Unicaja Banco SA

MAD:UNI

Earnings Call Analysis

Unicaja Banco Q4 Performance and 2023 Outlook

In 2023, Unicaja Banco navigated a transitional phase towards greater profitability with several milestones. The bank's Net Interest Income (NII) surged by 26% annually and over 6% quarterly, outpacing higher funding costs and bolstering the customer spread by 120 basis points to 275 basis points by year-end. Total fees climbed by 1.6% despite a challenging environment. Operational expenses were shaved by 0.4%, marking a positive trend amidst inflation, leading to a 40% growth in banking margin. However, extensive provisioning led to a 4% dip in net income, landing at EUR 267 million. The bank's asset quality also strengthened, with Nonperforming Loans (NPLs) dropping around 19%, and foreclosed asset disposals exceeding EUR 700 million, bringing about a 32% year-on-year reduction. The Common Equity Tier 1 (CET1) ratio stood firm at 14.7%, even considering a cash dividend accrual of 50% of net income. Moreover, a proposed EUR 100 million share buyback representing up to 3.8% of total shares is set to enhance shareholder value, with post-buyback CET1 projected at approximately 14.3%.

CEO's First Earnings Presentation Unveils Strong Governance and Commitment to Profitability

Isidro Rubiales, the CEO of Unicaja Banco, made his first in-person earnings presentation with a strong show of commitment to shareholder value, highlighting significant changes in board governance. 2023 was marked as a transitional year toward increased profitability, with a notable banking margin growth of 40% annually, driven by a 26% growth in net interest income. A proposed cash dividend representing 50% of 2023’s net income solidifies the focus on shareholder returns, alongside a EUR 100 million share buyback program indicating confidence in the bank’s undervalued shares.

Operational Resilience Showcased Through Growth and Asset Quality

Despite challenges from the private sector deleverage in Spain, the bank reported stability in customer funds and a surge in commercial dynamics by year-end. Growth in net interest income and a reduction in total costs, with the latter supported by a 4% drop in personnel expenses, contributed to a sizeable uplift in banking margin by 40%. Moreover, a reduction of nonperforming assets by an impressive 31% helped strengthen the bank’s structural profitability.

Robust Capital and Liquidity Position Set the Stage for Future Growth

Unicaja Banco’s strong solvency, with a CET1 ratio at 14.7% after a 173 basis-point gain over the year, and a liquidity coverage ratio (LCR) above 300% provides ample room for strategic maneuvers. They are well-positioned for both enhancing profitability and exploring new ventures while emphasizing consistent cash payout to shareholders.

Digital Initiatives and ESG Commitments Keep Pace with Modern Banking Demands

The bank has made strides in its digital offerings, with 30% of new customers procured via digital channels, supporting nearly half of customer lending and a third of mutual fund activities. Unicaja Banco also continues developing its sustainable product portfolio and improving financial inclusion efforts.

Focused Growth Strategy with Moderate Net Interest Income Growth Expected for 2024

For the upcoming year, Unicaja Banco sets a guidance for a low single-digit growth in net interest income, slightly exceeding the 25% target set in 2023. This conservative estimate accounts for expected fluctuation in the cost of deposits and aligns with an aim to maintain a solid customer spread for the year. The bank's cost of risk is anticipated to remain stable, closely mirroring 2023's levels, largely driven by the SMEs and corporate segments.

Earnings Call Transcript 2023-Q4

[Jaime Marcos, executive]

Good morning, and thank you for attending Unicaja Banco fourth quarter results presentation. Our CEO, Isidro Rubiales; and our Chief Financial Officer, Pablo Gonzalez, will be the ones presenting quarterly and annual trends, but also providing some color into 2024. As you know, we will hold a Q&A -- a live Q&A after the presentation.So that's it. I leave the floor to our CEO. Good morning, Isidro, whenever you want.

[Isidro Gil, executive]

Thank you, Jaime, and good morning to everyone. As you probably know, these are the first annual results following my formal appointment and this is my first time presenting the results in-person. So, as you can imagine, it is quite exciting for me. I have been working on Unicaja Banco for more than 30 years in different roles with different responsibilities and I have assumed the CEO role with a huge motivation. I believe there is a lot of value in the company, which, under my view, is not reflected in current valuation. I want to reconfirm that profitability and shareholder remuneration will continue to be one of the main focuses of the bank, and this quarter results are an example and a good starting point.If we move to Slide 4, I would like to start the presentation with some of the most important milestone of the year. For us, 2023 has been somehow a transitional year to our becoming a more profitable bank. Let me start with governance. One of the most important milestone of the year has been the governance changes, mainly at Board of Directors level, moving toward a best-in-class composition with a Nonexecutive Independent Chairman.As you know, last week, the Board of Directors agreed to appoint as Independent Director, [indiscernible] Sevilla, foreseeing his appointment as Chairman of the Board of Directors as from his ratification at the next General Shareholders' Meeting. You all know him, and I ensure that he's going to contribute with his highly valuable experience. On top of that, I believe that we have a very strong and experienced Board of Directors that will remain stable and committed with the future of Unicaja Banco.Moving to profitability. The provisioning effort of the year has limit the improvement of net income. However, such provision will enable us to show a structural profitability going forward, starting from the first quarter 2024. It is worth noting that banking margin trend has been quite positive, growing by 40% in the year.All 3 lines improved in the year. Net interest income, 26% growth, almost 2% growth in fees and a small decrease in costs supported by a 4% decrease in personnel expenses. CET1 fully loaded stand at 14.7%, one of the highest of the sector after generating 173 basis points in the year. This capital position gives us flexibility and will allow us to continue analyzing different options to improve profitability and maximize return for our shareholders.We have improved our solvency position [ while ] achieving an NPAs reduction of more than 30% in 2023. This is something remarkable and will play a key role in showing our structural profitability and positioning of the bank. We reiterate our cash dividend target. The Board of Directors intend to submit to Annual General Shareholder meeting a proposal to pay 50% of 2023 net income in cash. Our intention is to maintain this cash payout going forward.Finally, I am very glad to confirm you that we have requested a formal regulatory approval to implement a share buyback program of EUR 100 million, limited to maximum of 3.8% of total share capital. With a comfortable outstanding solvency, the further [ reinforced ] balance sheet position after 2023 results and current market valuation of the bank, we believe that it is very positive to invest part of our capital in the acquisition of our own shares.Moving now to Slide 5. Let's review the main business highlights. Starting with business activity, the [ deleverage ] of private sector in Spain is reflected in overall lending trends. New loan demand remains below the amortization of the [ book ], which continued to be affected by the strong decrease of ICO loans amongst others.On the other hand, customer funds remain more stable throughout the year, and we have seen much better commercial dynamic by the end of the year. In terms of profitability, it's worth noting that net interest income grew more than 6% quarter-on-quarter and 26% year-on-year, [ busted ] by customer spread that grew 120 basis points in 2023 and 13 basis points in the quarter.Fees also grew by 1.6% in 2023, while the cost -- total costs, sorry, were slightly down. All these together have improved our banking margin by 40%. This is also reflected in our cost-to-income ratio that improved from 54% in 2022 to 48%. Asset quality delivered a very strong quarter. The cost of risk has remained stable slightly below 30 basis points throughout the year.Nonperforming loan ratio has fallen from 3.5% to 3.1% despite the decrease in loan book, explained by a 19% decrease of nonperforming loans. We have decreased the stock of real estate assets by more than 30% in the year. Overall nonperforming assets fell by around EUR 1 billion in 2023, which represents an impressive 31% decrease in net terms.Finally, in terms of solvency and liquidity, the trends were also very positive. As I highlighted before, CET1 fully loaded grew 173 basis points in the year to 14.7%, while MREL ratio reached almost 27%. Liquidity ratios also improved in the quarter with LCR above 300%.Overall, I believe that 2023 results will lead us in a very good position to show you our higher structural profitability going forward.Pablo will now go in more detail. Pablo, whenever you want.

[Pablo Gonzalez Martin, executive]

Thank you, Isidro. Let's continue with customer resources in Page 7, where you can see the overall customer funds grew 1.5% in the quarter. On balance sheet, funds grew 1.4%, supported by an almost 2% growth in private sector deposits. As you can see in the breakdown of private sector deposits, the weight of term deposits continued to grow throughout the year.At the end of 2022, they represented less than 10% of private sector deposits, while it now stands at 16%. However, as we show on the right of this page, total cost of deposits continues to be relatively low at 60 basis points. This is a clear consequence of the type of deposits that we have with a large weight of transactional, stable, and granular deposits, where around 75% are household deposits. Regarding [ off ] balance sheet funds, the trend was also positive with a 1.6% growth in the quarter and 4% in the year, achieving EUR 21 billion of assets under management.If we move now to lending on Slide 8, you can see how the lower demand and higher amortizations translated in a 2% decrease in the quarter. This trend is also explained by an active risk/reward commercial strategy to maximize offer [ to ] [ express ].In annual terms, household loans fell by 4%, while corporate loans fell by 17%. In the case of corporate loans, the relative higher decrease was mainly explained by amortizations. This is especially high on ICO loans, which decreased from [ EUR 2.1 billion to EUR 1.4 billion ] in the year, a 45% drop representing almost 1/3 of total corporate loans decreased.Early amortizations in mortgages were also significant, which, together with the lower demand after the increase in rates and very strong previous years, explain the decrease in households. Regarding the lending yield, its evolution remained positive one more quarter with an additional 26 basis points improvement supported by the continuous positive repricing of our floating mortgages that -- as you know, they reprice every 12 months, and also a higher front book, which will also play an important role going forward.On the next slide, we show new lending trends. As you can see in the slide, the new lending volumes in the fourth quarter of 2023 remain below 1 year ago, but we have seen an improvement on dynamics at year-end. When you look at the charts, the improvement is clear in corporate and consumer lending, which should continue to perform better than last year. Mortgage demand has continued to be relatively muted. We expect it to improve as the year goes on.On Slide 10, you can see that 30% of our new customers come from digital channels with overall digital activity remaining strong. As you can see, almost half of customer lending and 1/3 of our mutual funds activity was done through remote channels. All this was supported by the recent update of our banking application at the beginning of the last quarter of 2023.Moving to Slide 11. We have an update on sustainability, where the progress we have made over the last quarters is very significant. In the slide, we show you some recent milestones. We have approved a new exclusion policy for environmental and social risks, and we continue to include new products in our sustainable product offering. We are making progress in financial inclusion with new agreements and specific projects to facilitate access to finance and digitization for disadvantaged groups, while maintaining our successful financial education programs.Finally, in terms of governance, as already mentioned, following the recent changes in our Board of Directors has an structure in line with the best market recommendations.Moving to Slide 13. We show the regular P&L details. Net interest income is up 26% in the year and more than 6% in the quarter, leaving final 2023 NII slightly above our 25% guidance. This positive trend remained strong in the fourth quarter '23 because the continued repricing at higher rates of our assets more than offset the higher funding costs.Fees grew almost 1% in the quarter and 1.6% in the year, showing resilience despite the decreased lending activity and a challenging environment for asset under management with higher rates. Other revenues and expenses include an EUR 88 million charge in the fourth quarter coming from the contribution to the deposit guarantee fund.Total costs fell 0.4% in the year despite the inflationary context, thanks to the crystallization of the merger synergies. Loan loss charges improved significantly with the cost of risk very stable, slightly below 30 basis points during the last 4 quarters.Regarding other provisions, we have made a significant effort throughout the year and mainly in this quarter. This provisioning effort is partially explained by the impact in part of our real estate assets of inflation and higher rates. This has also enabled us to accelerate the decrease of the problematic asset exposure.Following this provisioning effort, we now expect real estate provisions to not be material going forward. All these trends led to a pre-provisioning profit above EUR 900 million, which is 23% above 2022, despite the introduction of the new banking tax.However, the mentioned provisioning effort left net income at EUR 267 million, that is 4% below the previous year, 19% higher, if we do a homogeneous comparison and we exclude the EUR 64 million of the banking tax that was charged in the first quarter of '23.Now, we will review in more detail the P&L, starting with the net interest income in Slide 14. As you can see on the slide, the ongoing repricing of the loan book and a contained cost of deposits enable the customer spread to continue expanding during the quarter.Loan yield improved by 26 basis points in the quarter and 125 basis points in the year, well above the cost of deposits that increased by 13 basis points in the quarter and 55 basis points in the year.As a result, the customer spread grew by 120 basis points in the year, reaching 275 basis points at the end of 2023. I would also like to highlight that, as you can see on the right, new lending yields remain more than 100 basis points above the overall back book.If we move to Slide 15, we have the main moving parts of the NII in the quarter. First, and driven by what we were explaining in the previous slide, lending contribution more than offset the higher cost of deposits. The fixed income portfolio contribution improved by EUR 14 million in the quarter as we have a short duration portfolio, and we have slightly increased its size.And finally, the higher liquidity of the bank more than offset the minimum reserve requirement impact and a small increase in wholesale funding. All this together left the fourth quarter '23 NII at EUR 380 million, that is more than 6% compared to the previous quarter and 28% above the EUR 297 million of the fourth quarter of '22.In Slide 16, as you can see, total fees were quite resilient in the year, growing 1.6%. Transactional fees fell 1% this year and nonbanking fees were very stable, with a small decrease in insurance and pension funds that was compensated by higher fees in mutual funds. Other fees that include a combination of different small items also improved, leaving total net fees at EUR 533 million.If we now move to Slide 17, we have total cost trends. Total operating expenses decreased by 0.4% in the year, which is very positive considering the current environment. While general expenses grew by 6%, driven by the inflationary context, personnel expenses fell almost 4%, mainly explained by the reduction in the number of employees that was agreed after the merger.As a reminder, you have on the right of the slide the evolution of employees and branches, where you can see that the number of branches was already stable this year, while employees continued to decrease by more than 4%. Total cost trends together with the already mentioned improvement in NII and fees led to a significant improvement of our efficiency ratio from 54% in 2022 to 48% this year.In the next slide, we show the evolution of cost of risk and other provisions. Regarding loan loss provisions, the cost of risk has been stable below 30 basis points since the beginning of 2023. In annual terms, it went from 39 basis points in 2022 to 29 basis points in 2023, which is below the low range of our guidance that was between 30 and 35 basis points. We feel very comfortable with our loan book and its coverage level, and we expect the cost of risk to remain very stable in the coming quarters.In the bottom of the slide, you have the details of other provisions and other profit and losses. The latest include mainly the real estate assets provisions. As you can see, and I explained before, these provisions significantly increased at the year-end, but we expect them to become not material going forward.On Slide 19, on the left, you can see what we call the banking margin that includes NII plus fees, minus operating expenses. It grew 40% in 2023 and 77% in the last 2 years.In other words, it went from EUR 580 million in 2021 to about EUR 1 billion in 2023. On the right side, you can see that the return on tangible equity, despite the significant improvement in our banking margin, it was very stable at 4.2%, owing to the high provisions booked in the year.However, if we adjust the return on tangible equity to the CET1 of 12.5% and excluding the bank tax, it improves to almost 6%. These are not the figures that we are aiming for, but we are optimistic about the future among others because total provisions will decrease significantly.Let's move now to asset quality, where we have made significant progress in the year 2023, starting with NPLs in Slide 21. On the top left-hand side, we have decreased by almost 10% the stock of NPLs in the quarter and more than 19% in the year. Such a positive outcome in 2023 is explained by some disposals and relatively low entries.However, in the fourth quarter, it is supported as well by some written-off loans that were already highly provisioned. The significant decrease is also reflected in the NPL ratio that fell from 3.5% at the end of 2022 to current 3.1% despite the drop in lending balances.Finally, it is worth noting that despite the significant decrease of Stage 3 loans, coverage has remained at circa 64%, which is a very comfortable level when considering that 53% of NPL balances are residential mortgages.In Page 22, we show foreclosed assets and overall NPAs. Foreclosed assets decreased by 21% in the quarter and 32% in the year. This is a very important reduction. As we have explained, we have made a significant provisioning effort in 2023. This year, we have reduced our foreclosed assets significantly. As you can see in the bridge, total exits represented more than EUR 700 million in the year, mainly through disposals.But in the fourth quarter '23, we have also taken off the balance around EUR 220 million of assets that were highly provisioned already. In net terms, foreclosed assets fell to EUR 327 million with a coverage of [ 70% ] -- coverage ratio of 74%. Total NPAs fell by close to EUR 1 billion in the year and its coverage improved from 65% to 68%. The NPAs ratio improved from 6.6% to 5.5% or 1.8% in net terms.Following the decrease in current coverage, we now expect real estate provisions to become not material in P&L, something that will significantly improve results and allow us to show the structural profitability of the bank going forward.Let's move now to solvency in Page 24. CET1 fully loaded improved by 173 basis points in the year and 54 basis points in the quarter. Let me start confirming that we have received the approval of the IRB models for the Liberbank retail portfolios, something that at the end, as we anticipated, does not have a material impact.The CET1 fully loaded continued to improve in the quarter, supported by the decrease in risk-weighted assets and improvements in valuation adjustments. On risk-weighted assets, we had different moving parts in the quarter. On the negative side, we had an increase from the mark-to-market of equity stakes and operational risk that was more than offset by the decrease led by the lower NPAs and the lending book decrease. The CET1 fully loaded reached 14.7% at year-end, which includes the accrual of cash dividend of 50% of net income.On top of this, as Isidro has explained at the beginning of the presentation, we have requested authorization for EUR 100 million share buyback with a maximum of 3.8% of total shares. As you can see in the chart, the buyback once approved, would leave the CET1 fully loaded at around 14.3%, assuming EUR 100 million, which is still above the level that we had in the last quarter.On Slide 25, you have our total MREL position. As you can see, following a couple of years being more active in the primary market, we have increased our MREL liabilities from around 21% to 26.8%, a level that includes a comfortable buffer over our 24.5% requirement. In the right-hand side, you have some additional info, including our MDA buffer that has grown to above 600 basis points.In the next slide, we have the fixed income portfolio details. This quarter, the size of the Alco portfolio has grown a little bit to EUR 27 billion, similar size that -- at the end of 2022. The increase was explained by higher liquidity, among others, because of the commercial GAAP evolution. The yield was 2.6% at the end of the quarter, the same as in September, but well above the 1.9% we had at the end of 2022.On wholesale funding, in Page 27, very little to add. We had the maturity of [ EUR 450 million ] of covered bonds in the fourth quarter, with the rest of the wholesale funding structure remaining the same. That said, let me highlight something that under my view is very important. After a few years in a building mode to meet our subordination and our MREL requirement, we are now in a completely different position.Going forward, we will be able to manage more actively and with much more flexibility, our wholesale funding and our MREL liabilities, which is a very positive news.Finally, on the following page, we review our liquidity position. As you can see, we continue to have a leadership position with a loan-to-deposit ratio of 74%, the NSFR at 149% and the LCR at a significant 308%. All of them very strong liquidity metrics.Now, I leave the floor back to Isidro to finish with some important final remarks.

[Isidro Gil, executive]

Thank you, Pablo. Let me finish the presentation, reiterating that 2023 results leave us in a very good position to improve 2 of our main priorities, which are profitability and shareholder returns.Regarding profitability, following the increase of our banking margin in 2023, together with much lower provision among others, will boost net income in 2024. We expect that the return on tangible equity adjusted for CET1 fully loaded of 12.5% to grow above 9%, which compare with 4.7% in 2023.On the shareholder remuneration, as we show on the right-hand side, the potential return in terms of dividends and buyback are also quite important. The [ mentioned ] level of net income, together with a stable 50% of cash payout implies around 10% dividend yield when considering current stock price.And on top of it, as we have announced today, we are planning to implement a share buyback of around 4% of our stock. It is very positive to run the business with a solvency buffer. It gives us optionality and flexibility. That said, we have started to put to work part of our excess of capital this quarter.First, the additional real estate provision that we have booked in the quarter. During last month, the environment has changed. And consequently, we have reviewed our expectation for part of these assets, the ones with lower quality. Following this provisioning effort, we have reduced our foreclosed asset balance. So going forward, provision for this asset will become not material. This will allow us to improve the result of the bank and show the structural profitability.Second is our shareholder remuneration, because, as I said before, it is our solvency position what has enabled us to continue to pay cash dividend and to execute a new share buyback program.Finally, there are other potential alternatives that are not so specific, but I wanted to reiterate that our idea is to continue to look for different options and potential investment that could further improve our profitability and shareholder returns going forward.Before we finish the presentation, let me reiterate one more time that we are fully committed, and we really believe that we can continue to improve our profitability and shareholder return, while keeping a relative conservative approach, thanks to our strong balance sheet fundamentals and comfortable solvency position.

[Jaime Marcos, executive]

Thank you, Isidro, and thank you, Pablo. We will now move to the Q&A. Please, in the interest of the time and in order to allow as many questions and also analysts as possible, remember to ask only 2 questions each one, please. Also, remember to mute your line after the questions. Operator, please open the line for the first question.

[Operator]

[Operator Instructions]. Our first question comes from the line of Francisco Riquel from Alantra Equities.

[Francisco Riquel, analyst]

Yes. First one is on asset quality. I mean, your coverage ratios have typically been above the peer average, but you came with the top-up provisions this quarter as you anticipated. So the question is, how can you reassure us that these are -- that do not have the right markdowns in the balance sheet? A big part of the reduction in the legacy real estate assets are write-offs, but do you plan to sell NPAs, or is the rotation of the stock to prove that the coverage is right? So also, if you can shed the light on how old the legacy assets have been here in your balance sheet to date? And then, what are your guidance in terms of provisions for '24 in terms of loan losses, real estate assets and other provisions, if you can clarify the breakdown here?And then the second question, your 9% ROTE target for '24 is based on a denominator of 12.5% CET1 ratio. So I wonder if this is just a theoretical exercise? Or do you really plan to reduce the denominator to those levels? And how do you plan to allocate capital in '24? I mean between organic growth, which has been depressed, or further top-up provision, cost cutting, shareholder returns?

[Pablo Gonzalez Martin, executive]

I'm going to go for the first question, the asset quality, and the higher provision that we have. I think it's clear, we have made a strong effort to mark-to-market all the foreclosed assets and to reduce our NPL in the quarter, as you can see from the numbers. The reduction in the quarter, as you can see, it's [ EUR 170 million -- almost EUR 170 million in NPL and EUR 324 million ] in foreclosed assets. So almost EUR 500 million and the reduction in the ratios, as you know. How can I -- or how can we be sure these are the final needs for provision. You never know, Riquel. We have made our best effort to make sure that we can forget about the legacy and the foreclosed assets level.Obviously, NPL will -- some of the NPL will become foreclosed assets, but the trend will be very small compared to the previous level. And in that sense, we are quite confident. We have done the exercise. We don't expect rates to go up a lot again -- construction costs to go up a lot again and the demand to come down in the real estate market. We have a slightly better view for real estate demand next year. So we were confident that we have a good level.So I think the important is -- I'll give you some details on the guidance that you asked for provisioning this year. I think the first one regarding cost of risk, we expect to be in line. We are confident with the level of coverage that we have. So it's going to be similar to last year, so between 30 and 35 basis points in terms of cost of risk.In terms of legal provisions, I think we expect a reduction again this year, between 15% to 20% reduction in legal provision, but obviously, it will depend on how things evolve, and which I think is the more -- the most relevant one is the real estate provision, and I want to be quite clear here. We don't expect any material provision coming from the real estate assets.I think we have done a very thorough analysis going item by item and double checking and what we think is the market expectation for pricing on the different assets. So we're confident that we will not have any material real estate provision again in the coming quarters.Regarding -- there's another question on…?

[Jaime Marcos, executive]

I think, we can move to the following – operator, to the following question, please.

[Operator]

The next question comes from the line of Maksym Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have 2. The first one is on the NII. Could you please share your views on what kind of evolution you expect for 2024 and perhaps on 2025 [ primarily ]? If you could break it down in the evolution of customer spreads and loan book growth, that will be fantastic. And then the second one is a follow-up on the previous questions on capital. I was wondering, you still have a solid [ excess ] over the 12.5% threshold. What kind of ways to deploy it could we think of? Maybe you're planning to present new strategic targets sometime in the coming quarters? If you could share your thinking, that would be very helpful.

[Pablo Gonzalez Martin, executive]

I'll go for the NII guidance. I think in the NII, there's a lot of moving parts, and -- but I think the key point is, we still expect the NII to grow in 2024 at a low single-digit, at least, which -- we can see it's a growth compared to this year to 2023. And on top of that, I think I'm going to give you some guidance on what's the assumption that we have. And we see the customer spread to be higher than -- on average than on 2023. The Alco contribution, we think it's going to be slightly lower, but very similar to this year. And which is -- the key point is the cost of deposits. We still think it's going to increase.On average, we have 41 basis points this year, and in the fourth quarter, it was 60 basis points. And we expect this to still go up a little bit to around 75 basis points for 2024. So -- and you have to consider that the average 12-month Euribor in the [ forwards ], it's around 100 basis points lower than the one that we have on average in 2023. So even considering this downward trend, at least from the forward, we still consider that the cost of deposit will go up this year. And even with this increasing cost, we still expect to improve our NII in 2024.

[Isidro Gil, executive]

In term of excess of capital, let me say that having an excess capital in [indiscernible] that gives us the opportunity to undergo different initiatives to generate value for the bank. The use of that excess of capital will depend on different conditions, but we expect to continue generating capital going forward, which will give us additional flexibility and optionality.As I said in the presentation, we have already started to use part of our excess capital this quarter. We have booked additional provision to improve our NPA exposure, which will help us to improve results and show our structural profitability. We have requested the formal authorization to buy and [ amortisize ] our own shares of around 4% of our current share accounts. These are 2 value-creating initiatives for our shareholders, and we will, of course, continue analyzing alternatives to use our capital on the benefit of our shareholders.

[Jaime Marcos, executive]

Operator, please, next question?

[Operator]

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

[Ignacio Ulargui, analyst]

I have 2 questions, if I may. I mean, linked a bit to the comments of Isidro just right now on -- what kind of buildup do you think that the bank can deliver in 2024? And what will be the regulatory headwinds that we should expect from Basel IV at the end of the year? And the second one is on the EUR 1.2 billion of foreclosed assets that you have with a net gross value -- net value of EUR 327 million, if I remember correctly. What is the strategy there? I mean, you want to accelerate offloading. I think that's the best way to really validate that you have done your best efforts. Is that vis-a-vis the stock gets [ offloaded ]? I mean, is there a strategy to reach a certain level at the end of the year? Or it will depend a lot the market conditions?

[Pablo Gonzalez Martin, executive]

On -- I think the idea is we still expect to maintain capital generation for next year. We don't have an explicit guidance for the capital generation, but we still are -- we expect higher profitability. We still don't expect the risk-weighted assets to grow next year.So overall, we still believe that we are going to maintain our buildup in capital. And obviously, it will depend on how the loan book evolves, but we're quite comfortable with the level of capital and the optionality that -- as Isidro mentioned, that we have with the capital.And in terms of Basel IV, what I can say, it's very limited impact, almost negligible. So we don't expect any impact from Basel IV.

[Jaime Marcos, executive]

Pablo, I think there was another question on the foreclosed assets or real estate asset strategy and expected disposals going forward?

[Pablo Gonzalez Martin, executive]

We have -- sorry, we have a strong commitment on reducing our NPA exposure, and we think we have the right level of provision to be able to do so. So we maintain our strategy to reduce NPAs, both NPL and foreclosed assets.

[Jaime Marcos, executive]

Please, operator, next question?

[Operator]

Next question comes from the line of Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, analyst]

I have a couple. The first one is on net interest income. You guided for NII to grow by 25% in '23, which implies probably flat Q4, but you've done a very strong 6% growth in the quarter when Euribor started to trend lower in December. So could you explain a little bit what outperformed your guidance? What better than you didn't expect in Q3 results? And also for 2024, your guidance of low single-digits. What's the driver of that growth, because lending is [ not ] improving? [ You ] just said the customer spread to be broadly flat, same as the Alco contribution. What is the driver? Is it simply the higher base effect from Q3 '23? And the second question is on capital. I'm just trying to understand a little bit that reference of 12.5% CET1 ratio for the profitability guidance. How do we reconcile that with a 14.7% reported ratio? Is that your intention to drive gradually the capital position to those levels? Or it's just a reference of capital that you consider reasonable for the bank, but for the time being, as you have discussed in the past, it's not a target in the short-term, it's more of a theoretical number? Just wanted to understand how do you really see that number, for us to understand how much capital can be deployed going forward?

[Pablo Gonzalez Martin, executive]

I'm going to go for the NII. I think regarding -- we -- why we had an increase of 6%, as I said, we have several moving parts. The first one is the lending repricing, the loan book repricing still have a significant positive effect in the quarter.And obviously, we had a clear view on that, but they always -- what has been the major unknown for the quarter was the cost of deposits. And even it increased by EUR 22 million, the level of increase in the loan book was EUR 28 million. So it had a net positive also in the fixed income portfolio. Although the Euribor was coming down, we already switched some of the portfolio to short-term fixed rate. So it helped to improve the quarter-on-quarter contribution from the fixed income portfolio.So net -- on the liquidity position, the asset [ gathered ] in the quarter and the deposit grew significantly. And as you can imagine, we have now a better NII position from the liability than in the past because the excess liquidity that we built in the quarter also helped to improve the money market contribution. So I think basically, it's better liquidity position, better deposits than initially expected and lower cost of deposits that we had expected. So altogether, we outperformed our initial guidance.In terms of the return on tangible equity and the guidance -- and we -- obviously you can work the numbers compared with the 12.5% and what you think our capital position will be at the end of the year. But we think it's clear, if we have a fixed reference on capital -- because that gives a clear idea of the profitability of the bank. And we think that given the risk profile of the bank, the 12.5% reference that we have always mentioned, or above 12.5%, it's a good reference for the level of risk that the bank runs.We still -- we have been doing a lot of MREL issuance, as you know, and the ratings agencies are catching up with the right level of risk that we have. So we still want to maintain some excess above the 12.5%, as we said, and this will be shown in lower cost of funding in the future and a better profitability.But in terms of seeing how profitable is the business, the structural profitability, once we get rid of the excess provisioning that we have done in the past for foreclosed assets, now we're getting close to our cost of equity, and we will keep working on improving that.

[Jaime Marcos, executive]

Operator, please, next question?

[Operator]

Next question comes from the line of Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, analyst]

I have 2 around NII. If you can be a little bit more specific on the volume outlook in the first place, especially around -- those plans you have communicated around building up a better corporate SME franchise? A bit of color basically of how you expect volumes to evolve in '24? And how quickly do you think you can turn around actually the SME and the corporate franchise? And the second one is on the updated rate sensitivity. And if you can give us information basically on fixed versus floating on credit, Alco, and wholesale funding, please?

[Pablo Gonzalez Martin, executive]

In terms of volumes implied in our guidance for next year, I think in mortgage, we expect, if the interest rate that the market -- and the interest rate cuts that the market is expecting are realized, we expect to have a certain pickup in volumes in mortgage for the sector and for ourselves. So we will start with a lower level and picking up in the second half of the year. So the net-net is a flattish evolution for mortgage book for the year. That's within our guidance numbers.In terms of consumer, we still think we can perform and improve, and we think we can grow around mid-single digit for the year. And I think the question that you said, we still keep working -- as Isidro has mentioned in the past, we deploy one specific general manager for corporates and SMEs. And we keep working on developing the franchise.This requires some time. And we still want to build a profitable -- and in risk/reward parameters. So we will be very focused on RAROC and not grow just for the sake of growth. So we will want to grow in a profitable manner. And developing this takes time. And so still -- within our numbers, we still have a decrease in our loan book for the next year, and we have to be prudent in this sense. And its around mid-single-digit decrease in the corporate book for next year. And even with this decrease, we still consider that we can grow the NII.

[Jaime Marcos, executive]

Pablo. There was another question on NII sensitivity.

[Pablo Gonzalez Martin, executive]

In the NII sensitivity, I think for next year, it's better if we do the NII by the guidance because obviously, the cost of deposits which has some lag will influence, and it's always hard to explain. But if we move forward, if we consider a constant balance sheet and with a 100 basis point parallel downshift scenario, we expect compared to 2023 full year numbers, a small negative impact of low single-digit in year [ too ].What I can say, we have been decreasing our sensitivity to interest rate throughout 2023 and we still have tools to maintain this process. But obviously, we cannot completely reduce the sensitivity because, although our base case scenario is that rates are going to come down, there's always a [indiscernible] that can change the evolution of rates and we have to be in a balanced position. So as I said, it's a small negative in the low single-digit for the second year after the whole book has repriced.

[Jaime Marcos, executive]

Operator, next question, please?

[Operator]

Next question comes from the line of Borja Ramirez from Citi.

[Borja Ramirez Segura, analyst]

I have 2. Firstly, on the 2024 outlook, and if I compare versus the consensus, it seems that the implied net profit is broadly in line, maybe slightly higher than consensus. So it seems that -- the total provisions seem to be in line and NII may be slightly better. Could you give details on the costs and the fees guidance, please?And my second question would be, given we are in a decreasing interest rate most likely this year, and you have a very comfortable capital position, maybe -- are there any additional levers you could use to improve your recurring profitability? For example, you could do any cost restructuring or any further cleanup for example, of other provisions?

[Pablo Gonzalez Martin, executive]

Regarding the comparison between the outlook and the consensus -- and I think you have some missing parts to work out the guidance. In terms of the cost, we think we have to build and improve our product offering, our customer experience. So we will have to do some investments in people and also -- in our people and process and in technology. So the guidance will be around mid-single-digit increase for operating cost.And also on fees, we have to keep the balance between NII and cost of deposits and maintenance fees. So we expect some impact of that balancing that we are doing, and we will keep doing. So we expect to have a low single-digit decrease in fees.And regarding the other potential measures that we can take going forward, we are not looking at the moment any -- another cost restructuring process and reduction. I think we have to work on our revenue side more than on the cost side at the moment. And we have done quite a lot on that in the past, and I think we have to keep building on that.And in terms of other measures to improve, I think we are going to focus on ways to improve our revenues rather than our cost. And regarding the other provision effort, we already have done what we think is the right level of provision for foreclosed assets. We don't think we need more extra provisioning on that sense.And obviously, the other provision, the cost of risk, we think we are in our average medium-term level. Obviously, you cannot do provision expecting what is going to happen in the future. So you have to comply with accounting rules, and we do so.So I think to sum up, we will focus on revenues -- to improve our revenues and we will improve our product offering, our policies, our customer satisfaction rather than any cost control measures in the short-term. Obviously, always focus on cost to income, but I think the focus at the moment will be more on revenues.

[Jaime Marcos, executive]

Isidro, there was an additional question on -- again, on the excess of capital. I don't know if you want to say something else?

[Isidro Gil, executive]

Well, yes, as I mentioned, and I said before, we have already started to use part of our excess of capital this same quarter. And as I also explained, we will continue analyzing different alternatives that we think [indiscernible] at value. As I said in the presentation, we can also invest on a specific segment, businesses, or opportunity where we might see some attractiveness.

[Jaime Marcos, executive]

Operator, one question -- one more question, please?

[Operator]

Next question comes from the line of Carlos Peixoto from CaixaBank.

[Carlos Peixoto, analyst]

Very quickly, the first question would actually be on the share buyback. What's the rationale behind the 3.8% of share count limitation on the share buyback? I'm just asking this because it does seem that there could be a risk that, that limitation exceeds the maximum amount. So just trying to figure out what's the [ low ] threshold?And then on the NII guidance, apologies for asking, but I understood that you expect it to grow in 2024. Could you give a bit more color to it? Are we talking about low single-digit or a bit more than that?And then on the cost of risk, the NII stood 30 to 35 basis points for next year. If so, do you see here the company segment is the main driver, consumer? What areas are the ones that will be contributing for cost of risk to remain at levels which would be more or less similar or actually slightly higher than in this year? Just to have an idea on the rationale behind those figures.

[Pablo Gonzalez Martin, executive]

Regarding the -- while we have the 3.8%, we have this limit because you always have -- when we decided that we wanted to have the EUR 100 million, we -- that was the number that came from the actual price of the stock at the moment. So there's not really any other measure. We started with this EUR 100 million. And obviously, it will depend on future evolution and how this work at the moment. So I think there's nothing really behind that 3.8%. It's only the number of shares -- the EUR 100 million divided by the price of the stock at the time. So it was 3.8%. So nothing more than that.And regarding the NII, going back again to what I said, why we have this low single-digit. I think that the major driver will be the cost of deposits. And I think we have been very clear, it's -- rather than the [ EBITDA ] -- obviously, the [ EBITDA ] will grow. If you consider what the market interest rate forward will be realized, so the Euribor will come down significantly, as I said, more than 100 basis points. If it doesn't come down, it will be better. If the cost of risk is not [ 75], it's lower, it will be better. If it's higher, it will be less than that. So we can be close to flat.But I think I've gone through the points. It's -- we expect to maintain better customer spread on average than in 2023 in the -- between [ 260 ] and [ 270 ] on average for the year. And I think the contribution from the Alco portfolio, obviously, there could be some opportunities in the market, and we will be closing and still managing as actively as we can and try to improve our guidance.But as I said, we expect to be a slightly lower contribution, but very similar. And as I said, the key point and the major driver -- probably because we expect a slightly lower volumes in loans. In deposits, gathering, we still maintain our good momentum, and we expect it to be quite flattish compared to this year. So the only missing or less known is the deposit, depending on how the market evolves, and I said 75. It depends on what you think.And the cost of risk, the latest question, I think the drivers will be very similar to this year. I think it's going to be some coming from the mortgage and the big bulk or -- will still come from SMEs, corporates and so on. So very similar to this year.

[Jaime Marcos, executive]

Thank you, Pablo. I think in the interest of time, we have time for a couple more questions if we're quick. So please, operator, can you please open the line for the next one?

[Operator]

Yes.

[Jaime Marcos, executive]

Yes.

[Operator]

Okay. The next question comes from the line of Hugo Cruz from KBW.

[Hugo Moniz Marques Da Cruz, analyst]

I just wanted to ask a bit more on NII, if you could talk about the hedging strategies that you have in place in the different parts of your balance sheet? But also, if you could give guidance on the taxes? Because I think the tax rate is a bit lower than I expected for this year, so what do you expect for '24?

[Pablo Gonzalez Martin, executive]

I think that the hedging -- Regarding the hedging strategy, as you know, we have a fairly large share of the loan portfolio at fixed rate, and we manage that with some hedges to float in, as we mentioned in the past. And the other part that we hedge the duration of the balance sheet is the Alco portfolio and the issuance -- the wholesale issuance, the MREL issuance mainly, where we have also a significant hedge.Going forward, probably it will imply some hedges on the deposit. At the moment, we don't have any hedges for the deposits. So it's mainly the Alco portfolio, the mortgage book, the corporate loan book as well as some hedges to float in as well and the market issuance. And the way we work is, we have a view on the NII sensitivity that we want to have and with the limits that -- obviously, that we have from regulatory views and the risk appetite of our Board. We have some limits, and we don't want to have a very strong interest rate risk, and we manage with these different items.

[Jaime Marcos, executive]

Hugo, I think on the tax rate, just very quick -- just to confirm you that there is probably explained by the small loss of the quarter, that it changed this quarter. But on -- going forward, if you want to do the math for your models, we will continue to pay slightly below 3%. The tax rate is 30%, but there are 2 lines of the P&L that come in net of taxes, that are the dividend income and equity method. So that's the way -- that is probably the best way to estimate it. So we move to the last question, please, Operator?

[Operator]

The last question comes from the line of Fernando Gil de Santivanes from Bestinver.

[Fernando Gil de Santivañes d´Ornellas, analyst]

Just a quick one, please. Can you please remind us of the level of unrealized losses on the Alco portfolio [indiscernible] please?

[Pablo Gonzalez Martin, executive]

Fernando, as you can imagine, with the evolution of interest rate in the year, especially in the last part of the fourth quarter, the reduction on the unrealized losses has been 1/3. But I think this is important to have a clear view. The held-to-maturity portfolio, it's held to maturity. And it's like -- the loan book is like the deposits, it's like any other items on the bank.What I can say is, in the last 2 years, our EVE so that -- the value of the discount cash flows of the assets and liabilities has improved significantly, and that's what we care. We manage the whole book of the bank, not only one item on isolation. I think it hasn't got much point to look.The only problem that some banks in the U.S. have in the past is that they have a very weak deposit base and very concentrated. And it's not our case at all. We have the largest share of deposits that is guaranteed by the guarantee fund. And it's really diversified. We have more than 300% LCR. We have the best-in-class liquidity position. And so we don't think we will ever have to sell any of our held-to-maturity for liquidity reasons. So we look at the valuation of the different items.And obviously, we have good news in the last quarter, but I don't think it's important. Still, we had some improvement in our [ EVE ] or the valuation of the different items in conjunction, considering all assets and liabilities.

[Jaime Marcos, executive]

So I think that's all from our side. The IR team is available for additional questions. So please do not hesitate to contact us, and we see you next quarter. Thank you very much.

[Isidro Gil, executive]

Thank you.

[Pablo Gonzalez Martin, executive]

Thank you.