Unicaja Banco SA

MAD:UNI

Earnings Call Analysis

Improving Profitability and Strong Capital Ratios

The bank reported a robust increase in net interest income, up 25% year-on-year, driven by positive loan repricing and stable deposits costs. Core banking margin soared 42% from the previous year, and net income, excluding a banking tax, rose nearly 30%, reflecting improving profitability. Operating expenses fell on both a quarterly (1.5%) and yearly basis (nearly 2%), supporting a better cost-to-income ratio of 46%, a 6% improvement from last year. Notably, the cost of risk remains at the lower end of guidance at 30 basis points. The CET1 ratio comfortably increased to 14.2%, indicating a robust capital position, with liquidity ratios also at industry-leading levels. Loan books are anticipated to decline in the high single digits for the year, but fee income and consumer lending show resilience, and digital channels are expanding.

Impressive Performance Amid Seasonal Effects

The bank has displayed an impressive income and capital performance. Net interest income (NII) grew by 11.5% from the previous quarter and a substantial 25% year-over-year, largely due to successful lending repricing and a steady low cost of deposits. Despite the expected seasonal downturn in the third quarter, marked by increased spending, the bank managed to reduce operating expenses by 1.5% from the previous quarter, contributing to an enhanced cost-to-income ratio of 46%. These cost reductions are integral to the bank’s strategy, which continues to realize efficiencies.

A Managing Act in Loan and Deposit Dynamics

The bank has navigated a complex environment with on-balance sheet funds reducing by 1.3% due to typical summer spending, a slowdown in mortgage repayments, and customers seeking higher yields elsewhere. However, off-balance sheet funds have increased by 3.2% year-over-year, offsetting some impacts. Loan demand has subdued as interest rates rose and the bank tightened its risk-reward criteria, impacting new lending which has slowed. Nonetheless, consumer lending grew at 2% through existing customers, signaling strong performance in a challenging sector.

Embracing Digital Trends and Enhancing the ESG Proposition

The bank is evolving with digital trends, boasting a third of new customers from digital channels and significant sales via remote mediums. A new app and website launch have been positively received by customers. In environmental, social, and governance (ESG) initiatives, the bank has issued a senior non-preferred green bond and continues community support through financial education and investment. The appointment of new CEO and board members is anticipated to usher in fresh perspectives and governance practices.

Resilient Fee Income and Operational Excellence

Despite slower lending and seasonal impacts, fee income has remained resilient, staying stable quarter-on-quarter and growing by almost 2% year-over-year. Expense management has been noteworthy, with a 1.5% quarter-on-quarter reduction, a testament to the bank's operational excellence. Personnel expenses have fallen, and a number of branches remain stable, showing discipline in bank operations with further synergies expected in 2024.

Strong Solvency and Liquidity Maintained

Solvency remains robust with a CET1 fully loaded ratio improving to 14.17% and capital buffers significantly above regulatory requirements. The bank's liquidity position continues to be a competitive advantage, with a loan-to-deposit ratio at 77%. This strong liquidity and reduced funding costs reaffirm the bank's financial stability and prudent management as it looks to navigate future macroeconomic conditions.

The Road Ahead: Balancing Growth and Risk

The bank expects to see a recovery in the fourth quarter, traditionally a strong period, especially in consumer lending. While digital innovation and customer acquisition through those channels continue to progress, the bank remains mindful of its capital generation and profitability focus, expecting loan book decreases but emphasizing the quality and yields of new lending. The bank's liquidity, supported by an advantageous deposit base and effective cost controls, enables it to adapt to market changes and potentially enhance its wholesale funding costs over time.

Earnings Call Transcript 2023-Q3

[Alberto López, executive]

Good morning, everyone. Thank you for joining us today for Unicaja Banco Third Quarter 2023 Earnings Conference. I'm here today with Pablo González, our CFO; and Juan Pablo Lopez, Head of Investor Relations, and they will take us through their presentation. Please remember, we will have the live Q&A session after the presentation. Thank you, Pablo.

[Pablo Gonzalez Martin, executive]

Thank you, Alberto. Let's start with the recap of the key highlights of the quarter, as we always do. We have seen the deleverage of the private sector in Spain speed up a little bit in the last few months. In our case, the consumer lending is performing very much in line with the sector, decreasing 2.5% year-on-year as the demand is lower due to higher rates and macro uncertainties. Private customer resources remain supportive and have decreased by only 1.4% year-on-year despite high mortgage and corporate repayments. Keep in mind, we are managing our liquidity as a whole, and we have little pressure from the asset side, so we can be a little bit selective on the deposit front. Regarding profitability, we keep significantly improving our banking margin year-on-year with all 3 lines improving in the year. Net interest income improved 11.5% quarter-on-quarter and 25% in the year. We have had a very positive repricing on the lending side this quarter because of the nature of our loan book, while we keep showing best-in-class deposit franchise with a very sustained cost.Fee income, slightly down in the quarter in a seasonally weak quarter, although growing by 1.6% year-on-year. This shows a very recurrent fee income structure for the bank. Operating expenses are down 1.5% quarter-on-quarter and close to 2% year-over-year, which supports the continuous improvement of the cost-to-income ratio, which stands at 46% in the first nine months of the year, 6% tag points better than last year. Adding these three together, our core banking margin has improved by 42% versus the first month of the last year. And net income, excluding the banking tax has improved by 28% compared to last year. We also continue reducing the stock of NPAs, which is, as you know, one of our key priorities. The stock of NPLs has decreased by 10% this quarter, thanks to an NPL portfolio sale of nearly EUR 200 million, while maintaining the coverage ratio flat. Cost of risk also remains stable at 30 basis points in the quarter. in the lower part of our guidance and with no signs of deterioration for the time being. The stock of foreclosed assets is also down by EUR 263 million in the year with more than EUR 300 million of gross sales.Lastly, another quarter of strong performance on capital and liquidity ratios. CET1 fully loaded ratio is up by 38 basis points in the quarter and 119 basis points in the year, reaching 14.2% ratio, which leaves us in a very comfortable capital position. The capital generation, together with our latest issuance, has brought our MREL ratio up to 25.8% already comfortably above the capital requirements. Finally, the liquidity coverage ratio stands at 259%. The net stable funding ratio at 147%, and loan-to-deposits at 77%, which are best-in-class ratios with just EUR 900 million of TLTRO remaining. Now, Juan Pablo will cover the business activity of the quarter in more detail.

[Juan Pablo Lopez Cobo, executive]

Thank you, Pablo. Starting with customer resources. On balance sheet funds decreased 1.3% in the quarter, and we see three trends here. First, third Q is usually weaker as summer season implies more spending and the quarterly comparison is affected by the double pay in June. Second, the repayment of mortgages slowed down, but is still high, and this explains half of the movement in the quarter. And third, the search for higher yields in other type of products, such as TBL or insurance or mutual fund continue. Regarding of balance sheet funds, they were affected this quarter by the mark-to-market and seasonality. And when we look to the year-on-year comparison, total private customer funds are 1% down with on balance sheet 2.9% down and of balance sheet 3.2% up. Good performance, bearing in mind our customers acquired Spanish builds and accelerated mortgage prepayment during the year.All this while we maintain cost under control. You can see the EBITDA stands at 12% in the third Q. This is our main competitive advantage, a cheaper and stable customer deposit base. We will see later the liquidity position remains very strong, and the commercial gap keeps improving. Moving now to lending on Slide 7. We see lower demand for credit as interest rates increase and macro uncertainty remains. Both companies and households are shrinking their balance sheet, which is an effect of the monetary policy of the Central Bank. Regarding corporate book, there is lower demand for new loans as companies continue to postpone long-term investment. We also see some portfolios as ICO loans reducing even at faster pace as the companies give back part of their extra liquidity. One positive news here is that new lending is done at attractive pricing. The mortgage book slowed down this quarter a bit further, but we remain pretty much in line with the sector as we had a better start of the year. Consumer lending grows at 2% with existing customers at very nice rates with a low cost of risk. Lastly, be aware the book we call Consumer and Other is also affected by the seasonal effect of the EUR 650 million social security advance payment booked in the previous quarter.Next slide on new lending. We have seen a quiet quarter across the board, a slowdown at the sector level, together with our risk-reward appetite a little bit stricter explains the side quarter in terms of new lending. We have been focusing on appropriate pricing and quality new loans more than volumes. In business lending, we keep seeing lower activity in the short term. In mortgages, the demand for credit remains low. Having said that, the 4Q is usually a good quarter for us, and we expect to see a recovery compared to what we have seen in the third Q. Consumer lending continues to be the best performer. On Slide 9, you can see our customers are becoming more and more digital. 1/3 of our new customers came from digital channels. In terms of product and channels, same story. We keep investing and moving more activity to digital channels each quarter. In consumer lending, for instance, almost 50% of the sales are through remote channels. Last week, we launched a new app and website, which seems to be having a very good reception by our customers.Moving to Slide 10. ESG. Regarding the E, we continue doing a lot of work. And in the quarter, we issued a new senior non-preferred green bond. On the social front, our commitment is clear. An example of this is the wide network of agents and branches providing financial services in rural areas and small municipalities. Another good example is our investment in financial education and the work done by our foundations, shareholders, thanks to the dividend they receive and that they give back to the society. Finally, on the government front, we plan to ratify our new CEO and new board members at the coming shareholders' meeting in November.Moving now to the quarterly P&L in Slide 12. As always, we will comment the main lines in more detail later, so just some highlights. Net interest income is up 25% in the year and 11.5% in the quarter, thanks to the strong repricing of the loan book mainly that way more than offset the higher funding costs. Fees show resilience supported by recurring activity even in a seasonally weak quarter. Other revenues had a negative impact coming from the disposal of an NPL portfolio. OpEx, personnel expenses decreased after booking some variable payments in the second Q. Loan loss provision. The cost of risk is stable at 30 basis points. And other provisions, litigation charges slightly down in the quarter, while we have made another effort on the NPA side. All in all, core business is doing well and profitability is improving. Net income, excluding the banking tax, would have increased almost 30% year-on-year.Now going into a bit more detail and starting with NII, I guess, this is probably one of the best news in the quarter. Customer spread increased by 36 basis points, explained by loan book repricing and higher new lending yields. The loan yield improves 46 basis points, while the deposit cost is only 10 basis points up. On the right-hand side, you can see lending yields at the end of the quarter that continued improving. Front book yields are 46 basis points higher than the previous quarter and well above the back book. Next slide shows the moving parts of the NII in a quarterly comparison. First, you can see lending contribution increases EUR 55 million, thanks to higher yields, more than offsetting lower volumes. Retail funding costs increased by just EUR 17 million in the quarter. We still maintain cost at a very low level. The fixed income portfolio contribution improves by EUR 8 million as part of the portfolio is at variable rate or hedged. Wholesale funding costs increased EUR 13 million due to the fact that around 70% of the issuance are swapped and including the cost of our latest and probably last senior nonpreferred issuance at the beginning of September.Finally, on Interbank, we have a positive delta of EUR 8 million, basically explained as we have generated some positive liquidity versus last quarter. Moving to the next slide on fees. Total fees are quite resilient despite some lending slowdown and seasonality, lower activity. In the quarter, main items were pretty much stable. Mutual funds a bit better, offset a bit weaker insurance revenues, and then we also increase the fees paid to our agents. On the nine months, the year-on-year comparison, fees are almost 2% up that compares very well in a challenging fee environment. Next slide, total OpEx decreased by 1.5% in the quarter. General expenses remained well under control, with a slight increase and personnel expenses decreased 3.4% after booking some variable payments in the second Q. On a yearly basis, the downward trend remains with 1.9% decline compared to 2022. This allows us to improve our cost-to-income ratio. As you can see on the right-hand side, the number of branches has stabilized as expected, and the number of employees keeps coming down, although at a lower pace as most of the exits of the restructuring plan have already taken place. Having said that, we will still have some synergies in 2024 as we have had people leaving the bank throughout this year.Next slide, cost of risk stands at 30 basis points in the third Q, in the low part of our guidance, which was 30 to 35 basis points. We maintain the guidance, although we are not seeing signs of deterioration for the time being, and we could probably end on the lower end of this guidance. On Slide 20, on the left, you can see what we call the banking margin, growing at 42% versus the first 9 months of 2022. The improvement in NII, combined with lower costs and a slight growth in fee income explain the significant improvement. Basically, all items are moving on the right direction. On the right side, you can see that net income adjusted for the bank tax have increased by almost 30% compared to same period of last year. And now, I pass the work back to Pablo.

[Pablo Gonzalez Martin, executive]

Okay. Let's move now to asset quality. On the top left-hand side, you can see the NPL stock evolution. The strong decrease in this quarter is mainly explained by the sale of an NPL portfolio of EUR 190 million, which has taken place without any impact in the coverage ratio, which remains at 66%. The underlying trend in NPLs is also encouraging. Gross entries are quite low compared to the previous quarters, which is combined with good quality exits, mainly recoveries and cures in the quarter. So far, we are not seeing signs of deterioration and the NPL ratio has improved from 3.6% to 3.4% in the quarter. As I have just mentioned, NPL coverage levels remain very strong at 66%. And if we include the guarantee from the ICO loans on NPLs, this coverage ratio increases to 77% and above 100% for corporate NPLs. We remind you that here, that we have a conservative loan book with more than 75% individuals and public sector exposure and should cope well if the macro situation deteriorates, which is not our base case so far.Next slide. Foreclosed assets are down EUR 101 million in the quarter and EUR 236 million in the year. Another good quarter in terms of disposals. We sold EUR 116 million of foreclosed assets, reaching total sales of EUR 350 million in the year, and we are selling all kinds of assets. 46% were finished buildings, 30% was land, and 24% building under construction. We continue reducing the stock of foreclosed assets, which, as you know, this is one of the main priorities for the bank. The continuous reduction of NPAs will have a positive impact on different fronts for the bank. Coverage ratio of foreclosed assets improves to 67% in the quarter. Looking at NPA ratio, if we consider it net of provision, it has improved to 2.2%, which is already a very low and manageable exposure, which again, we expect to continue reducing.Moving now to Solvency. CET1 fully loaded improves 39 basis points in the quarter to 14.17%. The main variations in the quarter are up 21 basis points from retained earnings, net of dividend accrual at 81 coupons. 41 basis points from lower risk-weighted assets. This decrease is mainly explained by 3 main items: the first one, lower corporate lending book and lower NPAs. The second one is lower density of the mortgage book as all the new lending comes from IRB. And third, the mark-to-market of equity stakes that this quarter has been negative. And the third part is the 23 basis points negative of valuation adjustment, mainly corresponding to the EDP stake that we have through a vehicle. All in all, as I said, CET1 fully loaded of almost 42.2%, which is obviously a very comfortable capital position for us.  Very quickly in next slide. Capital levels remain well above capital requirements. And this quarter, we have increased an already very strong buffers. CET1 fully loaded buffer reaches EUR 1.8 billion, and MDA buffer stands at 548 basis points. MREL fully loaded after the last issuance reaches 25.8% as of September already exceeding the requirement of 24.5% on fully loaded basis. I would like to highlight that we have built more than 8 percentage points of MREL since our merger with Liberbank a couple of years ago, which is a very strong effort from our side. Moving to the next slide on the fixed income portfolio. This quarter, the size of the ALCO portfolio has remained broadly stable at EUR 26 billion. The composition of the portfolio maintains a very similar structure with 93% public debt. The average duration slightly decreased to 2.4 years, and the average yield continues improving for around almost 20 basis points in the quarter to 2.6% as of end of period. As you know, we have part of the portfolio at variable rate, and we still have some tailwinds from further repricing. As we always highlight, it is important to bear in mind that almost the entire portfolio is accounted at amortized cost with no impact on capital.On wholesale funding, after the last issuance, we have exceeded the MREL requirement. As I have just said, we have made a very significant effort on issuing front in all the capital stack. We issued EUR 300 million of senior non-preferred in September with an improved pricing versus the previous senior non-preferred bond of the bank. The maturities calendar is well spread, as you can see in the slide. And finally, in this slide, I would like to point out that as you can see on the right-hand side, that funding rates are in line with the current interest rate curve, since we have a significant percentage of wholesale funding portfolio swap to variable rate. After the effort we made over the last few years and the positive evolution of the bank, we believe we will be able to gradually improve our wholesale funding costs.Finally, on liquidity. We maintain a leadership position. Our loan-to-deposit that stands at 77%. NSFR at 147%, and LCR at 259%. On retail funding, some strong metrics as well, that is good to remember, 75% of our retail deposits, and we have an average balance of around EUR 20,000 among our old customers. 80% of private sector deposits guaranteed by the deposit guarantee fund, and also around the same, 80%, are considered stable for the LCR methodology. We have just EUR 900 million of TLTRO funding outstanding that will mature in March in the next year. We have EUR 21.8 billion of high-quality liquid assets and additional issuance capacity of almost EUR 11 billion. These best-in-class liquidity ratios, together with our deposit franchise allows us to maintain a very strong liquidity position quarter after quarter, which is a huge advantage for the bank and especially in the current interest rate scenario where our deposits are very valuable. And this is for the presentation. Alberto, we're ready now for the Q&A session.

[Alberto López, executive]

Thank you, Pablo. We are now ready for the Q&A. Please try to keep it to 2 questions so we can get as many of you as possible. And now operator, can you get the first question through?

[Operator]

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

[Maksym Mishyn, analyst]

I have two. The first one is on the NII. I was wondering what we should expect quarterly and for 2023 and 2024. How much of your loan book has already repriced to the current interest rates? And what kind of sensitivity do you currently have to a 100 basis points move in rates? And the second one is on capital. Your capital build is running fast. Deleveraging is helping. Now you have the new management team and Board in place. I was wondering if you have any discussions on the deployment, and you could guide us a little bit more on what to expect.

[Pablo Gonzalez Martin, executive]

Thank you, Maks. You're wondering on what do we expect on NII going forward? I think the first thing to say on NII is this is always uncertain and the major driver is the bit of the deposits. Let's see, for the remaining 2023 for the fourth quarter and for the year as a whole. We have to consider we have a couple of negative impact. And the first one is our latest insurance of EUR 300 million of senior non-preferred green bond at the beginning of September. And then we also have the MREL at 0% that will have an impact in the fourth quarter and not in the first quarter. But consider this and also even an increase in EBITDA from 12% to almost 17%, 18%, which is what we think could end up the final quarter of the year, which is speeding up a little bit, but not significantly the trend that we have seen so far. We expect to be around 25% for the year, which is higher than our previous guidance. Our previous guidance was above 20%, which was already higher than the guidance that we did at the beginning of the year. So I think in NII, still very positive, even with lower volumes and the major reason is the low EBITDA on deposits.And for 2024, I think we're still in the process of budgeting for next year. And I'm not too confident on giving you numbers. Obviously, we'll have to review the numbers, but the most likely is that we have a slightly positive between low single digit with increase in NII compared to 2023. But this is with the EBITDA that we are expecting around 25% on average in the year, which is still probably higher than what our peers think is the process, but we still have to review and see what happened in this quarter to have a more clear guidance that we will give at the end of the year. In terms of how much repricing we have. And also, you were asking the sensitivity. The sensitivity, as we mentioned, is always a tricky thing because of the analysis of the EBITDA. And as always, this is a theoretical exercise and under the assumptions of cost and balance sheet. And having said that, and in [Indiscernible] and parallel movement of 50 basis point of the interest rate card will increase in the second year once the whole balance sheet is fully repriced of around a mid-single digit, to a low single digit to mid-single digit between 2.5%, 3.5%. But always, I think it's important that these assumptions depend a lot on what happened with EBITDA in the model of the assumption.

[Juan Pablo Lopez Cobo, executive]

Going to capital. There was also a question regarding the potential repricing left in the portfolio. We can tell you, for instance, the mortgage book that obviously is the largest book for us during the third Q was repriced taking into consideration an average Euribor of 3.1%. So we have to reprice another 100 basis points on this book. And maybe, Pablo, if you want on capital?

[Pablo Gonzalez Martin, executive]

Yes, I'll take that. I think we still expect to continue generating strong capital organically. As you know, we are in the process of analysing the different options, and always, this is something to be decided by the Board of Directors, and we don't want to get into what they will decide. But obviously, as you can imagine, this comes to the options that we have mentioned in the past, which has increased the shareholder remuneration, and it could be in the form of share buybacks that make a lot of sense at the current low valuations. This is something that we have done in the past. But obviously, this is something that the Board of Directors will analyse and decide in. Also, we can invest in our own business to make it more profitable, and we see room to grow with our existing customer base in consumer SMEs and corporate, for instance. Another option in order to make more visible the structural profitability of the bank, is to reinforce our real estate assets coverage, which balance is very, very small at the moment, but still it has been a drag in the last few quarters. So as said, let's give some a little bit of time to the new CEO and the Board to decide on the final decision of the uses of the excess capital.

[Operator]

The next question comes from the line of Francisco Riquel from Alantra Equities.

[Francisco Riquel, analyst]

Yes. And first one is a follow-up on capital. So you are now meeting the MREL issuance [indiscernible]. You are one percentage point above the 2025 requirement. So do you see this buffer enough to use this excess capital, or will you have to issue additional debt before you consider any of the users you mentioned before? Also, if you can update on the potential impact of the IRB models, given that the mortgage public and the standard model has been running down. And your balance sheet has also fallen below the EUR 100 billion threshold for several quarters now. Do you expect any relief from regulatory requirements because of this? And then the second question on asset quality. You mentioned that you can still reinforce the coverage. So I wanted you to update here. NPA ratio has fallen to 6.3% after disposals, just to maintain the target to go below 5% given the reduction of the denominator? And what provisioning effort is left to that they are both in loan losses and real estate provisions.

[Pablo Gonzalez Martin, executive]

Thank you, Paco. In terms of MREL, I think it's important I think we have now more than -- if you consider that our MREL, it stand at 25.84%, and our requirement is EUR 24.5 million for next year. We also still need to see the requirements for next year. And we will, as usually receive then in the first quarter of 2024, and we don't expect them to be a lot different, at least for next year. Going forward, this may change, as you said, because of the lower EUR 100 billion total assets. But at the moment, obviously, this depends on someone else, and we cannot plan considering any relief from this side. But having said that, we will have a good buffer going forward in the requirement of MREL and the subordination as well. So we are confident that we have already done all the MREL issuance that we need. And going forward, it will be only replenished. I think it's good to remember that we have done almost EUR 3.3 billion of issuance since the merger. I think in AT1, Tier 2, senior non-preferred and senior preferred. I think this massive drag on our profitability coming from this high cost is over and the level of cost that we have in our MREL issuance.Going forward, if we achieve a better credit quality and rating and better consideration from the fixed income community and no overhand of paper down the line, even probably lower, but not much higher, I think it will be a good positive tailwind down the line. And I think it's important to remember the strong effort that the bank has done in this building the stock. And in terms of IRB, we have not announced anything because the process hasn't finished yet. And regarding the potential impact, we already anticipated in the last quarter result presentation that the impact should be negligible. And on one quarter later, we can confirm this that we don't expect any significant impact on neither positive or negative from IRB because this review is mixed with other adjustments on IRB and because we already have benefited in our capital position from the new production being within IRB models and the early amortization and amortization of the portfolio coming from Liberbank. And you have to consider we have generated a lot of capital in this quarter and for the whole year, more than 100 basis points of capital, which is very significant. So we don't expect any positive news from IRB, as we said in the previous presentation. And I think in asset quality was your last question. I think it is true we have been making significant effort in this line over the last few quarters. And also true, we have a strong coverage level.And what I can say is we still expect to make another effort in the next quarter. And this will be the way that we will be able to leave this topic behind us for the next year and to show the real profitability of the bank. So I'm not in a position to come with a number of how much this effort is going to be in the fourth quarter because we're still an ongoing review and trying to make sure that this is not a drag going forward in the following quarters in next year. So I'm sorry to have this new, but I think it's important that we get rid of this drag on our profitability. And we intend to do this in the final quarter and this quarter as well. And coming with the exact number is always hard. I just want to remember the overall number is around EUR 500 million, the net number. So the impact once we do this final adjustment on the net value of this portfolio to leave this behind. And so next year, we will have a more real profitability of the bank down the line.

[Operator]

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

[Borja Ramirez Segura, analyst]

I have two questions. Firstly, on the customer spread. This quarter, you showed a higher increase quarter-over-quarter than domestic peers. I would like to ask how you see this trend going forward? And also, where do you see the customer spread in the medium term? And then the second question is on capital build. Your capital build seems to be rising, thanks to the loan deleveraging. And also, I think potential DTA utilization may also mean lower threshold deductions. I would like to ask how do you see your capital build in the coming quarters? And linked to this, I'm aware that you recently appointed your new CEO, but I would like to ask when could we hear more news about the potential -- what are his plans to optimize the group's balance sheet and profitability?

[Pablo Gonzalez Martin, executive]

I think in customer spread, we reached  EUR 260 million. And as I said in the previous call, we expect this to be between EUR 250 million and EUR 275 million. So for next quarter, we still see some potential upside. And as you asked, for medium term, this is always very hard because it implies that we have a view of medium-term interest rate level, and this is something that we have to be humble and not make long-term predictions on interest rate. With the implied curve for the medium term, we think we can move in the range between EUR 230 million to EUR 300 million, depending on the levels off. So, but I know it's quite broad, but it's closer in the medium term to EUR 250 million. If the EBITDA as we are expecting and the implied level is maintained in the future. So for the short term, still going up, medium term stabilizing slightly lower if the EBIDTA get close to what has happened in the past. It's EBIDTA is lower, we will maintain even higher level of customer spread. I know it's not very helpful, but you have your own analysis to decide where will be the level. On the capital build?

[Juan Pablo Lopez Cobo, executive]

Yes, sure. Thank you, Borja. Regarding capital evolution, what we see for the next quarters is to continue to generate capital organically. We see risk-weighted assets continue to decrease. We can comment later probably more in detail, but probably loan book. We know that the macro environment right now, we should expect loan book to continue to decrease in the following quarters. Then NPAs, I guess, this quarter was with the example, NPAs continue to reduce for us, and that has an impact in terms of also risk-weighted assets reduction. And then obviously, the net income that we expect to generate. So all in all, we expect the capital evolution to perform relatively well for next quarters.

[Operator]

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

[Carlos Peixoto, analyst]

Yes. A couple of questions from my side. The first one would actually be focusing on NII. Looking at your average loan yields, you roughly are a bit over 100 basis points below the average of other Spanish banks, at least the ones we're reporting so far. Do you see this gap as structural, or do you believe you can catch up a bit to others in the coming quarters? And alongside with that, if you do see it as structural, what are the main reasons behind this? Is it the higher weight of mortgages in the book. It's a higher weight of fixed rate mortgages unswapped or with without any swap to variable rates? Basically, what could help to explain this type of deviation there? And a follow-up as well on what you were mentioning before, but I believe I missed the comments you made on 2024.I know it's still early to guide us, but I believe you mentioned something in terms of growth, but I didn't really catch it. So if you could repeat. And then on the loan book. Second question on the loan book, your expectations for this year. And next one, Juan Pablo just mentioned that you do expect to see some slowdown in the loan book, but maybe if you could quantify a bit, what are the segments you see as defining the most and where should some recovery, if any, come from? And then finally, just on provisions. On other provisions. So you have in the provisioning line has been a bit strong over the last quarters. I was wondering how short should we think of it in the upcoming quarters should it remain high given your plans to continue to work on NPA reduction, basically, any type of guidance you could have on that?

[Pablo Gonzalez Martin, executive]

Thank you, Carlos. I think regarding long yield, I think there are different moving parts in this. I think the first one is we have our loan books due to mortgages and public sector and high-quality corporates. So the level of risk within the portfolio is lower, and this usually comes with a lower yield. This is one of the major reasons. The other one could probably be also, as you mentioned, that we have almost 50% of our loan book at fixed rates and this in the non-mortgage. In the mortgage is only 1/3 and fixed. And this also could be a time difference compared to the peers in terms of the loan yield. And the duration in this portfolio, it's also 2.6%, around 2.6% for the corporate portfolio at fixed rate. And also, I think one other key point here that I want to mention is we are focusing on profitability and not volumes. And these should be buried in mind. We have a clear mandate to improve our profitability, not to be a larger bank, but to be a more profitable bank. And we are quite conscious on having the best return regarding the risk that we take on the portfolio, and we are in this process.And regarding the NII for 2024, we are not giving guidance at the moment, but the starting points because we have to review what we think is going to be the EBITDA depending on what's going on in the market and the situation. But to give you some numbers that we have run, so you are not completely blindsided on how it will evolve. We expect to grow NII in 2024 compared to 2023 in the low to mid-single digit with EBITDA of around 25% on average, which means it will come from 17% and goes up to 35% more or less at the end of the period. So these are numbers that we've run in the past. We are updating the EBITDA. So we cannot confirm this as a guidance, but the running numbers and this obviously will depend also on volume evolution, the demand, the interest rate evolution. Now it looks like we are reaching the peak in rates, but we will have to see on the different hedges that we may have in the future. So these are very preliminary numbers, but just to give you some colour on that. Do you want something else, Juan Pablo?

[Juan Pablo Lopez Cobo, executive]

Yes. There was another question regarding lending volumes. Okay. Here, if we look to the different portfolios, starting with mortgages that is our priority. If we look to the last two years, we actually outperformed slightly but outperformed the market, and we gained some basis points in market share. This third Q was weaker, bear in mind as well that usually 3Q is also weaker for us. We are more focused on first residents, and we expect the 4Q to recover. All in all, for 2023, what do we expect in terms of mortgages to be pretty much in line with the sector. And we see the sector decreasing something around 3.5%, 4% down year-on-year. So you should expect that for our book. In terms of consumer book, here, this is the best performer across the sector, and we expect some growth on this portfolio. As you know, we are not doing open market. This is existing customers, and we have increased prices by around 150 basis points, so very attractive yields. And then corporate book that here, we are underperforming the sector probably for year-on-year, you should expect a decrease of around 15%, 16%. And here, as Pablo has commented, we are focused on yields.It's very easy to get large tickets to make volume, but doing it at the right price is the key. This is also helping us in terms of risk-weighted assets and capital generation. But the main focus is profitability, is yields. And probably, this is a portfolio that should plateau in the next quarters, but for the year, we see this decrease. And also, you have to bear in mind the colons are amortizing at higher speed. And also, we had some loans related to TLTRO. We can give you an example here. I guess this also helps in terms of NII and repricing of the book. Until year-end 2024, we got around EUR 1.2 billion of corporate loans that matures and they have a yield of 2.8%. We will make profit with these maturities because the new production we are doing at around 5%, above 5%. So I guess this is another good example of how this should also help NII and profitability. So all in all, the loan book should decrease high single digit year-on-year, but we have to be aware of the drivers of the different portfolios.

[Operator]

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

[Fernando Gil de Santivañes d´Ornellas, analyst]

All right. Two questions from me, please. First one is what is the focus on the view that you have for the volume that are defined on the single resolution fund for 2024 and onwards? And the second is, you didn't give us a comment on the strategy with EDP state.

[Juan Pablo Lopez Cobo, executive]

Fernando, could you repeat the second one? We didn't get the second question, please.

[Fernando Gil de Santivañes d´Ornellas, analyst]

Sorry, yes. Can you please comment on the strategy on the EDP state?

[Juan Pablo Lopez Cobo, executive]

Okay. Thank you, Fernando. I will take the first question regarding the contribution to the single resolution fund. I guess like other peers, et cetera, we are expecting this to end next year. In our case, we got a contribution of around EUR 45 million. And regarding the deposit guarantee fund. Here, probably we got more a question mark but of the exact timing, but we expect as well is to finish in the short term. Our contribution here is around EUR 90 million. I guess that for us, these two items are very important probably in relative terms because we are a retail bank with more deposits, our loan-to-deposit ratio, we are more affected by this type of contributions, and this should help significantly to improve profitability and ROE in the next years, next quarters. And Pablo, I don't know if you want to go on anything.

[Pablo Gonzalez Martin, executive]

Yes, Fernando. Our stance is, at the moment, the same as in the past. As you know, we hold the stake in EDP through an investment vehicle. And this state has been profitable for the bank, and we have been shareholders for quite some time. And we know the asset very well, and we feel quite comfortable with the management. And having said this, as always, we are looking to maximize their return on capital for our shareholders. And so we still analyse every single quarter what to do with this.

[Operator]

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

[Ignacio Cerezo Olmos, analyst]

I've got two. On the capital discussion, I mean, can you share some colour in terms of what is the CET1, the minimum CET1 ratio you feel comfortable with at this point? And the second one, if you can give us a little bit of information around your sensitivity to declining rates. Obviously, the balance sheet structure has changed a little bit since we started talking about sensitivity store rates going up, et cetera. The move on rates might be completely different to the one we have seen on the way up. But if you have a little bit of information on sensitivity to decline interest rates.

[Pablo Gonzalez Martin, executive]

Okay. On capital, minimum capital, I think we don't have any new information on that from the Board and the shareholders. I think it's the 12.5%. It's our minimum CET1 level that we feel comfortable considering our business profile and risk. And regarding the interest rate sensitivity going down, I think it's very similar. And as you said, we have reduced our sensitivity in 2021. We have a very positive skewed towards higher rates. And now we are more balanced in the 3%. But obviously, we are considering to lock in these good levels of NII going forward. So we will see if we maintain an even lower sensitivity in the way down.

[Alberto López, executive]

Thank you, Ignacio. I think we have one final question, operator. So if you could let it through.

[Operator]

The last question comes from the line of Karin Canningum from Autonomous.

[Karin Canningum, analyst]

I just had a couple of quick clarifications and then a couple of questions. When you mentioned high single-digit reduction in the loan book, were you talking now about 23% or 24%. And then also, did I hear you correctly that you're talking about maybe booking another cleanup charge for NPAs in Q4. Those are the clarifications. And then the questions were, could you let us know if you did a mark-to-market up to current valuations on your bond portfolio, what would that do to your CET1 ratio? And then the other question was, I get the sense that you feel like the deposit EBIDTAs are, although they're very low, they seem to be moving pretty quickly now. So perhaps you can give us a bit of colour on if there's anything in particular that's driving that.

[Juan Pablo Lopez Cobo, executive]

Yes. Regarding the first question, we were referring to the 2023 guidance.

[Pablo Gonzalez Martin, executive]

Regarding the second question on the additional effort, I cannot quantify it at the moment. I think the idea is to make sure that this is not a drag going forward for next year, but the process is an ongoing process, and I cannot be more specific on how much will it be. And regarding the unrealized losses on the held-to-maturity portfolio, I think they are very similar, slightly lower now than at the end of the year. But we always look at the held-to-maturity considering our very sticky deposit base, a hedge in interest rate that has served us quite well and has allowed us to improve our NII going forward. And if rates stabilize or even comes down a little bit, we'll probably be better because we have some fixed rates in the short term there. The duration is only 2.4%, but still we managed that as a hedge, not as a trading portfolio.

[Juan Pablo Lopez Cobo, executive]

There was also one question regarding the EBITDA on deposits.

[Pablo Gonzalez Martin, executive]

Okay. I think the EBIDTA on deposits this quarter has been -- the pace of increase has been even lower than the second quarter. So I don't see your point of an increase in the EBITDA. The point that I made that we expect 17% to 18% is because we prefer to be prudent on the evolution of the betas. And we said it could move from this 12% to the 17% to maintain our new guidance of almost 25%. But obviously, we don't see any speed up on the EBIDTA in the Spanish market at the moment. I think it's quite stable and the customers that have willingness to invest and they have very large opportunities to invest, but we don't have any news regarding different stance on the EBIDTAs. We just still prefer to be prudent on the evolution considering the EBIDTAs rather that we have seen anything in the market at the moment.

[Alberto López, executive]

Thank you, Karin. This is it from our side. Thank you very much, Pablo, Juan Pablo. We wish you the best.

[Juan Pablo Lopez Cobo, executive]

Thank you.