CIXPF - Caixabank SA (CAIXY) Q2 2023 Earnings Call Transcript

2023-07-28 14:37:09 ET

Caixabank SA (CAIXY)

Q2 2023 Earnings Conference Call

July 28, 2023, 05:30 ET

Company Participants

Gonzalo Gortazar - CEO & Executive Director

Javier Pano - CFO

Maria Luisa Martinez Gistau - Head, Communication & Institutional Relations

Conference Call Participants

Ignacio Ulargui - BNP Paribas Exane

Francisco Riquel - Alantra

Sofie Peterzens - JPMorgan Chase & Co.

Andrea Filtri - Mediobanca

Ignacio Cerezo - UBS

Carlos Cobo - Societe Generale

Alvaro Serrano - Morgan Stanley

Marta Sánchez Romero - Citigroup

Britta Schmidt - Bernstein Autonomous

Fernando Gil de Santivanes - Bestinver

Presentation

Unidentified Company Representative

Good morning, and welcome to CaixaBank results presentation for the second quarter of 2023. We are joined today by the CEO, Gonzalo Gortázar; and the CFO, Javier Pano. In terms of logistics -- presentation and about 45 to 60 minutes with a Q&A.

In the Q&A is live, we would have received the instructions by e-mail on how to participate. One additional housekeeping item this quarter. Please note that the historical figures for 2022 and the first quarter of 2023 that were reported in the first quarter have been restated to reflect additional information related to the presentation of the P&L under IFRS 17.

And with that, just one reclassification that has taken place in that restatement is from -- just to note that it has been reclassed some revenues from service insurance result to NII. There has been no impact on net income for the full year 2022 or the first quarter of 2023. And with that, let me finish by saying that my team and I will be at your full disposal after the call. Without further ado, please let me hand it over to the CEO, Gonzalo Gortázar.

Gonzalo Gortazar

Thank you, Marta. Good morning, everybody. And I'll get directly into the highlights of of the quarter. It's been a very good quarter for us. I would say, in terms of volumes, I'm particularly looking at how volumes have evolved also for the market and our competitors this 2.7% growth in customer funds and 0.8% performing loans, though affected by seasonality are pretty good numbers. And the sense we have is we are functioning at 100% in terms of commercial activity.

Nonperforming loans down again to 2.6%. It's the minimum over the last 15 years. High coverage liquidity and capital continue to be very strong. I would highlight the liquidity continues to increase despite the fact that we repaid partly the TLTRO. Return on tangible equity at 12%, which is our target to exceed this level by the end of next year. So clearly, well ahead of planned efficiency gains with cost income below 46%, all points in the right direction. And with that, we have decided to announce a share buyback for €500 million.

Basically the amount that is pro forma for the pending impact or regulatory impacts that we have on capital, This is the amount that is over the 12% target. And given that we can do it now, we've decided to accelerate that and make sure that we are able to execute it starting this second half of the year. And obviously, this buyback is in addition to our 50% to 60% payout. So it's not replacing dividend. It's in a decent and in line with our strategic plan and our commitment to generate €9 million of capital available for distribution about that 12%, of which Obviously, with increased profitability, we're running ahead. And hence, there's clear upside on that front.

Net income, up 35%, 35.8% year-on-year and 48%. It will look at last year in terms of the quarter. Point of the economy. Obviously, the economy is doing much better than expected. We just had this morning figures for the second quarter on GDP, which basically are in line with our estimates. So they confirm what you see here on this page.

We have upped our projection for GDP growth for Spain for this year for 2.3% compared to 1.3% in January. And in the case of Portugal, we're talking about similar, even further increase up to 2.6%, well above the euro area. We're doing better in inflation. As you know, we also have inflation numbers this morning. Obviously, inflation was too low in May is now slightly correcting but in line with our estimates for inflation this year, 3.4%, a bit higher in Portugal in both cases, below the euro area. Housing prices are doing better than expected with still some growth, almost flat in real terms, but 2.9% growth in nominal terms.

Employment, we had figures yesterday, very strong employment figures with over 600,000 jobs created in these 6 months. And you can see the export performance in terms of both services and goods doing very well. The figures for this second quarter also indicate that the domestic consumption is recovering, thanks to, I think, also a lower level of inflation. All in all, to be honest, the environment is much, much better than what we expected. And this is obviously a bedrock for our performance and particularly for our expectations going forward.

In terms of the loan book, what I mentioned, 0.8% growth with some seasonality in this quarter. If you take that away, basically, loans are flat, and you see the evolution growth in business lending and consumer lending and deleveraging in mortgages associated to the higher level of rates. This is something that we expected in the case of mortgages. I think both business and consumer lending, I would say, we're doing better than expected. We're gaining share, as you see on the business front.

With respect to the mortgage book, remember that 70% approximately of that book is floating. You have here some numbers, and I think there are 2 messages for you to take away from this. One is already 55% of the portfolio has repriced. Euribor is at or above 3%. A but we still have pretty good levels of asset quality and the affordability ratio is actually going to stay below 30% on average, moving from lower than 25% to lower on 30%. So on the one hand, you'd say, [indiscernible] but on the one hand, we're not seeing a negative or significant impact that is negative on asset quality.

And at the same time, as you can see, almost half of the portfolio has not yet he has not yet reached the 3% level. So in terms of NII and asset repricing, there is further to come.

Loan production consistent with the evolution of stock. Small fall in business lending, a significant one in mortgages, 21.5%. Note, however, that it is much higher than the first half of 2021. So it is comparing to a very high level of activity that we had in the first half of last year and consumer lending, again, sustaining those production levels, which is significant, I would say, loan yields on the front book, obviously picking up very strongly in the semester.

Customer funds up 2.7%. I would say, particularly noteworthy, the increase in long-term savings, 5.5% in the year, half of that approximately -- or a bit more than that €6.8 billion you can see on the bottom left comes from market effects, but there's over €5 billion of net inflows both in the insurance business and in the mutual funds business.

There is also a positive impact on balance sheet deposits, although there, we also have a positive seasonal effect associated to extraordinary or double salaries that are paid at the end of June. But all in all, a fairly positive figure, as you can see on the customer funds side. Protection insurance doing well, growth of almost 9% in insurance premia over both life risk and nonlife.

On the life risk, obviously, some impact from the lower production of mortgages. But despite that lower production of mortgages, you see it's quite remarkable. We had growth in new insurance premium, and that is a lot to do also with the new products that we launched last year, my box [indiscernible], which is affecting positively both our savings, but also our protection insurance because it has a component of life risk on top of the sort of retirement saving feature. Very positive, hence, the evolution of market share in the light risk business and still quite a lot of potential.

MyBox currently has just over 160,000 clients after just one year. And obviously, these are sort of saving on a monthly basis, and we continue to grow that. So here, we have business that today is already having a positive impact, but particularly, it's going to have a very significant compounding effect over the years. It will continue being successful with it, which is what we think on non-life also pretty good performance across the board.

PPI is really becoming an engine more and more for the group. You see market share in loans, residential mortgage, long-term savings, all up year-on-year. Numbers that actually are consistent quarter after quarter also for card turnover. And with increasing rates, now you see how cost income is come down to 43.6% and return on tangible equity of 12.5%. It is now at a very attractive level, but obviously, with further room to improved.

Asset quality continues to be extremely good, particularly looking also at the levels in Portugal, 1.9% of nonperforming loan ratio and a very high coverage. So again, another very strong quarter from BPI. We get to 12%, obviously, because of fundamentally increase in revenues, a lot of that associated with interest rates, but good level of activity, obviously, some negative from the banking tax and then the evolution of costs. And the rest has a negative, although not a very significant impact.

And that's how we get from last year to this to this one. And just to finish on my side, we continue to be in a very strong position when I look forward and said here is the best financial position in 10 years. And probably could be in 15 years, certainly since 2008, 2009. We've seen now that we have the lowest NPL ratio in the last 15 years. Remarkably, we have reduced it another quarter June.

The pre-provision profit obviously now being at 1.81%, giving us a wide margin to observe any deterioration on the cost of risk side, which we're not expecting in any significant way, but obviously gives us comfort to know that we have all that cash and should the negative developments.

Liquidity, I'm sure Javier will provide some further details but very attractive levels, MREL, full compliance, capital generation, MDA buffer, and basically, our profitability and efficiency. I think when we look to what is happening in this quarter, we feel very good about what we have achieved. But when we look forward, we actually feel even better about what we can achieve in the future.

And with that note, I will -- sorry, it seems that I have a couple of pages more before I get into the P&L. I am kind of holiday mindset, as you can just trying to find shortcuts, apologies. But -- and we had a couple of comments, obviously, good track record in terms of earnings and tangible book and dividend per share, but we are certainly looking forward to project that track record the future.

And in terms of delivering on our capital distribution targets, we have obviously distributed already €3.5 billion. We're adding this €500 million and with cash payout for this year, next year and obviously, additional exercises of capital distribution, we expect to be able to meet. And in fact, we are clearly running ahead now of that €9 million estimated level of capital available for distribution.

One final note on a great quarter and a great half of the year. I'm spending a lot of time reminding everyone in the financial community and outside the financial community that beyond our shareholders, we're taking care of many other social causes that we have through our profitability, we're helping la Caixa, the foundation. And obviously, we expect that to continue on the rise, continue to have this commitment to be present in rural Spain, which is quite unique. We're obviously, by far, the largest bank.

It's quite unique and also it's is being profitable. And we are very happy to say we did not withdraw from many towns. It used to be a business that was hardly breakeven even Obviously, with positive rates, it becomes a business that is attractive again. And we have, obviously, a major competitive advantage there vis-a-vis others.

Micro lending continue to be the largest in Spain. We have had a few requests of under the code of good practices for mortgages. 5 -- a little bit below 6,000, which indicates one that we're obviously helping our clients that cannot pay their mortgages. And at the same time, that the number of clients that are in that situation is quite limited. And hence, it means that we do not have social problem certainly at this stage associated to the increased level of interest rates.

Diversity, employment, our volunteering programs and our partnership with Foundation and our commitment to sustainability and among other things, can be shown by the funding that we do in sustainable development or SDG bond issues we have done over the last 5 years, which is the largest for European markets.

So a note to remind you that we have a different positioning to most other banks in Europe because of our origin and our DNA. We want to make sure that bringing good news for shareholders is also bringing good news for the society at large, which is obviously what we are doing, but it's a message that is important to convey everywhere, every time. Thank you.

Javier Pano

Okay. Thank you, Gonzalo, and welcome all of you. Well, as usual, further details on the P&L and the balance sheet. Net income, slightly over €1.25 billion. That is close to 50% year-on-year and quarter-on-quarter. Strong revenues, basically core revenues, NII growing strongly. We'll go into that in a minute.

Fees affected by lower banking fees. This is gradually being partially offset by recovery in asset management. The insurance serve result that continues to grow double digit year-on-year. And on noncore items, I would remark the dividend from BFA and then also the single resolution fund charge that is usually the case is impacting the second quarter.

Below costs, in line with our expectations, in line to meet our guidance for the year. Remember, 5%. On loan loss provisions, stable at remaining at low levels. And I would remark on other provisions that this quarter are impacted by the update of IFRS 9 models related to contingent commitments that for accounting reasons there is a small impact on this P&L line. So all in all, a historical high in terms of net income in the second quarter.

Now yes, moving into the details. NII. As you see, close to 12% quarter-on-quarter over 60% year-on-year below on the NII bridge evolution quarter-on-quarter, you may see client NII being the largest contributor. Still, the ALCO having the impact from river repricing on our wholesale funding that, as you know, is basically swapping to floating. But all in all, really strong performance during the second quarter.

Margins expanding significantly with a customer spread at 320 basis points, up 34 basis points in a quarter below, you see the yields of our loan book and our customer deposits, the loan book at 375 basis points, obviously, reflecting the repricing -- positive repricing on our floating rate loan book, but also the positive impact of the front book loan yield that, as you may see, at 472 basis points is clearly accretive.

Then on deposits, 34 basis points is the cost of our client funds, excluding structural hedges and foreign exchange funding. And well, this is deposit EBITDA that is gradually increasing. Now the second quarter at 11% from 7%. And clearly, those trends imply upside on our fiscal year guidance, something I'm sure we are going to discuss in the Q&A session.

The ALCO, not much to say. We have had a few maturities this quarter. There is not much incentive to add to the portfolio with a negative yield curve. You see here the maturity profile the ALCO portfolio breakdown, the yield that has been progressing and is now standing at 1%. The average life and duration pretty much stable, slightly below 5 years. On the chart on the right, you see the evolution of wholesale funding costs. Remember, this is -- those -- this wholesale funding is swapped into floating. So 96 basis points over 6-month LIBOR, clearly reflecting part of the issuances we have done during the quarter. Moving to fees.

As I said, fees are affected by recurring banking fees that are reflecting the gradual normalization in this positive rate environment. So it's cash custody fees that all of us grow that have already gone, but also lower account maintenance fees as initiatives implemented in the negative rate environment are now gradually reversed. And as we are trying to find the right balance in this new rate environment.

Asset management gradually progressing. You may see a positive evolution year-on-year and quarter-on-quarter. Below, you see the evolution of average balances. As you may see, the average balances during the second quarter already 1 percentage point over the average of last year. But by the end of the second quarter, above the average. So markets permitting, and so far is the case, we can expect that important revenue line for us to do well in the near future.

Insurance distribution affected by some nonrecurring positive items in the second quarter last year and the first quarter this year. But what this -- we're expecting from an accounting point of view to improve during the second half. And the underlying business, as you saw in terms of volumes is doing really well.

Wholesale banking, always more volatile. We've had a really strong first quarter. So basically, here, you can see the evolution year-to-date and that fell line up by 17%. Continuing with some comments on other revenues. Here, you have the insurance service result, plus equity accounted revenues on the left-hand side chart. You may see the combination of both growing close to 20% year-on-year.

Remember that on the first quarter this year, we had an inorganic extraordinary positive in the equity accounted on [indiscernible] deals, you need to take this into account when making the quarter-on-quarter comparison. In the central part of the slide, you see the breakdown of the insurance service result, positive evolution, I would say, in the first 2 lines, life risk insurance up by 24% year-to-date life savings insurance up by 17%.

As Gonzalo commented, we are having approximately 50% of the long-term savings inflows into life savings insurance. So obviously, here, higher yield curve is helping on that revenue line as we can build attractive products for our clients. And then on unit linked, I would say that you can expect the same that with AUMs, markets improving. So average balances hopefully will gradually improve and we can expect this to do better in the second half of the year.

Shifting to costs, as I said at the beginning, not much to say. On track to meet our guidance for the year, 5%. The most remarkable in this slide is the cost-to-income evolution 45.7% by the end of the quarter. And you may see on the bridge below that is basically revenues that is contributing, but also the impact of the banking tax, it's 1.7 percentage points. So we are disclosing our cost-to-income ratio, including that impact.

And finally, on comments on the P&L cost of risk, loan loss charges at low levels and well on track also to meet our guidance below 30 basis points here. This quarter, we have updated the IFRS 9 models with new parameters. And as a consequence of that, we have assigned approximately €300 million of the collective provisions for macro uncertainties and now the balance outstanding is €1.1 billion. We continue to hold a high NPL coverage at 76%, as you may see.

Moving to the balance sheet, a few comments. NPLs, historical low, 2.6% NPL ratio. You may see that we don't have any deterioration across any segment. You may see that below and a few comments on our credit exposures, a low commercial real estate exposure, 2.4% of our loan book. And as always, an update on ICOs, of those loans already amortized and the current balance of standing at €14.4 billion and what is classified on that portfolio as stage is 3.8%, which is fairly stable, actually a little bit below previous quarters.

Liquidity and ample liquidity position, which is clearly becoming a competitive advantage now. You have here several liquidity metrics, liquidity cover ratio well above 200%, even including or excluding betas, the TLTRO funding, we have a pending maturity in March for approximately €8 billion.

The liquidity coverage ratio is pro forma 189%. So a very comfortable position. Other metrics also very comfortable ones, asset encumbrance loan to deposits at 91%. And bottom left, you see our liquidity sources close to €200 billion. It's not only HQLA, it's also DCB, deposit facilities available. And on top of that, €52 billion of covered bond issuance capacity.

On the right, you see the breakdown of our client deposits, the [indiscernible] of retail 79% and wholesale 21%. And clearly, also a key aspect is the percentage of deposits that are guaranteed is 64%. A few words on MREL. We end the quarter on a pro forma MREL ratio at 26% and that pro forma includes issuances in the month of July, basically €1.5 billion senior preferred and what we have announced today, which is this call for 500 million, 81 that, as I say, has been announced this morning.

With this, we have an NDA buffer taking into account the expected 2024 MREL requirements of close to 2 percentage points. You may see that we face maturities and/or potential early calls in a comfortable calendar across several instruments, and you can expect us to be in the market regularly as has been the case so far this year across several instruments in order to keep our MREL stack at approximately current levels.

And finally, capital, strong quarter, 61 basis points of organic capital generation minus 39 basis points from the dividend accrual. Remember, accruing at 60% plus 81 coupons. And then on markets and other, basically, we have here minus 29 basis points from regulatory impacts plus the impact on OCI from the depreciation, among others of the Angolan Kwanza.

Then also -- sorry, with that, we have a CET1 ratio at 124%. And we also disclosed a pro forma ratio at 12%, including our estimate for pending regulatory impacts, minus 20 bps. We expect those in the third quarter. and also the €500 million share buyback that is having an impact of minus 23 basis points. And on the right, finally, the tangible value per share evolution, we ended the quarter at €3.82, up by close to 8%, including the dividend.

And finally, just as a reminder, although it has already been said, we keep our dividend policy and change it for a cash payout between 50% and 60%. And on top of that, this new share buyback is expected to begin in the fourth quarter for €500 million pending the supervisory approval. So thank you very much, and I think that we are ready for questions.

Maria Luisa Martinez Gistau

Thank you, Javier and Gonzalo. With that, let's open it up for Q&A. Operator, can you please let the first call in.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question is from Ignacio Ulargui of BNP Paribas.

Ignacio Ulargui

I have two, if I may. The first one is just coming back a bit to what you love to open, Javier, on the full year guidance for NII. I mean what should we expect in terms of outlook for 2023 after the performance in this quarter. you could update us a bit on when the peak NIM could be reached and how the deposit pickup that you have given us in previous quarters should end up for '23 and '24, it will be great.

And also linked to your comments on follow-on prospects that you have for the future, looking a bit to your expectations of ROTE trying to see whether the current levels that we have had in the quarter, if we could extrapolate net of the charges, taxes single resolution contributions. What could be the level of profitability of CaixaB going forward?

Gonzalo Gortazar

Thank you. Thank you. Obviously, I'll let Javier elaborate on NII, but it's pretty obvious that after the second quarter, our guidance is too low and -- but Javier will will give you the details. The things are obviously working well for us on that front. In terms of capital, at this stage, we're not going to be giving new figures or profitability or capital generation for next year. The environment is is moving, obviously, fast. Fortunately, it's moving fast in the right direction. And clearly, based on anyone's projections in the market, you see we're going to be ahead of our targets particularly on this €9 million, where will be as -- as time goes by, we will be updating EU. You will be seeing what's generated. But certainly, our commitment to distribute the excess capital over 12% is unchanged. And the reality is profitability means that there is a clear upside on that front. NII, Javier? You anticipated this question maybe.

Javier Pano

No. I wasn't expecting that one. Well, I -- and thank you, Ignacio. Well, basically, so far this year, we're having more positive news, I would say, across the board. So it's -- it's basically rates that is at or higher than initially expected. It's better volumes in general. So not only on the asset side, but also on the liability side, and this is important also -- and probably the most important of all, which is deposit EBITDA that is evolving, I would say, more slowly than initially expected. So on the back of that, clearly, we have delivered a really strong second quarter, and we are going to be over our initial guidance. So we now expect that we are going to be for this year over €9.25 billion. Exactly how much, I don't know, but because it's depending on EBITDA basically.

We had yesterday a little bit of a piece of bad news because you know that the minimum reserves are no longer going to be paid, and this is going to have a negative impact. I can already tell you which is the amount we are estimating is approximately between €140 million, €145 million per year, assuming current rates. So -- but well, even with that impact, we are expecting we are going to be able to be over [indiscernible] for this year.

And I can understand here that the question is what about 2024. And and I will do my best on that front. And basically, here, we have uncertainties on 2 fronts. Basically, it's rates. The market is already pricing to 2 rate cuts from next summer, as you know well, and then the evolution for Vita. For Vita, we are estimating that this year, we are going to be ending 2023 with a Vita circa 20%, and this to keep progressing into 2024 to end the year with Vita in the mid-30s area. But it's not clear to us this path is it's going to be linear or to what extent at some point will accelerate. And if it accelerates, if it accelerates earlier or later. So it's an open question. And although we have all those uncertainties and considering, well, that what is now the market pricing in terms of rates and that internal estimate we have for the evolution of Vitas, we are expecting that for fiscal year 2024, NII should be around €9 billion. So this is our expectation.

If we outperform in terms of bits or betas in general, do better than this guidance I am giving you or this estimate I'm giving you. Obviously, there is an upside to that figure I make. And if at the end of the day, those rate cuts that are now priced in by the market, are finally do not happen, then there is also that will result into upside. So I think that I am not missing anything here. And this is our best view as of today. But obviously, we'll have to follow that basically on the EBITDA front. We continue to be of the opinion that we can deliver better than the average. And so far, considering the figures we are seeing reported from our peers is what we do. And this, I would say, better transactionality we have with clients, not only with retail, but also with SMEs and corporates. At the end of the day, may result into lower EBITDA than the others. But the figures I gave is the estimate from what we have built these projections I have commented with you. Thank you, Ignacio.

Operator

The next question is from Max Mishin [ph] of JB Capital.

Unidentified Analyst

I have a couple. The first one is on fees. Your fees has disappointed somewhat in the second quarter because of banking fees. And I was wondering if you reiterate the guidance for fee and insurance revenues to reach €5.1 billion in 2023. And what measures are you going to take in the second half to reach that guidance?

And then the second question is on the outlook for loan book growth. If you could just give us a little bit more color on why are you growing so well in the corporate segment? And what is the outlook per segment for the rest of the year?

And then the last one is on the -- on your Angolan stake. There were some news in Portuguese press about the potential disposal that was helped then. I was just wondering if you could provide a little bit more information on what's your strategy there.

Gonzalo Gortazar

Thank you, Max. And on fees, maybe, Javier, you will comment on the loan book on the corporate segment, I'd say we are functioning that on, let's say, on all engines. And obviously, our corporate book also includes what we're doing through our international branches. Remember that we had a goal to continue expanding our international business, which is basically investment grade with with mostly Eurozone clients, and that has add ed some growth, that is growth in our loan book, our corporate business. It's approximately €5 billion of growth this year to date, which is obviously helping our figures when you look at the comparison with others. In any case, I think it's relevant to look at just the business from Spain, we are also gaining market share. So I think basically, the investment that we've made in foreign branches in Europe and our ability because we have the relationship with all these corporates for time. We have upgraded the relationship at pain company level we were needed and the fact that actually our CIB business has been doing well, particularly when markets have been volatile and then capital markets issues have been less of an alternative or at least corporates have been willing to make sure that they do not fully rely on capital markets for the funding, all that has favored as clearly. Javier, maybe you want to take the rest.

Javier Pano

Okay. On fees, well, yes, we are reconfirming our guidance. Here, you need to take into account that this reclass that has Marta commented, is going to result into a transfer from insurance to NII for this year, we are estimating approximately €50 million. So we're just taking this into account, I think that we are going to be there. Basically, here, what is happening is that, as I was commenting on the presentation, we have been charging maintenance fees for current accounts. And well, in this positive rate environment, we need to strike the right balance between charging clients to maintain a current account and the cost of funding.

And at the end of the day, you may see some pressure on that specific part of the fuel revenue pool. But on the other hand, you are seeing clearly a better performance in terms of Vida or in terms of NII at the end of the day. So I give you this explanation because this is at the end of the day, the dynamic in order to manage our client base. And then on the second half, in general, we expect a better evolution. We have basically AUM balances that, as always, markets per meeting, but it looks like at least the difficult market situation impacting fixed income plus equities we had last year is not going to be the case this year. So we are seeing average AUMs, just by market impacts doing better, also the pace of inflows that although we had a really strong first quarter, but is continuing to the second quarter.

So we expect that AUMs in general will do better, and you know that this is very important for us. It's a very important part of our business. Then there is always seasonality in payments. So payments, you have a better second half. You have the summer season, then you have Black Friday, Christmas. So all that is a positive factor in the second half. And then in non-life insurance that has been impacted, as I said, initially with some, let's say, accounting issues in terms of the accrual of the fees that are being recognized. We expect that from the second half as the underlying business is doing well, you could see in terms of new production, new premium, et cetera. So we expect that also we'll do better.

And then the insurance business itself, the insurance result, life savings, it's 50% of our inflows into long-term savings, a higher yield curve is allowing us to build more attractive products for clients. So you can expect that part of the business to continue to do well. And life risk, as always, and now with new products being launched my box that is clearly doing very well with very low churn.

So I think that on that part also, we continue to do work. So yes, it's true that probably we have had a weaker first half, but we expect to recover. And at the end of the day, taking into account those restatements to deliver on our guidance.

Operator

The next question is from Francisco Riquel of Alantra.

Francisco Riquel

I wanted to ask about the cost of deposits, which is basis points lower than reported is excluding the hedges. So you can guide us through when the hedges will unwind and when the reported costs will convert with adjusted. And if you can clarify whether the guidance in terms of deposit EBITDA is on the adjusted or the reported deposit costs.

And then two questions about the share buyback. One is your share price is trading close to your NAV per share. So is that a gap when you consider executing the share buyback? Or would you be willing to buy the shares up of the [indiscernible]

And then you are returning the excess to the 12%. I wonder if you plan to build a buffer for potential regulatory impacts by the end of the strategic plan. You are still committed to the 12% target. If you can update on the regulatory headwinds left and Basel IV?

Gonzalo Gortazar

Thank you. Thank you, Francisco. On the share buyback, and I'll let you on deposits, Javier, as always. TNAV is not relevant for the share buyback purposes. So we are committed to executed tangible net asset value is I think a low bar in terms of valuing our shares. It's obviously the current market now. But what could I say, given our profitability, our resilience and the cash flow that we can generate because a lot of our profitability is distributable. Obviously, we see much more value. And in any case, it's the market who would decide, but we will execute a tangible net asset value is not a reference for us. And yes, I confirm our target is 12%, and our commitment is to distribute the capital above that level. We're not changing that 12% at all. With that, Javier?

Javier Pano

Yes. Yes, on hedges, we have approximately €20 billion that are swapped to floating. So we have approximately €5 billion that are maturing early next year. And the other €15 billion, it's longer term. So it goes already into '26, '27. When we give EBITDA, it's, let's say, with the ex hedges in order to be understood. So taking into account the real cost we paid to customers.

And in terms of regulatory impacts, we have those 20 bps spending. We have had the rest that were expected this second quarter. And those 20 pendings, the base case is that are going to be in the third quarter. In terms of your math question, if I remember well, on Basel IV, we are not expecting a material impact from Basel IV, I would say, a very few basis points, if any at all. So this is our estimate as of today.

Operator

The next question is from Sofie Peterzens of JPMorgan.

Sofie Peterzens

This is Sofie from JPMorgan. So just going back to net interest income, on a quarterly level, we should -- when should we expect net interest income in Spain to be -- do you think that will be kind of next year or earlier? And then my second question would be on the single resolution fund and deposit guarantee fund across next year, one of your competitors expect these to be almost nothing next year. Is that also your expectation?

And then just the final question. On the share buyback, should we expect any further share buybacks in 2023 or you're kind of done in terms of new share buybacks for this year? If you could just comment here.

Gonzalo Gortazar

Thank you, Sophie. Again, I'll leave NII for Javier and you can add to any of my point on the contributions to the deposit guarantee fund and the domestic and the resolution fund for next year, it should be 0 on the resolution fund the it would be very limited in 2024 in Spain for the deposit guarantee fund. This is something that we actually presented already when we discuss our strategic plan last year, that was our expectation. And fortunately, that has been pretty much confirmed at this stage in both instances. So that will certainly help our profits next year.

On the share buyback, we obviously have looked at pro forma numbers for the end of June. I think being practical, you should expect us to look at pro forma numbers again at the end of this year, December. So these are we need to measure what our capital position would be in December and obviously then make decisions on extraordinary capital distributions. That will be based on profitability generated in 2023, but will be obviously executed in 2024. And then to be honest, during 2024, we plan to do the same I think an important point in our mind at this stage is we think that with the current sort of set of circumstances, we're going to be generating capital on a current basis. And rather than wait and do large exercises, you may see us come in very frequently to the market and doing a smaller exercise. And obviously, we would like to over time, aim to incorporate into our own valuation, the fact that this is an exercise that we tend to do with high frequency. High frequency, meaning it doesn't necessarily to be once a year or once every 1.5 years, but smaller distributions that could happen once or more likely twice a year. Time will tell because it all depends, obviously, on profitability and capital generation. But to be honest, we feel very positive on this front.

Javier Pano

Okay. So on NII, well, let me elaborate. In terms of the loan book repricing, we can expect a positive repricing until the third quarter next year. And then it's about Bitolution. And depending on your assumptions on the final landing level on the pace or the shape of the curve of the EBITDA, then you may reach the peak in terms of NII, 1 quarter or another. Our base case estimate is that we are going to be delivering quarterly NII, not far from current levels until the third quarter of next year. So this is our -- this is our expectation. Then it depends on the yield curve. It depends on if those rate cuts priced in the yield curve finally are delivered or not, and it depends on -- not only on the absolute level of EBITDA, but on the shape of how you reach that level. I hope that helps, Sofie.

Operator

The next question is from Andrea Filtri of Mediobanca.

Andrea Filtri

Will there be significantly change [indiscernible] yes, if patients are promoted by the same taking the...

Operator

Mr. Filtri. We cannot hear you very well, actually.

Maria Luisa Martinez Gistau

Can you call again, Andrea, please? We are hearing you with a lot of problems.

Operator

The next question is from Alvaro Serrano of Morgan Stanley.

Alvaro Serrano

You'll be pleased to know I'm not going to ask about buybacks. Two questions around the NII, please. And sorry if you've addressed this already. On deposit balances, you're actually growing deposit balances, possibly one of the only banks in the world doing that. Can you explain what's going on there? And in particular, in demand deposits, I see they're pretty much stable. What's your outlook for current accounts going forward? Do you think you can maintain that stable and your general views of what's going on there?

And second, I just want to follow up on Javier on a comment you made in passing around that you didn't think it was time to increase the bond portfolio. other banks are doing it not necessarily in Spain, but other banks are doing it as they start to think about '24 and '25 in rate cuts. What are you waiting for where do you want to see the yield curve? I know you said it was inverted, but what specifically what are you specifically looking at in terms of short-term yields versus long-term yields to put that back on?

Gonzalo Gortazar

Thank you, Alvaro. And on deposits, let me say we have a seasonal impact. We actually pay pensions and payrolls for approximately 10 million people in Spain. And as many of you know, we have Parasol double salary in our extraordinary salary in Spain for many companies. And that generally, it's always in June significant increase of money in our current accounts. So I think you should look at it more like flattish once you take away that impact. And hence, there is a deviation, a positive 1 from other banks, certainly, but maybe not as marked as the number suggests. But our -- the strength of our franchise is precisely this one. We have a 36% market share of payrolls in Spain, similar one-off intensions, 34%, way above our sort of total deposits. And this is transactional money, Javier has -- and you know that Alvaro and all of you has mentioned it many times, this is zero cost money and it's relational transaction are very sticky. And hence, I'm not surprised at all that we are doing better. I also have to say that our commercial effort is been focused and continue to gain payrolls this year.

We have gained 800,000 payroll so far. Obviously, this -- we have also lose some payrolls as people change jobs, et cetera. But in terms of the marketing effort is above last year and it means that this is our core sort of competitive advantage in basic banking. And I would expect that we do better than others both in volumes, but then particularly when we talk about betas not that we pay less, it is mostly that our mix is different, and we have a higher component of zero costs deposits than others. So the outlook I would say it's going to be certainly better than the market, in my view. And in terms of volumes, we need to see how this transfer of money away from on balance sheet to off balance sheet evolves. What we have seen in the second quarter is that has reduced its pace, clearly. This is not related to the events of Silicon Valley and sort of market concerns because that didn't hit Spain at all. As you know, it's more about just alternative ways of investing. But what we are seeing is a major opportunity also as if and when, but it looks increasingly likely that market stabilize that we have this feeling of maybe these soft landing is possible in general and that eventually inflation is brought under control without a major sort of economic earthquake.

Then what we're going to see is not just money moving from deposits towards fixed income products. But for instance, this year, mutual funds for the whole market have been just about sort of buy and hold fixed income short-term products and obviously, in many markets as well. I think looking at balanced portfolios, reconstructing, what's the normal sort of saving portfolio is going to be a key investment case and we will be a net beneficiary of that moving on to 2024. Provided that sort of the backdrop is of a reasonable recovery from the current uncertain situation.

Javier Pano

Alvaro, you had a question on the ALCO. Well, here, basically, we have had the yield curve pricing rate cuts since the very beginning. And what has been happening is that the year car has become even more inverted. So actually, when you look at long-term yields or longer-term yes or medium-term to long-term yields have been pretty much stable, right, although with some volatility but pretty much stable since some time ago. So actually now making the ALCO portfolio larger, you are looking in what is already priced in the market, which are those rate cuts. And well, you are no longer giving the chance that at the end of the day, those rate cuts and not happening. Obviously, we can be wrong and you have -- you may have even more rate cuts than what is already priced in the market. But we are a little bit waiting if there is some kind of opportunity in the market in order to increase hedges being the ALCO portfolio or derivatives in a situation where, at some point, the yield curve is no longer discounting rate cuts as soon as our pricing now and it's basically what is driving our decision-making process. Thank you, Alvaro.

Maria Luisa Martinez Gistau

Operator, can we try to reconnect with Andrea Filtri, with Mediobanca, please?

Operator

The next question is from Andrea Filtri Bank.

Andrea Filtri

I hope my line is cear now. The question was the run of reserves, if you expect further negative by the ECB? Second question what assumption you have [indiscernible] in '24 in our €9 billion guidance. And finally, cost solution for [indiscernible] are, there is a extension of the factor and growth we're seeing in 3 years proxy.

Maria Luisa Martinez Gistau

Andrea, I think we couldn't hear -- I think I got the first question. I thought it was about the ECB impact whether it was included in our guidance. Is that correct? Andrea?

Javier Pano

If the question is that? The answer is yes.

Andrea Filtri

It's about what -- can you hear me?

Maria Luisa Martinez Gistau

Not really. And so look, if you don't mind, I will call you after the call, Andrea, and try to address all the questions. Thank you. Sorry about that. Operator, next question, please.

Operator

The next question is from Britta Schmidt of Autonomous Research.

Britta Schmidt

Just to follow up on the ALCO portfolio. I mean, obviously, the shape of the yield curve impacts your thinking there. But what sort of mix of non-remunerated versus remunerated deposits do you expect and the lack of terming out impact is as well, maybe you can give us also an update as to where you would see your ACA portfolio next year? And then the second one is just on the LCR, which is a very high post-TLTRO, where do you think there will be a reasonable target, either for you or even the sector.

Javier Pano

On the last hybrid, on the liquidity coverage ratio, I think that our our levels to be, let's say, comfortable at over 140%, 50%. But well, obviously, we have those 180, 90s, happy to have. So nice to have. So it's -- I think that, generally speaking, if I as a manager of the liquidity of the bank, I think those levels are, let's say, the comfortable ones because the liquid recovery ratio may be a little bit volatile depending on the conditions. And on the remunerated and nonremunerated deposits. So at the end of the day, this is like a go-to figure because this is progressing, as you could see, the percentage of time deposits that are being remunerated is gradually increasing, and this is what will continue to happen going forward. But according to our internal models, we're estimating that approximately very close to 40% of our deposits will be even in, let's say, at the end of the cycle, the internal rate cycle, being nonremunerated deposits. And so this is our internal estimate, and we have back tested that with past situations and really stressed situations back 10 or 15 years ago during the sovereign crisis. And it's actually what we had. And precisely, we have the feeling that we can do even better than back then in terms of transactionality and our capabilities in order to maintain balances at a very low cost. So I think that probably this is -- this is going to be a figure that obviously is moving upwards, upwards, what is remunerated and towards what is non-remunerated. Our estimate is that we can end having like [indiscernible] Hope that helps, Britta.

Operator

The next question is from Marta Sanchez Romero of Citi.

Marta Sánchez Romero

So it's -- you're going to be making a lot of money next year. do you have a history of leakage, right, cost restructuring in the balance sheet. So my question is, what can we expect in terms of costs and provisions in 2024? Are you going to be using some of your extra NII to address pending tasks?

My second question is related to the first one, really. So can you improve your cost-to-income target of less than 48% for next year? And what do you think your ROTE should be based on the current forward curve?

And just finally, one quick one on your insurance savings book. What is the spread that you are generating here? And sorry if I missed that, how much do you expect to grow that book?

Gonzalo Gortazar

Thank you, Marta. On capital impacts. We're not expecting any. We have obviously done exercises of cost restructuring in the past. And we don't see anything on that front looking forward. We have gone through the integration. We feel we have the right resourcing in sort of big terms. Of course, there's always things we can do here and there. but we're not expecting to use capital for restructuring at this stage, neither for other things in the past, obviously, over the years, we also had a significant sort of on core equity portfolio, the things that are all things we have dealt with. So nothing that I can think of that should sort of get part of this capital prevent from shareholders getting it.

In terms of the cost-income target, the 48% that we announced at our 3-year plan, when we presented it was pre-IFRS post IFRS 17, we've said it's approximately 2 percentage points. So obviously, the 48, let's say, by definition, becomes more like 46%, and -- and on both cost income and return on tangible equity, our expectation is, in both cases, we said is cost/income below that 48% now, I would say, below that 46%. I mean the cost income is above that at or above that 12%. In both cases, we expect obviously to meet these targets. We didn't put a cap on return on tangible equity or a floor on cost income and hence, at this stage is pretty obvious that these targets are within reach. But we are not at this stage producing guidance on how much better will be 2024 on this front. I think there is enough uncertainty mostly on NII, as Javier said, what's eventually do we have rate cuts in the second half which we think is unlikely, but the market is pricing in, that will have probably more an impact on 2025, but then what's the evolution of betas, et cetera.

And I think at this stage, obviously, reconfirming and increasing our confidence that we will be both at or above 12% and at or below 46% in cost income is what we would like to do. Obviously, that doesn't help you much because you like probably to see how much we -- how much better we do. But at this stage, we're not revising guidance for next year on the most 2. There's a question on insurance, maybe anything you want to add.

Javier Pano

Marta. Well, insurance, as I said, is doing well. It's now the weight on the inflows is approximately 50% I don't have clear it's going to continue to be 50%. But what is clear to us is that it's going to continue to be very positive. And because of our client base because our expertise in terms of building those products, we think that we can deliver. And obviously, I'm not giving you guidance for 2024. But for this year, probably we can expect approximately €1 billion inflow into long term -- sorry, not into on-term save into savings insurance for the next couple of quarters, 1 quarter -- €1 billion per quarter. You need to take into account here that the amount of benefits that are being paid is significant. So when we talk about inflows, it's the net that's to give you some figures. So far, we have had year-to-date approximately €2.5 billion of net inflows. But at the same time, we have had benefits of approximately 1.5%. So it's quite a significant amount. So it's positive.

And the average margin we are making here is approximately slightly over 1 percentage point nowadays. It was much tighter with very low rates, but with rates in the long end between 3.5% and 4%, we can work with those margins

Operator

The next question is from Ignacio Cerezo of UBS.

Ignacio Cerezo

I've got three. The first one is if you can help me reconcile the €9 billion guidance NII next year. with Javier's comment around NII probably been around current levels until the third quarter of next year because the latter would suggest actually higher in NII for 2024. The second one is there seems to be bit of a gap actually in terms of the yield on the total fixed income portfolio and the ALCO portfolio this quarter. I mean, normally, there has been a decent amount of correlation between both this quarter is around 30 basis points higher for the total portfolio. So if you can elaborate on why?

And the third is if you can give us basically the capital cost of [indiscernible] -- so how much it would cost you basically from a CET1 point of view to break those swaps and stop basically having negative carry?

Javier Pano

Well, on guidance, just to confirm what I have said. I said that for next year, we can expect a quarterly performance on NII, not far. So not far means probably below current levels, but not that far. So I didn't give a specific figure. Well, this is what I intended to say. And on the ALCO the yield, here, basically the reference is on Sarepbonds. We hold like €17 billion of solid bonds that are at floating -- those are basically indexed to 3-month river. So as 3-month arrival, reprices higher, then you have a different between the 2 figures. The ALCO portfolio, we're disclosing as, let's say, a structural alco portfolio that is yielding now and including solid bonds that is higher because the month arrival is obviously higher than 1%. And in terms of the impact on capital, on hedges, well, there are several hedges in several places. So it's not only those on deposits. And also, we have hedges also on wholesale funding. We have a few hedges also on mortgages that at fixed rate that initially were swapped into floating. So I would say that looking at a very specific part of the balance sheet on that topic, probably does not make sense. And by the way, I don't have the figure with me here. So -- but here in Matthew, I think that this is not what should be looked at. And I think that all banks have hedges here and there, and I don't know if everyone is disclosing specifically the mark-to-market of all those hedges.

But in any case, you can look at Page 37 of our today's presentation, where you have all assets and liabilities at amortized cost, including the ALCO portfolio that are fair valued and that includes all hedges and includes hedges on the asset side, hedges on the liability side. The fair value of deposits of wholesale funding and the net amount of assets liabilities, ALCO portfolio on all those hedges is positive by over €30 billion. So just to give you a figure of the overall impact of all those hedges and mark-to-market of portfolios within the whole picture.

Operator

The next question is from Carlos Cobo of Societe Generale.

Carlos Cobo

Two, three more questions from my side. One is a follow-up on that hedging strategy. I mean, the message is very clear, but more broadly, could you elaborate a bit more on how do you use those hedges in the balance sheet? What was the intention? Because in general, we tend to assume that we use the ALCO portfolio to hedge the NII. But how do you complement that overall big picture hedging with the IRS? It will be interesting to see to understand which parts of the balance should you use it because some of the banks say they use in the ALCO portfolio and you seem to be using it in other parts of the balance sheet. So understanding your hedging strategy would help.

Second is on price competition. I think we are seeing enough concerning trends because the sector is well capitalized and strongly funded and we are seeing how new mortgage spreads are coming in below, so basically with negative net spreads. How do you see that evolution? Do you think that it's going to accelerate because people continue to accumulate capital and they try to compete on price and cross-sell? Or do you think that process is going to stabilize going forward?

And lastly, on 2024, you've touched a little bit on NII. Could you discuss more like directionally, not specifically, but the direction of the cost of risk evolution next year and the cost inflation next year? Where do you see that trending? It will be very helpful if you could share.

Gonzalo Gortazar

Thank you, Carlos. On price competition, I expect the market to continue to be very competitive in pricing overall. As always, sometimes where some products can be subject to further sort of degrees of stress in terms of competition. But overall, I think we have a very competitive market and it's going to stay that way. One good proof is what you say on mortgage spreads. Obviously, all banks look at mortgages, not just as a product by itself, but looking at the complete picture of a client that usually in Spain, when you bring the mortgage, you bring the whole relationship with that client. And in fact, to achieve some of these prices certainly, yes, we obviously, we demand for the client to become relational and bring their financial business to us, including insurance, et cetera, et cetera. So I would expect this to be sort of the normal state of things in Spain, strong competition.

On the last point, cost of risk and cost inflation, for 2024, we are expecting -- you saw that our expectation for inflation this year on average in Spain, 3.4%. Next year, we actually have the same number because, as you know, we still have some positive base effects during this year in inflation associated to the increases in energy prices that now are being reverted. So it's -- that 3.5%, 3.4%, 3.4%, then coming down closer to 2%, 2.5% in 2025. And if you look at the agreement of the employers' association and the business association and the unions it marked a path of 4% increases this year, 2023, then 3 and 3.

So that gives you the framework of where costs could evolve. I think that 3% to 4% range. Obviously, then there would be the impact of other things. One is we're going to keep investing in the business. Obviously, this year, everything is kind of dominated because of this big swing in -- but we all know that there's a lot of other things happening to stay competitive and to be even more competitive long term, we're going to need to continue investing. And at the same time, we are putting in place various programs of looking at a higher degree of efficiencies. Technology has to help us, AI, et cetera. So we will have some further pressure and also some efficiency on the other front, affecting that kind of 3%, 4% sort of cruising speed of the cost base that I am expecting. Obviously, we, in due course, we'll do a similar exercise 3-year plan, and we will be able to provide further details. But sort of ballpark. This is what I see or where we see things now. And cost of risk, we're still expecting some deterioration in asset quality. And obviously, this is the story that gets postponed every quarter. But there is logically going to be some pressure. We have the unassigned collective funds, which means, obviously, that we have some protection. But we're going to be using those progressively. This quarter, in fact, as we updated our macro scenario, we used a part of that and this will continue to be the case. So all in all, I think cost of risk is not going to be fairly different from the current level. So there will be some upside pressure into next year if we get it right, under some modest deterioration of the economy. But on the other hand, we do have these collective provisions to protect us from that pressure. We'll see how that evolves. But I wouldn't see big swings on that front.

Javier Pano

Carlos, on the rationale about hedges, basically the starting point is the structure of the balance sheet from a commercial point of view. And in our case, we have approximately 2/3 of the loan book that is at floating rates. And then on the liability side, as we have been commenting, we have a lot of transactionality with clients. I mentioned to a previous question from Marta that we were estimating that we had approximately 40% of our deposits that we are estimating that are so transactional that at the end of the day will be very sticky and very sensitive in terms of the sensitivity to interest rates. So in order to manage all that and the positioning of the balance sheet, you need to, at some point, introduce fixed rates, you need to receive fixed rates in order to stabilize and not to make this positioning towards higher rates to extreme, okay? So this is the rationale.

And we have our internal metrics, our internal risk framework in order to manage all that -- and this is the rationale behind. So what is in here. We have been very transparent. It's all wholesale funding that is swapped into floating on the liability side. On the liability side, also we hold €20 billion of hedges were €5 billion are maturing early into next year and €15 million that will remain for longer. And on the asset side, there are very few hedges that transform fixed rate mortgages into floating. But this is a small amount and not that material. So this is what all we have, the fair value of all that including the amortized cost accounted assets is -- we disclosed it on our yearly presentation obviously results, but we have been updating this second quarter, and you have on Page 37, the summary of all that, as I said to the question from Ignacio it's a positive fair value of approximately over €30 million, okay?

Maria Luisa Martinez Gistau

Operator, I believe we have time for one more question, please, and that will be the last.

Operator

The last question is from Fernando Gil de Santivanes of Bestinver.

Fernando Gil de Santivanes

Two quick ones, please, on the international businesses. The first one is on BPI. NII is up year-over-year about 90%. I wonder if you can comment on the trends for the rest of 2023 and 2024. Second is on the AUM on the funds under management that you have seems to be down in the quarter substantially. And I wonder if you can share why this to case, and that would be al..

Gonzalo Gortazar

Okay. Javier?

Javier Pano

Okay. On NII, BPI, basically, the dynamic -- the structure of the balance sheet of BPI is not that different compared to that of CaixaBank. Here, although there is a slightly higher percentage of loans at floating because Portugal in general has been later in terms of originating fixed-rate mortgages in recent years, okay? This is first thing.

Second, loan dynamics are more positive. There is more loan growth in Portugal than in Spain, in general, and BPI is delivering well on that front. So this -- it's I would say, affecting marginally also a little bit more positive. In terms of deposit EBITDA, I would say that the evolution is not that different. You can expect probably EBIT as in Portugal to be slightly higher. First thing, BPI does not have, let's say, the market share we have in Spain. So this, to some extent, may affect. But also and I commented that on the previous quarter presentation, we had this product by the Portuguese Treasury distributed to retail that at the end of the day, was also impacting on that floor. So far, you can expect BPI to be a little bit more sensitive to rate changes than Spain, but not that different.

And you said about AUMs, if I understand well, where we have had inflows this quarter of approximately €1 billion, slightly over €1 billion. This is less than the previous quarter. The previous we had -- it was like the first quarter with high rates, et cetera, and we had clients that shifted funds from deposits to money market funds or targeted profitability or targeted yield funds that we launched also during the first quarter. And this is why we had I would say, higher inflows into -- in the first quarter compared to this quarter. But we can expect this to continue to do well when expecting the pace of fee flows to continue. And as I said before, with markets also recovering, I think that we are going to perform well on the long-term savings business.

Maria Luisa Martinez Gistau

Okay. That's all for today. Thank you, Gonzalo. Thank you, Javier. Thank you, everyone, for joining us. Have a wonderful summer and be safe.

Gonzalo Gortazar

Thank you.

Javier Pano

Thank you.

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Caixabank SA (CAIXY) Q2 2023 Earnings Call Transcript