Thank you. Yeah, so, insurance and other financials get a break now, but in banks, we're, we're dedicated. We're pushing on straight through. You are welcome to drink your coffee as long as you pay attention. I am just covering while Antonio get his mics on. We're doing everything in just in time here. Thank you for being timely back in the room. I'm gonna try and do that, do it on the radio. Count down six, five, four, three, two . Welcome back to CaixaBank. I'll leave you in Antonio's hands.
Back-to-back, from one room to the other, from a Spanish bank to another one, and we've got another duo for you. Very pleased to have both Gonzalo and Javier, respectively, CEO and CFO of CaixaBank. Thank you all for coming and attending this session. Thanks for joining us today. We've got a lot to talk. I mean, it's been an eventful 12 months for the banks when we look back. And the resilience of your business model has been tested once again, I would say. Maybe to start, we can run through some of your thoughts. How are you seeing fundamentals in this environment? How do you manage a bank like Caixa, in such a steep and fast changing rate environment?
Well, thank you, Antonio, and thank you for the invitation. Once again, it's a pleasure to be here. It's obviously a better year than other years for the sector, also for us. Fundamentals all point in the right direction, I think, to the point we haven't seen in the last 15 years. The change in rates is now evident. It's coming to a new normal. That's the reality. It's new, but it's the old normal, because we always had positive rates. And where we are now is just where I think steady state of things should be. The change has been very fast, so it's obviously very extraordinary, but the landing zone is normality. And hence, we need to look at the business, we need to look at the fundamentals with positive rates.
What we see is obviously that we are an institution in a strong position because we have taken advantage of the last 15 years to actually fight hard to improve certain businesses that were not NII dependent, namely, obviously insurance business and asset management, private banking, where we have very strong growth engines, even though maybe seasonally or at this point, because of markets, they may not be growing as fast in certain cases, but clearly, structurally, very attractive businesses. We've made our bank much more efficient, obviously through M&A and organically. We have, now, I think the right size and structure, both in terms of branches and people, solvency and liquidity, asset quality. During this year, we've continued to manage to reduce our non-performing loans.
We've continued to maintain a fairly low cost of risk, as well as, very sizable unassigned provisions. So what can I say? The fundamentals are, I would say, very strong. We all know that, the pace of change has been very quick, and we are all debating about, when is peak what. That has its relevance. But if you look at what you asked, Antonio, the fundamentals, what is more important is that now we're in a different time zone, and this time zone is, actually here to stay.
Thanks. Very clear. And one of the questions that comes up a lot with you over the last two weeks that's been probably dominating debate also with respect to the rest of the Spanish banks is, of course, we've seen you launch a new commercial initiative recently and introduced a new term deposit offering for wealthier clients, which have deposits above EUR 5,000. Why launch it now? And how do you think this will affect, well, your business and the second derivative effect deriving from how your competition might respond to that?
Well, thank you. Yes, we've launched this time deposit. As you probably are familiar with it, but it's a 12-month deposit with a base rate of 1%, and that base rate can go up to 2% as long as the client has certain other products with us. Relatively simple, but mostly insurance-related and income-related, whether they have a payroll, pension, or similar. Why are we introducing this product? Because in a market where rates have now reached the level of 4%, it's necessary to have a time deposit offering for your retail clients. Obviously, it was a matter of when, but I haven't seen any market where this does not happen. Otherwise, we, as banks, would not be, I think, fulfilling our mission. Why now? Well, I would say, why not?
At some point it's needed to come, and we thought it was a good time after the summer, and obviously it's something that we've been planning for some time and decided to move ahead. Just be clear, let's remind you that we have obviously given some guidance from betas, NII. This move is entirely consistent with previously given guidance, and there's nothing that is not kind of part of the logical evolution in a market where rates used to be negative, and now they are at 4%, and obviously, banks need to launch a product.
This product is obviously aimed at our existing clients, completing our product offering, making sure that when we discuss about savings, if a client has a short-term horizon and wants absolute safety on their funds, then we have a product for that. It doesn't mean that this is a product on which we wanna lead the discussion about financial objectives, time horizon, portfolio diversification. This is just one part of it, but one part that needed to be in the picture.
Great. In the meantime, I remind everyone that if you have any questions, we're gonna leave the last 10, 15 minutes for you to sort of be able to raise and interact with management as well. Going back to sort of the year, and it's obviously been a very strong performance, best second quarter, best first half, and probably you're gonna be printing the sort of record high profitability for this year for Caixa. The market, however, still believes the banks are over-earning, and they've been trying to figure out what is the true sustainable level of profitability beyond this year. Now, you got it to NII in 2024 to be not far from the levels of this year. What is the overall profitability outlook for CaixaBank looking into next year?
Well, thank you. Obviously, when we talk about next year, we tend to compare what 2024 will be compared with what 2023 is likely to turn out to be, no? And what we are seeing during the year, increasingly quarter- after- quarter, is that 2023 is becoming a better and better year, better than we had expected. And some of the trends that we had forecasted are actually having an impact on the business earlier, no? And I'm talking obviously fundamentally about net interest net interest income. So, when I look towards the next six quarters, I see a very strong positive development. Clearly, with an initial or continuation of a strong improvement during the second half of the year.
Depending on how rates evolve, and let's assume that the rates will be stable around these levels, we still have part of our asset repricing to take place. We will also have, obviously, part of our deposit repricing to be made. In line with what the betas that we have been given guidance for, what we are going to see, and I remind you the guidance we gave for NII for this year is about EUR 9.25 billion, and around EUR 9 billion for next year. You're seeing that there's some slowdown and small coming down on NII. That is an assumption based on rates. Rates are doing a bit better than what we expected, and it's an assumption based on betas, and betas are also doing clearly better than expected.
So, we still have very strong growth in NII, very strong levels this year, next year, and most importantly, I think a new, as I was saying, before, a new normalized level of NII, going forward. If we have, and this materializes as a small slowdown on NII, when we compare 2024 to 2023, we are going to see, also a very significant offsetting force when you look at net revenues, which is, the drop of, sharp fall in, Deposit Guarantee Fund contribution and the, Resolution Fund contributions, no? So when you look at net revenues, we're actually seeing, I think, a, a positive environment as we move into 2024.
We should have a normalized development of our cost base, hopefully, a disciplined one, and then cost of risk, which is still very much under control. And where we're seeing that actually, again, every quarter, we are having better news than the news that we were expecting for the quarter, no? Still expect some deterioration in asset quality. We were expecting it from the beginning of the year. It hasn't happened yet. We still have reduced our non-performing loans in the second quarter. But even if there's some slight deterioration in asset quality, we feel that our cost of risk is gonna be well contained. So all in all, it goes back to what I was saying at the beginning. We've moved completely from one zone of profitability to another.
This latter one is the good one to project on our future, and we are obviously looking forward to grow profitability from this new level in 2024 and onwards.
Let's talk a bit more about those two levers that you've mentioned, the sort of the non-interest income revenue stream, and then we'll touch on asset quality. Non-interest income growth is going to be a key focus point for the market next year, as and when rates start to come down. I think the market sometimes forget, Caixa is not just all about NII. Your ability to cross-sell is one of the key strengths for you. So markets, of course, are always difficult to predict, and we've not had an easy year for fees.
But when you look at the outlook for fees across the different products, which you obviously have retained a lot of the factories in-house, where do you see the biggest opportunities for growth? Maybe a word on sort of now that the bank integration's been sort of dealt with, where do you see the biggest product penetration gaps from Bankia's products into your own.
Javier, do you wanna-
Okay, yes, I'll take that one. Well, you are right. So this is, an engine for growth, has been there, since the beginning, no? And now we have the second engine, which is NII, but obviously it's not the only one. Well, we have to remember about, our unique business model in the sense of, being, actually the, the only pure bancassurance , business model in Spain, no? And basically, it's, it's insurance, no, the area where we are more optimistic. Remember that in terms of P&L, after IFRS 17 replaces, we have now a dedicated P&L line for insurance result that is basically, savings insurance, risk insurance, and some other. But basically, we are really optimistic with, higher yield curve, for example, on annuities, everything related to savings insurance.
Life risk, as has been the case in the past, we think that we can deliver really well. We have a very well-structured product offer that is continually rolling over in terms of of new production. And then, on fees, it's true what you say, you know, that probably this year we have had some, some weakness. We have to remember here that the cash custody fees we were charging to large corporates, this has gone, obviously, with positive rates. And then we are managing those, let's say, current account maintenance fees, trying to strike the right balance on that front. And obviously, you have the other side of of the coin as positive NII, no?
But going forward, we think that our very well-established long-term savings business, remember, close to 30% market share and gaining market share on that front in Spain, will continue to deliver. We see positive inflows never coming down despite the new rate environment, and markets hopefully doing better vis-a-vis the previous year compared to, let's say, 2023 vis-a-vis 2022. Let's say 2024 vis-a-vis 2023, we will have a much better comparison. So in terms of average AUM balances, this will not be a drag. And then also the payments business, we see that consumption in consumption in Spain and also Portugal is doing well. Our payments business is set to continue delivering.
More in the short term, I think that probably the second half of the year will also show better figures on that front, no? So, so well, overall, I would say that insurance, that is a key differentiation, we really have a strong focus on, on that, or it's gonna be the case for next year, and our long-term savings business, no? So those are the key engines that are gonna support. You mentioned, I think the potential, well, the revenue synergies, that's actually not potential, but the revenue synergies we're having from the bank integration is through that, the former Bankia clients have a lower penetration rate in several products. Basically, it's protection in general, so in insurance in general, long-term savings, also consumer lending.
We have key differences in products with high value added, like health insurance, for example. We are market leaders. It's a huge penetration gap between both, and well, we have our long-term plan on that, and we are delivering. We are on track. Actually, we are ahead of our initial estimates, and this is gonna be an additional tailwind to what I was commenting before.
Thanks, Javier. Maybe staying with you on the asset quality, which was the second follow-up, which we touched on. You know, provisions in this cycle have turned out to be maybe below what expectations looked like at the beginning. We've seen a number of banks that have called for below the cycle cost of risk. You've got the cost of risk to be below 30 bps . But this year, how do you think that changes in the current environment? I mean, you've had overlays as well, which are significant. How should we think about the utilization also of these overlays in the second half of this year and in 2024?
Okay, well, the truth is that we were expecting some kind of a new non-performing formation, and this is being postponed, eh? So the truth is that the micro conditions are better than initially expected. We have just presented the record low NPL ratio last quarter, and we are expecting some deterioration at some point, but it's being postponed, no? And well, now we were expecting that probably we would go up on NPL ratio from 2.6% to 3% by the end of this year, but now we have the view that this probably is gonna be further down the road or probably even at lower levels, no? So, we hold those overlays you mentioned.
Some of those will be used by the end of the year, but we have the feeling that we will end the year with still a decent amount of those for 2024, which obviously gives additional protection, no? So we are quite upbeat on the situation. We expect some deterioration, but clearly not in line with our initial expectations.
Yeah, similar message, I would say. Maybe one last question before we open up for any questions from the audience. On capital returns, and obviously, this is a key pillar of your, your investment thesis. You're now a 12% pro-forma for regulatory headwinds. And the EUR 500 million share buybacks that, you know, you've, you've just approved, you're pending on the 20 basis points to go. After that, my understanding is you'll be paying 100% of your organic capital generation. By that date, you should be, well, well in excess of the EUR 9 billion you had guided by the end of 2024. Is that fair? What's your stance in general in terms of shareholders remuneration from here? How should we think about the mix between dividends and buybacks going forward?
Well, indeed, back to the strong fundamentals in which we are in, the result of all those strong fundamentals is not just profitability, but also the fact that these profits are available for distribution, no? The growth we are seeing is limited, particularly in on-balance sheet, capital-heavy RWAs. And it's likely to stay that way for some time, even though in due course, obviously, we expect for loan growth to resume and accelerate. And that would be good news, because we're having clearly a business in which we make returns above our cost of capital. That's certainly how I see it going forward. But in the meantime, growth is going to be on balance sheet limited. A lot of our growth is coming actually from capital light activities.
Insurance is one example, and obviously, the Danish Compromise means that the very high profitability of insurance business is, to a very large extent, distributable. And hence, we need to decide what to do with that capital. We've been very open that we're not an aggressive M&A bank. We're not looking to do acquisitions. We feel that we have the perimeter in which we operate, Spain and Portugal, and for certain businesses, Europe, no, maybe, on the CIB side. But for our fundamental retail business, Spain and Portugal, we are in the markets where we are. We have appropriate market shares. We have the product capacities. We do not need to sort of add on skills that we do not have.
And hence, as long as we keep being profitable and generating capital, this capital should go back to shareholders. We don't see a reason to keep it on balance sheet, certainly even less so when valuations are so depressed for the entire banking system, but also for us. Yes, our expectation is that we continue to be highly capital generative and for this capital to be regularly flowing to shareholders. How? We've mentioned already what's our payout, 50%-60%, which we think is a reasonable, sort of, sustainable payout in almost any scenario.
But clearly, in the current scenario, there's still quite a lot of capital generated, above and beyond this level, and that's where we're saying we will continue to do extraordinary capital distributions, i.e., share buyback, like the one we have announced. On these basis, as we do not see our share buyback coming out of one specific divestment or situation, but out of our current capital generation program, we have decided to move into what we announced in at the second quarter results presentation. It's a smaller buyback, only 23 basis points, which was approved fairly soon, and we started yesterday, with the intention of being more regular in our buyback programs.
So you should expect that we come back as we keep generating capital over and above the 12% level, to come back with announcement of capital distributions. That could be, and our aim is that they will be more regular, maybe less spectacular in terms of size. But our aim is that after a while, the market gets to putting this into our stock as an extra capital distribution that comes regularly and hence obviously something that should be incorporated in our, in our price, no? That's the message. Obviously, if circumstances were to change, we need to retain more capital, we will suspend or reduce buybacks. But clearly, when we look at the next years, we see a horizon where capital distributions over and above the 60% level are going to be a frequent pattern.
Thanks, Gonzalo. Any questions from the audience? We have about 10 minutes to go. If you do have any, please raise your hand, and we'll get the mic to you. Otherwise, one question on costs from my side. You're targeting EUR 300 million of incremental OpEx related to sort of IT and business development over the plan horizon, which was inevitably also a function of sort of your revenue expectations when you announced this. I wonder to what extent with higher revenues you'd be willing to increase the size of such investments, and where would you see the biggest returns? And maybe related to that, how should we think about sort of staff costs and D&A from here? There is an important sort of labor contract updating to your end.
Thank you. Obviously, costs are a critical part of our business. How do we manage costs? And because we have had this significant increase in revenues, any organization could be tempted not to look so much at the cost base. We've been very clear that this very significant increase in revenues, which is, again, returning to normality, is a one-year process, you know? When we look into revenues in 2024 versus 2023, we'll go back to, let's say, single digits comparison. That's my expectation. And hence, the need to take a very hard look at costs again. At the same time, we have a business that offers substantial opportunities for us, a market leader.
Having gone through an integration, but having now the house in order, we see plenty of areas in which we can do better. Some areas where we actually thought that there were no profits to be made, now they are fairly profitable. Obviously, everything that has to do about collecting retail deposits has completely changed, and hence, the investment and expense that we need to dedicate to this from an economic point of view is much, is much higher. We have already been doing it in 2023, to a large extent. For instance, all the initiatives we've undertaken to better serve the senior citizens on which I think we are market leaders.
We're gonna continue that way, but the part of the discipline is that we need to look hard at the business and see where are we going to finalize and disinvest from in terms of money that we may be spending, that can be spent in a better form elsewhere, no? In terms of being specifics about the numbers, there is this negotiation that has not yet started, that it will be for a large part of the industry. Well, in fact, for as the banks, the former commercial banks, will have their own negotiation in parallel, and experience shows that those processes tend to end up with fairly similar results. This will take months. I won't gonna prejudge now how the negotiations will evolve.
We need to be, obviously, open and reasonable, and we expect the other side to be also reasonable. The fact that inflation is coming down, which is now, I think, very clear. Question is how much it is coming down, but the fact that it is coming down is obviously going to be helpful. But, in a nutshell, we're gonna continue to invest. We need to. We see opportunities. We want to spend money, but only where we're gonna get the appropriate returns. And all in all, I think we're gonna continue to have a cost base that is managed in a way that is consistent with positive growth, which is obviously the key to long-term success.
Thank you. Any last... Oh, there's one question there. Sorry.
Hi there. You've got, obviously, quite a short-dated balance sheet, which has benefited a lot as short rates have risen. And you've expressed sort of confidence this is a new normal in rates. But how much flexibility do you have to kind of lock in this higher profitability and extend duration, whether it be by bonds or floating to fixed rate, kind of, duration on the asset side, just in case you're wrong, right, and this is not a new normal and rates come back down? Could you just talk a little bit about your thinking with regards to kind of extending duration for a potentially different world to how you see it?
Okay, actually, we have been doing so naturally, you know? We have been reducing our NII sensitivity. So I remember when presenting our strategic plan in May 2022, in an environment where we were foreseeing rates at, let's say, one and a half talking about sensitivities between 15% and 20% for a 100 basis points move on the yield curve, no? And now this is down to less than 5% because, first thing, with higher rates you have less sensitivity because deposit betas are higher, and because in a natural way, we have been originating fixed rate assets, basically originating mortgages at fixed. So first thing is that the sensitivity is lower than it was previously. And second thing, as this has been the case, we are a little bit opportunistic on that front, no?
So now you have a negative yield curve that is pricing rate cuts and actually, hedging, via, ALCO portfolio bonds or derivatives or whatsoever. Actually, we are locking those rate cuts, no? And you are protecting against, as you suggest, even a more negative, rate scenario, no? So we are happy with this lower sensitivity, a bit, a little bit on the sidelines, so we don't have a negative carry with cash at 4%. So, looking for, let's say, more flatter yield curve in order to take action. And actually, if you see market rates as of today, as we speak, are at the highest of the cycle, even long-term rates.
That was great and perfectly on time, actually. So thank you very much for joining us, Javier and Gonzalo. Thank you, everyone, for attending the session. We have HSBC next. Thanks.
Thank you.
Thank you.