Banco de Sabadell, S.A. (OTCPK:BNDSF) Q2 2022 Earnings Conference Call July 28, 2022 2:30 AM ET
Company Participants
Gerardo Artiach Morenes – IR
Cesar Gonzalez-Bueno – CEO
Leopoldo Alvear – CFO
Conference Call Participants
Maks Mishyn – JB Capital
Sofie Peterzens – JPMorgan
Andrea Filtri – Mediobanca
Britta Schmidt – Autonomous
Borja Ramirez – Citi
Ignacio Ulargui – Exane
Gerardo Artiach Morenes
Good morning, and welcome to Banco Sabadell’s Second Quarter 2022 Results Presentation Audio Webcast. Our CEO, Cesar Gonzalez-Bueno and our CFO, Leopoldo Alvear, will present the main highlights and details of the commercial and financial performance of the bank in the quarter. The presentation will be followed up by a Q&A session. We were scheduled around 1 hour for the whole session.
Before handing it over to Cesar, we would like to apologize for the late availability of our information. As you are very well aware, there have been some technical difficulties out of our control this morning, and we were not able to make information available. We were planning on publishing the half past 6, but unfortunately, it’s been published about 1 hour later. We will try to catch up through the Q&A session. But in any case, you have the IR team at your disposal.
Let me now hand it over to Cesar.
Cesar Gonzalez-Bueno
Good morning, everybody, and we know that this is a very busy day for you, so we’ll try to be effective in our explanations. Let’s start in Slide 4.
As you will see during the presentation, our results remained strong in Q2. Let me highlight some of the key elements of this quarter. Firstly, we continue to make progress with our transformation progress — process as set up in our strategic plan. Our efficiency plan is completed and cost savings are coming through at full speed. Furthermore, we are implementing relevant digitalization and ESG initiatives.
Secondly, our commercial activity improved further in the quarter, and performing loans grew by 2.2% quarter-on-quarter. Thirdly, this positive evolution enabled Sabadell to post a net result of €393 million in the first half of the year, increasing its core results by 13% in the quarter. And finally, we also improved our asset quality metrics in the quarter with our NPL ratio at 331%, posting a 35 basis points reduction in the quarter.
On top of these positive results, our core Tier 1 fully loaded ratio reached 12.48% and the return on tangible equity stood at 7%. We are confident on the evolution of our profitability looking forward. Therefore, we are upgrading our return on tangible equity guidance for the year to about 7%. We are not considering the potential impact of new Spanish tax on banks in this guidance.
In Slide 5, we share the evolution of the radical transformation we are undertaking at our retail banking business. In mortgages, savings and investments and insurance, our strategy is based on personal and expert support to our customers.
One example of recently implemented initiatives is the deployment of 600 specialized relationship managers mostly in mortgages and insurance. These RMs are productive, more productive and are already delivering increased sales per manager.
In consumer loans, current accounts and cards, our strategy is full digitalization of our offering to serve our customers in a more convenient way. One recent initiative is the launch of our new digital account in May. Another example is the evolution of our pricing and risk management models in consumer loans with greater price discrimination according to customers’ risk profile.
Moving to Slide 8. We can observe the progress of our transformation in business banking. We have a very solid position in this business line, and we are working to strengthen it. An example of this is the improvement of our risk management framework through intensive use of data analytics. As a result, we have granted 76% of our new lending to these prioritized customers.
This is a significant change. We are proactively driving the growth of our volumes to our preferred customers. And we remain #1 in NPS ranking in SMEs and in large companies, which is a source of sustainable competitive advantage.
Slide 7. Regarding our efficiency plans in Spain, we are reaching all cost-saving targets in line with our guidance, and we have done so without affecting our commercial capacity.
Our efficiency ratio ex TSB has gone from 61% in Q1 2020 to 53.7% in Q2 2022. This is a slightly better figure than one of our peers in Q1 this year, which is the last available data. This comes as a result of growing our revenues by 3.1%, but especially by reducing our cost by 9.3%. This is a quite impressive jaws enhancement feature.
Looking forward, efficiency will keep improving due to the expected growth of our income, in line with the new interest rate context. As you can see on Slide 8, our loan book in Spain evolved positively growing by 2.2% in the quarter and 4.1% year-on-year. The U.K. franchise maintained a solid growth dynamic on year-on-year basis. Quarterly, TSB loans volumes in euros decreased by 0.9%, but considering constant exchange rates, grew by 0.6%.
The loan book of our international geographies grew by 6.1% quarter-on-quarter. The commercial stance in these countries has been fully aligned with our strategy, increasing the focus on profitable growth.
In terms of customer funds, on-balance sheet volumes grew by 1.3% in the quarter, bolstered by higher inflows to site accounts. Off-balance sheet funds decreased by 4.4% in the quarter, impacted by market volatility.
Slide 9, a review of the commercial activity in Spain. New mortgage lending increased by 19% quarter-on-quarter, posting a quarterly all-time high.
Our market share on mortgage stock as at March 2022, which is the latest available data, decreased by 1% — sorry, 1 basis point versus December 2021. This was the result of our decision to defend margins versus volume in the context of rising interest rates and highly competitive pressure on prices. We will see something quite analogous when we review TSB.
However, we are fairly optimistic about our market share looking forward. We are already observing signs of pricing normalization, and we are undertaking the transformation of our value proposition, as I explained a few minutes ago.
So moving to consumer loans, origination increased by 17% quarter-on-quarter and 12% year-on-year. Our stock market share as at March 2022 was up by 15 basis points versus December ’21.
Slide 10. New protection insurance premiums were up by 5% in the quarter, following the evolution of mortgage origination and the cross-selling of life insurance that it generates.
Our market share in life insurance premiums as at March decreased versus December 2021. This is mainly due to the slowdown in mortgage lending in Q1 as I explained before, but it is also due to a shift in our commercial approach to life insurance originated together with mortgages. We are progressively moving from single premium insurances to life insurances with renewable premiums through the maturity period of the mortgage, which is better for the customer and better for the bank in the medium term. This results in a lower up-front payment by the customer, therefore, impacting our market share today. This effect will continue in the coming quarters, but it is a desired effect.
Regarding mutual funds, assets under management were impacted by market volatility. In this context, net inflows in the first half of 2022 amounted to €271 million. Our market share declined by 9 basis points in the year. There is an impact here of cancellation of fixed income mutual funds by enterprises now that negative interest rates are being left behind.
In Slide 11, you can observe that payment-related services keep growing strongly. In cards turnover, we reached a 16% increase quarter-on-quarter and 23% year-on-year. The turnover in Q2 was an all-time high. Our market share increased by 4 basis points in the year.
Regarding payment process through our point-of-sale devices, quarterly turnover increased even more by 27% quarter-on-quarter and 43% year-on-year. We also reached our quarterly all-time high in this business line.
Our market share increased by 33 basis points year-to-date, we keep managing for profitability. Hence, our point-of-sale fees continue to grow above our point of share — point of sale turnover.
Regarding Business Banking in Slide 12, origination of loans and credit facilities increased by 30% quarter-on-quarter and 2% year-on-year. On the other hand, working capital financing is performing well, posting double-digit increases both in the quarter and year-on-year.
Regarding our market share of total business lending stock, it increased by 12 basis points year-to-date. This is at the core of our franchise, and it is performing in a stronger way. So we see a brighter future here.
Now let’s have a look at the evolution of our performing loan book ex TSB in Slide 13. In Spain, mortgages and consumer loans grew in the quarter and on a year-on-year basis. The SMEs and corporate book was also — had also a positive evolution. This quarter has been outstanding in terms of loans to the public sector. The growth of other lending was positively impacted by social security advanced payments of around €600 million.
This is a temporary effect. It happens every year, and it’s reversed in July.
As you can see on the right-hand side of the slide, Mexico grew by 8.1% in the quarter and Miami by 10%. Considering constant exchange rates, the growth in Miami was 3% quarter-on-quarter and 2% in Mexico.
Looking now at TSB in Slide 14. Our U.K. franchise increased performing loans by 0.6% in the quarter. We keep growing our mortgage book which is up by 8% year-on-year, in line with our guidance of mid-single digit growth for the year.
Our stock market share increased by 2 basis points in the year. We are achieving this despite lower origination volumes of new mortgage in the quarter as a result of the decision to protect margins versus volume. TSB has a competitive advantage in the way it manages the intermediary service channel, which represents more than 80% of new lending in the U.K. mortgage market. Therefore, as market prices normalize, our competitive advantage should allow us to capture a significant amount of new mortgage applications.
In Slide 15, we look at the TSB financials. Our British franchise show the remarkable performance across all P&L lines. We recorded a net profit of GBP 61 million in the first half of the year.
NII grew by 11%. Fees and commissions grew by 11.4%. Costs decreased by almost 6%. Provisions and impairments remain at similar levels to last year. As a result, we doubled our core results and increased our profit before taxes by 140%.
Nevertheless, the profit — the net profit grew by 22.5% because of the onetime impact of the bank levy reversal. This is a onetime impact that we already anticipated last year when we shared this positive impact in 2021. Moving on to Slide 16. If we take a look at the financials on a group basis. We recorded a net profit of €393 million in the first half of the year.
This performance is driven by a positive evolution in all the P&L lines. It is worth noting that our core results grew by more than 18% when comparing the first half of 2022 versus first half of 2021 and by 13% quarter-on-quarter in 2022.
Regarding capital, our core Tier 1 fully loaded was broadly stable in the quarter to levels around 12.5% while growing our loan book. Finally, our return on tangible equity stood at 7%.
And with this, I will hand over to Leo, who will continue with the presentation.
Leopoldo Alvear
Thank you, Cesar, and good morning, everyone. Moving on to the financial results. I would like to start by emphasizing that, in my opinion, we present another solid set of results.
Net profit in the quarter reached €179 million, which when added to the Q1 results, drove half year net profit to €393 million.
Allow me to highlight that all relevant lines present a very healthy quarterly evolution, which shows the good momentum of the business, as I explained before, as well as a solid year-on-year performance, which provides a good estimate of the expected evolution for the full year 2022.
Core banking revenues, this is net interest income and fees, grew by 4.3% in the quarter and 3.6% year-on-year. Costs continue to reduce Q-on-Q as we can now see the full quarterly contribution of the cost savings from the efficiency plan executed in Spain.
The combination of core revenues and costs drove our core results upward to 13% in the quarter and 18% year-on-year. This, combined with the guided evolution of cost of risk, drove the aforementioned net profit figures.
On top of this, good performance this quarter. The P&L includes the following items, which are worth mentioning. On the one hand, the Single Resolution Fund payment of €100 million, which is usually booked in Q2 each year on the other income and expenses line.
On the other hand, the trading income and ForEx lines recorded €50 million, which is above the current run rate. This is explained by €23 million of positive adjustments from the derivatives portfolio of our customers, and it is linked to the increases in rates. In any case, this positive adjustment has been deducted from capital following applicable regulation.
And finally, I believe it’s important to highlight that TSB continues to improve its profitability. As Cesar just mentioned, making a positive contribution of €35 million to the group net profit in the quarter while the half year contribution reached €54 million.
We will go now through the different items of the P&L in more detail, starting in Slide 19, where group NII increased by 4.8% on a quarterly basis.
On the top right-hand side, you can see the bridge of NII evolution in the quarter. Moving from left to right, customer NII contributed €19 million, underpinned by higher volumes and better yields, while the benefit of Euribor repricing has not yet been material and will further contribute over the coming quarters.
The additional day count represents an impact of €6 million and the ALCO portfolio added €20 million in the quarter as we started to rebuild our portfolio in Q2, benefiting from the higher interest rate environment.
Finally, higher wholesale funding costs as well as other manufacturers contributed negatively by €4 million.
In a year-on-year terms, group NII outperformed our flattish growth guidance for the year and with a rate north of 4%. In this regard, let me highlight the NII drivers going forward and how we expect them to perform compared to our previous guidance. In the first place, interest rates are currently higher than our initial assumptions in all geographies. Let me remind you that our budget assumes no rate increases in Continental Europe and Bank of England rates only rising to 50 basis points.
Secondly, as we continue to reinvest further in the ALCO portfolio at higher yields than previously expected. This also should be a tailwind for NII this year rather than a headwind as it was initially assumed in our budget.
And finally, loan volumes are growing broadly in line with our expectations after a strong quarter as previously explained by Cesar. With all this in mind, we upgrade our NII guidance to mid-single-digit growth for 2022.
Leaving the NII line to one side and moving on to fees. This quarter, fees have increased by more than 3%. This growth has been driven mainly by service fees. In particular, it was supported by commissions related to payments and cards as we had a higher transactionality during the quarter as Cesar explained at the beginning of the presentation.
Also, credit risk fees made a positive contribution in the quarter, driven by a more dynamic lending activity. As it happened in Q1, asset management fees were somewhat weaker as the volatility of capital markets continued in the quarter, particularly in the fixed income products, which are the ones our clients are most invested in.
When comparing year-on-year, fees increased roughly by 3%. In any case, with this year-on-year evolution and despite the macroeconomic environment, we hold to our guidance of positive low single-digit growth for the year.
Moving now on to costs on the next slide. I would like to highlight that our cost base is down by 1.6% in the quarter and by 4.8% on an annual basis. This decrease in costs reflects the remaining cost savings from the second phase of the efficiency plan in Spain completed during Q1 this year. The reduction of the cost base can also be seen in the evolution of group costs as a percentage of business volume, where we continue to reduce the weight of costs on our activity and already have converged to our strategic plan target of 0.8%. This is more than 1 year in advance.
On the following slide, we take a look at our core results, which includes NII plus fees minus costs. This quarter, core results have increased by more than 13%, driving the annual variation to over 18% at group level. This positive trend is driven by wider jaws as we have seen both NII and fees growing, while at the same time, costs are decreasing as savings from the efficiency plan materialize.
On the right-hand side of the slide, you can see the bridge, of course, has evolution year-on-year. The increase of this metric is supported by the positive contribution from all lines. We see a north of 4% increase in NII, circa 3% rise in fees and a decrease of almost 5% in the cost line. Going forward also, we expect core results to continue improving in the coming quarters on the back of growing core banking revenues. This is NII and fees.
In Slide 23, we describe cost of risk and the main remaining elements between pre-provision profit and profit before taxes. The group’s credit cost of risk for the first half year stood at 40 basis points while total cost of risk was 55 basis points. Both figures have remained stable Q-on-Q and performed in line with our guidance.
Taking a look at the breakdown of total provisions on the top right-hand side. If we follow the graph from left to right, we can see first that we booked €166 million of loan loss provisions in the quarter, €30 million for charges and foreclosed assets, €28 million of NPA management costs; and finally, other provisions, which are mainly related to litigations, stood at €41 million. This item is subject to some volatility, and this quarter, for example, was impacted by 2 one-offs. On the one hand, €13 million related to the goodwill impairment of investee with no impact in capital and €11 million due to provisions for estimated charges related to the treatment of some TSB’s customers in arrears.
All in all, in any case, credit cost of risk is in line with our guidance, which is the range between 2019 and 2021 levels, meaning somewhere between 32 and 49 basis points. And in fact, now that we have more visibility on asset quality for the remaining of the year, we expect total provisions for the second half of the year to be lower than those booked in the first half.
Let’s move now on to the next section, where I will walk you through asset quality, liquidity and solvency. Starting with asset quality. As we have done in previous quarters, I would like to begin with a quick look at the status of ICO loans.
At the end of the second Q, the total amount of ICO loans granted stood at €13.9 billion, of which €8.3 billion have been withdrawn to date. In the quarter, 86% of the outstanding grace periods expired, involving approximately 31% of total ICO loans drawn or €2.6 billion, meaning that those customers had to resume principal payments in this quarter.
The early indicators of default show that only 3% of these loans expired during the quarter are more than 10 days past due, which is a very similar performance to the existing ICO portfolio. Finally, as you can see from the graph, the default rates of the ICO portfolio as a whole have remained contained with stage 3 ratio at 6% when already 95% of the loans are paying principal and interest.
Moreover, now we have 4 full quarters in which at least 60% of the portfolio has been facing principal and interest payments. And as you can see, after an initial increase in the last quarters of 2021, stage 3 levels have remained stable. So all in all, a good performance of this portfolio and certainly much better than what was expected back in 2020 when the ICO program was launched. I would like to remind you in any case that for those nonperforming exposures, the state guarantee covers an average of 76%.
In the following slide, we take a look at the group’s nonperforming loans, which represent a significant reduction of €500 million in the quarter. On top of the organic reduction, approximately €100 million, the decrease has been boosted by an institutional portfolio disposal of close to €400 million of NPLs. This portfolio was composed of unsecured NPLs and were around 3 years in default, thus improving the mix of the remaining stock of NPLs. Therefore, after the transaction, the profile of the remaining portfolio has improved. For example, the stock of 90 days past due NPLs in Spain has been reduced by 2 percentage points to 46%.
The unsecured exposure has also been reduced by 4 percentage points, down to 35% or the vintages has been also improved coming from 3 years to 2.8 years.
All in all, we’ve seen a positive evolution of asset quality ratios, bringing the NPL ratio down to 3.3% at the end of the quarter, while total coverage on NPLs stood at 55%.
Moving on in terms of foreclosed assets. It is worth mentioning that the stock continued to decline while coverage improved. This portfolio still benefits from having a sound risk profile as 95% of total foreclosed assets are finished buildings.
In terms of NPAs, which include both NPLs and foreclosed assets, these were down by 7%, which drove the gross and net NPA ratios down to 4% and below 2%, respectively.
Now turning to liquidity. At the end of the half year, the group continued to have a strong liquidity position with an LCR of 225%, loan-to-depo ratio of 97% and high-quality liquid assets of €55 billion.
In terms of credit ratings, it’s worth mentioning that during the quarter, 2 rating agencies S&P and DBRS upgraded their credit outlook for Sabadell to positive and stable, respectively.
In terms of TLTRO III, we remain having €32 billion outstanding. And in terms of TFSME we have GBP 5.5 billion drawn.
Moving on to capital. We ended the quarter with a CET1 fully loaded of 12.48%. This is increasing by 3 basis points Q-on-Q despite the negative fair value adjustments as well as the contribution to the single resolution fund in the quarter that I mentioned before.
Looking at the graph from left to right, you can see the different drivers that brought our capital to this level. First, organic capital generation, including the accrual of 31.8% dividend payout. This is 2021’s distribution, represented 10 basis points in the quarter. The fair value reserve adjustments had a negative impact of 8 basis points. And finally, the evolution of RWAs was fairly neutral in the quarter, adding just 1 basis point.
From a regulatory perspective, the CET1 ratio stood at 12.61% on a phasing basis, which implies an MDA buffer of 415 basis points, which comfortably beats our target of maintaining a buffer above 350 basis points.
This capital generation, mostly driven by the retention of earnings, has its reflation in the evolution of our tangible book value. In the right-hand side of the slide, you can see that tangible book value per share has increased by 6% in the last 12 months when we add both tangible book value per share and the distributed dividends.
Finally, to conclude this section, the next slide shows our MREL position. We are compliant with the current MREL requirements based on both risk-weighted assets and leverage ratio exposure.
As explained in previous quarters, our funding plan will be focused on optimizing the funding costs and funding sources as well as keeping capital buckets full and a number of management buffer.
And with this, I hand over to Cesar, who will conclude our presentation today.
Cesar Gonzalez-Bueno
Thank you, Leo. So to finish our results presentation today, I would like to recap on the key messages of this quarter. We are doing what we set ourselves to do in our strategic plan, and we are delivering on it.
Firstly, the transformation has been visible and radical in Retail Banking and Business Banking also moving forward. Secondly, commercial activity remained strong across products and segments. Thirdly, our efficiency in Spain has improved significantly as a result of increasing revenues and also of a significant cost reduction. Fourthly, regarding asset quality, we reduced NPAs by more than €500 million in the quarter. Cost of risk is in line with our guidance, and we are not seeing signs of credit quality deterioration.
And finally, we are capable of generating capital organically, having increased our core Tier 1 fully loaded reaching a level of around 12.5%, which implies an increase of 30 basis points year-to-date, while we remain, maintain an MDA buffer of 415 basis points well above our 350 target.
All in all, return on tangible equity stands at 7%, and we have upgraded our guidance to deliver an above 7% return on tangible equity this year, excluding the potential impact of the new Spanish tax on banks.
And with this, I will hand over to Gerardo to kick off our Q&A session. Thank you very much. Half an hour exactly.
Gerardo Artiach Morenes
Thank you, Cesar. We will now begin the Q&A session. Given the late availability of information, we will not dramatically restrict the number of questions. But please remember that there is many of you in the queue, so try to keep them to as few as possible. Please let me also remind you to properly identify yourself in the system.
We cannot give you access if you are not properly identified.
With that, operator, could you please open the line for the first question?
Question-and-Answer Session
Operator
First question is coming from Maks Mishyn from JB Capital.
Maks Mishyn
I have 2. The first one is on ROTE target. We appreciate the improved guidance for 2022. And I was wondering if there are any implications to your 2023 target? How should we think of profitability evolving next year?
And then the second question is on the disposal of your payments business or a stake in payments business. If you could just update us on how — on the situation?
Cesar Gonzalez-Bueno
At this point in time, we are not giving guidance on return on tangible equity for 2023. The only comment that I think we can make fairly and confidently is that we see that the tailwinds of interest rates are higher than the potential headwinds related to inflation and related to potential increases of cost of risk. In that sense, we cannot foresee any reasonable scenario in which the headwinds will not be better and overcome the potential headwinds. So the tailwinds should be better than the headwinds. With this said, I think we are postponing any more clarity to see how the market evolves and especially the macro environment.
I don’t know if you want to complete anything on that, Leo? We’ll discuss the [indiscernible].
Leopoldo Alvear
No I think it’s clear. As of this date, we have visibility for the rest of the year, and that’s why we upgraded our guidance both on NII and also in cost of risk because we believe the second part of the year should be lower than the first half. That’s the visibility that we have right now in asset quality or things are going well, but we need to have a little bit more visibility at year-end, and then we will upgrade certainly for 2023.
But as Cesar mentioned, we cannot really foresee a scenario now where bad news coming from the asset quality and therefore, cost of risk, could outstand the good news coming from interest rates from — for 2023.
Cesar Gonzalez-Bueno
Yes. So on the merchant business, I think we are looking much more for a partner than anything else. Therefore, what moves this potential alliance is much more an industrial and efficiency reason than anything related to capital. Therefore, we should not expect neither a big up-front payment nor a big loss of fees and commissions going forward. What we are seeing is a great interest by the big players in this franchise because it’s a very, very attractive one.
We have a 19% market share in point-of-sale devices. And as you have seen in the presentation, it’s growing very handsomely and it’s growing even more handsomely in terms of income and in terms of turnover. So nevertheless, it requires big technical capabilities that are better provided probably by players that have a broader footprint than what we have at Banco de Sabadell. So combining our very strong commercial franchise with technical abilities that could be greater than ours and that could provide more — better service to our clients, we think that’s a good idea.
It’s evolving well. We are seeing a lot of interest, and we will communicate if any transaction occurs in due time. But as I mentioned, we are looking more for a partnership and cooperation than for a disposal that would generate capital at this point in time.
Gerardo Artiach Morenes
Thank you, Maks.
Operator
Next question is coming from Sofie Peterzens from JPMorgan.
Sofie Peterzens
So sorry about that. Your core equity Tier 1 at 12.5% is quite strong. With the first quarter results, you mentioned share buyback that is something you’re considering, how should we think about the potential future share buybacks? So that would be my first question.
And then the second question would be on TSB. Do you consider TSB core? Or do you consider setting TSB, the price was right?
Cesar Gonzalez-Bueno
Thank you very much, Sofie, for your question. There was a lengthy debate at the Board and the very clear position from the Board is that it has the intention of increasing payout as results improve. Nevertheless, at this point in time, it has decided to postpone a clear guidance on dividends for next year based on this year’s results.
And the reason is very clear, there’s a lot of uncertainty out there. But the message should be very, very clear. The intention is to increase the payout with an increased set of results.
In terms of the structure, certainly, it will consider at a certain point in time, share buybacks, it might be this year. It might be the coming year. What it will always do is share buybacks out of ordinary profits, not out of extraordinary disposals or reduction of capital per share.
You were present in the discussions, Leo. I don’t know if you want to complete anything.
Leopoldo Alvear
I think it was precise what you mentioned. I think we discussed this in Q1 results also. One thing, it’s the total distribution to shareholders. This is what’s the payout. And in this regard, as we increase profitability, well, we should be thinking on going towards where the market is.
And the second one is the format that payout, whether it’s cash or whether it’s through a buyback or through a combination of both, that has no impact on capital ratios. And it serves, well, what the 2 big groups of shareholders maybe asking for. So on 100 retail shareholders, we’re probably more inclined towards cash payouts. And for institutional shareholders, when a company is trading below book value as it is the case, well, certainly, there is a financial rationale behind buyback, but this will be discussed in due time.
Cesar Gonzalez-Bueno
And as per your TSB question, I think we’ve answered this question many, many times. TSB is performing extremely well. But furthermore, we continue to believe that it has a very significant potential going forward. We see its evolution quarter-on-quarter for the last 6 quarters in a growing trend. And we think that this trend would continue in the future.
We consider that TSB is part of the Sabadell group, and that’s how we see it going forward.
Operator
Next question is coming up from Andrea Filtri from Mediobanca.
Andrea Filtri
I would like a bit more color, if possible, Leo, on the interest rate sensitivity. If you could actually isolate it either giving us an idea of what would be the NII impact for ’23 if you plugged in forward rates curve with a 0% deposit beta or something that basically we can relate to because the one under very strong part of her shift is always very artificial.
And also, if you could elaborate on what you’re planning to do on the ALCO portfolio going forward. Finally, if you have any comments or indications on an eventual banking tax. There are some news today as well on that front. If you have any comment or any color on it.
Leopoldo Alvear
Okay. Shall I start with NII? So basically, yes, I mean, the sensitivity that we have on NII, it’s strong, obviously, towards rate hikes. And what’s even more important is that we have a quite large operational leverage. So despite the final impact on NII, it’s worth mentioning that around 4% increase in NII drives through the P&L towards all things being equal, obviously, 20% increase in net profit and therefore, 1 percentage point of return on tangible equity, so pretty leveraged.
Now on the distribution of our balance sheet, basically, we have around, I would say, close to €40 billion, which are directly floating loans, okay? So those will come through 2022 [ BAT ], especially through 2023. Please remind that when we are repricing loans towards rates, for example, in the case of mortgages, there is a delay of approximately 2 months. In other words, those mortgages who are — which were repriced in June were repriced with the official Euribor rate of April, which, if I recall correctly, was 1 basis point, okay? So effectively, basically, June was the first month where we have started to see the repricing of Euribor because May was a price with March, which was still minus 20-something basis points.
In other words, for ’22, we have lost half a year, if you wish, talking broadly in terms of repricing. So we’re going to see some good news coming out of this repricing in the second half of this year. But more — even more in 2023 because of the reasons I just mentioned.
On top of this €40 billion, we also have approximately, I would say, around €20 billion, €22 billion of loans which amortized in the coming 12 months, especially coming from an SME and corporate space. So all these loans should be, if we are able to do so, repriced with the current rate environment. So all this is also floating.
And on top of this, there’s many other moving parts in the balance sheet. So we have a part of the ALCO portfolio, which is swapped to variable rates. So all that increases also with the evolution of rates. And then we have a lot of cash and liquidity, which will also move with the rate movements at the ECB, for example. So as I said, there’s a high beta, if you wish.
But at the end of the day, I am reluctant to say a final number because as you very well mentioned, Andrea, it depends very much on the pass-through, whether we banks are able to do the pass-through on the asset side of things, but also on the liability side of things. But even in, I don’t know, a very conservative approach, I think the beta, the evolution will be quite significant both for ’22 and especially for 2023.
Cesar Gonzalez-Bueno
As per the tax on banks that you asked, Andrea, I think it’s early. I think as early as today, we might have some more information of the initial proposal that is going to be put forward, although then it will have to go through discussion in parliament in the fall.
At this point in time, the only thing that we know is that the Spanish Prime Minister announced a special tax on banks with an expected amount of €1.5 billion per year and that it would be, and this is very important, a temporary tax applied just during the years ’22 and ’23. We are confident that based on the clear rules around competition that the tax will be founded on level playing field between players, and we have to wait a bit further. We will have some more news today, but certainly, it will be during the fall that the final structure of the tax might be better defined after the discussions in parliament.
Leopoldo Alvear
And sorry, Andrea, I forgot, I think you asked about the ALCO portfolio. So in the quarter, we have bought a little bit below €5 billion, which taking into account the amortization of the period have increased our book by €3.4 billion towards the €25 billion and the change that we have right now, and we expect to keep on building this portfolio in the second half of the year towards the numbers that we shared with you at the beginning. So basically, around €8 billion to €10 billion will be bought this year towards the €30 billion figure, which is what we had in September 2020. This is previous to the disposals that we made in order to fund the efficiency plans that have been carried out in 2021 and 2022.
And what I mentioned at the NII slide is that while when we were budgeting last year, this was the idea, but we thought we were going to buy these portfolios at much lower rates. And therefore, the total contribution of the ALCO portfolio compared to 2021, this is total 2022 to total 2021, was negative. This is — we would — the contribution would be lower. But currently, where the yields — where we are right now, we believe that this contribution will not be negative, but positive, so it’s another of the tailwinds, which should help us to improve our NII guidance from flattish to the mid-single-digit number that I mentioned before.
Operator
Next question is coming up from Britta Schmidt from Autonomous.
Britta Schmidt
Yes, I hope you can hear me now?
Gerardo Artiach Morenes
Yes.
Britta Schmidt
Okay. Great. I’ve got some questions on asset quality, please. Have you done any analysis on energy-sensitive exposures. Maybe you can give us a bit of color on that?
Also, what is the current stage of your overlay provisions, the IFRS 9 macro provisions? Have you booked anything there? And what sort of scenarios are you incorporating in your IFRS 9 modeling, and maybe you can also briefly comment on the developments in your Stage 2 loans?
Cesar Gonzalez-Bueno
So I’ll take the first one on energy sensitive. I think we have looked at the whole portfolio, not only energy sensitive, but inflation sensitive, customers that were able to transfer their cost increase and customers who were not able to transfer their cost increase, sensitivity on the mortgages, on interest rates. We have reviewed 100% of the portfolio with a lot of detail. And of course, the future is per definition, unpredictable. And what would be the levels of the shocks, but at this point in time, there are 2 things that we can say with confidence.
The first one is that we have seen no deterioration and no signals of deterioration year-to-date in the book whatsoever.
And looking forward, and having done all the sensitivity analysis based on all the potential negative impacts, it’s difficult to assess, but we are confident that our portfolio is resilient for what might come. In that sense, I think it’s very important to realize that the sectors that have been affected by the pandemic are very different than the sectors that are being affected by the second crisis derived from the war, the energy crisis and inflation. And therefore, this switch in the customers that are impacted makes both more resilient because none of them is impacted twice. In that sense, yes, we have done the analysis. And with the information that we have at this point in time and including macro scenarios that should not be extremely positive, we are confident of the resilience of the book going forward, but certainly, we live in a world of uncertainty.
Leopoldo Alvear
As per your question is related to the overlay provisions that we booked in 2020, those remain broadly in our books. So the other ones that have been released were at TSB and not all of them. I think TSB booked something like €120 million, something like that. And of which perhaps 90 — €80 million or €90 million have been — were released actually in 2021, not in 2022. So those provisions are still in our books, not the ones that we booked for ex TSB, if you wish.
When we look at the portfolio, as Cesar was mentioning, it’s hard for us to come to numbers right now. So on the one hand, mortgages, we will see what happens. But basically, 50% of this book was granted before the previous crisis. So basically, it has already been amortizing for over 12 years, principal. So certainly, the loan part of the loan-to-value ratio has decreased significantly.
And on top of that, the value, the other part of the ratio has improved since those mortgages were granted. And on top of that, these mortgages have been able to pay even through very harsh times where in Spain, for example, the unemployment rate was at 27%, while now it’s at 13%.
So of course, we might see some surprises in this book, but honestly, for me, basically AAA mortgages, pretty secured.
The remaining 50%, it’s basically half-on-half of the book has been granted in the last probably 5 years since 2016. Now — so on average, this book has also paid principal for a couple of years or 3 years. And the value has certainly gone up since they were granted. And on top of that, it’s important to mention that in the case of Sabadell around, I’d say, 75% to 80% of these mortgages were granted with a fixed rate payments. So the increase of rates will not affect this portfolio.
We have done an overview of the remainder, if you wish now the part that was granted on a floating stage, and we are monitoring very closely that book, which is, as you can imagine, small, and so far, we have seen no signs of deterioration. Again, I don’t want to sound bullish at all. It’s just that right now, I’m sorry, but we don’t have any further visibility to go further than year-end. And from now to year-end, I think it’s going to be very difficult to see material deterioration nor on the retail side of things. This is mortgages, for example, nor on the SME and corporate space, which I think is what Cesar was referring to more broadly before.
And regarding your question on Stage 2 loans, we have increased the Stage 2 loans in the quarter, basically put in or taking into account a more cautious macro scenario, but not because we’ve seen specific signs of specific companies because otherwise, those would have been booked obviously as subjective Stage 3 unlikely to pay loans. It’s more a general view of sectors, as Cesar was mentioning before, that has driven us to move this amount of loans towards this Stage 2. But as I said, I’m sorry to say, but we have no further visibility on this topic yet. Things have performed well in the first half. I think we need to, we’re going to have to need to wait until year-end.
Another pretty good source of good news for me has been the evolution of the ICO loans in the quarter, which is something that we were expecting to see how these close to 90% of the remaining grace periods expired and how they would evolve. And the evolution has been pretty good. Of course, we need to wait a little bit more time because they’ve just been — they’ve just started to pay principal. But these loans, we must remember that, were granted in general terms to its sectors that were more affected by lockdowns, such as, for example, tourism and services. And those sectors in Spain right now are booming because of how things are going, and we expect a pretty good evolution at least in the summertime.
We will see after that.
Another piece of good news, in my opinion, is that the sectors that can be affected more by inflation going forward are different to the sectors that were affected more by the lockdown. So we’re not putting the pressure again on the same sectors. But again, I would — very clearly would like to convey the message that we’re not trying to be bullish here. It’s just that right now, unfortunately, we have no further visibility to give you more details.
Operator
Next question is coming up from Borja Ramirez from Citi.
Borja Ramirez
I have 2 quick questions, if I may. The first one regarding the NII and I would — for the guidance provided for the year, I would like to ask what pass-through of rate increase on deposits you are assuming? And also, what percentage of the ALCO portfolio is swapped into variable rate?
And my second question would be regarding the recent NPL disposal. I would like to ask how was the buyer appetite for NPLs in Spain and also any views on outlook?
Leopoldo Alvear
Okay. So on NII, basically, I think we’ve included some numbers of pass-through of deposits in those numbers. I think probably looking at the number of the banks. I believe that, as I mentioned before, we — our loan-to-depo is below 100%. In other words, all our credits are more than funded by our deposits.
And that’s the case for the rest of the sector as opposed to what was the situation back around in 2010, where loan-to-deposit banks were ahead of 160%. In other words, I don’t see the need for deposits on the banking system. In other words, unless we see a hike, significant hike in loan demand, which we’re not foreseeing now, I think things are going well, but we don’t expect that, I don’t think banks will be eager to gain volumes of deposits. So I don’t think there’s going to be such a situation as the one that we had in 2020.
Now our other big competitor here, it’s probably, or it was shortly the 12-month TBL. And 12-month TBL was yesterday around 0.6%. So I don’t expect a lot of movement on deposit pricing in the short term. Of course, at some point, it will come, and it’s very difficult to say when.
I think what we will first lose, it’s what we are yielding, the negative yields that we’ve yielded in on SMEs and corporates. And that once the rate is positive as it is today after last week’s meeting, will probably start to disappear, if you wish. In our case, that’s around €17 million per quarter, roughly speaking. So I think that’s the first thing that’s going to happen.
As per the deposits, we need to monitor that. We have included some numbers. Allow me not to share them with you because that’s part of our commercial, if you want, approach. And the numbers that would have included in my opinion, are reasonably conservative, if you wish. And I think this will probably more — be more I think of 2023, although we have included them in 2022.
As per the question regarding the ALCO portfolio, basically, what we have is a book which has its €25 billion book. Out of which, €5 billion — €5.8 billion are in fair value. And the remainder, close to €20 billion are in hold-to-collect.
The total maturity of the book, it’s 7.5 years. But with the hedges that we have in the book, we reduced that maturities to a duration of €2.4 billion. So as you can see, it’s pre-hedged.
And finally, regarding the NPLs. The truth is that we saw quite some appetite for the portfolio that we put in the market, which, as a reminder, was unsecured loans, okay? So there was a good competition. We managed to sell the portfolio without an impact or a further impact on P&L. So basically matching the coverage levels, the prices that we got were matching the coverage levels.
So I think it was a good transaction in our case. And I think there’s appetite for more transactions going forward. As I think we already said this in Q1, we don’t foresee a major, big massive transaction, but it’s part of our business in terms of recovering NPLs to, obviously, always monitor the market to see if there are — there is appetite for this kind of hundred of millions transactions. So probably going forward, we shall see more transactions of this type.
Gerardo Artiach Morenes
Thank you. I think we have one last caller. Operator, could you please give access to this one last call.
Operator
Last question is coming up from Ignacio Ulargui from Exane.
Ignacio Ulargui
I just have 2 questions. One, a bit theoretical, but I just wanted to get a bit of a sense on the 7% ROTE guidance that you have given for 2022. If you assume a scenario that you probably have run with the tax, what would be that time of level of ROTE that we should expect for the bank as to get a bit of an order of magnitude what kind of heat we are expecting from the government?
And the second question on trading income. I know it’s quite volatile. But I mean, should we expect second half to be in line with the first half level of the increase in [Indiscernible] giving the opportunity to generate more trading gains going forward? Or there was a bit of a one-off in the quarter?
Leopoldo Alvear
On the first one, I’m sorry, Ignacio, but given that we have no numbers on the tax rate, it’s impossible for us to give you an estimate. In any case, if you make yourself some assumptions on how much the tax can be, you compare with numbers. It’s not that complicated. I mean once you make an assumption of the number, but allow us not to make that assumption because we really have no clue of what’s the final impact going to be. That’s why we provided a return on tangible equity guidance based [Indiscernible], so basically based on the information that we have and what it is in our hands to produce this year.
On top of that, we will have the tax. And we will need to wait and see what the number for that tax is, whether that tax is deductible or not, et cetera. I mean there’s a number of uncertainties on the table now, which don’t allow us to give you a number. Sorry about that.
And as per trading, no, I think trade in the second half of the year, it’s certainly not going to look like — or we don’t expect it to be as first half. I would say second half of the year should be pretty low. But again, we have been surprised in Q1 and Q2 by the amount of trading that we’ve done, especially through the derivatives of clients, which as I explained before. In any case, it’s deducted from capital, but that’s not in our hands and depends very much on the rate movements. But all things being equal as per the management of the portfolios, if you wish, the ALCO portfolio, which is in our hands, which is what is in our hands, we do not expect significant numbers in the second half.
Gerardo Artiach Morenes
Okay. Thank you. Thank you all for your questions, and thank you, Cesar and Leo for your answers. We now wrap up the Q&A session. As always, the full IR team is available for any further questions that you may have.
Once again, thank you all for your participation and for joining us today. For those going on holiday soon. Have a good break. Buh-bye.
Cesar Gonzalez-Bueno
Thank you, bye.
Leopoldo Alvear
Thank you. Buh-bye.
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