Unicaja Banco SA

MAD:UNI

Earnings Call Analysis

Unicaja's Q3 performance shows significant profit and strong asset quality improvement.

In the third quarter, Unicaja experienced a remarkable 58% increase in net income, reaching EUR 451 million, driven by an 18% rise in banking margin. Customer funds grew by 3.6% year-on-year, while the non-performing loans (NPL) ratio fell to 2.8%. Total provisions decreased by 32%, and asset quality metrics improved, with NPA coverage rising to 70%. The bank revised its 2024 guidance for net interest income to exceed 10% growth, while expecting fees to decline mid-single digits. With a CET1 ratio at 15.4%, Unicaja demonstrates a solid capital position for future growth.

Q3 2024 Performance Overview

The latest earnings results for Unicaja reveal a strong performance in Q3 2024, with net income standing at €451 million for the first nine months of the year, marking a significant increase of 58% from the prior year. This impressive growth is attributed to an 18% rise in the banking margin. The bank has successfully managed its operating expenses, which increased by only 5% year-to-date, primarily due to personnel cost increases from union agreements.

Cost Efficiency Developments

Unicaja's cost-to-income ratio improved notably from 48% in 2023 to 45% in 2024, primarily driven by rising income levels. Their total provisions also decreased significantly by 32% year-on-year, reflecting better asset quality and a lower cost of risk, which is projected below 30 basis points for 2024. This positive trend should enhance the bank's profitability metrics going forward.

Asset Quality Improvements

The bank has made great strides in improving asset quality, with non-performing loans (NPLs) down 22% year-on-year and a stable coverage ratio of 66%. The NPL ratio now stands at 2.8%, signalling a strong control over credit risk. Additionally, their net foreclosed assets have significantly diminished, indicating effective management of previous troubled assets.

Guidance for Future Revenue Growth

Looking ahead, Unicaja has revised its net interest income (NII) growth guidance for 2024 to exceed 10%, a revision from earlier expectations of low single digits. The bank anticipates continued strengthening in the NII driven by a favorable interest rate environment. Conversely, the bank expects fees to decline mid-single digits in line with its strategic plan focusing on improved customer loyalty.

Trends in Customer Funds and Lending

Unicaja reported a solid increase in customer funds, growing by 4.3% year-on-year. New loan production in the private sector also showed positive momentum, with total private sector loans reaching €1.8 billion in Q3, up from €1.2 billion in the same quarter last year. This resurgence in lending activity points to a recovery in corporate and retail sectors, despite previous challenges.

Strategic Positioning and Capital Management

The bank’s CET1 capital ratio stands at a strong 15.4%, reflecting their solid capital position. Furthermore, shareholder remuneration has become a key focus, with the bank completing a €100 million share buyback program representing 3.14% of its shares, boosting tangible book value per share by 7% year-to-date. This commitment to returning value to shareholders is a positive signal for investors.

Future Challenges and Market Conditions

Investors should remain aware of the competitive landscape that Unicaja operates in. Despite positive trends in lending and customer acquisition, the bank's performance will be influenced by external economic factors and interest rate changes in the coming quarters. The evolving market conditions will require strategic adaptations to maintain growth momentum.

Conclusion

Overall, Unicaja’s Q3 results showcase resilience and strategic strength, suggesting a positive outlook for both performance metrics and shareholder value. The substantial gains in profitability, coupled with enhanced asset quality and effective cost management, present a favorable investment proposition for investors looking for robust financial institutions with solid growth prospects.

Earnings Call Transcript 2024-Q3

[Jaime Marcos, executive]

Good morning, and thank you for attending Unicaja Third Quarter Results Presentation. First, let me confirm you that today, before market opened, we have published this presentation, and the rest of the quarterly financial information in the CNMV and our corporate website. Pablo Gonzalez, our Chief Financial Officer, will go through the slides and then we will move to the Q&A. Pablo, whenever you want.

[Pablo Gonzalez Martin, executive]

Thank you, Jaime, and good morning to everyone. I will start in Slide 4 with the main highlights of the quarter. Regarding business activity, during the third quarter, the commercial activity gradual improvement has continued. Total customer funds are growing by 3.6% year-on-year and off balance sheet funds, almost 7%. Performing loans fell in the quarter. However, if we exclude the seasonal impact from the pension advances, private sector performing loans were flat for second quarter in a row.

 

Profitability has continued improving during this quarter again. Banking margin rose by 18% in the first 9 months of the year. Cost to income reached 44% and net income was 58% above 2023. Asset quality trends also remain very positive. NPL balances fell 22% year-on-year and foreclosed assets, 36%. NPAs coverage ratio grew from 66% in third quarter '23 to the current 70%. Total provisions also decreased by a meaningful 32% year-on-year with the cost of risk at 24 basis points for the year, which is well below our initial guidance of 30 to 35 basis points. All-in-all, another very positive quarter in asset quality, too.

 

Finally, in terms of solvency and liquidity, our CET1 reached 15.4% in the third quarter. The tangible book value per share also grew 7% in the first 9 months of 2024. On liquidity, as you all know well, we have a comfortable position with best-in-class metrics like LCR ratio above 300% and the loan-to-deposit at 70%. So as you can see third quarter trends continue to improve towards a higher structural profitability with a conservative profile.

 

In Slide 6, we have the customer funds evolution. As you can see, total customer funds grew by almost 2% in the quarter and 4.3% year-on-year. Regarding on-balance sheet funds, they grew 1.4% in the quarter and 3.6% year-on-year. Off-balance sheet funds grew even more this quarter. Total off-balance sheet funds grew 3.6% quarter-on-quarter and almost 7% year-on-year, supported by a 6.3% quarterly increase in mutual funds.

 

Moving to lending on Slide 7. You can see that the performing loan book fell 2.3% in the quarter. However, excluding the almost EUR 800 million of seasonal pension advances of the second quarter, as we show in the right column, private sector performing loans were almost flat, decreasing only 0.2% quarter-on-quarter. It is worth noting that corporate loans grew almost 1% in the quarter, reverting the negative trend of previous quarters.

 

In Slide 8, we show some additional information on what we call wealth management and insurance business. To value generating businesses for our clients. In the top left, you have asset under management balances evolution that, as you can see, have grown 10% in the last 2 years, supported by a 15% improvement in mutual funds. In the first 9 months of 2024, mutual funds trend is very positive as we show in the bottom left. Net inflows were above EUR 1 billion, improving significantly compared with the last 2 years.

 

On the right, you have revenues coming from these businesses, including fees from assets under management, securities and insurance. That reached altogether EUR 257 million in the first 9 months of the year, representing 17% of total gross margin. So this is a very significant business for us that we are improving quarter-by-quarter.

 

On the next slide, we show private sector new lending trends. Third quarter private sector new lending volumes were above the third quarter of previous year in all segments. Total private sector new loans in the third quarter of '24 reached EUR 1.8 billion, that is well above the EUR 1.2 billion of the third quarter of last year. Very positive trends because we have improved the new loan production despite high competitions in all segments.

 

Moving now to Slide 10. We have an update on sustainability. You have a lot of info in the slide. Let me highlight some of it. From an environmental point of view, we successfully issued our fourth green bond in September. We continue promoting sustainable growth through our business. Note that 29% of new corporate lending are sustainable loans, but also through specific initiatives as it is the CREA project. In which we are promoting sustainable economic growth in Andalucia with collaboration with the regional government, Harvard University and Oliver Wyman. At the same time, we continue advancing in our decarbonization pathway. Our own carbon footprint has been verified for first time by DNV, and we have reduced it by 18.3% in 2023 when compared with 2022.

 

From a corporate governance perspective, let me highlight that our MCSI rating has improved to A following the last review that has just taken place. Finally, you also have in the slide some additional details regarding other social developments like our financial training and educational project called Edufinet or our digitalization manager program that has been implemented in more than 150 branches to support our customers in digital tasks.

 

Moving now to Slide 12. We start with the P&L review. Net interest income was flat in the quarter and growing 19% when compared with the first 9 months of the previous year. As we will see later in more detail, this trend was supported by lower wholesale funding costs that compensated the lower interest income coming from the lending book. Fees were also flat in the quarter and falling 9% compared with the last year, in line with our mid-single-digit decrease guidance, explained by commercial campaigns with lower transactional fees for more loyal clients. Other revenues were in line with the same quarter of the previous year, except for other expenses that were higher, owing to a EUR 10 million adjustment of the Spanish banking levy for this year.

 

Total costs in the first 9 months of the year were 5.4% above 2023, explained by higher personnel expenses. Pre-provision profit improved almost 22% compared with the first 9 months of the previous year. Total provisions fell 32% in the first 9 months of the year, driven by much lower foreclosed assets provision and a lower cost of risk. As I mentioned before, it is worth noting that third quarter '24 other provisions include a negative charge of EUR 9 million related to the adjustment of the Spanish banking levy of 2023. So this quarter, such adjustment has 2 impacts. We have EUR 10 million impact in other revenue and expenses related to the adjustments for the 2024 and another EUR 9 million in other provisions related to the adjustments of the 2023.

 

The adjustment is explained by the interpretation of fees coming from the insurance business. All these moving parts led to a pre-tax profit of EUR 653 million and a net income that reached EUR 451 million in the first 9 months of the year, which is almost 60% above last year.

 

Moving to Slide 13. We will start reviewing in more detail the P&L, starting with the net interest income. As you see on the slide, the cost of deposits remained stable in the quarter. However, loan yield fell 8 basis points, pushing down the customer spread. During the last 12 months, Euribor 12 has decreased by 91 basis points, while our customer spread is 14 basis points higher as the lending yield has increased more than the customer deposits cost.

 

If we move to Slide 14, we have the NII quarterly trends in more detail. As you can see, the decrease of the retail business contribution was compensated by a small improvement in the contribution from the ALCO portfolio and mainly the lower wholesale funding costs, which together have left NII almost flat in the quarter. On the retail business, I would highlight that the increase in the cost of deposit in euro terms was driven by the volume effect, while in the case of lending, the decrease is explained by both a small decrease in volumes, mainly in public sector loans and also because of 8 basis points drop in the average loan yield.

 

In Slide 15, as you can see, total fees were almost flat in the quarter. For the first 9 months of the year, total fees fell by 5%, in line with our guidance. As we have explained in the past, the expected drop in 2024 is explained by some commercial campaigns to adapt fees to the new strategy focused on a more loyal customers to whom the main effort is to offer them value-added products and services. We believe this is the right thing to do for the future, and we expect it to become a positive going forward. On the positive side, we have insurance fees growing at 6.2% in the year. However, as we have explained, this strategy will reduce total net fees close to mid-single digits for 2024.

 

If we now move to Slide 16, we have the breakdown of other income. That includes that part of the gross margin that is not related to fees nor NII. The third quarter '24, most of the items were in line with the same quarter of 2023, except other operating expenses that are higher because we have taken here the EUR 10 million charge related to the adjustments of the 2024 banking tax. On top of this, as I said before, the adjustments for 2023 have been included in other provisions as we will see later. All in all, total income was EUR 5 million in the third quarter '24, EUR 9 million below third quarter '23 because of the mentioned EUR 10 million adjustments for the banking tax.

 

Moving to Slide 17, we show total cost details. Total costs grew 2% quarter-on-quarter, driven by a similar increase in personnel expenses. For the first 9 months of the year, total cost grew by 5%, in line with our guidance and explained by higher personnel costs that continue to grow, mainly on the back of the agreements reached with the unions and higher variable remuneration on improved profitability. However, despite the higher cost, the positive income contribution has led to a positive improvement of our cost-to-income ratio that, as you can see in the left side of the slide, reached 45% in the first 9 months of the year, down from 48% in 2023.

 

In the next slide, we show the evolution of the cost of risk and other provisions. Loan loss provisions have improved further this quarter to EUR 27 million, representing 23 basis point cost of risk. Loan loss charges are better than initially expected. That is why, as we will explain later, we are improving our 2024 guidance. When we look at total provisions on the right, the trend is also positive, decreasing 32% year-on-year, mainly explained by the much lower provision for real estate assets and loan loss charges. This positive trend more than compensates the higher other provisions that in the third quarter include this EUR 9 million of the adjustments of the banking tax of 2023. Excluding such impact, other provisions were flat compared with 2023.



On Slide 19, we have included our regular profitability update. As you can see on the left-hand side, we have reached EUR 451 million in net income in the year, which is one more quarter, a historical high, supported by an 18% growth in the banking margin. On the right side, you can see that the evolution of the adjusted return on tangible equity has grown from around 5% in 2022 to close to 6% in 2023 to the current 8% adjusted for the excess capital over 12.5% CET1. Bear in mind that we calculate the ROTE, the return on tangible equity, considering the last 12 months' net income, something that explains the gradual improvement. Also, let me remind you that our profitability target is to further improve this ratio above 10% by year-end.

 

Let's move now to asset quality on Slide 21. As you can see, we have continued our positive evolution one more quarter. NPLs fell another 5% quarter-on-quarter and 22% year-on-year. The NPL ratio has decreased further to 2.8% with a coverage ratio stable in the quarter at 66%. This is a very positive trend that is also reflected in the relatively lower cost of risk that we are reporting.

 

In Slide 22, we have the foreclosed assets and overall NPAs details. Net foreclosed assets decreased to EUR 264 million in September. In gross terms, balances continued to fall one more quarter to EUR 1 billion, helped by EUR 273 million of exits during the year that represents 22% of the gross initial stock. On the right-hand side of the slide, you have the NPAs trends that also continued to fall during the quarter to levels below EUR 2.4 billion, while coverage remained stable at 70%. Gross NPA ratio fell further to 4.8% and net NPA ratio stands at just 1.5%, a significant improvement that, as you know, has been part of our main priorities this year.

 

Let's move now to solvency in Page 24. CET1 fully loaded increased by 31 basis points in the quarter to 15.4%. The evolution of the quarter was explained by the organic generation through retained earnings and valuation adjustments that were all above the negative impact coming from the dividend accrual and risk-weighted assets increased EUR 7.3 billion with 88% classified in the amortized cost portfolio. The yield and duration fell a little bit in the quarter, but nothing material.

 

In Slide 29, we have included some closing remarks. On the left, you have a chart showing where the profitability improvement is coming from. As you can see, total revenues have improved by 14% in the first 9 months of the year, something that together with the 32% decrease in total provisions has mitigated the 5% increase in total cost, which altogether improved pretax profit to EUR 653 million, something that after deducting EUR 202 million of corporate tax leaves net income in EUR 451 million, which is 58% above last year. Such an improvement is also reflected in our shareholder remuneration. As you can see in the right, our tangible book value per share has grown 7% year-to-date to EUR 2.4. Shareholder remuneration this year represents close to 13% of average market value for the year. Both things are obviously supported by the significant improvement in recurrent results and the amortization of 3.14% of total shares following the execution of the share buyback program.

 

Finally, let me finish the presentation in Page 30 with an update of our 2024 guidance. We haven't included any reference for 2025, because, as you probably know, we are currently working on a 3-year new business plan for the period that goes from 2025 to 2027. We expect to give you some color about the main targets next quarter, together with our annual results. It will be then when we will also give you some guidance for the 2025. But until then, let me review with you what we expect for the 2024 full year results. The net interest income trends have been more positive than were initially expected. At the beginning of the year, we were guiding you for a low single-digit increase. After the second quarter results presentation, we improved the guidance to close to 10% growth. And now considering the recent trends, we believe that we will finish above 10%. 





In fees, we reiterate our current guidance of mid-single-digit decrease, owing to our current strategy, as I said, focused on improving loyalty and client satisfaction. So 2024 will be a transitional year in fees. Total cost trends have been already discussed to. We expect a mid single digit growth on the back of higher personal expenses mainly because of the agreements that we reached with the unions. On cost of risk we are improving our previous guidance this quarter. We were expecting long lost charges to remain between 30 and 35 basis points at the beginning of the year. In the second quarter we updated the guidance to the lower part of the range and now we believe that it will finish in the year even below that. More between 25 to 30 basis points. Considering all the previous trends and evolution of the first 9 months of the year, we believe that the return on tangible equity when adjusted for the C1 of 12.5% will be above 10% in 2024. So that is all from my side will be happy to go to q&a now

[Operator]

The first question comes from Maksym from GB Capital.

[Maksym Mishyn, analyst]

Two questions from me. The first on the loan book growth. Your corporate loan book has picked up quarter and quarter. Are you doing anything differently there to improve your market share? And how much of ICO loans do you still have that can be a headwind? And also, what was the reason for a decline in new mortgage production? And then the second question is on capital. In your ROE guidance, you used 12.5% as a threshold for CET1, but I was wondering what kind of normalized level should we think for Unicaja in the medium to long term? What kind of impact of Basel IV do you expect? And do you consider additional buybacks now that the last one is done?

[Pablo Gonzalez Martin, executive]

Regarding the loan book growth on corporates, we have said in the past that we have established a strategy to promote our capabilities and improve our relationship with corporates and SMEs. We're still working. We're starting to see some developments in this field, and we expect this to keep proving that we are in the right path. Still a lot of measures to be taken and improve in terms of talent, process and applications to run this business even better. This is in line with our strategy and the good news, as you said, is we have turned the decline in the loan book regarding corporates. This is good news, and we expect this to follow in the coming quarters to maintain a good momentum in corporates and SMEs.

 

 

Regarding the ICO loans, we have around EUR 1 billion still in ICO loans, and this comes from EUR 2.5 billion. The redemptions and amortization of this has been significant. We have reviewed more than several times the different entities and loans that we have, and we are comfortable with the level of provision and even the classification in Stage 2 and Stage 3 that we have for the ICO loans. So we don't expect any bad news coming from this portfolio. Regarding the capital, which was your second question, I think we believe that we have excess capital, and we are best-in-class in capital position among the listed banks in Spain, more in line with other European peers, but ahead of the Spanish peers.

 

 

This basically give us an opportunity to undergo different initiatives to generate value for our shareholders, as you know, and we have said in the past. We have just finished a share buyback program of EUR 100 million, 3.14% of our share count. This, together with the dividend payout, will translate in a very significant shareholder remuneration. Obviously, I cannot say what is the expected level of capital at this moment. We are actually undergoing a strategic review, and we will give you some more color in the next fiscal year presentation on the main highlights of the plan and the strategic positioning.

 

 

Good news is that we keep building capital. We keep growing our capital because of higher profitability and also because the way we manage the position. This gives us a lot of opportunity to improve shareholder remuneration to tap new investment opportunities to improve profitability. We are confident the right level to have in capital we are discussing internally and with the Board on what should be the level that we should target, and we will give you more color at the end of the year.

[Jaime Hernández Marcos, executive]

Thank you, Pablo. There were 2 very specific, very short questions on Basel IV, just to reiterate you that we don't expect any material impact from Basel IV. Also, you were asking on the amortization of mortgages in the quarter, they were still slightly above 10%. It was a bit more than 10%, 10.6% to be exact. That, I think, answers all the questions. So thank you, Maksym and thank you, Pablo. Please, operator, let's move to the following question.

[Operator]

The next question comes from Ignacio Ulargui from BNP Paribas Exane.

[Ignacio Ulargui, analyst]

Thank you for taking my question, I have two, If I may. The first one is on deposits. I have seen a very strong growth on deposits in public sector in the quarter. I was wondering, given your strong liquidity position, how should we think about this sector growth, this subsector growth on public administrations given that normally it's more expensive. The second one, it's on the performance of financial liabilities and wholesale funding in the quarter. You have said clearly during the call that there has been declining wholesale funding costs. I have seen a 24% decline in the combined volume of wholesale funding and financial liabilities in the quarter. How should we think about this in coming quarters? Is it sustainable to think that you will continue reducing wholesale funding and financial liabilities at this?

[Pablo Gonzalez Martin, executive]

Ignacio, regarding deposit evolution, I think this is something that we have stressed in the past and is within our priorities. When we tend to talk about activity, commercial activity, we're focused on the asset side, but also on the liability and obviously on balance sheet evolution. The good news is we're improving in net inflows in off balance sheet, more than EUR 1 billion in deposits. The total deposit cost in the NII, if you look, it's around EUR 3 million increase in cost but the average cost is 72 basis points, the same as last quarter. This EUR 3 million comes because of the volume.

 

 

We have more excess liquidity just to give you some color on ECB deposit facility, which was around 315 basis points for the quarter. This makes more than double the cost. Obviously, we manage the duration of those deposits, the level of those deposits. Net, which is what we follow closely is the impact from the deposit business has been net positive in the quarter on NII. On top of that, it improved. As you can imagine, comes because we have reduced our wholesale funding. This has been another way to express this improvement in deposit that we were mentioning. I think just to give you some color, we already said we have covered our MREL. This is one of the levers that we have to maintain our profitability going forward in a lower rate environment. 





So I think going forward, I think the volumes in the next year, but in terms of the rates, the price, it will come down with the new level of rates. This will come sooner compared to other because it reprice in a shorter period than the mortgage portfolio, but it will come down definitely.

[Operator]

The next question comes from Carlos Peixoto from CaixaBank.

[Carlos Peixoto, analyst]

A couple of questions from my side as well. So looking in the first one was actually being somewhat below the level of the Euribor. My question would be, is this triggered by the fact that you have a relatively substantial weight of a fixed rate mortgages in your loan book? And as console, I mean, to be less sensitive to interest rates movements going forward as they go down. So should we expect it to be a bit more stable and fluctuate less because of that? And also still on the NII, in your guidance for the year for NII, what's the embedded average cost of deposits that you expect on it? The second question would actually be a bit on capital, just a minor one. The RWA evolution in the quarter, we see RWAs up by roughly 3% quarter-on-quarter, whereas your loan book was [indiscernible]?

[Pablo Gonzalez Martin, executive]

Thank you, Carlos. I'll go for the first thing, the NII and the loan yields lower than the Euribor. As you know, to give you some color, we have around 52% fixed and around 48% is floating. Regarding the mortgage is the other way around. So it's slightly less than half is fixed and around the rate evolution. If rates comes down, it will have some offsetting to have some part of the book at fixed rate, as you mentioned. But obviously, we still have this half of the portfolio that will reprice. So there is around 50-50, as you said. And also, we have the liquidity position, which is floating, obviously, because it's very short term.





On the liability, we have floating the wholesale funding mainly. So we have, regarding your question on cost of deposit in our NII guidance, we maintain we were expecting the beta of deposit to go up, but we have seen in the last few quarters that it has been still, so this will be another buffer in the impact on NII going forward. So we still have maintained our initial view on cost of deposit and the betas of the deposits better than our initial expectation, which is one of the reasons, as I said, the two reasons that explain why we started with an NII of low single digit at the beginning of the year, and now we are above 10% comes from two lines it will depend on the evolution and inflation and the economy as a whole. But we think this is for good. That's why we have been trying to hedge as much as we thought possible throughout the quarters. 





So in terms of cost of deposits, just even if we have a lower loan book, which is almost flat for the private sector, if you take the seasonal advances that we have in the second quarter. But if you go through the [indiscernible] and also regarding some modeling on IRBs and all of the things. On top of that, because we have this optionality on our capital position, we have increased while doing all these measures goes to the risk-weighted asset increase. But as I said, even with this increase in risk-weighted assets, we managed to improve more than 30 basis points our total capital position.

[Operator]

The next question comes from Filippo Munari Bank of America

[Filippo Munari, analyst]

So the first one, can you give us an updated NII sensitivity for the first 12 months? And also if you have an estimate of how much would that sensitivity increase for any subsequent decline of what is fair to assume that the original 15% to 20% decline somehow gets shifted to 2025?

[Pablo Gonzalez Martin, executive]

Thank you, Filippo. Let me go to the NII sensitivity. It's the new business evolution. It's the behavior of customers on the deposit side. It's the prepayment on the asset side. It's the implicit optionality that some of the loans has. So there's a very tough challenge to do this analysis even we have done some hedges in the quarter. We still consider that a constant balance sheet movement of 100 basis points of a parallel down sheet scenario and considering a stable the second year because we always use the second year because in the first year, the impact is smaller. We always consider the second year of the reduction in rates when the full mortgage portfolio is fully repriced.



So a regulatory model has a different position, but we try to make it more understandable so we use the same beta. Obviously, slightly similar as the one that we have in the last quarter, proven to be better. Our assumptions on rates for the coming years, we're still working on our planning. Depending on what you ask for the budgeting, we have one assumption at the moment is the September run like different scenario analysis. We run like 14 different scenario rates analysis, but the major 3 will be rates coming down up to 1.5%. The expected one is more in the 2% area, is the base case, and about half the reductions that we were expecting and then rates could go and to stabilize in the 2.5%.





This obviously is a very complex analysis, and we run different scenarios but the base case now you will add this was the level implied by the market. We tend to use market rates but also do our internal analysis on how much do we think we have to hedge and to look at that. Yes. It was the legal claims. I think in the legal claims, it's important that you consider that within our provisions, we have done an analysis on we have booked in the legal provisions EUR 9 million regarding the interpretation carried out by the tax authorities on the levy. And because of our prudent approach, we have decided to book as a provision this EUR 9 million in this legal provision line. But this doesn't mean that we agree with the final interpretation on the tax calculation. And as you know, we are litigating both the tax levy and this adjustment following its final interpretation that has been taking us to book this provision. 





However, let me stress this, we believe that to apply this tax on a permanent basis is a bad idea and it discriminates us against the sector, it's a competitive disadvantage compared to other European banks and other players in our market that don't have the levy, reduce significantly investor and market confidence because of a stable legal environment. And we will have to wait and see what happens with finally with this levy going forward. But in the meantime, as I said, we have decided to book the adjustment for both years in the quarter results. EUR 10 million has gone in other expenses, for the 2024 levy and EUR 9 million has gone in the other provisions.





And regarding the other legal provisions, we are still analyzing the evolution on the mortgage cost claims and the mortgage floors, and we will review our models at the end of this year. But I think medium term, the trend of this should be coming down. It didn't come down this year as we were expecting, and this has been due to some effect of this mortgage cost setup claims that we have. We are managing that properly, talking with the customers, and reaching agreements as soon as we can. But now we're modeling how much should be in our books. We will come with a clearer view on this. This is stabilizing, and it has come down from the second quarter, but we have to let it go more few months to have a clearer view on how much should be going down the line. But obviously, this line in the medium term should be lower.

[Jaime Marcos, executive]

Thank you, Pablo. Let's go for the next one. Please remember to only ask 2 questions because we got plenty of analysts in the queue, and we would love to hear as many as possible. So operator, please let's go for the next one.

[Operator]

The next question comes from Borja Ramirez from Citi.

[Borja Ramirez Segura, analyst]

I have two. The first is your excess capital above your target is around 30% of your market cap. This is one of the highest in Europe. However, you continue to lose market share in loans. So I would like to ask why not utilize part of the excess capital to gain market share? Then the second question is on 2025. Currently, consensus expects NII to fall, costs to increase and provisions to grow year-over-year. I would like to ask if you could give some color on whether consensus may be missing anything? And also, if you could envisage any actions to utilize your excess capital to improve the 2025 profitability?

[Pablo Gonzalez Martin, executive]

Thank you, Borja. Regarding our excess capital, I agree with you, we have a significant excess capital compared to our market cap. And obviously, this this only gives tailwind for our market evolution because we can use this excess capital for improving shareholder remuneration, invest in opportunities in the market, as we mentioned, on long market share. As I said, incorporates, we are improving. I think when we look at the commercial activity, the driver is not the volumes. The driver is shareholder value and the shareholder value comes from volumes, pricing, and risk. It's not only about volume. We have to grow where we think the ROC is positive for our shareholders and will create value down the line. Obviously, the competition is tough out there. We have to improve our product offering. We are working hard on that. We will have even more measures in the strategic analysis that we are doing, but we are already working on that, and we have changed the trend on the downtrend that we have in lending. 

 

Just to give you some color, we were coming down in mortgage 4% year-on-year basis, and now it's only 0.7% and we were almost at double digit incorporates and now we are growing our lending. So we have changed the trend. We stabilized, and we expect that to grow down the line. But obviously, with one caveat, it will depend on demand and it will depend on the competition and the value creation. We won't grow just for the sake of growth. I think it's very important that we are very confident. When we grant a loan, we are confident that it's for value creation. So we have to consider the risk and the level of pricing. In terms of the NII that the market consensus expect that to fall for next year and also cost and provision to grow. Let me reiterate, we are currently doing this strategic review. internally, and we don't want to come with any guidance for 2025.

 

Obviously, as I said, we have a negative interest rate sensitivity. So it will have a negative impact. This is an obvious thing to say. But on the other hand, we have measures to offset that impact. As I said, we have floating wholesale funding. We have cost of deposit that can come down. We can improve our fees. We can improve our volumes in deposit off balance sheet. We can improve and we have some part of our book, which is already fixed, on the loan book and also the fixed income portfolio. So we are working on the measures. The rates are still quite volatile. We have changed from a lot of rate cuts at the beginning of the year to almost none. And now we are considering a lot of them again. 





So we have to see how the rate settles. But obviously, we will come with some guidance after all the measures that we are taking in for the final year result presentation. And in cost and provision, I think cost, obviously, we are improving our efficiency, and this is our major goal to improve our efficiency. And in terms of provision, as I said, we are already 32% down compared to last year. We are quite confident that the quality of our loan book and the asset quality of the whole portfolio is very good. So we're confident that we are going to maintain a low level of loan loss provision, but we will give you more color.

[Jaime Marcos, executive]

Thank you, Pablo. Let's move quickly to the following, operator.

[Operator]

The next question comes from Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, analyst]

So I'll focus on one question basically. Most of the others have been answered. If I can come back to the corporate book and the growth actually you're starting to see, if you can give us a bit more detail basically on duration, CapEx versus working capital, what kind of sectors basically you're seeing some demand? And what kind of yields are you extracting on that new production?

[Pablo Gonzalez Martin, executive]

Thank you, Ignacio. We are working on the corporate book and as you can imagine, the third quarter whereas in the mortgage book, we have negative seasonality because of the summer in the corporate book, most of the corporate funding is done in the third quarter. So it's a good month. And most of the funding that they require is considering medium to long-term funding rather than working capital needs. On the working capital needs, we are underrepresented compared to our share of wallet with the customer base. So this is one of the areas that we are working to improving down the line, but in the short term, it has been more medium-term funding from the customers. 





In regarding fixed or floating, it's very similar to the portfolio, slightly more floating now, but it's around half-half and the level of rates is above our back book. I could say it's around 100 basis points. The front book is around 4.5% and the back book is 3.6%. So it's one of the drivers of improving profitability and NII, the growth. And if you consider the growth compared to 1 year ago in corporates, I think this is an important point in our activity. We are growing at more than 60% in loan production in the corporate sector compared to the same quarter in 2023. So these are quite good milestones and still work to do. But overall, we are confident this will help us down the line.

[Jaime Marcos, executive]

Thank you, Pablo. Let's move to the following one, please.

[Operator]

The next question comes from Francisco Riquel from Alantra.

[Francisco Riquel, analyst]

So my first question is on fees. Mutual funds under management are up 15% year-on-year, but the mutual funds related fees are down 3%. If you can explain this gap and also the commercial policy? And also related to the fees, if you can please quantify also in other fees beyond asset management, you are removing maintenance fees as part of your new commercial policy. You can quantify that this minus 5% guidance for the year, what would be without this commercial action and because I wanted to ask also if you will be done with this action in '24 or you will extend it to '25 as well? My second question is about the ALCO. You mentioned that the part of the growth in RWAs is related to the securities portfolio. So I wonder if you can comment on the composition of the ALCO, where are you reinvesting that is consuming capital and what type of yield duration? Any color you can give on the securities portfolio?

[Pablo Gonzalez Martin, executive]

Thank you, Paco. Regarding fees and devolution of asset under management, I think the devolution in volumes is quite positive, as you can see. And as we have shown in the presentation, and if we compare to last year 9th month of '23, it's around 3% up, whereas the volumes is 6.7% on a yearly basis more than on a quarterly basis, there's more noise on the devolution. But obviously, the volumes are growing faster than the fees, and this is related to the profile of the funds that our customers demand. They're moving to target a rate type of fund. It's more monetary funds, it's short-term fixed income, which have usually less fees than the more mixed and equity-related funds. So this is the major reason. 





The trend is stabilizing, but still coming down the average fee that we charge on the mutual funds. We expect this combined with the volumes for the coming quarters to keep growing and to close the gap between the growth on asset under management and fees. But still, the trend is what it is, and this is the reason that I explained. And regarding our strategy with the customer base, this has a negative impact, as you can see, on a year-on-year of more on payments and accounts of more than 10%, 12%. If you take that out, the fees on a year-on-year basis are positive in the nonbanking fees and especially insurance is 6% up. We're still working on building on fees on value-added products rather than transactional but obviously, we expect this to smooth out in the coming quarters and to finish the process of adapting and engaging more loyal customers for the fee structure. 





On the ALCO portfolio Paco, I said we manage the portfolio. We have increased our fair value OCI portfolio compared to the amortized cost portfolio, where in the amortized portfolio, we haven't increased the portfolio and we maintain the level. We expect that to even to come down slightly, but we have increased due to the high liquidity position that we have had and also the hedging done in the amortized portfolio to have 3 to 4 years fixed, 3 to 5 years depending coming from the contribution from the amortized portfolio. So, it's more private debt than public debt, but it's also public debt. And the reason that the risk-weighted assets has gone up is because the increase in that portfolio is mainly private and that has some requirement in terms of risk-weighted assets.

 

In terms of overall, it's obviously, as you can imagine, is higher than the average, but has allows us to offset the negative impact of having -- when you go to a fixed compared to floating in the amortized cost, you have a lower rate fixed than the floating, but it flattens the impact in the coming years. So, this negative impact has been offset because the actual average yield of the portfolio is very similar, slightly lower than last quarter, but very similar to last quarter. So, these are the moving parts.

[Jaime Marcos, executive]

Okay. We are running out of time, but let's do a couple of more if they are quick, please, operator. Let's move to the next one.

[Operator]

The next question comes from Alvaro Serrano from Morgan Stanley.

[Alvaro de Tejada, analyst]

Just very quick follow-ups, hopefully. On the ALCO, I know you've done a lot of forward purchases. Is that what's coming through? And should we expect the ALCO book to grow more? Apologies if you touched on this already, but I joined late. And second, Pablo, you mentioned that your mortgage book is just below 50% is now fixed. Presumably, you've locked in some of the, given that high, some of the variable mortgages. I interpret from your comment that have been moved to fixed, locked in the Euribor curve. If this is the case, my understanding is this is done for 12, 18 months max. Have I understood this correctly? And if that's the case, would the rates that go up beyond that time horizon?

[Pablo Gonzalez Martin, executive]

Thank you, Alvaro, for your question. Regarding the ALCO portfolio, it's not that we have forward purchases. We have forward swaps, which means that we maintain fixed for 3, 4, 5 years. Obviously, we don't try not to have 1 year of repricing risk too high. So mainly, we will have, now it's around more than 80% of the portfolio. It's in fixed for the next between 2 to 5 years. And that's the major driver of the strategy on the ALCO portfolio. And regarding the mortgage fixed part, it's not that we have hedged for the 12 months. It's now we have a larger portion of fixed rate mortgages and 3- to 5-year fixed. It's not 12 months. We have between almost 20% now of the portfolio, it's coming from these fixed for a few years and then floating. And it's around 3 to 5 years on average because of the production and the seasonality of the mortgage, it will be slightly higher than 3 years, 3.5, 4 years on average on the fixed part of that portfolio. 





You can't -- we don't have a cliff effect of next year kicking in that part of the portfolio fixed to floating. So, we are trying to smooth the impact. We have the view that rates are coming down, but not as a cyclical thing, but not as much as in the previous after GFC. So, we don't think we are going to go to negative rates. And we think we will see a pickup of rates in the medium term again. So, the average could be positive. So, we don't want to take too long duration on neither on the fixed income portfolio nor on the mortgage portfolio. So, it's more hedging the fix in the long term and having short-term fix for the floating.

[Jaime Marcos, executive]

Thank you, Pablo. We only have time for one more question. So please, operator, let's move to the final one.

[Operator]

The last question comes from Hugo Cruz from KBW.

[Hugo Moniz Marques Da Cruz, analyst]

Two questions. First on NII. If I take your guidance, I assume it's 11% year-on-year, then that would imply a 10% decline of EUR 40 million in Q4 on NII. So, if you could talk a little bit about the moving parts of NII for Q4, that would be very helpful. And second, the new business plan, do you expect any charges, one-off charges in Q4 to support the implementation of the plan? Thank you.

[Pablo Gonzalez Martin, executive]

I think, as I said, the Q4 NII expectation in the wholesale, although we expect some slightly lower contribution from the ALCO portfolio, but it will depend on if we see opportunities tactically in the quarter. but will be offset by lower wholesale funding cost. As I said, not because of volume, but because of rates, this portfolio, the wholesale funding has an impact shorter than the lending. On the lending and the retail, I think it's important to understand that the repricing of the mortgage portfolio start to get full speed in the fourth quarter. So, this will have a bigger impact on the lending revenues coming from the portfolio.

 

Obviously, the NII above 10% is very prudent and is regarding the deposit initial expectation that the cost of deposits should be still going up, whereas if you ask me today and with the strategy and the measures we're taking, I don't think it will go up. So maybe the 10% is, let me say, we have said above 10%, it doesn't mean that it's going to be 10%. So, we are expecting -- we didn't want to be too specific because it will depend on those drivers, the contribution from the ALCO portfolio on opportunistic investments due to our higher liquidity position and also on the deposit evolution from customer. What we have a clear view is that the the loan contribution will be lower in the quarter as in the coming quarters due to the rates and repricing of the mortgages that will have full impact in the fourth quarter and the next 3 quarters of the 2025.

[Jaime Marcos, executive]

Thank you, Pablo. Let's leave it there. [indiscernible]

[Hugo Moniz Marques Da Cruz, analyst]

Yes, there was another question.

[Pablo Gonzalez Martin, executive]

Sorry, about the business plan and if we expect let me not be too specific on the business plan because it's still an ongoing discussion internally on the plan. So, we will give you more color at the end of the year in the final year presentation.

[Jaime Marcos, executive]

Thank you, Pablo. Let's leave it there then. The IR team is available for continuing to answer offline all your questions. Thank you very much for your time and your interest, and see you next quarter.

[Pablo Gonzalez Martin, executive]

Thank you