Banco de Sabadell, S.A. (BNDSF) Q4 2022 Earnings Call Transcript
Banco de Sabadell, S.A. (OTCPK:BNDSF) Q4 2022 Earnings Conference Call January 26, 2022 3:00 AM ET
Company Participants
Gerardo Artiach Morenes – IR
Cesar Gonzalez-Bueno – CEO
Leopoldo Alvear – CFO
Conference Call Participants
Francisco Riquel – Alantra
Maksym Mishyn – JB Capital
Alvaro Serrano – Morgan Stanley
Carlos Peixoto – CaixaBank
Britta Schmidt – Autonomous Research
Gerardo Artiach Morenes
Good morning, and welcome to Banco de Sabadell’s 2022 Full Year Results Presentation Audio webcast. Our CEO, Cesar Gonzalez-Bueno and our CFO, Leopoldo Alvear will present the main highlights and details of the commercial and financial performance of the bank throughout 2022. The presentation will be followed-up by Q&A session. We have a scheduled around 1 hour for the whole session.
Let me now hand it over to our CEO, Cesar Gonzalez-Bueno.
Cesar Gonzalez-Bueno
Thank you, Gerardo. Good morning, everyone, and welcome to Sabadell’s annual results presentation. Let’s just start with the key messages in Slide 4. Firstly, commercial activity. Good figures here. In 2022, we delivered a moderate 0.8% growth on our loan book. This is in line with our approach to loan origination, which is focused on managing risk-adjusted return on capital, not on maximizing volumes.
Another example of our sound commercial activity are point-of-sale transactions, which increased by 25% in 2022 compared to ’21. This is a clear sign of strong economic activity in Spain throughout the year.
Secondly, strong core results. A solid commercial momentum. The positive interest rate environment and the efficiency plans executed in the past contributed to deliver a solid growth of our core results, which grew by 26%.
Thirdly, improved asset quality. The NPL ratio stood at 341% by year-end, following a 25 basis points reduction in the year. Fourthly, we ended the year posting a net profit of EUR859 million, which means a 62% increase year-on-year.
Finally, return on tangible equity stood at 7.8%, and the fully loaded core Tier 1 ratio reached 12.54%, increasing by 36 basis points in the year. I would also like to announce that our Board will submit a proposal at our next AGM to increase the payout ratio to 50%, which will be distributed as a combination of cash dividend and share buyback.
Moving on to Slide 5. I would like to share some relevant achievements related to ESG. As you all know, this is a complex topic, and we have made a big leap forward in the last year. We have improved the embedding of ESG in our strategy and in our risk management processes, including risk granting and follow-up.
We have established a 2030 decarbonation targets for four CO2 intensive industries in the context of Sabadell joining the Net Zero Banking Alliance. We have also improved our scores with the main rating agencies and indexes such as the Dow Jones Sustainability Index, or the score by Sustainalytics.
From a regulatory perspective, we are, of course, fulfilling of our obligations, and we are doing it in a successful way. So providers are giving us positive feedback about our evolution in this field. In summary, we are very comfortable with our progress and satisfied in all fields of ESG during the year.
Slide 6 shows the evolution of business volumes at the group level. In 2022, our loan portfolio increased by 0.8% in the year. That is a 2% increase, considering constant FX mainly because of the sterling depreciation, which had negative impact on UK volumes in euros. This growth rate is in line with our target of low-single digit growth for the year.
Moving to customer funds. Our balance sheet funds grew both in the quarter and in the year, as our clients continue to build their savings and excess liquidity. Our balance sheet funds trended downwards in 2022 due to the underperformance of financial markets. In these regards, we are enhancing our product offering with value-added products such as guaranteed return mutual funds to limit deposit beta. As we will see later, this strategy has allowed us to significantly increase inflows into mutual funds in the last months of the year.
In Slide 7, we start reviewing the commercial activity in Spain. Both new mortgages and new consumer loans performed well in the quarter. Mortgage origination grew by 2% quarter-on-quarter and new consumer loans remained flat. On a year-on-year basis, quarterly mortgage origination grew by 10% and consumer loans by 14%.
Our market share of lending stock in mortgages increased by 2 basis points versus December ’21 and stands at 6.6%. The quarterly market share of new mortgage lending stood at 7.7%, a higher figure than our stock market share. In consumer loans, stock market share increased by 18 basis points and stands at 3.8%. The quarterly market share of new consumer lending stood at 5.6%, again, a higher figure than our stock market share.
Let’s move to Slide 8. New protection insurance premiums in the quarter were down by 3% quarter-on-quarter and decreased by 14% year-on-year. As we have explained in previous results presentation, this is mainly due to a shift in our commercial approach to life insurance originated together with mortgages.
We are moving from single premium insurance to life insurance with renewable premiums throughout the term of the mortgage. This results in a lower upfront payment by the customer. As a result, our market share of life insurance premiums decreased 68 basis points in the year and stands at 8.8%.
Regarding mutual funds, assets under management ended the year 8% below December ’21 in a context of market volatility. On a quarter-on-quarter basis, assets under management grew by 3%. Net inflows in mutual funds reached EUR958 million in 2022. Although the figure is lower than ’21, net inflows have started to pick up since the last months of the year. Actually, our market share of net inflows reached 8.3% in Q4.
In Slide 9, we can see that payment-related services continued to deliver positive dynamics in the quarter. Card turnover increased by 1% quarter-on-quarter and by 11% year-on-year. Our market share remained stable in the year. Regarding payments processed through our point-of-sale devices, quarterly turnover decreased by 10% quarter-on-quarter. This is expected due to seasonality as point-of-sale turnover in Q3 is always higher than in Q4 due to tourism economic activity in Spain during the summer.
On a yearly basis, turnover increased by 23%, and the number of transactions increased by 25%, in line with our turnover evolution. Our market share of point-of-sale turnover increased by 88 basis points in the year, while more importantly, point-of-sale fees continued to grow above turnover.
Moving to Business Banking in Slide 10. Origination of loans and credit facilities increased by 26% quarter-on-quarter. This is again impacted by seasonality as Business Banking activity in Q3 is always lower than in Q4. And therefore, the quarterly increase in Q4 is always high. On a year-on-year basis, originations decreased by 6% as a result of a greater focus on customer profitability. We are targeting our growth on customers with a better risk profile, therefore, focusing on profitability and not necessarily in volumes.
On the other hand, working capital financing continued to perform well, posting an increase of 11% year-on-year. This is another sign of solid economic activity among our Business Banking customers. Regarding our market share of total business lending stock, this has decreased by 4 basis points year-to-date. As I explained recently, this is the result of prioritizing new lending with targeted customers.
Let’s move to Slide 11 to analyze our commercial performance in Spain for each product. In the graph, we have plotted the percentile (ph) variation of business origination between 2021 and ’22 versus the stock share variation for each product in ’22. Let me comment on the key elements for each product. In mortgage origination, we focused on managing prices versus volume in a context of high competitive pressure on pricing. We are growing our origination volumes while maintaining stock market share.
In consumer loans, we grew origination volumes and increased market share. We achieved these positive results leveraging on a new pricing model. In cards, we delivered a strong growth of turnover in line with the market. So, our market share remained broadly stable. In Business Banking, which includes both working capital and medium-term lending origination, we grew, but there was a slight decrease in our market share. This is the result of our strategy, greater focus on profitability versus volumes.
In point of sale, we increased turnover, coupled with the strong increase of our market share. This outcome was delivered while increasing focus on customer profitability, very positive performance here. As you can see, all these products are in the upper right part of the chart, which is the best place to be, growing volumes while maintaining or increasing market share.
On the other hand, as I explained, new origination mutual funds decreased due to the high volatility of the market. However, we performed in line with the market. We are well positioned to increase volumes as the market recovers.
Finally, new insurance premiums were impacted by a new product mix of life insurance. Both origination volumes and market share are decreasing. This is in line with our strategy for life insurance, as I explained before. We are moving from single premium insurance to life insurance with renewable premiums. Summing up, 2022 was a good year in Spain from a commercial point of view, and we are performing in line with our strategy in our product lines.
On Slide 12, we analyze our performing loan book by segments and products. On the left-hand side of the slide, you can see that ’22 — in ’22, we managed to grow across all segments in Spain; mortgages, consumer loans, SMEs and corporates and public sector. The total loan book in Spain grew by 1.1% in the year. On the right-hand side, you can see that the performance of our international business was also positive. Mexico and Miami posted positive growth rates in the local currencies and even higher growth rates in euro, supported by stronger exchange rates.
Moving on to the UK on Slide 13. TSB’s new mortgage lending volumes were impacted by a sluggish UK mortgage market in the second half of 2022. Besides the current high levels of inflation, higher interest rates also reduced individual’s appetite for mortgage borrowing. However, on the lower right-hand side of the slide, you can see that TSB’s mortgage book kept growing. It grew by 1.3% in the quarter and by 4% in the year.
In the lower left-hand side of the slide, you can also see that TSB’s market share of mortgage stock increased by 1 basis point in the year, standing at 2.2%. TSB’s market share of mortgage origination declined in the first half of the year due to our focus on protecting margins in a context of very aggressive pricing dynamics in the market.
Our market share recovered in the second half of the year, when competitive pressure on pricing eased slightly. Our market share of mortgage origination for the year stood at 2.2%, in line with our stock market share. TSB keeps focused on protecting margins of its mortgage book, even if that means slight reductions of its origination market share.
As you can see in Slide 14, TSB’s business is moving forward at a very good pace. NII and fees grew by 13% and 10% in the year, respectively, while costs decreased by almost 5%. As a result, core results grew by 71.6% in the year. The underlying profitability of TSB keeps improving very, very positively. However, in 2022, there were three elements that weighted on TSB’s annual net profit.
Firstly, provisions increased in ’22 versus ’21. This is due to the release of provisions we had in ’21, therefore impacting the annual comparison. Secondly, changes in the bank levy impacted the tax line in the year. And thirdly, the fine related with the 2018, ‘19 IT migration hit TSB’s P&L. I’ll go into the details in a bit. Overall, the franchise posted a net profit of GBP102 million in 2022. However, without the fine, TSB would have posted a net profit of GBP149 million, which is equivalent to a return on tangible equity of 8%.
Let’s move to Slide 15. By the end of ’22, TSB received the fine related to its 2018 IT migration. The amount of the fine was GBP48.7 million. The net impact in TSB was GBP46.5 million, while the impact for the whole group was EUR25.1 million, since most of the insurance recoveries took place ex-TSB. The resolution of additional insurance claims is still in progress, and we will see some results in the current year.
You will find all the financial details on the right-hand side of the slide. Now that this fine has been settled, we can finally leave those issues behind. Today, TSB has a powerful IT platform that gives us a key competitive advantage in the UK, especially for the broker channel.
In Slide 16, we review the group’s P&L, which performed well across all lines, as Leo will explain later in more detail. Starting with NII, it grew almost 11%, beating the guidance that we set for the year. Fees and commissions grew by 1.5%, in line with our low-single digit target. Costs continued to trend downwards, thanks to the efficiency plans undertaken in Spain and in the UK, and the cost containment discipline put in place. Recurrent costs decreased by 3.5% in the year.
As I pointed out at the beginning of the presentation, our core results improved significantly while provisions remained on a downward trend. These positive results drove the net profit for the year to EUR859 million in ’22, and took a return on tangible equity to 7.8%. In terms of solvency, our capital ratio has continued to grow steadily and stands at 12.54%.
Moving on to Slide 17, shareholder remuneration. Our Board will propose at our next AGM a new shareholder remuneration structure for 2023. The new capital distribution will consider a payout of 50% against 2022 results, which will bring the total amount allocated to shareholders to EUR430 million. This capital distribution will combine a cash dividend and a share repurchase program.
First of all, EUR225 million will be allocated to a cash dividend and will include an interim cash dividend of EUR0.02 per share, which was already paid in December ’22, and an additional cash dividend of EUR0.02 per share to be paid upon approval by the AGM. Altogether, this represents a total cash dividend yield of 4.5%.
Furthermore, shareholders will also be asked to authorize the Board to execute a share buyback program during 2023. This program will be subject to the aforementioned approval by the AGM. We expect to execute it in Q2 or Q3 this year, of course, in the absence of serious macroeconomic surprises, which for sure we don’t foresee at the moment.
Our intention is to allocate EUR204 million to carry out the share buyback, which will be equivalent to close to 4% of the current market cap. All-in-all, this represents a dividend yield of 8.7%, considering the closing price of January 24.
And with this, I hand over to Leo.
Leopoldo Alvear
Thank you, Cesar, and good morning, everyone. Now moving on to the financial results. I would like to start by emphasizing that we have had another quarter of positive results. We’ve recorded a net profit of EUR149 million at group level in Q4, which implies, as Cesar was mentioning, a full year result of EUR859 million or EUR884 million, if we exclude the net impact of TSB’s fine and the insurance recoveries. This net profit entails a return on tangible equity of 7.8% or 8%, if we exclude the aforementioned one-off of the fine.
Before reviewing the P&L, please let me highlight the seasonal or non-recurring items in it. Our quarterly results were mainly impacted by two elements: the first, the IDEC and deposit guarantee scheme annual payments, which amounted to EUR149 million, which are usually recorded in Q4 every year. And secondly, the fine related to TSB’s IT migration that amounted to EUR25 million in net terms, as Cesar just explained.
This figure includes EUR57 million related to the fine itself, which is not tax deductible and EUR45 million of insurance claim recoveries, which are taxable, and allowed us to partially offset the impact of the fine. Although, we will review them thoroughly throughout the next slides, please let me highlight the main progress in both the quarter and the annual P&L.
Starting with the quarter, I would like to highlight the performance of NII, which grew at 11.6% and reached EUR1,077 million. This positive evolution underpinned core banking revenues. This is NII plus fees, up to 7.1%. When we add these to the costs, which were reduced by 0.4% to EUR720 million, we can see that our current results — our core results increased by 15.5% in the quarter.
As we anticipated, total provisions and impairments grew quarter-on-quarter, as we updated our provisioning models in order to include the new macroeconomic scenario. At bottom line, we printed a net profit of EUR149 million, EUR174 million, if we exclude the net impact from the fine.
Now looking at the annual P&L, we can see that NII and fees increased in the year, driving core banking revenues to grow above 8% at group level. With regards to the cost line, recurrent costs, excluding the restructuring charges in Spain and in the U.K. that were booked back in 2021, declined by 3.5%, thanks mainly to the significant cost savings achieved from the efficiency plan undertaken in Spain.
All-in-all, and excluding the aforementioned restructuring charges accounted for in 2021, the recurrent costs — the core results, sorry, increased by more than 26% in the year, underpinned by all the three lines moving in the right direction as we’ll review later in more detail.
Additionally, it is worth mentioning that total provisions decreased by 15.7% in the year, supported by the improvement in asset quality despite the top up of macro provisions. We will deep digger into this topic later on the presentation. So overall, these results allowed us to post a return on tangible equity of 8% for the year, as mentioned initially, excluding the net impact of TSB’s fine.
As always, we will now go through the different items of the P&L in more detail. Starting in Slide 20, we can see that NII increased by 11.6% on a quarterly basis, showing an acceleration compared to last quarter. This allowed us to end the year with a double-digit growth of 10.9% and actually to surpass our year-end target.
On the top right hand side, you can see the bridge of NII evolution in the quarter. If we move from left to right, first, we see that customer NII was by far the main contributor at EUR89 million in the quarter, underpinned by higher customer margins, loan book repricing at higher Euribor and higher loan volumes, which were partially offset by the impact of FX.
Secondly, we see wholesale funding costs and ALCO contribution, which produced almost a flat impact, minus EUR4 million. On the one hand, we had higher wholesale funding costs driven by floating rate instruments repricing at higher yields, plus the cost of two new senior unsecured debt transactions that were printed in September and November. On the other hand, the ALCO portfolio contributed positively by EUR41 million, almost offsetting the increase in wholesale funding costs.
The positive evolution of the ALCO portfolio is explained by the low duration of the book, which, therefore, reprices to higher yields very quickly, while we only reinvested EUR0.5 billion in the quarter. The rest of the performance is explained mostly by the TLTRO contribution.
We benefited from accruing a positive cost of the funding at the average deposit facility rate from the drawdown of the facility until the 22 of November. And along with this, a higher remuneration of the liquidity deposited at the ECB. Total TLTRO III contribution amounted to EUR58 million in the quarter, which entailed EUR23 million of positive delta Q-on-Q.
Allow me to finish by highlighting the remarkable acceleration in customer spread as well as in net interest margin, which increased by 21 basis points and 18 basis points, respectively. This is, on the other hand, a trend that we will continue to see in the coming quarters.
Moving on and continuing on the NII topic. In the next slide, we cover our expectations for NII going forward. In this regard, we expect NII to grow by high-teens in 2023. In this slide, we show the different moving parts that will lead our NII to achieve these growth rates, along with the different tailwinds that it will face.
We have split NII into three different main repricing buckets. On the one hand, loan book ex-TSB. On the second hand, the ALCO, the wholesale funding and the excess liquidity; and finally, TSB’s evolution. First of all, given the decrease in current interest rates, the main tailwind will come from the fact that a meaningful proportion of the loan book equivalent to almost two-third of the loan book ex-TSB. This is around EUR70 billion out of a total of EUR113 billion will reprice in 2023.
This includes loans that are either linked to variable rates, mainly 12-month Euribor or loans that will mature and therefore will reprice during 2023 in average at higher rates. As per the pass-through to depositors remuneration, we are forecasting an average deposit beta of 20% to 25% in 2023 over all our current accounts and deposits ex-TSB.
To give you a sense of the level of pass-through this implies, let me share with you that we closed 2022 with a beta of 5%. In other words, the increase of the repricing in 2023 that we are budgeting should include, or should be between 15% and 20% of the aforementioned book. Therefore, we are confident that customer spread should improve materially in 2023.
The second bucket, the ALCO portfolio, which is in part linked to variable rates, along with the remuneration of the excess liquidity deposited at the ECB, should broadly offset the end of the TLTRO III facility, as well as higher wholesale funding costs. So the net impact of all these elements should be near to zero.
And finally, as per TSB, customer spread should also increase, although not in the same proportion as the rest of the book. As the biggest booming part, the structural hedge is not within it. This structural hedge will be the biggest contributor to TSB’s NII, as it continues to reprice with a significant gap between its front book, the five-year swap today at 3.5%, 3.6%, and its back book currently around 1%.
Let me remind you that this is a five-year structural hedge over EUR26 billion, of which one-fifth reprices every year. In other words, EUR5 billion will reprice in 2023. So all in all, we believe NII should increase in the high-teens in 2023 and gives us confidence to see NII improvement further in 2024, as most of the tailwinds still continue to contribute further repricing, potential ALCO reinvestments or TSB’s structural hedge, just to point some out.
Turning on to fees in Slide 22. Group fees increased by 1.5% in the year, which was in line with our year-end target of low-single digit growth. On a quarterly basis, we recorded a negative growth of minus 4.1%, mainly driven by lower service fees. These lower service fees income is explained by the fact that TSB recorded a positive EUR5 million non-recurrent fees in Q4, which affects the quarterly comparison and also by lower current account fees, which reached the all-time high figure in Q3.
On the other hand, asset management fees advanced in the quarter, although success fees, which are usually recorded in Q4, were lower than other years due to the financial market volatility throughout the year. On a yearly basis, we can see that underperformance of asset management fees offsets partially the good evolution of both credit and service fees, which were up 4.5% and 3.6%, respectively.
Going forward, we expect fees to decrease by a low-single digit figure in 2023. This is explained by the fact that in a higher interest rate environment, current accounts balances become more profitable. And therefore, we expect admin fees to be reduced while limiting interest rate pass-through into the depositors.
Moving on to costs on the next slide. It is worth noting that our recurrent cost base in 2022 was down by 3.5%, supported by a downward cost base in Q4. In the year, this downward trend of the cost base was mostly driven by the significant cost savings from the efficiency plan in Spain carried out in Q1, which amounted to EUR105 million, out of the EUR110 million expected.
Nevertheless, without considering exchange rate movements, these cost savings would have represented EUR128 million, well above our target despite the inflationary environment. To finish with this cost line and looking forward, I would like to point out that we expect 2023 cost base to be around EUR3 billion. This represents a 4% increase, which will be mostly driven by salary increases and inflationary environment.
Now on Slide 24, we look at the core results, which include NII, plus fees, minus recurrent costs. As you can see, in 2022, the group core results increased by 26.3%. Additionally, when comparing each quarter with the same period of last year, we can see a remarkable upward trend over the year. On the right, we can observe that the different elements that led to wider draws in the year were both the increase in revenues, 11% NII, 1.5% fees, coupled with a decreasing cost base, minus 3.5%.
Going forward, we also expect core results to keep on improving in the coming quarters, obviously, on the back of a higher NII, which will more than offset lower contribution coming from fees or higher costs derived from the current environment.
Moving on to the lower part of the P&L on Slide 25. We cover credit cost of risk and other provisions. This is the main remaining elements between pre-provision profit and profit before tax. In this regard, 2022 group’s credit cost of risk stood at 44 basis points, while total cost of risk stood within guidance at 60 basis points. In the year, credit provisions include EUR170 million top-up in light of the current macroeconomic uncertainty.
Taking a look at the breakdown of total provisions in the quarter on the top right-hand side. If we follow the graph from left to right, we can see that we booked EUR247 million of loan loss provisions in the quarter, EUR13 million of charges on foreclosed assets, EUR30 million of NPA management costs and finally, other provisions, which mainly related to litigations stood at EUR33 million. These provisions levels allowed us to be within the range of our guidance, 60 basis points of total cost of risk and also 44 basis points in terms of credit cost of risk.
Moving on to the following slide and continuing with provision expectations for the year. Let me highlight that we believe that total cost of risk will be around 65 basis points in 2023. Let me elaborate a little bit on the outlook for 2023. Looking at the breakdown of total provisions in 2022. So as we can observe, credit cost of risk increase the most, with 44 basis points out of a total of 60 basis points.
Going forward, we foresee a small increase, not material, driven by a scenario of lower economic growth and a potential slight increase in NPLs. The rest of provisions, namely foreclosed asset provisions, NPA management costs and other provisions, mainly litigations, accounted for 16 basis points in 2022. And we expect them to remain broadly stable throughout 2023.
Moving on, in the next section, I will walk you through asset quality, liquidity and solvency. Let’s start on Slide 28 with NPLs. The NPL ratio decreased by 24 basis points in the year to a 3.1% ratio, while the coverage ratio remained broadly stable at 55%. In the quarter, NPLs were pretty stable as well. We carried out an institutional NPL disposal, which had no impact on P&L. However, it was somehow offset by the non-recurrent net new inflows related to a single name.
Looking at the coverage ratios by stages on the right-hand side, we can observe that our Stage 3 coverage ratio is 39.4% at group level and 41.2% at ex-TSB level, given that TSB’s loan book is 90% mortgages, a product which will obviously entails lower level of provisions.
Moving on in the next slide, let me highlight some ideas regarding our NPL portfolio. We have reduced NPLs in the year by EUR400 million or 6%, while keeping the coverage ratio stable. This has been thanks to our ongoing organic recovery capacity and the active management of small NPL disposals. This approach has also allowed us to improve the composition and the profile of our NPLs, as you can see in the table.
So for example, NPLs classified as 90 days past due were reduced by 6 percentage points in the year, representing at year-end, 43% of total NPLs. The remaining 57% are unlikely to pay, which, as you may know, are, in fact, still performing, but we have decided to reclassify them as Stage 3 as there are some signs of deterioration with the collector.
Within this 90 days past due portfolio, it is worth noting that secured NPLs increased by 6 percentage points, representing now 64% of the portfolio. These NPLs are guaranteed with a collateral, and therefore, the recovery prospects on them are higher. This is demanding lesser provisioning effects. In addition, the vintage of these NPLs that is the number of years that the loan has been past due in our balance sheet has also been reduced by 0.4 years.
Allow me also to highlight that all this improvement in the composition has been made while maintaining coverage ratios broadly stable. Now looking forward, despite the improved credit quality of our NPLs and expected shallower economic downturn scenario and the fact that we have not yet seen any sign of credit deterioration, we have been cautious and we have budgeted for NPLs to pick up moderately in 2023.
In terms of foreclosed assets and total NPAs on Slide 30, you can see that the stock of foreclosed assets declined by more than EUR200 million or 15% decrease in the year. Today, the portfolio actually represents less than EUR1.2 billion. Let me also highlight that the coverage ratio for this portfolio remained unchanged at 38%, and also that 95% of the foreclosed assets are finished billings.
If we consider both NPLs and foreclosed assets, total NPL — NPAs amount to less than EUR7 billion, having decreased materially in the year, almost EUR600 million or 8% in relative terms, while the total coverage remained stable at 52%. Finally, the gross and net NPA ratios stood at 4.1% and 1.9%, respectively, with a year-on-year improvement.
Moving now on to liquidity in the next slide. The group once again ended the quarter and the year with a record liquidity position, even after having prepaid part of the TLTRO facility. This is reflected in the EUR57 billion worth of high-quality liquid assets as well as in the LCR ratio, which stood at 234% for the group.
At ex-TSB level, the ratio is even higher. It’s 267%. And this is explained by the fact that even though TSB’s LCR stood at 196%, its LCR — it’s capped at 100% when computing the ratio at group level following the applicable regulation, given that TSB is a ring-fenced bank. The loan-to-depo ratio ended the quarter at 96%, coming down from 97% in the previous Q, given that deposits have increased more than loans in the fourth Q.
In terms of the European Central Bank funding, we have already repaid 50%. This is EUR16 billion out of the total of EUR32 billion with loan from TLTRO III. There are still EUR16 billion to come, EUR11 million of which mature by June 2023, while the remaining EUR5 billion mature in March 2024. In terms of the TFSME, we currently have GBP5 billion outstanding, the bulk of which matures in the second part of 2025.
And to end with this slide, let me share with you the different improvements that we have achieved in credit ratings throughout the year. We improved our S&P rating to BBB from BBB- on the back of building a comfortable buffer of eligible subordinated liabilities, ALAC in their terminology. We also achieved a positive outlook from Moody’s on the back of improved profitability going forward. And finally, we also got an improvement in the outlook assigned by DBRS, where we went from negative to stable.
Turning to the next slide. Here, we can see our current MREL position. We recently received the updated MREL requirements and the subordination requirement applicable to us on a consolidated basis. As you can see, Sabadell is already compliant with all the requirements that need to be met from January 1, 2024 onwards, which are in line with our funding plans. The issuance plan will, therefore, focus on optimizing the costs and sources of funding and on maintaining capital buckets and MREL management buffer. We will also be present in the covered bond market, both at TSB and group level.
Finally, as we announced some days ago, an AT1 EUR400 million issuance will be called in February 23. This issuance has been replaced by the EUR500 million that we printed in early January, which leaves the AT1 bucket completed, as well as shows our investor-friendly approach to bondholders given that we call the AT1 by issuing another one in the first window available.
Finally, as per our capital position, we have continued to generate capital organically as our profitability improves. Our fully loaded CET1 ratio stands at 12.54%, having increased by 2 basis points in the quarter and more importantly, by 36 basis points year-on-year even after the increase of our payout from 32% to 50%.
When we look at the quarter’s evolution in more detail, we see an increase derived from organic capital generation despite the contributions to IDEC and deposit guarantee scheme as well as lower RWAs, which offset the small impact from the fair value reserve adjustments and the uplift in the payout from 40% to 50%.
From a regulatory perspective, CET1 ratio stood at 12.66% on a phase-in basis, which implies an MDA buffer of more than 400 basis points, which comfortably beats our target of maintaining a buffer above 350 basis points.
Finally, in terms of shareholder value creation, tangible book value per share increased by 8% year-on-year, including the distribution of cash dividend of EUR0.05 per share during 2022. This value creation can be partially explained by higher profitability as reflected in an EPS growth north of 60% in 2022.
And with this, I hand over to Cesar, who will conclude our presentation today.
Cesar Gonzalez-Bueno
Sorry, my microphone was off. Thank you, Leo. And now to finish our results presentation today. And before opening the Q&A session, I would like to summarize a few key conclusions. In Slide 35, you can see that we have reached all the financial targets that we have announced one year ago. Regarding the P&L, NII surpassed the target, while fees and costs are in line. Credit cost of risk is also in the targeted range.
Return on tangible equity stands at 7.8% versus an initial target of about 6% for the year. Our capital ratio stands at 12.54% above the 12% target, while MDA buffer reaches 402 basis points, clearly exceeding the target for the year.
Moving on to Slide 36. We are giving our new guidance for ’23. We are targeting an NII increase in the high-teens growth rate, as Leo mentioned before. Regarding fees and commissions, we expect a low single-digit decline. In a context of normalized positive interest rates, we expect to reduce fees to customers as current account balances are profitable again.
Total costs are expected to stand at around EUR3 billion. Regarding total cost of risk, we expect a limited upward trend in 2023 and are targeting a lower than 65 basis points cost of risk. Finally, we are targeting a return on tangible equity above 9%. Return on tangible equity would be above 10.5%, if we exclude the impact of the temporary banking tax in Spain. However, this is not the end of the road and return on tangible equity will further improve in 2024.
And with this, I will hand over to Gerardo to kick off our Q&A session, and thank you very much.
Gerardo Artiach Morenes
Thank you, Cesar. We will now begin the Q&A session. [Operator Instructions] Operator, could you please open the line for the first question?
Question-and-Answer Session
Operator
First question is coming from Francisco Riquel from Alantra. Please go ahead.
Francisco Riquel
Yes. Hello. Thank you for taking my questions and congratulations for the results. I wanted to ask you about your deposit base. In general, first in Spain, I wonder if you can give us some color on the deposit mix, how much is retail versus institutional? How much would you say are stable deposits?
Second, you lost a few deposits in Q4, partly captured off the balance sheet, I wonder how do you see trends in deposits in ’23? How much of the deposits you think you can afford losing before having to increase pricing? And you also mentioned a beta of 20%, 25% in ’23, but I wonder if you can share with us your views about the terminal beta in this interest rate cycle that you expect in ’24? And lastly, you can comment also on the deposit base for TSB and what beta do you expect here? Thank you.
Cesar Gonzalez-Bueno
Okay. I think you’ve — Francisco, you’ve nailed the question. I mean, if there’s something that is relevant for what is going to happen during the results of ’23, it’s certainly the beta on deposits, both in TSB and in Spain. And it has all our management. It has all the management attention. Let’s just start with how the situation is today. And of course, I will ask Leo to give a lot more color into my response because I think this is a key question looking forward.
So let’s just start with where we stand. The beta in Spain right now is, the pass-through is 2% of the total on balance liabilities, including deposits and including current accounts and including everything and including all the segments. So that’s a minimal, minimal starting point. Are we seeing any movement recently during the month of December, during the month of January? No, we are seeing nothing. So for the time being, it’s very peaceful.
As this is a very difficult projection, we are projecting a 17% pass-through in Spain around and a 20%, 25% for the group as a whole because, of course, our franchises outside Mexico, Miami, although, they are not huge in terms of capital. Nevertheless, the interest rates there are much higher and they follow much more the market. Why are we confident that the pass-through is going to be moderate? Because — well, and significant at the same time. First, we have different levels.
The first one is that we were charging commissions for the maintenance of the accounts, and we were charging negative interest rates on the corporates. And that is being reversed and that’s why we are giving a projection of negative evolution of the fees for 2023. And in general terms, this is much more painful for clients. I mean, if you look at customer behavior, the sensitivity to fees for services is significantly higher than the sensitivity of lost income or opportunity cost on the liability side.
And we have a lot of management attention because at the same time, we see that the loan to deposits that we ourselves have, which stands at 97% right now, it has room. In the previous circumstances where there was a tremendous fight for deposits, you have to remember that the loan to deposits were almost doubled. So, they were between 150% and 200% in most of Spanish banks with interest rates that were much, much higher and where the sensitivity of customers is significantly higher.
And with this, I’ll turn it to Leo, which will give much more color, I’m sure, to this very relevant question, Francisco.
Leopoldo Alvear
Hi, Francisco, if I forget something, please remind me because there were a bunch of questions. So the first one is the — if I understood, basically, the breakdown between retail and wholesale in terms of deposits in Spain. So, we’re talking that, basically, we have around, I would say, almost 50-50 split. And today, it’s mostly in current accounts, okay, especially on the retail side of things. Basically, we have very little deposit base. Sorry, deposit base as understood of savings, okay? So it’s basically on current accounts.
The deposits in Q4 actually went up. They didn’t go down, but we changed the accounting of the commercial paper, which is now included in a different line, which is basically in, let me tell you line — it’s basically sec in depth and other marketable securities. And there, we have around EUR900 million, which are actually deposits in the form of commercial paper. So if you include that, the deposits went up. So, we’re not seeing any usage. In other words, we’re not seeing any usage of retail savings, if you wish, which for me would be a first sign or could be a first sign of asset deterioration. And as a matter of fact, the loan-to-depo went down in the quarter from 97% to 96%.
Now talking about the beta. As I explained before, the overall beta over all the deposits excluding TSB was in 2022, 5%. Now, this 5% is obviously very much impacted by the deposits that we have, both in Mexico and in Miami, which are included in that bucket, okay? Because rates there are — have gone up at a much higher speed. In Spain, that beta was 2%, so negligible, almost nothing. What we’re guiding for is that we would think that this 5% can become 20% to 25% as an average through the course of 2023 by taking into account that we are starting at 5%, okay? And that we have not seen any significant movements in January.
So basically, that 2% that I was mentioning for Spain still remains the same in January. So, I think there’s room for that delta to keep on growing. We believe also that this delta will grow in 2024. Yes, that’s what we have budgeted. That’s what we have included. Where will this end? Obviously, it’s very, very soon to know where this can end. I think it’s very important to take into account as Cesar was explaining that the context is very different to previous context that we have seen in history. It’s not only us who have this 96% loan-to-depot. All banks in Spain are working with a loan-to-depo below 100%.
So looking at the future, we don’t expect volumes to grow in the assets next year, not materially. We are not seeing any usage of savings yet, and we were expecting to be seeing these from a few months ago. And this is not yet happening. So basically, loan-to-depo should remain without all things being equal, broadly stable. And in this context, I think no banks need deposits or volumes of deposits. I think there will be a lot of competition on probably new customers, new digital customers, but I don’t think the focus of banks will be based on gaining volumes, billions of deposits, which is what could increase significantly the prices. But we’ll have to see on this regard.
And finally, with regards to TSB, basically, we expect that the beta to continue growing next year in line with the evolution of the rates. Right now, the beta at the end of the year was around 12%, and we’re expecting that can go up to, again, 25%, 30% average for the year, more or less 30%.
Gerardo Artiach Morenes
Thanks a lot. Thank you, Francisco for the questions. Operator could you please give access to the next call.
Operator
Next question is coming from Maksym Mishyn from JB Capital. Please go ahead.
Maksym Mishyn
Hi. Good morning. Thanks for the presentation and taking my questions. I have two. The first one is a follow-up on NII guidance and you mentioned that you don’t expect assets to grow in 2023 in Spain. But I was wondering what are your expectations for your loan book per segment embedded in the guidance?
And also, if you could clarify which part of loan book has repriced in 2022, so that we can get an idea what will be left for 2024 after the 60% repricing in ’23? And the second question is on the potential disposal of your payments business. I was just wondering if you could provide us an update on the timeline that you expect. Thanks.
Cesar Gonzalez-Bueno
I’ll take the second one, Leo, if you agree. And basically, the timeline, we have no rush and we want to do this properly. As you have seen, it’s not solving anything today with growth above 20% on a year-on-year on the payments business and with an increase of the volumes, not only in amounts but also in income. This is not an urgent thing. This is an industrial transaction. And therefore, we will take our time.
The good news is that what we are seeing out there is that in terms — not of commercial, but in terms of technical capabilities, what we are seeing out there is very good and very encouraging. So, we are very inclined to do the transaction. But these transactions are complex. The contracts are complex, and we need to review every step of the way so that we can do it in a proper manner. And that’s basically — I think we anticipate that for sure, it will happen in the course of the year and we are advancing swiftly there.
Leopoldo Alvear
All right. Now with regard to the evolution of the assets next year, what we’re expecting is barely growth of around 1% or slightly below 1% in 2023. Now if we focus in Spain, basically, we are expecting a little bit of a growth in mortgages, but fairly flat.
Probably some more growth in the consumer finance space because we’re coming from behind and because this is a very small book. SMEs and corporates should be slightly positive, but again, very slightly. And basically in TSB, we’re also looking forward a flattish environment. So overall, as I said, between flattish and 1%. That could be more or less what we’re budgeting on. And I think 2023 is, as Cesar mentioned before, a year to focus on margins and not volumes.
Regarding your question of how much it reprices, as I said, as we tried to explain in the presentation, in 2023, we have around two-thirds, a little bit less of two-thirds of the non-DSP book — loan book, which reprices. That’s around EUR70 billion. And a part of this book will certainly be — keep on repricing in 2024, depending on where the rates in and so on and so forth. And then there are maturities in 2024, which will be repriced. So, there’s further tailwind to be gained on that regard in 2024. Thank you.
Gerardo Artiach Morenes
Thanks a lot for your questions Maksym. Let’s please give access to the next call.
Operator
Next call is coming from Alvaro Serrano from Morgan Stanley. Please go ahead.
Alvaro de Tejada
Hi. Can you hear me, okay? Hopefully, yes.
Cesar Gonzalez-Bueno
Yes.
Alvaro Serrano
Yeah. Thanks. Just a follow-up on the term deposit mix. Leo, I think you didn’t want to give an exact number unless I’ve missed it, but maybe some color to help us sort of guess what could it be or model it. I don’t know if you can give — I realize banks are not going to compete given the liquidity situation, but I don’t know if you can give us amounts of deposits among your wealth customers, the presumably old customers and some of the excess liquidity that corporates might hold in deposits that could make its way to letter or something along those lines that would give a proxy of what could realistically move to term deposits over time even if it’s not this year?
And the second question is around your cost of risk, the 65 basis points all in. We don’t really see — we’re not seeing an asset quality cycle unless you tell me otherwise. When I think about what’s the normalized number going forward, where do you think is there a further reduction from that 65 basis points? I’m thinking about your comments about further growth in 2024. Would that be led by lower provisions or further revenue momentum, which, I guess, given the rate curve is going to come to an end in ’24. So some color there as well would be appreciated. Thank you.
Leopoldo Alvear
Okay. I think a lot of quite a bunch of questions. Please remind me if I forget some.
Alvaro Serrano
Yeah.
Leopoldo Alvear
So regarding the term deposits, no, I can tell you no problem. We have, in Spain, basically around 7% of our deposit bases in term deposits, mostly wholesale. So very little retail. We don’t have — we don’t — I mean there’s no product. What we have in retail is basically the parts that you would refer to as the private banking space that we were talking about before. We expect this to change, but it hasn’t changed yet, not — I mean as of January as we were speaking. And we’re not seeing the momentum yet to be built.
Nevertheless, we have budgeted for a significant increase of deposit beta this year because at some point, I think it shall come. I think it’s going to be — but I may be completely wrong, pretty different from other, basically, cycles because of the fact of the starting position of the banks. And we will offer to those clients who are requesting for further profitability, for example, guaranteed funds. We’ve done that in Q4. It has been very successful. Obviously, that is one of the things that we’re going to be pursuing in 2023 to be able to provide with a product for those customers who requested it.
Now, this is — I understand this is the basic assumption for all banks this year. How much is the deposit cost going to increase? We’ve done a very thorough analysis segment-by-segment, book-by-book of how much we could be paying for deposits. And I think we came to a fair assumption. Now whether this is going to be the final picture or not, I’m afraid we’re going to have to keep on waiting to see it quarter-on-quarter.
What I can tell you without a doubt is that right now, we have not seen any change from December, okay? And we are at the end of January already. So one month has passed. So when I look at it from 10,000 feet view, we’re budgeting for a deposit beta of 20%, 25%, which is basically 15%, 20% more than what we had in 2022.
Is that too much? Is that too little? We are still 5%. So the average would have to grow very fast or the beta would have to grow very fast to meet — to surpass that average for 2023, okay? But as I said, I’m sorry, a lot of parts. And I think we’re going to need to have — to wait. I think the assumption is fair. I think it’s been — there’s a lot of intelligence behind it, but we have to see how the market evolves.
As per the cost of risk, 65 basis points. Yeah, I think we’ve been cautious in this regard, as I tried to explain before, because this implies 5 basis points more than in 2022. Is this because we’re seen as asset quality deterioration? The very basic answer is no. We have not seen any asset deterioration yet, end of January, I repeat. So the amount of loans 30 days past due is the same as we had last year.
As a matter of fact, it started in January ’22, worse than it ended in December ’22, but it’s basically flattish, if you wish or with a small downturn, but we have not seen any pickup. I have not seen any pickup on a slow path of, for example, number of transactions in payments, which for me is a very clear, could be a starting signal of asset quality deterioration if we started to see a number of transactions going down. We have not seen, as I try to explained in the previous question, a reduction on the retail deposits. So, savings are still there. Of course, there will be different situations.
But on an average term, we’re still there. So no, we’re not seeing anything yet, but we thought it was cautious to budget with a conservative view. We are talking about a slight increase in NPLs. So we — obviously, we’re not seeing anything material here. We may get it wrong, and the reality be a little bit more optimistic than that, but we thought it was the right thing to do to budget in this regard.
Now going forward, is this a normalized cost of risk? No, I don’t think so. I think this is pretty high. If we have, I don’t know, cost of risk of 35%, 40% — basis points, sorry, could be reasonable depending on the mix that you have on SMEs and corporates and mortgages, taking into account that 50%, 5-0 percent of our book are mortgages, including DSB. And that topped up with the rest of the provisions around 15 basis points. So, I don’t know, we could be talking about a total cost of risk of 45 basis points, 50 basis points in a normalized over-the-cycle scenario if we are ever to see that again, okay, because the road has been bumpy in the last few years.
And as per 2024, yes, I think the revenues will go up. I still think that NII has room for maneuver because a part of our loan book will still reprice. Of course, the deposit beta will increase. That’s for sure. But the margins in net figures, it should be positive. And on top of that, we have, for example, just to mention one or a couple of levers, TSB structured hedge. That’s EUR5 billion every year, EUR5 billion times the five-year swap versus the back book. That’s a lot of money.
And then on top of that, we have the ALCO contribution, which will — if we are to believe that rates will go down in 2023 — or 2024, sorry, the wholesale funding costs should be reasonably stable, while we have not yet put forth all the profits coming out of the ALCO because, for example, we still have to buy a part of it in 2023. So all in all, put in all together, I’m reasonably confident that NII should keep on growing in ’24. In ‘24, there are many other moving parts, but it’s not what we are counting on the guidance of the increase of the ROTE — of the return on tangible equity. Because, as you know, for example, the contribution to the SRB ends. That’s a lot of money.
The contribution to the deposit guarantee scheme gets in half. So, that’s a lot of money. But that’s the current view that we have and what the current regulators are saying. So the SRB has already told us that there’s not going to be any contribution in ’24, but we will see. But when I was talking about further improving the return on tangible equity, I was mostly talking about the income, yes, most likely, if things go in the way that we’re expecting, a lower cost of risk. And then on top of that, you have the other levers that I mentioned. Thank you.
Alvaro Serrano
Thank you very much.
Gerardo Artiach Morenes
Thank you. Let’s please move onto the next question.
Operator
Next question is coming from Carlos Peixoto from CaixaBank. Please go ahead.
Carlos Peixoto
Okay. So Carlos Peixoto from CaixaBank here. A couple of questions from my side as well. Touching a bit on the capital side. I was wondering if you could give us some visibility on how you see capital evolving throughout 2023, particularly if you see any specific headwinds that we should take into consideration when modeling our own assumptions.
Related with that, on the shareholder remuneration, I was thinking on whether the 50% payout, particularly this blend between — this particular blend between cash dividend and share buyback should be the benchmark to upcoming shareholder remuneration packages. So basically, the payout policy on 2023. And then finally, taking a bit back on NII, whether you could update us on the current NII sensitivity to interest rates? That would be very helpful. Thank you.
Cesar Gonzalez-Bueno
So I’ll take the shareholder one. The policy that has just been approved by the Board is that in normal circumstances, the payout should be between 40% and 60%. And therefore, we could take the 50% as a middle ground. But of course, the policy also understands that, that number could be higher or lower depending on the circumstances.
But in normal circumstances, that should be the — what the policy stands for. In terms of the structure, of course, the share buyback is much more appealing when the book value — market to book value of the bank is lower than when it’s higher. And therefore, the Board will logically differentiate that split over the course of the years depending on where we stand.
Leopoldo Alvear
As per the capital, yes, we expect capital to keep on improving in 2023. We have no material headwinds coming ahead in ’23. We have the implementation of IFRS-17, but that is not material in the group. So with the kind of profits that we are aiming to achieve, the current return on tangible equity that we are aiming for, obviously, we will generate capital, and we will — I mean, the ratios will grow throughout the year.
And I think your last question was regarding NII sensitivity. I think we’ve — well, NII sensitivity, you have in the current accounts. In my opinion, I’ve said it before, that is very theoretical because it implies very strict assumptions, if you wish, and then the world moves and all the different buckets in the balance sheet moves. My honest answer to that would be that my best guess is high-teens growth that we are aiming for in NII for 2023, given the evolution of the macro environment that we are all seeing and the rates that we’re all seeing. I would stick to that. That’s my best guess right now. Thank you.
Gerardo Artiach Morenes
Thank you. We’re starting to run short of time. We’re going to try to squeeze one last question. But please make it brief. Operator, could you please give access to the last call?
Operator
Next question is coming from Britta Schmidt from Autonomous. Please go ahead.
Britta Schmidt
Yeah. Thank you. Just two quick questions from me. One on net interest income. Could you perhaps comment a little bit on the expected trajectory in 2023? So comparing the first half ’23 with the second half, are we going to see NII increasing substantially and then leveling off or maybe even decreasing in one of these later quarters? And the second question with regards to the cost of risk.
Does the assumption of less than 65 basis points include the release of any remaining overlays? And maybe you can tell us how many are left? And/or otherwise also ask, if there are no asset quality issues on the horizon, when would you have to really increase other provisions? Thank you.
Leopoldo Alvear
All right. So the first one, Britta, it’s the evolution of NII in the quarters, I think we’re going to see — if I, from a 10,000 feet give, NII in Q1 on the one hand, it’s going to improve quite a lot because of the customer margin. But on the other hand, we have tailwinds — sorry, headwinds, basically TLTRO. So that will be — I mean, over the year, we’re going to compensate that with the ALCO and the excessive liquidity, but Q-on-Q, there will be differences, some of that.
So obviously, TLTRO will have an impact in the first three quarters and less on the fourth quarter, a negative impact. And in 12 months, that’s going to be compensated. But in Q1, that would be a negative. So all in all, I don’t know, NIIs for Q1, I think it should be broadly in line with Q4, if you wish.
And from there onwards, the NII should — at least in our numbers should keep growing every single quarter. So yes, the second half of the year, it’s going to be higher than the first half of the year despite the fact that in the first half, it’s when we will see probably the customer margin growing further. But we have this issue with TLTRO. Hope I more or less have been able to explain it.
Regarding the cost of risk and the evolution, we have booked for, as I said, EUR170 million of overlays for the change in the macro this year. We booked in 2020 around — we have left around EUR550 million or something of overlays for the — that we booked for the COVID at that stage. But it’s important to take into account that these overlays are included within the names. So it’s part of the provisions of the single names of our clients, okay?
So no, we’re not considering any kind of release next year. That is why we are increasing our cost of risk from 60 basis points to 65 basis points. As I tried to explained before to Alvaro, this is our best guess, and I think it’s a little bit conservative, if we listen to what we are seeing in the ground in January. Well, let’s hope that’s the case. And certainly not thinking about doing any release in ’23.
In my opinion, Britta, and I think I’ve discussed this before, these overlays, when they are — you make an overlay and then you put that provision on the names of the clients. So, I really don’t expect these overlays to come up unless with the natural movement of clients. If we recover those loans, then we will recover those provisions. So in the near future, it’s not something that we’re thinking about. Thank you.
Gerardo Artiach Morenes
Thank you. And thank you all for all your questions. And thank you, Cesar and Leo, for your answers. To any of you who might have been left out, apologies, but we do not have any more time. Let me in any case remind you that the full team of Investor Relations is available for any further questions that you might have. And with that, we’ll now wrap up the Q&A session. Once again, thank you all for your participation, and thank you for joining us today.
Cesar Gonzalez-Bueno
Thank you. Thank you very much. Bye-bye.