CaixaBank, S.A. (OTCPK:CAIXY) Q3 2022 Earnings Conference Call October 28, 2022 5:30 AM ET
Company Participants
Edward O’Loghlen – Director, IR
Gonzalo Gortazar – CEO
Javier Pano – CFO
Conference Call Participants
Alvaro Serrano – Morgan Stanley
Sofie Peterzens – JPMorgan
Francisco Riquel – Alantra
Andrea Filtri – Mediobanca
Maks Mishyn – JB Capital
Ignacio Ulargui – BNP Exane Paribas
Carlos Cobo – Societe Generale
Ignacio Cerezo – UBS
Britta Schmidt – Autonomous Research
Esther Castro – Banco Sabadell
Edward O’Loghlen
Hello. Good morning and welcome to CaixaBank’s Financial Results Presentation for the Third Quarter of 2022. We are joined today by the CEO, Gonzalo Gortazar; and the CFO, Javier Pano.
In terms of logistics, just a brief reminder that we aim to spend around 30 minutes with the presentation, followed by 45 to 60 minutes of Q&A, for which you should have received instructions via e-mail. Let me just end by saying the IT team and I are available after the call for any questions that remain.
And without further ado, let me hand it over to our CEO, Mr. Gortazar.
Gonzalo Gortazar
Thank you, Eddie. Good morning everybody. And let’s go on to it. If I manage to put the presentation on, it doesn’t seem to be working now. You have another one. Sorry for that.
It’s not — okay. Well, I will go through my paper version. If in the meantime, you get it sorted out, [Indiscernible].
Okay. Well, good morning, again. I would say, third quarter for us has been a very good quarter, we’ll say another strong operational quarter. That’s certainly the case. In terms of commercial activity, to start with, it’s been on the lending side — now I can see the screen as well, apologies for that.
On the lending side, we have significant growth both year-to-date and quarter-on-quarter and quarter-on-quarter, in fact, we have growth, businesses, consumer lending, and mortgage lending in terms of balances. And obviously in terms of new production as well.
On the customer fund side, we have positive inflows, yet another quarter with €0.7 billion in the third quarter and €2.8 billion in the total of the year — in a year, which better than anyone how difficult it is.
So, activity is, I would say, very good level. So, we’re very pleased to see this level of activity with institution that only a year and a half ago completed a very large and complex merger.
Net income is obviously up and here we have core revenues going on the right direction and cost associated to the integration also coming down. Asset quality, very rewarding. It’s 3% now and it was 3.6% at the beginning of the year. While we still see obviously some or a number of — or many clouds on the horizon, in the economy, generally in, particularly in Europe, and obviously also in the U.S., the reality is that we’ve been doing very well on asset quality, coverage is going up and again, early defaults before they are — non-performing loans are also at historically low levels. So, very, very rewarding.
And then capital some impact on the quarter associated to markets, but still at 12.1% above our levels — comfort level. So, very good distance to MDA and liquidity, again, at very, very high level.
So, very pleased with the quarter. I have to say looking at the asset side, you see what I mentioned growth year-to-date and quarter-on-quarter over three categories mortgages, consumer lending, and business lending, that’s not been the case in the market and for some of our competitors, particularly on this quarter, which gives us a good indication that some slowdown in terms of market activity on the asset side that we had in the second and third quarter of last year is completely over.
And in terms of new production, it’s very notable the increase in mortgage production. I’m sure we can talk about that later, but also consumer and business clear, good science of how we are positioned in the market.
Customer funds, Tale of Two Cities, include the market impact, which is unfortunately the reality then you have a reduction in terms of one — both in year-to-date and in the quarter. But when you take into account what is X markets, you see significant growth in deposits and long-term savings and obviously, in this context, I would say a fairly good result.
Market shares, app and pension plans, mutual fund, savings insurance, long term savings, again, very good feeling of having the commercial strength that we’ve always had at full speed and with some significant developments in the quarter, particularly the launch of MyBox, which is going to be obviously not having an impact in a very short-term in terms of the financial results. But in the long-term, I think it’s a very, very promising initiative.
Protection Insurance, MyBox offering 25% in life, 21% in our life overall MyBox and non-MyBox, all production Premia on the new business up 11%, continues to be a source of growth for us and very rewarding.
You put all that together and look at net income, obviously, we have increasing revenues, mostly associated to activity, fees and insurance income. NII is still negative on the year-to-date, this is the nine-month comparison. Obviously, on the quarter have seen a complete inflection point with a strong growth which is to be maintained.
Cost savings, more than offsetting inflation so that we had an improvement in profits of 197 from recurring expenses, this is the after-tax number. And then positive because of the development of asset quality has been so positive, we have been able to both reduce loan loss charges and increase coverage levels. So, it’s an ideal world.
Efficiency, the recurrent cost income coming down to 109 basis points. Year-on-year we’re going very well towards our objective, planning in terms of cost income, and obviously very positive operating in the year.
Moving on to the economic environment. We’ve just seen some good news in terms of GDP in Germany. According to our expectations, also in Spain 0.2% growth in the third quarter. But in any case, we all know the economy’s set to slow down. In our case, we see Spain moving from 4.5% this year to 1% next year.
I think it’s relevant to remind that our view is that Spain is going to be doing better than the Euro area. You have it on the bottom of the page, we expect GDP growth, the Euro area of 0.2%. So, basically flat, and in fact, over the fourth quarter — first quarter of 2023 likely to be in a negative growth territory.
So, our 1% for Spain is obviously much lower than last year. But it is consistent with 0% growth in Europe, as we said because Spain is now in a better position. Obviously, we have a different energy situation with 90 — sorry, 9% of gas imports, dependence with respect to Russia compared to the 44% of the European Union, we have a different installed capacity with one third of the European Union capacity for LNG for regasification plants. So, we’re not going to have a shortage problem. We obviously will have some impact associated to higher energy prices.
But other than that, we have no real estate bubble. You have the figures there in terms of where we are and that is yes, the price but we look at an activity or the exposure of our banks, new houses started et cetera, all point towards a fairly solid real estate market. Even if we will have some slowdown you can see on the slide, the house prices for next year is 1.5% with inflation running at 4.5%. It means negative real price appreciation, but it’s positive in nominal terms. And obviously our mortgages are paid on nominal money. So, it’s good to see that house prices keep growing in nominal terms.
And at the same time private sector is much less indebted than it used to be. You can see the graph basically on the business side, we used to be at 140% in 2008, 140%, we’re now at 99% and below the Eurozone at 108%.
When you look at households, we are below the Eurozone in line but slightly below. But again 57% of debt to GDP compared to 85% at the peak down to 57%. So, resilience in the private sector is very different. Employment is doing well and then not on the chart, but also you should realize that our external sector, we have had a current account surplus now for 10 years in a row. This is absolutely unprecedented in Spain. So, we feel there will be a slowdown. That’s no question around that and an impact. But we think this time Spain’s economy is going to be affected clearly moving from 4.5% to 1% is a significant impact, but less so than the Euro area, which we expect to see at that 0.2%.
Now, with that environment, which is obviously a worsening one, we have to see where we are. And we feel very well and very good about where we are. For a number of reasons, obviously, the inertia that we have in results is pretty obvious. You see here pre-provision profit and the significant increase in pre-provision profit that we’re seeing and obviously, there’s much more to come, while at the same time cost of risk is well-maintained. But obviously, the first line of defense here is having more revenues, more profits, and that is working. The actual asset quality of the portfolio has been improving for 14, 15 years as the best ratios we had since before the crisis in 2007.
Coverage, as I mentioned before, is very high level 68% because we continue to have very large number of unassigned provision provisions on which Javier will comment later also the structure of the mortgage portfolio, which is going to prove very resilient in my view.
We continue to have liquidity both in the short and long-term structural ratios at very high levels, well above our competitors on average of the requirement. And we started with a very strong solvency position and that almost 400 basis points of MDA buffer.
So, we feel situation is likely to worsen. It’s likely to worsen less in Spain than in Europe. But then when we look at ourselves, we’ve never been in better shape in the last 15 years. That’s clearly my and our view.
And in that regard, obviously, we have our duty, so the ESG front both the social and environmental agenda, a few comments here. I think on the environmental side, very relevant our decarbonization targets for 2030, we have a started with the two sectors that actually account for 70% of emissions, oil and gas and power generation. We’ve actually come out looking at our competitors with levels that are, as of today, well below most other competitors and also put in some additional pressure and further reducing that along the way to 2050 getting to zero.
We have, again, I think a strong track record of these front in terms of our green and social bonds issue. We just actually incorporated into the posit on principles banks and have been recently by Sustainalytics named us — or ranked us having the lowest environmental risk in — among the Spanish banks, which is good news.
And then on the social side, we have a different philosophy in terms of financial inclusion. Our proximity to vulnerable groups where we have solutions for both day-to-day banking, but also microcredit, and obviously, social housing. And then all the activities we do together with a foundation, which puts us in a different bucket from most other banks and something which we plan to continue reinforcing during a tough period and certainly continue explaining to society of what we’re doing.
With that, Javier, maybe you can take from over from here.
Javier Pano
Okay, thank you. Good morning. Let me go deeper into the details now, while starting with an overview of the loan book you know it well, but you may see on the central chart that we have clear turned around since late last year, the loan book up by 3.4% year-to-date.
Even despite the third quarter seasonality, we have been able to keep a nice pace into the third quarter. Also below the chart you may see also the evolution of the performing mortgages already in positive territory in terms of volumes, year-to-date.
On the right hand side, you will see that clearly on this waterfall of our loan book, its business lending, what has been driving growth and well we expect that probably into the fourth quarter, we may face strong slowdown into — in that front. But in any case, probably a more flattish quarter.
Moving to the ALCO, we have grown the book slightly this quarter at €72.5 billion. It has been extremely volatile quarter as you know very well, but with relentless increase in yields since late August. So, — well in this environment, you may see that we have been able to add to the portfolio and taking advantage of market volatility.
As a consequence, the yield of the book increases to 0.7%. And as also you may see the average duration very much and change it, three to five years. Also, we continue to progress on our diversification process. And our, the weight [ph] of Spanish government bonds been reduced by nine percentage points year-to-date.
In terms of wholesale funding and stability, that we have almost 100% debt funding swapped into floating and the spread over six months of rival remains pretty much unchanged it at 676 basis points.
Moving to customer funds, Gonzalo already commented that we have had a strong market effects on our AUMs minus €18.4 billion year-to-date. But even under those circumstances, we keep having inflows at €2.8 billion for the year. Even these third quarter, positive inflow — positive net inflows by approximately €700 million. It’s not even a single quarter this year, despite the market correction in negative net territory. And also, you may see that our deposit gathering capabilities continue being there €8 billion accumulated during the year despite the quarter-on-quarter seasonality.
And more interestingly on the right hand side chart, you may see the average AUM balances and you can see that for the third quarter, already below by 2% approximately the average of last year. And by the end of the period — by the end of the third quarter, due to a strong market correction late into the quarter, approximately 5% below. Obviously, this may have some impact into fee revenues coming from that business. But anyhow, you may see that is moderate.
Let’s move to the consolidated income statement. The most remarkable is the improvement in terms of core revenues. You may see that at the bottom growing by more than 6% year-on-year also quarter-on-quarter approaching 4%. Basically that is a turnaround on NII. You may see that NII is growing quarter-on-quarter by 5%. And year-on-year by slightly more than 6%. Clearly, this is supported by higher rates and the pricing on our floating rate portfolios, but also volumes that year-to-date have been doing well as we saw before.
On fees, we have the traditional third quarter seasonality. But despite this, we are over the €1-billion-mark in third quarter and up by 4% year-on-year. Strong recurring fees more than offsetting any market impacts on AUMs and also remember that since this quarter, the corporate deposit fees is growing.
On insurance, I will say that very good performance, we keep growing on a quarter-on-quarter basis even up by more than 5% and year-to-date remember, boosted by the consolidation of 100% of bank EBITDA.
On non-core revenues basically, we no longer have [Indiscernible] when you compare year-on-year and then below, on costs down by more than 6% year-on-year on track to meet our guidance for this year. Normal charges and also other provisions, low levels of new provisioning. And we’re taking all that into account net income at €884 million, that is close to 19% over last year.
Let’s comment about Portugal where the positive momentum really continues. You may see also that core revenues improved markedly quarter-on-quarter, but also over double-digits year-on-year.
On that front, clearly, the loan book growth is supporting importantly in strongly in Portugal. You may see across the Board, also mortgages, but businesses. We are gaining market share in Portugal in terms of loans, 11.4% and now 0.4 percentage points year-on-year and at the same time keeping very low levels of NPLs and provisions.
These with good performance on fees and also flat cost or flattish costs year-to-date results into higher operating leverage up by close to 30% for the first nine months of the year. The net attributable profit in Portugal €74 million.
Let’s move to further details on the different P&L lines. NII close to flattish year-to-date for the nine months as you may see. And on the bridge quarter-on-quarter, you may see a very strong contribution from client NII. This has to do with higher average volumes. But basically, index resets that as you may see, bottom left also result into an increase of circa 21 basis points on our bad book deal on the loan book.
Also, back to this NII bridge, you may see that ALCO and other have a negative impact of €98 million, that’s basically repricing on wholesale funding that is floating. As I commented, money markets and some other hedges and also it’s basically lower impact from TLTRO in — lower positive impact from TLTRO quarter-on-quarter. As a consequence of all this, margins also improve and this index repricing is expected to accelerate from the fourth quarter, but basically also into 2023.
Fees, as I commented for the quarter, over the €1 billion mark, this seasonality that is always affecting the third quarter minus 2.2% quarter-on-quarter. But you may see that also for the year, we are up on fees close to 4%.
You may see on the bridge, upper right that it’s the year-on-year bridge that recurring banking fees really supportive for the period. This has to do with improvement in credit card activity, everything’s related to payments and other transaction related fees.
You may see actually in the chart bottom left, that traffic on credit and debit cards during the third quarter has continued to be really good compared to the same levels in 2019. And so far in October, it’s still being the case.
Asset management, back to the bridge year-on-year, having a slightly negative contribution due to the average balances recommended and still positive momentum in insurance distribution and also wholesale banking.
And also you may see that the breakdown year-to-date is positive across all fee segments. And remarkably, for example, on wholesale banking, we are up by 15% for the year.
Continuing with other revenues on that front is all the insurance related revenues and the most relevant here is as you may see on the central chart, a new record high on quarterly results from our life risk insurance activities, €220 million and when combining this with the equity accounted from basically several cash [Indiscernible], you may see that we are up quarter-on-quarter and also year-on-year by slightly more than 17%. Remarkable activity here and we are quite a bit about the evolution of this business.
Continuing with costs on that front, actually not much to comment. I would say that we are on track to meet our fiscal year guidance, remember circa €6 billion. We have already delivered approximately 65% of cumulative cost synergies and we expect that this level will be approximately at 80% by the end of the year. Remember that we have an increase in depreciation this year that is related basically what IT investments and some problems we already flagged on our Investor Day, but also remember the amortization of the bank EBITDA PPA.
Asset quality on that front low launch, low loan loss charges, sorry. You see that this results into a cost of risk that is really flattish in recent quarters, circa 23 basis points now and on track to meet our guidance circa 25 for the year. A clear reduction of our stock of NPLs, year-to-date, actually €2 billion which is remarkable. And this results into an NPL ratio to weather with organic NPL reduction of 3% this quarter. You may see that across the different segments, the reduction is also very clear.
A few words on ICOs. Well, that part of the portfolio is doing much better than I initially expected. We have now 4.4% of our exposure classified as Stage 3. We have 28% of our total initial ICO exposure that was already — that was granted in the past that has been already amortized and off what has not been on my face 90% is already repaying principle. So that part of the book that was strong focus, sometime is clearly and we redirect doing better than initially expected.
And let me give you further details in the following slide because there are plenty of details we think are interesting. We recommended that we face the uncertainties ahead with confidence and well.
Regarding our asset quality, looking forward, this is basically in two pillars. Well, first thing quite a strong coverage NPL ratio, which is quite strong at 68%. And we have been able to increase it by five percentage points year-to-date, it’s €8 billion of credit provision funds.
But this combined with low risk loan portfolio, and you have here the details across the main segments of which part of our loan book is collateralized. And once you take this into account together with the exposure we have to the public sector, in results that two-thirds of our loan book is collateralized or granted to the public sector, which makes these loan book very resilient while we face this increased uncertainty going forward.
But there is a more important aspect that would like to remark on the right hand side chart — side of the chart, sorry. And this –while this environment with higher rates, obviously, there are plenty of borrowers that have that face, higher monthly installments. But this is the breakdown of our mortgage portfolio.
So, you may see that we have 60% of our mortgage portfolio that has been originated before 2012. And this is a part of the portfolio that as you may see, is basically at floating, but it’s very seasoned. So, those are borrowers that have been paying the mortgage for more than 10 years. And actually, the reason they have been paying even higher rates than the rates that we face in the near future.
Then we have a period of time with low origination, this is what the aftermath of the real estate crisis and then since 2015, we have 33% of the book that has been originated since then. And as you may see, we have 72% at fixed, so those borrowers are shield against the new rate situation.
So, the summary is that the part that is at floating is very seasoned, and the part that is more recent, actually is at fixed. So, this results into quite a resilient portfolio in our view.
In order to add some further details below you may see. The average monthly installment of floating rate residential mortgage is approximately less than €450. With rates at 3%, which is at some point what the market has been pricing, now is it slightly below although today, we are seeing again, great increases in the yield curve, the monthly installment increased by slightly less than €100 per month. So, this is for the average of the portfolio.
And also a key piece of data is that the average affordability ratio is less than 25% for the average of the portfolio and in — with rates at 3% with one-month arrival at 3%, the affordability ratio is going to be still below 30%. So, I think that is quite interesting information or even quite relevant to understand the resilience of our portfolio.
Let’s move now to the final two slides, liquidity on that front, we keep an ample liquidity position as you know well. Here you have all the metrics. And regarding MREL, we are complying comfortably with requirements as you know well with an M-MDA buffer at 288 basis points, despite very difficult debt capital markets during this year.
We keep executing our funding plan €3.8 billion issued and well going forward, focused basically on the rollover of upcoming maturities and diversification of the investor base.
And finally, solvency or capital as I said, we ended the quarter with a CET1 ratio of 12.11% that is the result of plus 30 basis points of organic capital generation of which approximately minus 11 due to risk weighted asset growth, because basically, we have had larger books during this third quarter.
Then we have the minus 27 basis points from the accrual of 60% cash payout and the 81 coupons and then on top we have minus 12 basis points basically from the impact on markets on our fixed income portfolio classified as fair value OCI, and also on the [Indiscernible] cash price. On top of we have 26 basis points from IFRS 9 transition, and we end with an MDA buffer that is at 398 basis points. And finally, tangible book value per share improving to €3.81, an improvement of 6.4% year-to-date.
Thank you very much. And I think that we may be ready for questions.
Edward O’Loghlen
Indeed. Thank you, Javier, thank you, Gonzalo. It’s time to proceed to Q&A. Operator, could we please have the first call with the name of the institution that he works for? And just a brief reminder for everyone to keep the questions as brief as possible. Thank you.
Question-and-Answer Session
Thank you. [Operator Instructions]
The first question is from Alvaro Serrano of Morgan Stanley. Please go ahead.
Alvaro Serrano
Hi, good morning. Two questions. First one TLTRO, can you give us the specific contribution in millions in the quarter in the NII? I know there’s been some headlines the press conference, but contribution a quarter from TLTRO?
And given that there’s no carry trade, is there any point in holding it given your CRO ratios, how should we assume that you’re going to return all of it in the November window?
And the second question regarding payout? You’re accruing the 60% capitals down slightly. As we think about the full year and potential distributions for new year. Can you help us understand how you’re thinking about it? Should we assume — I mean, what I’m trying to say is if buybacks is still possible, and — is a possibility that you may not pay out the 60% in dividend and you might choose to do a bigger sharing in buybacks. Is — are you going to play around with the payout in the mix? Or should we continue to expect some kind of buyback? Just some reflections on full year distribution? Thank you.
Gonzalo Gortazar
Thank you, Alvaro. On TLTRO. I think this is a star topic today for –. And I think at this stage, we have sort of in practice given a range of over 50% and maximum 60%. And I think the word — the Board needs in due course, to take a decision within that interval. I wouldn’t like at this stage to say anything more. I think that range is valid and decision will be taken in due course, looking at situation and obviously with sort of better visibility into 2023 and beyond. But obviously, we are, at this stage, accounting for 60%, which is the most prudent strategy and hence, if we do 60%, you should have no impact from that in our capital, as I know you know. On TLTRO, Javier?
Javier Pano
Hi, Alvaro. Well, a very specific question, and I want to give you a very specific answer or at least I will try. The positive impact on NII from the TLTRO funding plus depositing it at the ECB deposit facility has been circa €65 million this third quarter. It was in the second quarter, circa 94 approximately €94, €95. So on a quarter-on-quarter basis, we have a negative impact, and this is what I flagged on that, let’s say, NII bridge quarter-on-quarter that on ALCO and other activities, we had a negative impact quarter-on-quarter from TLTRO of approximately €30 million.
So this is — those are the details. And just to add some further information, I give also the percentage of the accrual. So we have been accruing at minus 32% the TLTRO facility. And on the other hand these average you can calculate it, obviously, but I give you the figure. So the average of the deposit facility for this third quarter has been zero, because it was negative at the beginning of the quarter, and then it was more positive, but the average is zero. So those are the figures. And you mentioned if we are thinking to early redeem, but no final decision has been taken yet. But very probably, we will early cancel this funding because as you say, we don’t have any benefit from it.
Edward O’Loghlen
Okay. Thank you, Alvaro. Let’s move on to the next one.
Operator
The next question is from Sofie Peterzens of JPMorgan. Please go ahead.
Sofie Peterzens
Yes. Hi. Here is Sofie Peterzens from JPMorgan. So I was just wondering, yesterday, we saw ETB got retroactively changing industrial near terms. Do you think there is any risk that Spain could retroactively change the guarantee terms on the hike and ECO lending? And have you done taken any legal opinions around this?
And then my second question would be my usual one. Could you just outline the core equity Tier 1 headwinds and tailwinds to come? Is it still 20 basis points start from IFRS 17 and then another 20 basis points from other kind of M&A transactions? Or should we expect more headwinds or less? Thank you.
Gonzalo Gortazar
Thank you, Sofie. In terms of the question on ECO loan, I see no risk on changing those retroactively for many reasons, starting with legal points, but also with practical ones given the relevance of this. So we can discuss the changes of the ECB on TLTRO, but they are obviously on, I mean, you know all. So I don’t think it’s a good use of our time now to get into that part. But what is your question and more relevant is, I see no risk of that happening in terms of changing the ECO loans and certainly from a legal point of view, I just don’t see how that could happen. And Javier?
Javier Pano
Hi, Sofie. Well, you say, well, no, we have positives and negatives ahead for the fourth quarter. We don’t foresee any major net impact for the fourth quarter, but into 2023, yes, we’re estimating now the major part of the impact will be into 2023. So here remember that we still had approximately 20 bps from applying the Danish compromise to Banca Vida. So that was a positive we had earlier in the year. And then from now on and into 2023, and I don’t know, to some extent, something may even skip to 2024, we may expect a combined impact from IFRS 17 plus those, let’s say, update on models you mentioned of circa 50 basis points.
Edward O’Loghlen
Okay. Sofie, I hope that answers your question. Let’s move on to the next one, operator.
Operator
The next question is from Francisco Riquel of Alantra. Please go ahead.
Francisco Riquel
Yes. Thank you. I wanted to ask first about NII, if you can update guidance for 2022. Other banks have also given indications for 2023. I don’t know you it can be also case you can share with us? And in particular, if you can walk us through the mechanics of the re-pricing of the loan book, how much has been done year-to-date? How much is left in the mortgage and in the corporate? And also on the liability side, how and when do you expect to start paying for time deposits, if you think that this trend could be accelerated in the sector after repaying the TLTROs or not?
And second question is about the fee income. Also, you can update guidance in general here and also in particular on asset management fees, which are growing quarter-on-quarter despite the falling in the assets under management. If you can please comment what is driving this growth, the mix, and products that you are offering to attract inflows? And if you can remind also on the performance fees in the fourth quarter last year, and if we should expect any this year at all? Thank you.
Gonzalo Gortazar
Thank you, Francisco, I think guidance, I’m going to let Javier, please go ahead.
Javier Pano
Okay. Hi, Francisco. Well, that’s the key of the call. So let me try to elaborate. Well, for the fourth quarter on NII, I would say here that we are having faster asset re-pricing than expected. So obviously, 12 months of — and other rates are being higher than our initial expectations. Also in terms of volumes, we are doing well. So we’re starting the quarter in good shape on that front. And for the moment, in terms of deposits or let’s call it deposit EBITDA, we don’t see any pressure. So this is a little bit the summary.
So the TLTRO goes from November, but still there is a positive contribution into the fourth quarter. So taking all this into consideration, yes, we are in a position to upgrade our NII guidance for this year. And we think that we are going to be very close, if not at €6.7 billion for 2022, for the whole year. So this is our view for 2022.
For 2023, well, again, the starting point is a good one in terms of volumes. So on that front, we are going to have a larger part of the portfolio already re-priced and re-priced at higher rates than initially expected. The TLTRO clearly is not going to have a positive impact at all. So we have this year-on-year effect. But in any case, this is much more than offset by the book re-pricing during the year.
In terms of deposits, so here, we gave you details on our Investor Day about what we thought about betas, et cetera. What we are thinking and just to update a little bit, what we commented on a qualitative basis because on I would say, on a numeric basis, I think that everything is — we are in the same place.
So, what we think is that probably the EBITDA is going to take a little bit longer than initially expected to increase. Probably, we still, during 2023, don’t face what we may call the terminal beta. Not sure, probably the terminal beta is not in 2023, but it’s actually in 2024, once already, the loan book has already been re-priced. So we may have this kind of a slight lag on that sense. So this is very positive for 2023 NII. But time will turn, because what we have now the redemption of TLTRO, we have some talk from DCB about quantitative tightening to what extent this is going to actually affect the deposit betas or, let’s say demand for funding in general is yet to be seen. No, but generally speaking, what we said back in May is still valid. Obviously, with higher rates betas are going to be slightly higher, but not, I would say, on a material world, but probably more skewed into 2024 than 2023.
So this is a summary note. So we are not now in a position to give you a quantitative guidance for 2023. But what I can say is that we expect very significant growth for NII for next year. So, this is our message today.
You have a question also on fees, on that front is true that we have done better than expected and everything related to what we call transactional banking, from payments, transfers, foreign exchange, even security. So, all those areas have been doing really well. We have been able to offset with that part of the business, some more pressure on AUM, as you say, no, because obviously, average balances are having an impact.
And well, into the fourth quarter, here, we face uncertainty in terms of AUM balances. It has to do with market extremely volatile. You mentioned the impact from success fees, it’s also uncertain, not all success fees are in actual terms some are relative to indexes or benchmarks. But probably we face also some headwind on that front.
But all-in-all, combined with our insurance business, remember that we gave guidance at €4.9 billion for the year for the combined, let’s say fees plus insurance. And as an insurance business is doing very well, as you could see, we are in a position now to upgrade again this guidance to very close to those €5 billion we were before. So this is now the message we can give you.
And to the specific question about fees, asset management fees on the third quarter, it has to do with the mix of products that we can distribute to our clients. And basically, this is it.
Edward O’Loghlen
Thanks a lot. Let’s have the next one, please.
Operator
The next question is from Andrea Filtri of Mediobanca. Please go ahead.
Andrea Filtri
Thank you and good morning. I wanted to ask about ICO, where you see it going progressively in terms of size and contribution to NII? And if you could elaborate a little bit more than you’ve done so far on the actually corridor of the deposit beta. Right now, it’s very, very low terminal rates, where do you see it? And how do you see it evolving between now and the terminal rate?
And if you could give us your view on the negative correlation between interest rates and being coming in particular wealth management, including insurance, how do you see it evolving as NII rewrites, how is the income going to be?
And finally, what were the negative interest rates fees in Q3? Do you look them in the fee income? And how we’re going to see in Q4? Thank you.
Edward O’Loghlen
Thank you, Andrea. Javier, please.
Javier Pano
Hi, Andrea. Good morning. Well, on ALCO, in terms of contribution, well, I told you the contribution in terms of NII is not that large, basically with the ALCO, well with a fixed rate ALCO, which is what we are thinking about is we are to some extent locking the current rate situation, because if you look at the yield curve is not actually that steep compared to, let’s say, short-term forward there are not — there is not quite wide, for example, shoring a spread. So actually what you’re capturing is more than machine. You are actually locking, let’s say, the sensitivity of the balance sheet. And you are reducing that sensitivity to higher rates, but also to lower rates.
And well, this is a quite an important decision we can take. So in terms of volumes, what we have commented in the past about 90 billion, it is still in place or within that this is they will to figure at some point. But when to really take a step forward has more to do with the fact that we see that we are really done in terms of this rate hike cycle, no. And however, obviously is not easy. And obviously, we will not be lucky enough to be successful just one time, and this is going to be overall process and we will decide according to our better view on that front.
On deposit beta courier, well, I already hinted a little bit our views, so we think that beta will gather pace slowly. This is our view, starting with basically with large depositors, corporates and so on. And it’s going to take a while in retail, basically, because we have a different profile, we have explained it in detail with first thing, we have a very large deposit base from retail, this is the first thing. But even within retail, our deposits, let’s say, regional clients are operational accounts. And we think that there is a very large part of that pool of deposits that is actually not sensitive at all.
So for there is always — there will be at some point where, for sure, we may be starting paying also for some retail deposits. But we think that it’s going to take some time. And this is why I mentioned that probably the terminal beta is probably more to be in 2024 than in 2023 in the cycle. And actually, according to all the models, we have been analyzing this is also what has happened in the past, and not also in Europe, but also in other jurisdictions.
In terms of rates versus asset management and insurance, well, I think that insurance is a business that is very shield, very, let’s say, with very low correlation to the rate situation insurance in terms of protection, insurance in terms of savings insurance, actually is positively correlated, because so far in the past we have not been able to construct products attractive enough because of the low levels of long-term yields. And with current situation, this is something we can start doing again. So this, this is positive.
And in terms of protection, we don’t see much correlation, we don’t see much correlation. And you can see that we have been doing well this third quarter and this year in general. And we think that this positive momentum is set to continue.
On asset management, I think that obviously the market correction in general, not only affecting, let’s say, stocks, but also affecting fixed income is helpful. That’s clear. But despite this being the case, we have been able to keep having inflation also, we have very well established business model, advisory model, as you know, quite unique in Spain to be set. And well, once this volatility settled, or at least this correction settles, we think that the pace of inflows will restart again, because we think that, well, people and clients already understand that this is the best way for them to save and not saving into short-term deposits that’s actually with current levels of inflation.
And even if inflation is at, let’s say, the ECB target of 2%, well deposit will be are totally not offering positive real returns. So I think that the message from our side will continue to be that for long-term savings, AUMs and the different even insurance solutions, et cetera is the right thing to proceed.
And then you had a question very specific one about custody fees in Q3. So we were making approximately 10 million per month before ECB removed negative rates. And this in the third half has been half of that. So I believe we have had a positive impact on fees of approximately €15 million. And while in the fourth quarter, this is going to be zero for sure. Thank you.
Edward O’Loghlen
Okay. Thank you, Javier, that was very comprehensive. And thank you, Andrea, for the questions. Let’s move on to the next one.
Operator
The next question is from Maks Mishyn of JB Capital. Please go ahead.
Maks Mishyn
Hi. Good morning. Thank you for the presentation and taking my questions. I have one on mortgages, and your new production increased again. We don’t have the data for September for the sector. But it looks like you’re already above in production market share above your back book. I was wondering what the reason, if you could remind us you are able to grow your market share so fast, do you see less competitive pressure? And also how does cross-selling of new clients compare with the back book? Thanks.
Gonzalo Gortazar
Thank you, Maks. The market share, we estimate in the last three months where we have public information is around 30% in terms of new production. And that compares to 25.6% of market share in the back book. So it’s a slightly above, which is good news. We have not changed our credit standards. In fact, if anything, we are slightly tightening them. But we are just tightening them slightly because we had very strict policies in terms of affordability and loan-to-value on a number of others.
So from a risk point of view, we feel very good. And we look at the expected loss and probability of default of the new vintages that we do track them month-by-month, those are actually very good. So we have no concern on that front.
We have produced over 90% of these at fixed rate. And I think this has also been a reason for our success. We are very associated with a fixed rate mortgage in Spain, because of our size and the push we’ve made not this year, but over the last seven years as Javier pointed out in his slide. And certainly word of mouth about us being competitive in the long-term sort of mortgage fixed rate has certainly helped.
We also started this year with a stronger focus on the product, as we thought it was the right time. Remember, we launched MyHome which we have talked about and you know well and basically starts got aligned in that front. My expectation is that going forward these market share is going to be lower in terms of the share of new business. And as you remember, we said that we wanted a market share that would be at 12% — 20% above, but not in our strategic plan as a target. And I think that is — that range of 20 to 25% is probably more likely as a sort of final destination. Those are the comments I will remake. We’re very pleased again on how we’ve done here. And how our people, our branches will react to the right incentives, which we have put in place, because that target was to grow, and our — within that target in a very conservative manner. Now you had a second question, I couldn’t really see relate it.
Maks Mishyn
It was the cross-selling on the front book is the same as a cross-selling in the back book?
Gonzalo Gortazar
I don’t have the exact figures with me, but generally, I would say a cross-selling is better. The fact that because typically cross selling had been more associated to rates in household insurance, and obviously payrolls and other things that are not profitable by itself, but generate revenues of another type. We have developed this ecosystem of MyHome.
Now where the cross-selling is not related to insurance-only, it stays and it’s actually obviously very profitable from that point of view and very effective, but we are also doing as you know, solar panels. We’re doing alarms. We’re doing some of the sort of wire appliances and electronics for houses. We’re now moving into mobility electric chargers, et cetera for the car.
So the ability — or the range of products, we can actually cross-sell is much higher. And certainly all this is happening in the front book and increasingly so versus not in the back book, because we didn’t have the same number of products, some of them like alarms, we’ve been doing for five, seven years, but others would be not in more recently. Okay?
Edward O’Loghlen
Thanks, Maks. Let’s move on to the next question.
Operator
The next question is from Ignacio Ulargui of BNP Exane Paribas. Please go ahead.
Ignacio Ulargui
Thanks very much. Thanks for taking my questions. I had just two questions. One on the liquidity coverage ratio, what kind of buffer you’re seeing you’ll have over the minimum level? What would be the comfortable level for you at this stage?
Second question, it’s related to the NPL formation. We have a very good quarter in terms of NPLs and I know you commented in the call that bad indicators as it comes to that very positive. So could you give us a bit more color on that and what to expect in terms of NBL formation and NBL evolution in the coming quarters?
Just one, there’s small detailed question. The declining ICO loans in the quarter had something to do with those deposits. Have you seen corporates using deposits to repay ICO loans? Thank you.
Gonzalo Gortazar
Thank you, Ignacio. Let’s deal with the last two questions and then Javier can comment on LCR. On decline on ICO loans, we haven’t seen any particular sort of unusual activity, certainly deposits have kept fairly stable on the business side, there are some changes in deposits that are associated to very large movements, some of them associated to temporary collection of taxes. And some are specific large items, okay?
So not — no changes from that point of view. There’s some seasonality because we have deposits that are higher the end of June due to extraordinary total sort of payment of salaries and the pensions advance. So, nothing there, but obviously, what you’re seeing — what we’re seeing is that business have been able generally to pass on cost increases to customers, they are fairly stable. A situation where they have cash, they’ve repaid ICO loans early. As you know, we have now a figure close to 30%. I think it’s 28% that has been already repaid, but not particularly impact on deposits.
On NPL, yes, we have had an extraordinary year to be honest, looking into all what has happened. The fact that we have been reducing the non-performing loans in such a way is 2 billion in the year and 0.6%. Here, we have had both sort of portfolio sales and organic improvement, which is very significant. And to be honest, what we see for the fourth quarter is at least same trends, including the month of October with no sign whatsoever of a change in payment behaviors.
And again, with early defaults including month of October up to date at historically low levels. So there’s very good feeling from that point of view, we have to see whether there’s any deterioration in the last two months of the year. Probably not, but I think at the end of the year will always make some judgment on overlays and all those other considerations depending on just what’s happening in the last two months, but either we see 2023. But to be honest or what we see so far, it’s been so positive. That I think gradually the market is going to be coming to the view that we have, there will be a deterioration in asset quality. There’s no question, but it should be a modest deterioration.
And if we end the year at around these levels of 3%, we will look at 2023 ending 2023 with a higher number, but a number that would still start with a three. This is what we’re seeing. It allows us to continue to think that given the resilience of the portfolio, the fact that we think Spanish businesses and families are going to suffer less than other places in Europe. And the fact that, we have built this very large provision in unassigned provisions and what’s coming from the PPA, we feel fairly comfortable with the guidance we gave on the whole period for the whole strategic plan on asset quality.
When you look at — if that is contained, then obviously, this very significant increase in net interest income, as Javier explained, and I would emphasize the word very is going to have a significant impact on our profitability going forward.
Now we need to be alert because obviously the situation is fluid, is volatile, but we have been alert now for some time, and we’ve been very effective in containing any damage and because actually, the situation has not deteriorated. Our efforts have resulted not just not seeing a deterioration, but in seeing a notable improvement. We will see. But I would say, in terms of confidence, this is obviously an area of difficult outcomes. But I would say our confidence is very high on being well prepared for this deterioration. Javier?
Javier Pano
Well, there was a question about our comfort level on liquidity coverage ratios. I think it’s circa 150% is the go to area. Thank you, Ignacio,
Edward O’Loghlen
Thanks, Ignacio. Let’s get the next one, please, Operator.
Operator
The next question is from Carlos Cobo of Societe Generale. Please go ahead.
Carlos Cobo
Hi. Thank you very much for taking our questions. A couple for me. One would be on the ongoing negotiations with government for low-income families, you have in the current to media, you have proposed a slightly different approach in terms of freezing the installments. I wanted to understand how much of the potential portfolio that could be effective is already restructured? If you could give some numbers around that, and what could be the difference in potential provisions between one option in terms of freezing the mortgage or restructuring, it will be helpful to time.
I know it’s not going to be very, very sizable, but it’s good to understand before the agreement is confirmed. And secondly the cost of risk you have a run rate of around 33 basis points in the nine months, but you still maintain the 35 basis point guidance for the year. Why not lowering the guidance? Are you still considering a top-up, which wouldn’t make sense based on what you just discussed about asset quality –if you could able to understand that? And just a clarification, sorry, about the trajectory capital impact maybe I have the numbers wrong, but I have 20 basis points from IFRS 14 and another 20 basis points from other regulatory impact. And you’ve now said 50 basis points for IFRS 14, would that be on top of the other 20 basis points? So could you clarify what’s the total trajectory impact ahead?
Gonzalo Gortazar
Thank you, Carlos. Let me respond. I think the last one is 50. Javier?
Javier Pano
50 combined.
Gonzalo Gortazar
50 combined IFRS 17 and the other regulatory impacts. On the cost of risk for this year, the 25, obviously, as you correctly said, if we were to move to 25, it means that in the fourth quarter, there will be a higher level of provisions than in this quarter or previous quarters because we’re saying we’re at 23 basis points, but that is on the basis of the last 12 months, and we had some higher charges in the fourth quarter, which as you know, you may well think that banks tend to do that generally when the fourth quarter comes.
We’ve said around 25. It doesn’t mean it’s precisely 25. If we look –so that obviously gives us the ability to accommodate a lower number. At the same time, while we are not seeing a change in patterns now I think by the end of the year, we probably will have a better degree of visibility of what is the likely deterioration in 2023 and that given the way that provisioning rules work may or may not have an impact. But I would say, on this front, we feel comfortable with that around 25 basis points.
I don’t think it’s too relevant what is finally the charge in the fourth quarter versus 2023. I think what I feel very or we feel very confident now is in this environment that I’m describing, we’re going to contain provisions to the levels we said in our strategic plan. And in fact, we can accommodate a fairly significant degree of additional deterioration and still meet our guidance based on how things have evolved in 2022, much better than what we expected.
In terms of the impact of the negotiations with the government on solutions for mortgage affordability for more vulnerable customers, this is a discussion that has to be had by the banks among themselves and with the government. And I think it — it’s in the benefit of everybody to keep that discussion in this circle and not speculate on different solutions, different costs for different institutions depending on which solution. Again, there’s a lot of discussion. And eventually, we need to have all these discussions and reach an agreement with the government.
And I think that while that doesn’t happen, it’s better not to — each banker start saying what is best from their own point of view on what impact it may have because it’s not going to be helpful to find an agreement and an agreement that is positive for all. So if you allow me, I would not comment on the specifics. But in any case, I go back to what we are saying is with the combination of fixed rates for the majority of our customers in the last seven years and very seasoned portfolio, which we have for most of the floating rate portfolio.
We’re talking about some moderate numbers, which are consistent with what I said, we should have a deterioration in non-performing loans. But the figure should start with three during next year. We don’t see further deterioration. And part of that is not going to be because you mentioned refinancing and restructuring. We’re looking at this crisis as a crisis where job transaction is going to be very limited.
So generally, we’re going to be looking at clients that can pay, but they cannot pay in full now. So typically, this would result in changes that if there’s a significant increase in credit risk, which there will be for a part of the portfolio, we’ll move to non-performing loans, but as unlikely to pay, we’ll continue to pay a reduced amount and our experience is that eventually they will be back, obviously, after cure periods, et cetera. And so after a couple of years, three, they will be back as performing loans in the majority.
But we will have some reclassification on that front during next year, limited. And obviously, I would like to make sure that we agree with the government what do we do because that will also sort of position the industry on the right side in terms of helping the economy being part of the solution and not part of the problem. Whatever happens, whether we have an agreement or we do not have an agreement, we’re going to do the right thing. That’s clear. And again, with an impact, but less marked than certainly what we had in the past.
Edward O’Loghlen
Thank you, Carlos. Let’s move on to the next one. Please, operator.
Operator
The next question is from Ignacio Cerezo of UBS. Please go ahead.
Ignacio Cerezo
Yes, hi good morning and thank you for taking my questions. One is on costs; you’re sticking to the €6 billion target in 2022. If I remember correctly, your business plan target is around €6.3 billion in 2024, you still have some synergies coming through next year, according to the plan. I mean, how comfortable are you that those synergies can compensate underlying inflation next year? Or we need to think about absolute cost growth in 2023 and some pressure into the business plan target?
And the second question is on capital return. Given those 40, 50 basis points, impact from IFRS 17 and regulation, considering that you’re closer to 12% CET1, how comfortable are you actually on being able to distribute the kind of 80%, 90% payout actually that you have left in the rest of the business plan? Or do you think there’s going to be some restrictions around that coming from either the regulator or your profits actually been lower? Thank you very much.
Gonzalo Gortazar
Thank you. Thank you, I would say in terms of the cost base, we are going very well into meeting our cost targets for synergies, which is, as you know, we reviewed upwardly last year, and that’s in place.
There’s no question that we’re having inflation at higher levels than what we expected. And hence, we’re going to have over the life of the plan, a higher cost pressure. This year, we are actually, as you pointed out, and as Javier mentioned, we are keeping our guidance, and we expect to deliver €6 billion, but the risk is of upside pressure vis-à-vis our targets in 2023 and 2024. This is, I would say quite, quite obvious.
I think what really is relevant here is how does this compare to our revenue potential? No, the reality is that this inflation is put in — and will put pressure on 2023 and 2024 in terms of the cost base, but is providing us with an increase in revenues, that more than offsets any potential inflationary effect. So, we are certainly going to keep our targets in terms of efficiency, even if we eventually do have, which we will try to resist, but do have some impact on the cost base associated to the inflation situation, okay.
In terms of capital, I would say we continue to see the group as highly capital generative, we do have these around 50 basis points that Javier mentioned. And obviously that if asset will impact us during 2023 mostly, it means that the annual payout, which we have committed to for the three-year period, notice stay above 51%, on these 50 basis points, the further additional capital build-up in the short-term during 2023 is going to be limited.
When we look at the whole of 2024 and our targets we see obviously, increased profitability, certainly accelerated i.e. 2023, we’re going to see a lot of the good impacts that we were expecting to have in 2024 are being brought forward to 2023 given the evolution of rates in a very significant way as Javier mentioned, and therefore, we’re going to have a higher capital build-up because we will be more profitable.
We have a famous tax, the unexpected banking tax, which as I said, is €400 million to €450 million because revenues are going in the right direction more likely to be in the €450 million for 2023. And this — again in 2024 it’s obviously something that we need to accommodate.
But when I look at the whole picture, there are some things that are better, those that are worse, like the banking tax. All-in-all, we’re certainly at this stage remain committed to deliver this ambition in terms of capital and I think it will be done in a in a nicer way, i.e. we’ll have a bit more growth and more profits, which obviously will generate even if we maintain the same payout higher cash distribution for shareholder.
Certainly because of the economic environment, but to be honest, if you asked me today how do I feel about the future compared to when we presented our plan? I will say I feel better despite the short-term challenges.
Edward O’Loghlen
Okay Ignacio. Thanks for your questions. Let’s move on, please.
Operator
The next question is from Britta Schmidt of Autonomous Research. Please go ahead.
Britta Schmidt
Yes, hi, there. Thanks for taking my questions. I’ve got a couple of clarifications, please. Could you help us with a couple of numbers on the year-on-year comparison? What am on for deposit gearing, — and excess liquidity fees will drop out year-on-year? And another clarification on capital, do the minus 50 bps include anything from BPI models as a positive?
My second question is on the NII sensitivity, what is the incremental sensitivity to where the rates are now? And what would it be at the with a terminal B [ph]? Thank you.
Javier Pano
Hi, Britta. Well, I don’t know if I have all the figures you asked for, but I will try. So, on TLTRO, so what we are going to miss what — better said which has been the impact from TLTRO year-to-date, it has been circa €250 million, okay. Then still, on the third — sorry, on the fourth quarter, as the TLTRO let’s say rose or the — let’s say the benefit from TLTRO rose from the end of November, is still into the fourth quarter, we have some positive impact also from TLTRO, what is roll — to be slightly over €300 million.
And then on your asked also about dealing, I don’t have this figure with me. But well, this is approximately six times our — let’s say reserves, this is approximately €27 billion, €28 billion, probably you can do the math that was, let’s say at zero instead of at minus 50 bps.
And then about cash deposits, we were making like €10 million per month. So, we — I said before that in the third quarter, we had €15 million. So, probably, this is approximately €75 million that is going away into [Indiscernible].
Then you had a question on those minus 50 combined? Well, we said before 40, 45. Now we have refined the figure to 50. Your question is does this include positives from internal models from BPI? Yes, this is part of the positives and there are positives and negatives? So, yes, I gave the overall impact.
And on NII sensitivity and deposit EBITDA, I am not going to be able to give you a quantity — specific field. I tried to be as qualitative, helpful as possible. What I said is what we presented in May, is valid. What I say is, rates are higher, EBITDA are going to be slightly higher. But at some point, EBITDA do have a gap, even if rates are at — let’s say, saturating at 5%. So, there is always a gap. So, you don’t have a linear trend upwards.
And what I said is and here’s what we are actually assessing and this is why I’m not actually giving you a figure is that we think that probably this — the slope of EBITDA increase is going to be slightly flatter and probably the terminal EBITDA is going to be more into 2024 than in 2023.
Sorry for not giving more specific figures. I try to give you our qualitative thoughts now. But in any case, in any case, and I would like to reiterate we have done so several times today. So, the expected growth for NII next year is very significant. So, I think that this is the summary.
Edward O’Loghlen
Okay, thank you, Britta. And operator, I believe, we have one last question. Please push it through.
Operator
Next question is from Esther Castro of Banco Sabadell. Please go ahead.
Esther Castro
Hi, good morning, gentlemen. Thank you for your presentation. I only have one more question remaining. I mean, [Indiscernible] in the sensitivity provision for every minus 100 basis points on GDP. Thank you so much and have a great day ahead.
Gonzalo Gortazar
Thank you.
Javier Pano
Basically, the sensitivity of cost of risk in the — is 125 approximately. Obviously, change in GDP is different depending on what’s the impact on employment and real estate in particular. So, those are two variables that have a significant role here, but the figure that we publish is that €126 million.
Edward O’Loghlen
Okay. Esther, I think you were the last one. So, thank you very much for your attention, and catch-up with you next quarter. Bye, bye.
Gonzalo Gortazar
Thank you.
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