quarter, in the coming quarters. But in corporates, we still expect to have some decrease around mid-single-digit, although we are seeing some improvement, and we are deploying new resources, [indiscernible] talent in this segment. This takes some time to show the results, and this is probably something more for next year. So that's why we still expect to have some decrease in this year.

[Jaime Hernandez Marcos, executive]

Thank you, Pablo. I think there was a final question on OpEx on total cost on our guidance. I can confide you, Carlos, that the -- while we showed the dual trend that we show with higher personnel expenses and lower general costs is what we expect to sit for the whole year. And it is what is considered in our total cost combined growth of mid-single-digit for the whole year. So the guidance is also confirmed. So operator, I think that we have time for the last 2 analysts. Let's go for the first one, please.

[Operator]

The next question comes from Hugo Cruz from KBW.

[Hugo Moniz Marques Da Cruz, analyst]

So just to clarify -- 2 questions. On NII, you mentioned there was a slight ALCO contribution decrease in the quarter. I'd just like to understand that because the portfolio was, I think, up the -- no big change of duration. So what drove the decrease? And then on -- if you could remind us of guidance on Basel IV impact?

[Jaime Hernandez Marcos, executive]

Yes. The first one, Pablo, was on the lower contribution from ALCO in the quarter, if you can -- we can provide a little bit more color.

[Pablo Gonzalez Martin, executive]

On the ALCO?

[Jaime Hernandez Marcos, executive]

On the ALCO portfolio. Yes.

[Pablo Gonzalez Martin, executive]

Okay. On the ALCO contribution, it's -- the lower contribution, which is very small. It's EUR 1.8 million. It's obviously driven by a lower yield level on the ALCO portfolio. And one of the reasons is, as I said, we're hedging the interest rate. And instead of having the floating level that we have now close to 4%, we are swapping to the level of the 3%, 4%, which is at 3%. So you have a lower yield. And this lower yield in the short-term will help us to maintain a similar contribution in the coming years. So I think this is mainly the reason of this small contribution from the ALCO portfolio, but it's because we were looking on -- because we have a good estimate and evolution for the NII this year. So we were trying to be more less sensible to interest rate for the coming years. And the second question...

[Hugo Moniz Marques Da Cruz, analyst]

Potential impact...

[Jaime Hernandez Marcos, executive]

From [indiscernible].

[Pablo Gonzalez Martin, executive]

From Basel IV. As I said in the previous presentation, Basel IV will have a very small impact in our numbers. We're working on the different impact from the different changes that we have in the -- but it could be around 10 basis points or something like that. So it's compared to the MDA that we have and the level of excess capital that we have, it's not relevant. We have built more than 3x, 4x this in only 1 quarter. So it's not a big issue for us. If you want more details on the equity, the retail, the operational and the market impact, market impact is no material. On SMEs, it's not material in our case. We have some impact from the equity position, and we also have some impact from the retail floor on PDs. But if you want the details, get in touch with our IR team, and they will explain in more detail. Thank you.

[Jaime Hernandez Marcos, executive]

Thank you, Pablo. We can now move to the last question, please, operator.

[Operator]

The last question comes from Francisco Riquel from Alantra.

[Francisco Riquel, analyst]

Yes. Just last one for me. That is, if you can elaborate a bit more on the commercial strategy that you mentioned, you are aiming to increase engagement with clients by removing the maintenance fees. But what I see in the results is that demand deposits are stable, and it's actually time deposits, what are growing 11% quarter-on-quarter. And I don't know if a time deposit is the best product to engage with clients and then fees other than payments also fall by mid-single-digit. So if this strategy is just to stop the client attrition or we should expect a net positive impact going forward?

[Pablo Gonzalez Martin, executive]

Thank you, [indiscernible]. I think the strategy -- the commercial strategy is more ample than only the zero and the term deposits. I think we're working on improving the product offering for long-term saving. We were trying to explain -- we have an increase of around 7% in mutual funds. We have some growth in all of the -- let me explain. I think we want to have a simple offering with a lower number of products but with a very good value added for our customers. And this means having insurance, having insurance savings product, having better mutual funds, having term deposits and having side deposits. Some of our customers prefer to maintain some level of liquidity on their side deposit, and you cannot change that for transactional uses. And the term deposits is something that is demanded by our customers. It's not something that we're pushing to avoid anything. It's something that is demanded.

So we try to promote, to explain, to inform, so financial education for long-term investment is one of our goals, simple, but good value proposition on saving -- long-term saving for our customer. I think overall, we have a good evolution and expectation on the product offering that we're going to do for our customer savings and their investments and we are expecting this to be one of the major drivers of our profitability down the line. And we're confident we're building a good franchise on this.

[Jaime Hernandez Marcos, executive]

Thank you, Pablo. I think we can leave it here. The whole Investor Relations department remains at your disposal if you want to discuss with further detail, whatever trend. We wish you for those that can do it, a great summer break. And we are here to help if you need it. Thank you very much to everyone.

[Pablo Gonzalez Martin, executive]

Thank you.