Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2022-Q3

[Alberto López, executive]

Good morning, everyone. Thank you for joining us today for Unicaja Banco Third Quarter Earnings Conference Call. I'm here today with Pablo González, our CFO; and Juan Pablo López, our Chief Investor Relations Officer. They will guide us through the presentation. Please remember that we will hold a live Q&A session after the presentation. Now I give it to Pablo.

[Pablo Gonzalez Martin, executive]

Thank you, Alberto. Good morning, everyone. Let's start with the key highlights of the quarter in Slide 4. First of all, we have seen a robust lending activity in a seasonally weak quarter, both on the retail side and corporate lending actually picking up. The loan book keeps growing in the year, especially in the retail book that, as you know, is our main focus. The mortgage book has grown by almost 2% year-on-year, while consumer lending is up by more than 3% in the same period. We are capitalizing the business growth and improved profitability 1 more quarter. Net interest income is 5% up versus the same quarter last year, while on a quarterly basis, it is slightly down as the loan book and ALCO repricing have not fully compensated the decrease in the TLTRO remuneration and wholesale funding cost increase.

We are very positive on NII for the coming quarters as the loan book repricing gains more traction. Fee income maintains positive momentum despite market volatility, growing by 8% versus the same quarter last year. This is explained by strong activity on the retail side in lending, mutual funds and insurance business mainly.

Operating expenses are 7% down versus the same quarter last year as we keep advancing with our restructuring plan even faster than expected, with branches decreasing by 12% quarter-on-quarter, and employees also down by 3% in the same period. At the end of September, more than 70% of the employees under their restructuring plan have already left the bank. It is important to highlight that we are achieving positive business growth under such a significant restructuring and in the middle of an integration process. I think this is very remarkable. At the same time, asset quality trends remain quite supportive.

Cost of risk remains at low levels, very much in line with the previous quarter at 29 basis points, and we continue decreasing the volume of nonperforming assets 1 more quarter without any impact on our coverage ratio that remains stable at 64%. And finally, about capital, we keep generating capital 1 more quarter and CET1 fully loaded ratio stands now at 13%, increasing by 25 basis points in the quarter despite market volatility. We have a very comfortable capital position for our risk profile, and we are confident, we will keep generating capital in the future. Just as a reminder, we deduct 50% of the net income from capital as it is our dividend payout target.

Lastly, let me highlight that the tangible book value increased this quarter again by 3% quarter-on-quarter. Now I give the floor to Juan Pablo, who is going to cover the business activity of the quarter in more detail.

[Juan Pablo Lopez Cobo, executive]

Thank you, Pablo. Now moving to Slide #6. You can see retail customer funds are slightly down in the quarter and around 5% year-on-year. This is basically explained by market valuations on the balance sheet products and seasonality after the holiday season. On the yearly comparison, the main difference is explained by a decrease in public sector deposits.

On the right-hand side, you can see a better picture of our customer deposit, which is one of our competitive advantage, especially during increasing interest rates period. Almost 80% of total customer funds come from retail customers, which means a very sticky and granular deposit base, which gives us a lot of stability and lower cost.

Corporates and public sector are the most volatile and sensitive to pricing and represent 20% of our customer funds. This is below the average of the sector.

In Slide 7, we take a closer look to our mutual fund business, which is one of our main fee income growth engines. AUMs have decreased by around EUR 0.5 billion in the quarter on the back of the market volatility, but we remain positive on this business line, as you know, based on increasing penetration with our customers and a strong partnership with JPMorgan.

Given the interest rate scenario, there could be some product diversification on the balance sheet offers. For instance, this quarter, the saving, insurance products are increasing the AUMs. On the right side of the slide, you can see we are increasing the profitability of the mutual fund portfolio as we anticipated in the -- in our strategic plan. We are restructuring our portfolio. We merged both asset management business with a very positive result in fee income.

In Slide #8, retail lending book is up year-on-year. Again, as you know, this is our main focus over the next couple of years, both residential mortgages and consumer books are growing by 2% and slightly over 3%, respectively, year-on-year in a very competitive scenario.

On a quarterly basis, mortgages are slightly up and consumer and others, there is an impact by around EUR 700 million of pension seasonal advances last quarter. The corporate loan book has stabilized a little bit in a seasonally weak quarter and after some significant early redemptions in previous quarter. Our strategy here in this business line is to increase profitability, product offering to our existing clients and not so much on loan growth.

Next slide, regarding new lending. Corporates is 1% up versus last quarter, which is remarkable in the third quarter. Front book yields have improved significantly during the last 2 months, especially. Residential mortgages, new lending decreased 6% quarter-on-quarter due to some seasonality. The last couple of months of the quarter, we regained traction on this product, and we have seen a strong start of this 4Q as well.

Finally, consumer lending. As we explained last quarter, we are still migrating our preapproved models for Liberbank clients and experienced a bit of a slowdown from this aspect, but we are starting to see more normalized levels now.

In Slide 10, looking at our biggest portfolios. On the left, you can see the main KPIs of the residential mortgage book mostly first residence and low LTVs. In terms of geographic exposure Andalusia, Madrid have the highest weight of new lending. This is very important for us as both our top housing markets in Spain and with a high percentage of first residence.

On the bottom left, you can see the average loan has increased this quarter as we keep attracting a more affluent customer and mortgages help us to expand our relationship through cross-selling. On the corporate portfolio, a quick note on the ICO loans. During this year, more than 10% of the portfolio has matured or really amortized, leaving an outstanding balance of EUR 2.2 billion, and this explains part of the decrease of the corporate loan book.

Lastly, let me remind you that 75% of this stock is backed by the state guarantees and these are loans with long maturities and low fixed interest rates. So we believe this is a defensive loan book from asset quality point of view and with a high return on capital.

On Slide 11, we keep advancing our digital business since the IT integration was completed in the second Q. We have seen an improvement in all the metrics in terms of digital customers keep growing and almost 94% of the operational activity is performed on the digital channels. We continue developing our strategy through the different channels, reinforcing our relationship with our partners and looking for new ones, especially in the home segment, IKEA or Tyco for home alarms are recent examples of that.

Regarding ESG on Slide 12, you can see all the categories initially considered in the framework. They have grown by more than 8% in the first 6 months of the year. And this leaves us a comfortable buffer to continue to issue under our green framework going forward. On the right-hand side, we also wanted to share with you some of the measures we are taking to increase our social commitment, mainly the ones focused on the elderly population and rural areas.

Lastly, on governance, in the last few months the Board has added 3 independent members, out of which 2 are female, and we now have 4 independent members and almost 50% females on the board.

Now moving to the P&L. In Slide 14, we will comment the main lines in more detail later. So just let me highlight a few things. On net interest income, lending and ALCO repricing almost compensating full the remuneration decrease of TLTRO and wholesale funding cost. Fees keeps performing well, and it's more than doubly up on the yearly basis. Other revenues include positive results on real estate disposals, which reflects the good coverage levels. OpEx, we have accelerated some of the exits of the employees, and you can see some additional cost savings on personnel expenses this quarter that offset the pressure on general expenses.

Cost of risk stands below 30 basis points with no signs of deterioration. Other provisions include a one-off charge of EUR 7 million for the breakup of Liberbank merchant acquiring business agreement that we own now 100%. And again, other profits or losses include impairments and release of provision of real estate assets that was positive this quarter.

Now going into a bit more detail and starting with NII. Slide 15 on the left, you can see the fast increase of Euribor in the last few months, and this is not yet reflected in our customer spread as repricing of the loan book takes some time. The average loan yield increased this quarter. We expect customer spreads to increase significantly in the next quarters when the loan book repricing is more visible.

On top of this, on the right-hand side, we show the front book that stands well above the back book. It has increased by more than 20 bps quarter-on-quarter. And September, as we were anticipating before, we are seeing prices going up and new production on average is around 2.2%.

In Slide #16, NII is slightly down in the quarter. The repricing of the loan book and the ALCO portfolio partially covered the increase in funding costs and especially lower TLTRO remuneration. On the lending book, we have had a positive impact from repricing, which will speed up in the coming quarters. On the fixed income portfolio, as we had anticipated, we have a short duration and some bonds have some interest rates hedging, which has a positive impact as interest rates go up.

Finally, on funding, we have a small impact on retail funding. The negative rates on corporate deposits have faded away, but here highlight the cost of customer resources remain very low at 1 basis point. And on the wholesale side, the main impact is coming from the TLTRO lower contribution.

In Slide 17, we wanted to show a bit more detail regarding the main levers driving the NII in the current scenario and in the next quarters. On the left, you can see our TLTRO maturities. You can see the contribution has come down by EUR 21 million quarter-on-quarter from EUR 24 million to EUR 3 million in this third Q. We are applying probably one of the most conservative approach regarding TLTRO accrual, and this is important for comparison purposes. If we apply the criteria used by other peers instead of EUR 3 million interest income this quarter, it will have been around EUR 11 million, EUR 12 million. This is 3 percentage points of our NII. At the end, the cost will be more or less the same for everybody, but the path will be different, and we prefer a smooth evolution.

Looking to the asset side, we have around EUR 5 million net of financial intermediaries, deposit back at ECB. This will start generating income in 4Q. Here a disclaimer, and this is based on current ECB funding framework. On the right-hand side, you can see the yield and cost from ALCO portfolio and insurance for third Q and 4Q under the current scenario. It's important to highlight that around 60% of the insurance are swapped and repriced faster, while the ALCO book takes a bit longer. There are some swaps that are forward and will kick in during the next quarters. Also, the sale of bonds, almost EUR 4 billion, will start repricing in the next quarter and during 2023.

And finally, at the bottom regarding the lending book, we have around 2/3 of the residential mortgage book at floating rate, and most of them reprice once a year and 43% of the corporate book at floating. We will see a substantial increase of contribution to NII from these 2 loan books in the next quarter. And lastly, as a reminder, our customer funds, we already commented, our retail deposits should also support lower cost than the sector.

Next slide, total fees in the quarter are slightly up. which is a strong performance given the market scenario, banking fees that are mainly cards and payments and current accounts are stable quarter-on-quarter and 3.5% up year-on-year, while nonbanking fees are flattish quarter-on-quarter and 21% up on a cumulative basis.

Mutual fees, we commented that the improvement is a consequence of higher average yield from a change of the asset mix that we anticipated as well in the strategic plan. And finally, insurance are slightly down in the quarter due to some seasonality, but they are 11% up on the accumulated for the year. All in all, fees are slightly quarter-on-quarter and 11% year-on-year.

Moving to Slide 19. Total OpEx are flattish quarter-on-quarter and 8.5% down in the year. As of September, more than 70% of the employees under the agreed restructuring plan have already left the bank. This is a bit quicker than expected, which is reflected on personnel expenses. And it's also worth noting that since the merger, the branch network has come down by almost 40%, and it's already below 1,000 branches. We have done this at faster speed and with no impact on the business momentum.

Next slide, you can see cost of risk remains at low levels, 29 bps in the quarter, almost in line with the previous quarter. The reality is that we continue to maintain a high coverage ratio. And together with our conservative loan book, we continue to believe we are in a comfortable position to tackle any downside risk in economic activity.

On Slide 21, on the left, you can see the evolution of the banking margin, which continues showing a strong growth over the last 2 years at an average pace of 8% per year. And on the right side of the slide, you can see also how the return on tangible equity is improving with 5.5% in the first 9 months, remaining on track to meet our targets. And now with this, I pass back the word to Pablo.

[Pablo Gonzalez Martin, executive]

Thank you, Juan Pablo. Let's move now to asset quality. On the top left-hand side, you can see the quarterly evolution of the nonperforming loans, which maintained, as you can see a positive trend showing some decrease. At the same time, we maintain a prudent NPL recognition in the quarter, specifically 82 million subjective NPL entries in Q3. Coverage ratio remains stable at 65%, which is a very high ratio given that more than half of our NPLs are residential mortgages. If we include the guarantee from the ICO loans on NPLs coverage ratio, we would stand at around 73%.

On the top right, you can see the disclosure of the coverage ratio by portfolio with high coverage ratios in each segment, specifically in portfolios with strong collateral and low loss given the full, like the mortgage book. On the bottom right, you can see the different stages. Stage 2 exposure is 4% down in the quarter with a coverage ratio that remains above the sector average.

Next slide. Foreclosed assets are down EUR 57 million quarter-on-quarter. The trend, this trend is very positive in the 9 first months of the year, the total outflows amount EUR 396 million, while the level of entries in the same period are EUR 75 million. We keep selling at a good pace without tackling the wholesale market and maintaining more value on the transactions and maintaining our shareholders' value.

Coverage ratio of foreclosed assets remains at 63%, which is the best-in-class and will continuously support the pace of disposal going forward. Looking at NPAs. Altogether, the NPA ratio remained stable at 6.7% and the coverage ratio level at 64%. When looking at the -- within the relevant ratio, the NPA ratio net of coverage, we stand at a flattish 2.5%.

Moving to solvency. CET1 fully loaded has increased 25 basis points in the quarter. Let me explain the main changes in the bridge. The organic capital generation net of dividend accrual of 50% and AT1 coupon at 12 basis points, lower risk-weighted assets coming from a smaller corporate loan book and mortgages, new lending under IRB model as well as lower NPAs at around 26% and also risk-weighted assets also reduced due to some regulatory adjustments.

And finally, we have some negative impact from valuation adjustments in our equity and fixed income portfolio together with some regulatory adjustments. CET1 fully loaded stands now at 13%, well above our 12.5% management target. This together with our expectation that the bank will accelerate its ability to generate capital organically, puts us in a very comfortable solvency position.

Very quickly in the next slide. Capital levels remain well above capital requirements. We have a very significant CET1 fully loaded buffer of EUR 1.6 billion and an MDA buffer of more than 440 basis points. MREL stands at 20.4% as of September, more than 200 basis points above their interim requirement for 2022.

Moving to the next slide, the fixed income portfolio. We have continued the reinvestment of this portfolio in the last quarter of around EUR 2 billion, mainly in Spanish government bonds, increasing the size of the portfolio from EUR 25 billion to around EUR 27 billion. The average duration of this portfolio, although has increased a little bit, remains low at 2.8 years, and the yield continues to improve 1 more quarter, now at 1.6% at the end of this period.

We expect the yield, as Juan Pablo has mentioned, to continue increasing in the coming quarters as we have a good amount of exposure at variable rates, either directly or through hedging. It is also important to highlight that almost the entire portfolio is accounted at amortized cost with no impact on capital. And finally, on liquidity, as you can see, we remain in very strong liquidity -- with a very strong liquidity position with a 79% loan-to-deposit ratio and a very sound LCR and NSFR levels.

We have not issued during the last quarter. As you can see in the slide, the maturities are well spread over the next years and coupons are relatively high for 2023 and 2024 maturities especially. This is it from my side. And now we can start with the Q&A.

[Operator]

[Operator Instructions]

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

[Maksym Mishyn, analyst]

I have 3. The first one is on the outlook for demand for mortgages. And how do you see the outlook in the coming quarters with a higher rate? Are you adjusting the offer to more competitive pricing? And I was wondering if you have changed or you see the changes in mix of fixed to floating rate production in the last month? Then the second question is on the repricing. How much of your loan book has repriced already to the new rates? And how should we think about the NII evolving in the coming quarters? And the last one on capital. You keep accumulating capital. And I was wondering what are your thoughts on deployment of this capital. And also if you could update us on the IRB models at that you have for Liberbank mortgage portfolio, that would be great.

[Juan Pablo Lopez Cobo, executive]

Thank you, Maks. Probably will take the first 2 questions. Regarding the outlook on mortgages and repricing. And Pablo, if you want to take guidance on NII and excess capital. First, regarding the outlook of the mortgage market, what we are seeing is as of today, in October, it continues to be strong. We continue to see demand. It's going to be a strong month for us together in September. We are seeing prices increasing. This is always prices in the mortgage product, it takes, it's a bit slower than when we look to the market. Obviously, you have to take into account that we offer that we finally signed is 1 month difference on average, the time to cash that we used to talk in the past, it's around 1 month. But we're seeing positive trends in pricing in August, for instance, for the sector, it was 20 bps up month-on-month, we are following a similar trend as well. and we see volumes.

Having said that, it's true that in an environment with higher rates and inflation, this could put some pressure on the market. But here again, what we commit is to do better than the market and to gain market share in this product. And I guess I commented already. In terms of repricing of the mortgages, here, probably to highlight that our mortgages, they reprice almost all of them once a year. Basically, in this third Q, is the first Q that we started to see higher rates, but it's around [ 112 ] every month, and this was concentrated mostly at the end of the quarter. So what we are more and more positive is for next quarter and next years in which it would be much more visible. And probably, Pablo, you can comment more in detail regarding the guidance.

[Pablo Gonzalez Martin, executive]

Okay. Thank you, Juan Pablo. And thank you, Maks, for your questions. On NII guidance, I think interest rates have moved slightly faster than what we were originally expecting. And well, and significantly more than it was expected. I think it's important to go back a little bit when we gave our guidance for the year. At the beginning of the year, we were expecting to be below 5% or a decrease of more than 5% in our NII for 2022. And even with that consideration that through the period in our strategic plan, was to have even lower NII for the whole 3-year period.

And since then, and especially since June and March as well, we have increased our guidance and we do that again. And I think although this quarter, we have some adjustments and impact on the NII evolution, but we are confident and maintain an improvement of this year from the minus more than 5% with a very significant loan growth and with the -- that significant loan growth, we will have more around 4% NII growth this year.

And on top of that, I think it's important that this trend of improvement and changing on NII will follow the following quarters. So for 2023, we also are very positive, and we think that this improving trend will continue. And the reasons, as you can imagine, are basically the contribution from the lending book will improve significantly. We also have the -- our ALCO portfolio that is going to contribute more. And -- but consider the ALCO portfolio, it's funded by our customers, so it's a amortized cost. So it's within our interest rate risk strategy. And also we will have some revenues on the excess liquidity that we'll have in the future.

So all in all, I think this makes us very confident that we can almost change our initial guidance for around 10% in the year. And the following quarters in 2023 will be very significant increase, and we will give a closer guidance for next year.

One disclaimer, this is all considering the TLTRO doesn't change this afternoon. So the conditions, we expect that to, but we don't know what is going to happen. And the final question on capital. I think the other good side of this is we are building and generating even more capital due to the lower risk-weighted assets and the better capital -- organic capital generation than we were expecting so far. So we are even better than the initial trend.

But having said that, we're going to wait for some time, for a little bit to have more visibility on the macro outlook in order to be more vocal on what we're going to do with the excess capital and the evolution for next year. But -- what I can say it's a -- reiterate what I have said in the past is that we maintain our plan that it's either increase our shareholder remuneration that could be through dividends or through share buyback. This is obviously something that should be approved by the Board. But what I can say it's our boards, both banks, Unicaja and Liberbank in the past had share buyback program. So this could be one option. And the other one is to increase and invest in business that have a good return on equity and those are the options we maintain with that view.

[Juan Pablo Lopez Cobo, executive]

Maybe, maybe Pablo, if I may. There is another question regarding IRB model you want to comment. And maybe to clarify because, I think one number that's -- I think a little bit regarding guidance. Just to be clear, we expect 4% up year-on-year, 2022 versus 2021. And in 2023, as Pablo was commenting, we expect the trend to continue to improve and the yearly comparison, 23% versus 22% to be almost 20% up. And Pablo, if you want to comment on the IRB story?

[Pablo Gonzalez Martin, executive]

Yes. Sorry. The process is evolving well. So let me give you a bit more color regarding the latest steps that we have taken. We have presented the application package at the beginning of the second quarter. And after that, the regulator started the on-site inspection in June. In the second quarter, we already migrated Liberbank's equity portfolio to IRB. And after that, we only expect the impact coming from the retail portfolio migration for which we might get the approval at the beginning of 2023.

As we did 2 years ago, we'd rather be careful regarding the quantification of the impact and wait until we get the final approval, but you can run the numbers. The portfolio is around EUR 15 billion and the average risk-weighted assets at the moment is around 36%. So you can run the numbers on that. I think you -- with that, you have the answer.

[Alberto López, executive]

Thank you, Maks. [Operator Instructions] Operator, next question, please.

[Operator]

Our next question goes to Carlos Cobo of Societe General.

[Carlos Cobo Catena, analyst]

So 2 questions. On NII, could you, just to confirm that it's a 20% uplift in NII year-on-year, '23 versus '22. And what terms would that include in terms of TLTRO III? Is it assuming the forward curve for ECB expectations or just keeping the TLTRO, the deposit maturity rate at 50, 75 basis points? I know all this is changing, but I just wanted to understand what is your starting point to see how it could change.

Second, on the strategy. How do you think about the pricing going forward? You have a very, say, demanding strategy to gain volumes and market share in mortgages. That is now under more pressure because of the environment, pricing and GDP. How do you think about front book pricing? Do you think as the customers spread as a whole, so do you think that part of the higher term deposit spreads can subsidize tighter loan yields to continue to grow, or you're going to be disciplined on treating each product separately? I wanted to see how do you expect to continue to gain market share now that rates are raising and it's harder to price fixed rate mortgages within your peers.

[Pablo Gonzalez Martin, executive]

Okay. Let me be more specific on NII guidance. I think we have more visibility, obviously, for fourth quarter. And as I said, we have changed from minus 6% to the actual guidance now it's 4%. So it's a change of 10%. Next year, as Juan Pablo mentioned, this will even increase and because the impact of rates increase has been seen only in the second half of this year and not in the first 2 quarters. The rate of change that we expect should be similar to the rate of change that we have seen in 2022. So in the second half of 2022. So it's going -- we expect to be plus 20%.

We -- obviously, these are very first numbers. We're working with a budget and don't take this as a strong guidance, but if things evolve and with the interest rate sensitivity, and these numbers should be -- and have been made the initial analysis has been made with the implied curve of the Euribor for next year and with the TLTRO conditions as of today. Maybe tomorrow, we have to change that. Okay? We have considered the implied curve of the deposit facility, marginal deposit facility from the ECB implied from the [indiscernible] [ 154 ] today, 2% at the end of the year and almost 3% at the end of the period.

So with that, we know the new cost of the TLTRO will be. And with those numbers, and all the repricing of the whole mortgage and corporate book and repricing. And also, obviously, there's a tricky part here, which is the delta of the deposit base and how it moves. We have applied what we consider a prudent approach and especially considering the situation that we have today. I think what we have today to give you some color, if we run the regression analysis and we look back in the previous periods, our deposit base is quite sticky and loyal and has been quite insensitive to rate increases.

And even considering the situation in previous years with much higher rates, our delta was much lower than the sector. And one of the things I want to mention is this situation is completely different to the previous years, and some people tend to make comparison and talking even about word, deposit world. And just to give you a couple of data. In terms of the of the liquidity, the loan-to-deposit of the Spanish financial system was around [ 160 by 12, 2014 ]. And now it's [ 90% ]. In our case, it's even lower, as you know, 78%. But on average and almost all entities are below 100% and on average it's 90%.

And on top of that, just to give you more color, the deposit evolution from June 2019 for the whole system. That's Spanish -- Bank of Spain data to August 2022, it's EUR 210 billion increase in deposits and the loan side only increased EUR 20 billion. So -- and from that, and EUR 170 billion are for the customers, for household. So I think the liquidity situation, and on top of that, everyone is worried about TLTRO repayment. I think most of the entities in Spain, and if you look at the net liquidity in the Euro system, not only in Spain, we are talking net of the TLTRO repayment of EUR 2.8 billion.

So I think the liquidity situation on the wholesale market and on deposit basis, and loan-to-deposit is completely different. So even with the assumptions that the situation is similar to what happened in the past, and I don't think it's going to be similar, we will have a very positive NII evolution for the coming quarters. I've been a bit long, but I think it's important.

[Juan Pablo Lopez Cobo, executive]

Maybe I can take the other question regarding how we treat mortgages and...

[Pablo Gonzalez Martin, executive]

Yeah. I talk the pricing of the deposit, you talk the mortgages here.

[Juan Pablo Lopez Cobo, executive]

But here, the point is that we try to maximize both products. Obviously, there is a link because at the end deposits and we include the cost of funding in our mortgage pricing, but we try to maximize. What we are seeing in mortgage pricing, the offers that we are offering to our customers right now, they are well above the levels that we have seen in the last 2, 3 months, probably around 150 basis points more between May and August. We had slowed down a bit the new production, but now we are again getting traction on this product in September and October. So we will try to maximize.

And on top of the yield, as we always comment, there is another 100 basis points yield from the cross-selling products, insurance, credit cards, mutual funds. And on deposits, Pablo already commented a lot. That in our guidance, what we are assuming is that 10 deposits will stand at around 50% of the mix. This is what is in our guidance. But obviously, we think that we have probably one of the stronger, customer base is sticky and will pay lower than average.

[Carlos Cobo Catena, analyst]

That's at the end of the whole repricing period?

[Juan Pablo Lopez Cobo, executive]

Right. Right now, the cost of our customer deposit is 1 basis point.

[Alberto López, executive]

Thank you, Carlos. Operator, next question.

[Operator]

Our next question, we go to Ignacio Ulargui, BNP Paribas.

[Ignacio Ulargui, analyst]

I just have 2 questions, a bit related. One of the ALCO portfolio, I mean, what would be the -- your strategy that you have going forward, is the EUR 27 billion the right number? Or do you think you kind of still increase that stock of bonds? Secondly, what would be the implications of the TLTRO repayment that you were saying into this portfolio? And then do have any restriction for you to increase? Or do you have that liquidity available when you could repay the TLTRO straightaway without a constrained net contribution from the portfolio?

[Pablo Gonzalez Martin, executive]

Thank you, Ignacio. Regarding the ALCO portfolio, I think we have outlined our strategy since the beginning of the year and we maintain. We have increased slightly our portfolio, as you can see in -- especially in this last quarter. And the size of the ALCO portfolio, obviously it depends on the medium-term liquidity and stable liquidity of the bank. So -- and I joined with the second part, the TLTRO, and the TLTRO, it's not a constraint. We look at liquidity on a dynamic basis, and we have some maturities, and we have some evolution of the loan book and the deposit gathering business on balance, obviously, the balance sheet doesn't impact.

And the liquidity position for the next 2, 3 years, gives us a lot of room for, even increase slightly our portfolio if the loan book doesn't grow as much as we were expecting. So I think the liquidity position of the bank is very strong. Obviously, we have a large portfolio already, but it doesn't mean that we can grow our portfolio in the following quarters.

[Alberto López, executive]

Thank you, Pablo. Thank you, Ignacio. Operator, please next question.

[Operator]

Next question goes to Benjie Creelan-Sandford of Jefferies.

[Benjie Creelan-Sandford, analyst]

Just a question on Slide 17, which shows that 66% of your residential mortgage book is at variable rate. And if I compare that to the disclosure in the annual or half year report that sort of implies that historically, you've been swapping some of your floating rate mortgages into fixed. I just wanted to confirm if that is the case? And if so, can you give us a bit more detail about the structure of those swap positions and how we might think about the repricing of the mortgage book going forward? And equally, whether that is matched on the funding side as well. So any more details you can give us around those swap positions would be much appreciated.

[Pablo Gonzalez Martin, executive]

I think, Benjie, thank you for the question. I think regarding the position, what we have in the information, we have to check. We'll get back to you with the information, the IR team, Juan Pablo or someone else will get back to you with the information. But let me give you some color that -- we have said that the net position at the end of the quarter, considering the swap position, that's around 2/3 that we have now on floating, it's what repriced in the coming year unless we change our interest rate strategy.

So and that means that some of the fixed portfolio is swapped to floating. But there's no forward start. I think at the moment, the hedging of that portfolio, it start from today. So the 2/3 is the actual floating part of the portfolio.

[Alberto López, executive]

Thank you, Benjie. Operator, please next question.

[Operator]

Our next question goes to Carlos Peixoto of CaixaBank.

[Carlos Peixoto, analyst]

So my question would be, the first one, on cost of risk in asset quality in general would be. This quarter, we have a minority that's in NPLs, I also noticed that Stage 2 actually improved. So was this just a transition from Stage 2 to Stage 1 that we will see here and how should we think of cost of risk evolution over the next quarter, whether there will be some sort of provision overlay, the macro adjustments and into covenants and if we, basically the guidance on cost of risk for quarter and the next year.

Then secondly, on fees, maybe, if you could also shed some light on how you see it evolving probably into the fourth quarter and possibly into 2023, from '22?

[Pablo Gonzalez Martin, executive]

Okay. I'll take the NPL and the cost of risk question. I think in -- I think it's important in NPL to consider that we wanted to be cautious because we don't know what the final impact of the macroeconomic environment, and we have run some portfolio adjustment models. And obviously, considering the new inflation that the models don't consider on the expected probability of default and loss given the color of our portfolio. We continue to analyze. We already have some adjustments to our models in and the level, and that gives us a good coverage. And considering the low risk profile of our portfolio, we maintain that we think, at least for this year. Obviously, next year, we will have to revisit the evolution, but we are confident that we have a good level of provision in our credit risk portfolios.

[Juan Pablo Lopez Cobo, executive]

And regarding fee income, the trend, as we were commenting, remains supportive. Here, we maintain our guidance and expect fees to grow high single digit this year. And if we look to different products, credit cards are doing well. insurance, there is always volatility depending on the quarter, but the 4Q is a good quarter. And mutual funds, obviously depend on volumes and market evolution, but mix is becoming more profitable. So all in all, a high single-digit growth guidance for this year.

[Alberto López, executive]

Thank you, Carlos. Operator, please next question.

[Operator]

The next question goes to Borja Ramirez from Citi.

[Borja Ramirez Segura, analyst]

I have 2 quick questions, if I may. The firstly is regarding the loan yield trend quarter-over-quarter in Q3. If you could kindly provide some details on the evolution? And my second question would be regarding the NII guidance, that's very helpful. Thank you very much for providing that. I would like to ask if you could please provide the details, the NII guidance, if there were no further TLTRO contribution? And also what is the deposit bit that you would be assuming?

[Pablo Gonzalez Martin, executive]

I think going back to the NII. I think we have even disclosed the level that we have considered. And obviously, the TLTRO depending on the final outcome. I don't know if it's going to be another tiering or they're going to change the conditions? So I think it's very path dependent on the changes. So I'm -- don't feel, you can see what we have consider in the TLTRO contribution for this quarter. And we have done the same for the following quarter in the guidance. But as I said, the guidance is guidance for 2022 and the initial view of the trend that we can see. It's not a formal guidance for 2023. We will give the formal guidance for 2023, next quarter.

And in that, I think we already mentioned that we have considered the delta for our household. We -- our model suggests that if rates go up to 3%, which is -- was the implied curve at the moment when we run the analysis, the delta could go up to 50% of our deposit base. Doesn't consider the institutional deposit and other deposits that have a different delta, but the household delta. And that we consider to be quite a prudent delta, and obviously softer, the whole repricing. But obviously, these numbers are quite uncertain because of the volatility we have seen, 150 basis point changes in a quarter on rates.

So that's why just to give you the color of the sensitivity of the bank, we have given the number of what -- it's the forecasted projections. But now we have to make the formal budget for the year and give the formal guidance for next year. So take that with a pinch of salt because it's what running the numbers, we get for next year. And with those assumptions on the delta of the deposit, which we think is prudent, so we will have to review how the quarter is evolving and probably we will think it will be lower in the coming quarters. But at the moment, we prefer to maintain that.

[Juan Pablo Lopez Cobo, executive]

And maybe regarding the loan yield that you were asking Borja during the quarter, it was up 4 basis points quarter-on-quarter. There are probably 3 items to take into consideration here. Our portfolio, we have more weighting of mortgages and our corporate loan book at floating probably is lower than peers. So our loan book repriced a bit slower than the average, but this is why we are confident in the next quarters. This will see more visible in next quarter. The second reason is that Pablo mentioned as well during the presentation that during the second Q, there were some integration adjustments that's probably that explains as well the delta between one quarter and the other.

And the third reason is that probably we are different, unlike other peers we manage the interest rate risk more on the ALCO portfolio and some of the swaps that we were commenting, they are more in the ALCO portfolio. And maybe there are some peers that they manage more of the interest rate and swaps on the loan book, and that also explains probably the difference.

[Alberto López, executive]

Thank you, Borja. Operator, next question, please.

[Operator]

Our next question goes to Fernando Gil de Santivañes of Bestinver.

[Fernando Gil de Santivañes d´Ornellas, analyst]

Two quick ones, please. First one, is on SAREB bonds. I mean, can you please remind us the size and yield assumed on your forecast? This is one. Second is on the insurance agreements, we have recently had some news over there. Can you please remind us on the impacts on capital going forward and the forecasted contribution, please?

[Pablo Gonzalez Martin, executive]

Thank you, Fernando. I'll take the SAREB and [indiscernible] questions. And regarding SAREB, we have EUR 3.7 billion of SAREB bonds. And they, as you know, they reprice with the minimum -- they reprice almost half once a year, with the minimum of the Spanish government debt at 1 year, and the other half at 2 years, all Euribor plus [ 200 ] You have to consider when those were set up, the government bonds were above Euribor.

Now they are below Euribor around for 1 year to year between minus 50, minus 60 basis points. So you have to consider. And once that spread is set, it reprice on a quarterly basis. So it's -- you can run the numbers with Euribor minus 60, and you don't -- you will get more or less the repricing. So it started to kick and have some positive accrual in September. And obviously, it will be more -- even more in the fourth quarter. And regarding the insurance agreement, we haven't finished the process. We already have announced that we have bought the 2 companies from that we had. And now we have to complete the process by selling to Santa Lucia and we haven't updated on the information that we did in the relevant information at the moment.

[Alberto López, executive]

Thank you. We have time for 1 more, operator.

[Operator]

Alberto, our final question that goes to Maria Ojeda of Banco de Sabadell.

[Maria Paz Ojeda Fernandez, analyst]

Sorry, I was on mute. Sorry for that. I was seeing that almost all my questions has been answered. So I only have one remaining one. It's just regarding the customer -- the retail fund deposit evolution, which is its reached peak on -- at the beginning of the year. And what I have seen is the site deposit base has been on a downward trend quarter after quarter. If you just could -- it's not a threat right now, just 1% down year-to-date. But if you just could elaborate on that, if you just could comment if this is due to a shift to your mutual funds or just is your customer base, just picking up on the savings cushions they have just because of the lower rental or the impact of the high inflation on the personal income.

[Juan Pablo Lopez Cobo, executive]

All right. thank you, Maria Paz. I will take that one. Obviously, during the third Q, there is some seasonality. Usually, deposits from households, they come down in the third Q, the second Q is the opposite. Our customer base, probably we were analyzing and probably, this is a customer base and where we have, a part of them are pensioners and they will have probably the highest rates in there in what we could call their pension, 8.5%. So we believe the ability to save money from our customers is preserved in this environment.

And then it's true in the last quarters, and we commented regarding our deposit base, 80% retail, 20% corporate and public sector, these last two buckets. They are more volatile, more price sensitive. And you can see, for instance, in this quarter, the decrease was mainly explained by public sector. This is the main reason.

As Pablo was commenting, our liquidity position is strong. We are comfortable, so what we manage them, pricing remains very low at 1 basis point. So I guess that explained the recent evolution and the future. As said, we do not see our customers in a weaker position than average, probably the opposite.

[Alberto López, executive]

Thank you. Thank you, Maria Paz. Thank you, everyone. The IR team remains available for further questions. Have a good day.

[Pablo Gonzalez Martin, executive]

Thank you.

[Juan Pablo Lopez Cobo, executive]

Thank you.