Hello, good morning and welcome to CaixaBank's financial results presentation for Q3 of 2022. We're joined today by the CEO, Mr. Gonzalo Gortázar, and the CFO, Javier Pano. In terms of logistics, just a brief reminder that we aim to spend around 30 minutes with the presentation, followed by 45-60 minutes of Q&A, for which you should have received instructions via email. Let me just end by saying that the IR team and I are available after the call for any questions that remain. Without further ado, let me hand it over to our CEO, Mr. Gortázar.
Thank you, Eddie. Good morning, everybody, and let's go onto it. If I manage to put the presentation on. It doesn't seem to be working now. You have another one? Sorry for that. It's not.
They can see it, Gonzalo.
Okay. Well, I will go through my paper version. If in the meantime you get it sorted out, you project it for me, it would be easier. Okay. Well, good morning again. I would say Q3 for us has been a very good quarter. We say another strong operational quarter. That's certainly the case. In terms of commercial activity, to start with, it's been on the lending side. Now I can see the screen as well. Apologies for that. On the lending side, we have significant growth both year to date and quarter-on-quarter. Quarter-on-quarter, in fact, we've grown businesses, consumer lending and mortgage lending in terms of of balances and obviously in terms of new production as well.
On the customer fund side, we have positive inflows, yet another quarter with EUR 0.7 billion in Q3 and EUR 2.8 billion in the total of the year, in a year which you know better than anyone how difficult it is. Activity is, I would say, at a very good level. We're very pleased to see this level of activity with institution that only a year and a half ago completed a very large and complex merger. Net income is obviously up, and here we have core revenues going in the right direction and costs associated to the integration also coming down. Asset quality, very rewarding. It's 3% now, and it was 3.6% at the beginning of the year.
While we still see obviously some or a number of or many clouds on the horizon in the economy, generally in particular in Europe and obviously also in the U.S. the reality is that we've been doing very well on asset quality. Coverage is going up. Early defaults before they are non-performing loans are also at historically low levels. You know, very rewarding. Capital, some impact on the quarter associated to markets, but still at 12.1% above our comfort levels. Very good distance to MDA and liquidity, again, at very high levels. Very pleased with the quarter, I have to say.
Looking at the asset side, you see what I mentioned, growth year-to-date and quarter-on-quarter on the three categories, mortgages, consumer lending and business lending. That's not been the case in the market and for some of our competitors, particularly on this quarter. Which gives us a good indication that some slowdown in terms of market activity on the asset side that we had in Q2 and Q3 of last year is completely over. In terms of new production, it's very notable the increase in mortgage production. I'm sure we can talk about that later. But also consumer and business, clear, good signs of how we are positioning the market. Customer funds, tale of two cities. You include the market impact, which is unfortunately the reality.
You have a reduction in terms of NII both in year to date and in the quarter. When you take into account what is ex markets, you see significant growth in deposits and long-term savings. Obviously in this context, I would say a fairly good result. Market shares up in pension plans, mutual funds, savings, insurance, long-term savings. Again, very good feeling of having the commercial strength that we've always had at full speed.
With some significant developments in the quarter, particularly the launch of MyBox Jubilación, which is going to be obviously not having an impact in the very short term in terms of the financial results, but in the long term, I think it's a very, very promising initiative. Protection insurance, MyBox offering 25% in life, 21% up in non-life. Overall, MyBox and non-MyBox, all production premium on the new business up 11%, continues to be a source of growth for us and a very rewarding one. You put all that together and look at net income. Obviously, we have increase in revenues, mostly associated to activity, fees and insurance income. NII is still negative on the year to date. This is the nine-month comparison.
Obviously on the quarter, we've seen a complete inflection point with a strong growth, which is to be maintained. Cost savings more than offsetting inflation so that we had an improvement in profits of EUR 197 from recurring expenses. This is the after-tax number. Positive because the development of asset quality has been so positive. We have been able to both reduce loan loss charges and increase coverage levels, so it's an ideal world. Efficiency, the recurrent cost income coming down 209 basis points year-over-year, we're going very well towards our objective in the plan in terms of cost income and obviously very positive operating year-over-year.
Moving on to the economic environment, we've just seen some good news in terms of GDP in Germany. According to our expectations, also in Spain, 0.2% growth in the third quarter. In any case, we all know the economy is set to slow down. In our case, we see Spain moving from 4.5% this year to 1% next year. I think it's relevant to remind that our view is that Spain is gonna be doing better than the euro area. You have it on the bottom of the page. We expect GDP growth for the euro area of 0.2%, so basically flat.
In fact, over Q4 , Q1 of 2023, likely to be in negative growth territory. Our 1% for Spain is obviously much lower than this year, but it is consistent with a 0% growth in Europe, as we see it, because Spain is now in a better position. Obviously, we have a different energy situation with 9% of gas imports dependence with respect to Russia, compared to the 44% of the European Union. We have a different installed capacity with one-third of the European Union capacity for LNG, for regasification plants. We're not gonna have a shortage problem. We obviously will have some impact associated to higher energy prices.
Other than that, we have no real estate bubble. You have the figures there on, in terms of where we are, and that is just the price. You look at activity or the exposure of banks, new houses started, et cetera, all point towards a fairly solid real estate market, even if we will have some slowdown. You can see, on the slide, the house prices for next year is 1.5%. With inflation running at 4.5%, it means a negative real price appreciation, but it's positive in nominal terms. Obviously, our mortgages are paid on nominal money, so it's good to see that house prices keep growing in nominal terms.
At the same time, private sector is much less indebted than it used to be. You can see the graph basically on business side. We used to be at 140% in 2008, 140. We're now at 99% and below the Eurozone at 108%. When you look at households, we are below the Eurozone, in line but slightly below. Again, 57% of debt to GDP compared to 85% at the peak. 85% of the peak down to 57. Resilience in the private sector is very different. Employment is doing well. Then not on the chart, but also, you should realize that our external sector, we have had a current account surplus now for 10 years in a row.
This is absolutely unprecedented in Spain. We feel there will be a slowdown, there's no question around that, and an impact. But we think this time the Spanish economy is going to be affected, clearly. Moving from 4.5% to 1% is a significant impact, but less so than the euro area, which we expect to see at that point 2%. Now with that environment, which is obviously a worsening one, we have to see where we are. We feel very well and very good about where we are for a number of reasons. Obviously, the inertia that we have in results is pretty obvious.
You see here pre-provision profit and the significant increase in pre-provision profit that we're seeing, and obviously there's much more to come. While at the same time cost of risk is well maintained. Obviously first line of defense here is having more revenues, more profits and that is working. The actual asset quality of the portfolio has been improving for 14, 15 years. This is the best ratios we had since before the crisis in 2007. Coverage, as I mentioned before, is at a very high level 68%. That's because we continue to have very large number of unassigned provisions on which Javier will comment later.
Also, on the structure of the mortgage portfolio, which is going to prove very resilient in my view. We continue to have liquidity and both on short and long-term structural ratios at very high levels, well above our competitors on average and the requirement. We start with a very strong solvency position and that almost 400 basis points of MDA buffer. We feel situation is likely to worsen. It's likely to worsen less in Spain than in Europe. When we look at ourselves, we've never been in better shape in the last 15 years. That's clearly my and our view.
In that regard, obviously, we have our duties and the ESG front, both the social and environmental agenda, a few comments here. I think on the environmental side, very relevant, our decarbonization targets for 2030. We have started with the two sectors that actually account for 70% of emissions, oil and gas and power generation. We've actually come out looking at our competitors with levels that are, as of today, well below most other competitors and also putting some additional pressure on further reducing that along the way to 2050 getting to to zero. We have again I think strong track record on this front in terms of our green and social bonds issue.
We just actually incorporated into the Poseidon Principles and have been recently by sustainalytics named as or ranked as having the lowest environmental risk among the Spanish banks, which is good news. Then on the social side, you know, we have a different philosophy in terms of financial inclusion, our proximity to vulnerable groups, where we have solutions for both day-to-day banking, but also micro credits and obviously social housing, and then all the activities we do together with the foundation, which puts us in a different bucket from most other banks and something which we plan to continue reinforcing during a tough period and certainly continue explaining to society all what we're doing.
With that, Javier, maybe you can take over from here.
Okay. Thank you. Good morning. Let me go deeper into the details, now. Well, starting with an overview of the loan book, you know it well, but, you may see on the central chart that, we have a clear turnaround since late last year. The loan book up by 3.4% year-to-date. Even despite Q3 seasonality, we have been able to to keep a nice pace, into Q3 . Also below the chart, you may see also the evolution of the performing, mortgages, already, in positive territory in terms of volumes, year-to-date.
On the right-hand side, you see that clearly on this waterfall of our loan book, it's business lending what has been driving growth, and well, we expect that probably into Q4 , we may face some slowdown in that front, but in any case, probably a more flattish quarter. Moving to the ALCO, we have grown the book slightly this quarter to EUR 72.5 billion. It has been extremely volatile quarter, as you know very well, but with a relentless increase in yields since late August, no? Well, in this environment, you may see that we have been able to add to the portfolio in taking advantage of market volatility.
As a consequence, the yield of the book increases to 0.7%. As also you may see the average duration very much unchanged at circa 5 years. Also we continue to progress on our diversification process and the weight of Spanish government bonds being reduced by 9 percentage points year-to-date. In terms of wholesale funding stability, you know that we have almost 100% that funding swapped into floating. The spread over six-month Euribor remains pretty much unchanged at 67 basis points. Moving to customer funds, Gonzalo already commented that we have had strong market effects on our AUMs, minus EUR 18.4 billion year-to-date.
Even under those circumstances, we keep having inflows, EUR 2.8 billion for the year. Even this Q3 , positive net inflows by approximately EUR 700 million. It's not even a single quarter this year despite the market correction in negative net territory. You may see that our deposit gathering capabilities continue being there, EUR 8 billion accumulated during the year despite the quarter-on-quarter seasonality. More interestingly, on the right-hand side chart, you may see the average AUM balances. You can see that for the third quarter, already below by 2% approximately the average of last year.
By the end of the period, by the end of Q3 , due to a strong market correction late into the quarter, approximately 5% below. Obviously, this may have some impact into fee revenues coming from that business, but anyhow, you may see that is moderated. Let's move to the consolidated income statement. The most remarkable is the improvement in terms of core revenues. You may see that at the bottom, growing by more than 6% year-on-year, also quarter-on-quarter approaching 4%. Basically, there is a turnaround on NII. You may see that NII is growing quarter-on-quarter by 5% and year-on-year by slightly more than 6.
Clearly, this is supported by higher rates and the repricing on our floating rate portfolios, but also volumes that year to date have been doing well, as we saw before. On fees, we have the traditional Q3 seasonality, but despite this, we are over the EUR 1 billion mark this Q3 and up by 4% year-on-year. Strong recurring fees more than offsetting any market impacts on AUMs. Remember that since this Q3 , the corporate deposit fees is going. On insurance, I would say that very good performance. We keep growing on a quarter-on-quarter basis, even up by more than 5%.
Year to date, remember, boosted by the consolidation of 100% of Bankia Vida. On non-core revenues, basically, we no longer have First Bank when you compare year-on-year. Below, on costs, down by more than 6% year-on-year, on track to meet our guidance for this year. On loan loss charges and also other provisions, low levels of new provisioning. Well, taking all that into account, net income of EUR 884 million, that is close to 19% over last year. Let's comment about Portugal, where the positive momentum really continues. You may see also that core revenues improved markedly quarter-on-quarter, but also over double digits year-on-year.
On that front, clearly the loan book growth is supporting, importantly, strongly in Portugal. You may see across the board also mortgages, but businesses. We are gaining market share in Portugal in terms of loans, 11.4%. Now, 0.4 percentage points year-on-year, and at the same time keeping very low levels of NPLs and provisions. This together with good performance on fees and also flat cost or flattish costs year-to-date results into higher operating leverage up by close to 30% for the first 9 months of the year. The net attributable profit in Portugal, EUR 74 million. Let's move to further details on the different P&L lines.
NII close to flattish year to date for the nine months as you may see. On the bridge quarter-over-quarter, you may see a very strong contribution from client NII. This has to do with higher average volumes, but basically index resets that as you may see bottom left also result into an increase of circa 21 basis points on our back book yield on the loan book. Back to this NII bridge, you may see that ALCO and Other have a negative impact of EUR 98 million. That's basically repricing on wholesale funding that is at floating, as I commented, money markets and some other hedges. It's basically a lower positive impact from TLTRO quarter-over-quarter.
As a consequence of all this, margins also improve and this index repricing is expected to accelerate from Q4 and basically also into 2023. Fees, as I commented, for the quarter, over the EUR 1 billion mark. This seasonality that is always affecting Q3 , -2.2% quarter-on-quarter. You may see that also for the year, we are up on fees close to 4%. You may see on the bridge, upper right, that it's the year-on-year bridge that recurrent banking fees are really supportive for the period. This has to do with improvement in credit card activity, everything related to payments and other transaction-related fees.
You may see actually in the chart, bottom, left, that traffic on credit and debit card during Q3 has continued to be really good, compared to the same levels in 2019. So far in October, it's still being the case. Asset management, back to the bridge, year-over-year, having a slightly negative contribution due to the average balances we commented and still positive momentum in insurance distribution and also on wholesale banking. You may see that the breakdown, year-to-date is positive across all fee segments. Remarkably, for example, on wholesale banking, we are up by 15% for the year. Continuing with other revenues, on that front is other insurance-related revenues.
The most relevant here is, as you may see on the central chart, a new record high on quarterly results from our life risk insurance activities, EUR 220 million. When combining this with the equity accounted from basically VidaCaixa, you may see that we are up quarter-over-quarter and also year-over-year by slightly more than 17%. Remarkable activity here, and we are quite upbeat about the evolution of this business. Continuing with costs. On that front, actually not much to comment. I would say that we are on track to meet our fiscal year guidance. Remember, circa EUR 6 billion.
We have already delivered approximately 65% of cumulative cost synergies, and we expect that this level will be approximately at 80% by the end of the year. Remember that we have an increase in depreciation this year that is related basically well IT investments and some programs we already flagged on our investor day, but also remember the amortization of the Bankia Vida PPA. Asset quality. On that front, low loan loss charges, sorry. You see that this results into a cost of risk that is really flattish in recent quarters, circa 23 basis points now and on track to meet our guidance, circa 25 for the year. A clear reduction of our stock of NPLs. Year to date, actually EUR 2 billion, which is remarkable.
This results into an NPL ratio together with organic NPL reduction of 3% this third quarter. You may see that across the different segments the reduction is also very clear. A few words on ICOs. Well, that part of the portfolio is doing much better than initially expected. We have now 4.4% of our ICOs portion classified as Stage 3. We have 28% of our total initial ICO exposure that was granted in the past that has been already amortized. Of what has not been amortized 90% is already repaying principal. That part of the book that was a strong focus some time ago is clearly, and we reiterate, doing better than initially expected.
Let me give you further details in the following slide because there are plenty of details we think are interesting. We commented that we face the uncertainties ahead with confidence, no? Well, regarding our asset quality looking forward, this is basically in two pillars. Well, first thing, quite a strong coverage NPL ratio, which is quite strong at 68%, and we have been able to increase it by five percentage points year to date. It's EUR 8 billion of credit provision funds. But this combined with a low-risk loan portfolio, and you have here the details across the main segments of which part of our loan book is collateralized.
Once you take this into account, together with the exposure we have to the public sector, it results that two-thirds of our loan book is collateralized or granted to the public sector, which makes this loan book very resilient while we face this increased uncertainty going forward. There is a more important aspect that we'd like to remark on the right-hand side of the chart, sorry. This, well, in this environment with higher rates, obviously, there are plenty of borrowers that face higher monthly installments, no? This is the breakdown of our mortgage portfolio. You may see that we have 60% of our mortgage portfolio that has been originated before 2012.
This is a part of the portfolio that as you may see is basically at floating but it's very seasoned. Those are borrowers that have been paying the mortgage for more than 10 years. Actually, at the origin they have been paying even higher rates than the rates that we face in the near future. We have a period of time with low origination. This is the aftermath of the real estate crisis. Since 2015, we have 33% of the book that has been originated since then. As you may see, we have 72% at fixed. Those borrowers are shielded against the new rate situation.
The summary is that the part that is at floating is very seasoned, and the part that is more recent actually is at fixed. This results into quite a resilient portfolio in our view. In order to add some further details, below you may see the average monthly installment of a floating rate residential mortgage is approximately less than EUR 450. With rates at 3%, which is at some point what the market has been pricing, now it is slightly below, but although today we are seeing again rate increases in the yield curve, the monthly installment would increase by slightly less than 100 EUR per month. This is for the average of the portfolio.
Also a key piece of data is that the average affordability ratio is less than 25% for the average of the portfolio. In, with rates at 3%, with twelve-month Euribor at 3%, the affordability ratio is gonna be still below 30%. I think that is quite interesting information or even quite relevant to understand the resilience of our portfolio. Let's move now to the final two slides. Liquidity, on that front, we keep an ample liquidity position, as you know well. Here you have all the metrics. Regarding MREL, we are complying comfortably with requirements, as you know well, with an MDA buffer at 288 basis points, despite very difficult debt capital markets during this year.
We keep executing our funding plan, EUR 3.8 billion issued. Well, going forward, focused basically on the rollover of upcoming maturities and diversification of the investor base. Finally, solvency or capital, better said, we end the quarter with a CET1 ratio at 12.1%. That is the result of +30 basis points of organic capital generation, of which approximately -11 due to risk-weighted asset growth, because basically, we have had a larger book during this third quarter. We have the -27 basis points from the accrual of 60% cash payout and the 81 coupons.
On top we have -12 basis points, basically from the impact of markets on our fixed income portfolio classified as fair value OCI and also on Telefónica share price. On top, we have 26 basis points from IFRS 9 transitional, and we end with an MDA buffer that is at 398 basis points. Finally, tangible value per share improving to €3.81, an improvement of 6.4% year to date. Thank you very much, and I think that we may be ready for questions.
Indeed. Thank you, Javier. Thank you, Gonzalo. It's time to proceed to Q&A. Operator, could we please have the first call with the name of the institution that he works for? Just a brief reminder for everyone to keep their questions as brief as possible. Thank you.
Thank you. Anyone with a question may press star and one at this time. The first question is from Alvaro Serrano of Morgan Stanley. Please go ahead.
Hi, good morning. Two questions. First one on TLTRO. Can you give us the specific contribution in millions in the quarter in the NII? I know there's been some headlines at the press conference, but contribution in the quarter from TLTRO. Given that there's no carry trade, is there any point in holding it given your LCR ratios pretty high? Should we assume that you're gonna return all of it in the November window? The second question regarding payout. You're accruing the 60% capital down slightly. As we think about the full year and potential distributions for a new year, can you help us understand how you're thinking about it?
Should we assume, I mean, what I'm trying to say is what if buybacks are still possible and is a possibility that you may not pay out the 60% in dividend and you might choose to do a bigger share in buybacks. Are you gonna play around with the payout in the mix or should we continue to expect some kind of buyback? Just some reflections on full year distribution. Thank you.
Thank you, Álvaro. On TLTRO, I think this is a star topic today for Javier. On dividend, I think at this stage we have sort of in practice given a range of over 50% and maximum 60%. I think the board needs in due course to take a decision within that interval. I wouldn't like at this stage to say anything more. I think that range is valid and a decision will be taken in due course looking at the situation and obviously with sort of better visibility into 2023 and beyond. Obviously, we are at this stage accounting for 60%, which is the most prudent strategy.
Hence, if we do 60% you should have no impact from that in our capital as I know you know, no? On TLTRO, Javier.
Hi, Alvaro. Well, a very specific question. I'm gonna give you a very specific answer, or at least I will try. The positive impact on NII from the TLTRO funding plus depositing it at the ECB deposit facility has been circa EUR 65 million this Q3 . It was in Q2 circa 94, approximately 94, 95. So on a quarter-on-quarter basis, we have a negative impact.
This is what I flagged on that, let's say, NII bridge quarter-over-quarter, that on ALCO and other activities we had a negative impact quarter-over-quarter from TLTRO of approximately EUR 30 million. This is. Those are the details. Just to add some further information, I give also the percentage of the accrual. We have been accruing at -32% the TLTRO facility. On the other hand, and this average, you can calculate it obviously, but I give you the figures. The average of the deposit facility for this third quarter has been zero because it was negative at the beginning of the quarter, and then it was more positive, but the average is zero. Those are the figures.
You mentioned if we are thinking to early redeem, no final decision has been taken yet, but very probably we will early cancel this funding because as you say, we don't have any benefit from it. That's it.
Okay. Thank you, Alvaro. Let's move on to the next one.
The next question is from Sofie Peterzens of JPMorgan. Please go ahead.
Yeah, hi. Here is Sophie from JPMorgan. I was just wondering, yesterday we saw ECB kind of retroactively changing the TLTRO terms. Do you think there is any risk that Spain could retroactively change the guarantee terms on the ICO lending? Have you taken any legal opinions around this? My second question would be my usual one. Could you just outline the core CET1 headwinds and tailwinds to come? Is it still 20 basis points from IFRS 17, and then another 20 basis points from other kind of M&A transactions? Or should we expect more headwinds or less? Thank you.
Thank you, Sophie. In terms of the question on the ICO loan, I see no risk on changing those retroactively for many reason, starting with legal points, but also with practical ones, given the relevance of this. We can discuss the changes of the ECB on TLTRO. I mean, you know all, so I don't think it's a good use of our time now to get into that part. What is your question and more relevant is I see no risk of that happening in terms of changing the ICO loans, and certainly from a legal point of view, I just don't see how that could happen, Javier.
Hi, Sofie. Well, you say, well, no, we have positives and negatives ahead for Q4 . We don't foresee any major net impact for Q4 , but into 2023, yes, we're estimating now the major part of the impacts will be into 2023, no? Here, remember that we still had approximately 20 basis points from applying the Danish Compromise to Bankia Vida. That was a positive we had earlier in the year. Then from now on and into 2023, and I don't know, to some extent, something may even skip to 2024, we may expect a combined impact from IFRS 17 plus those, let's say, update on models you mentioned of circa 50 basis points.
Okay Sophie. Hope that answers your question. Let's move on to the next one, operator.
The next question is from Francisco Riquel of Alantra. Please go ahead.
Yes, thank you. I wanted to ask first about NII. If you can update guidance for 2022. Other banks have also given indications for 2023. I don't know if it can be also your case, you can share with us. In particular, if you can walk us through the mechanics of the repricing of the loan book, how much has been done year to date, how much is left in the mortgage and in the corporates? Also on the liability side, how and when do you expect to start paying for time deposits, if you think that this trend could be accelerated in the sector after repaying the TLTROs, or not. Second question is about the fee income.
Also you can update guidance in general, here, and also in particular on asset management fees, which are growing quarter- on- quarter despite the fall in the assets under management. If you can please comment what is driving this growth, the mix and products that you are offering to attract inflows, and if you can remind also on the performance fees in the fourth quarter last year, and if we should expect any this year at all. Thank you.
Thank you, Paco. I'm gonna let Javier, please go ahead.
Okay. Hi, Paco. Well, that's the key of the call, no? Let me try to elaborate. Well, for the fourth quarter on NII, I would say here that we are having a faster asset repricing than expected, no? Obviously, well, twelve-month Euribor and other rates are being higher than our initial expectations. Also in terms of volumes, we are doing well, so we're starting the quarter in good shape on that front. For the moment, in terms of deposits or let's call deposit beta, we don't see any pressure, you know. This is a little bit the summary. The TLTRO goes from November, but still there is a positive contribution into the fourth quarter, no?
Taking all this into consideration, yes, we are in a position to upgrade our NII guidance for this year, and we think that we are gonna be very close, if not at, EUR 6.7 billion for 2022 for the whole year. This is our view for 2022. For 2023, well, again, the starting point is a good one in terms of volumes. On that front, we are gonna have a larger part of the portfolio already repriced and repriced at higher rates than I initially expected. The TLTRO clearly is not gonna have a positive impact at all.
We have this year-on-year effect, but in any case, this is much more than offset by the book repricing during the year. In terms of deposits. Here we gave you details on our investor day about what we thought about betas, et cetera. What we are thinking and just to update a little bit what we commented, no? On a qualitative basis, because on a numeric basis, I think that everything is we are in the same place. What we think is that probably the beta is gonna take a little bit longer than initially expected to increase. Probably we still, during 2023, don't face what we may call the terminal beta, no?
Probably the terminal beta is not in 2023, but is actually in 2024, once the loan book has already been repriced. We may have this kind of slight lag in that sense. This is very positive for 2023 NII, you know? Time will tell, no? Because what we have now, the redemption of TLTRO, we have some talk from the CB about quantitative tightening. To what extent this is gonna actually affect the deposit betas or, let's say demand for funding in general is yet to be seen, no? Generally speaking, what we said back in May is still valid.
Obviously with higher rates, betas are gonna be slightly higher, but not, I would say, materially, but probably more skewed into 2024 than 2023. This is the summary, no? We are not now in a position to give you quantitative guidance for 2023. What I can say is that we expect very significant growth for NII for next year. This is our message today, you had a question also on fees. On that front, it's true that we have done better than expected. Everything related to what we call transactional banking, no? From payments, transfers, foreign exchange, even securities, all those areas have been doing really well.
We have been able to offset with that part of the business some more pressure on AUMs, as you say, no? Because obviously average balances are having an impact. Into the fourth quarter here, we face uncertainty in terms of AUM balances. It has to do with markets, extremely volatile. You mentioned the impact from success fees. It's also uncertain. Not all success fees are in absolute terms. Some are relative to indexes or benchmarks, but probably we face also some headwind on that front. All in all, combined with our insurance business, remember that we gave guidance at EUR 4.9 billion for the year for the combined, let's say fees plus insurance.
As the insurance business is doing very well, as you could see, we are in a position now to upgrade again this guidance to very close to those EUR 5 billion we were before. This is now the message we can give you. To the specific question about fees, asset management fees on Q3 , it has to do with the mix of products that we can distribute to our clients. Basically, this is it.
Okay, Paco. Thanks a lot. Let's have the next one, please.
The next question is from Andrea Filtri of Mediobanca. Please go ahead.
Thank you. Good morning. I wanted to ask about ALCO, where you see it going progressively in terms of size and contribution to NII. If you could elaborate a little bit more than you have done so far on the actual corridor of the deposit beta. Right now it's very low. Terminal rate, where do you see it and how do you see it evolving between now and the terminal rate? If you could give us your view on the negative correlation between interest rates and fee income, and in particular wealth management, including insurance. How do you see it evolving as NII rewrites? How is fee income going to behave? Finally, what were the negative interest rates fees in Q3?
Do you book them in the fee income, and how are they going to zero in Q4? Thank you.
Thank you, Andrea. Javier, please.
Hi, Andrea. Good morning. Well, on ALCO, in terms of contribution, well, actually the contribution in terms of NII is not that large. Basically, with the ALCO, well, with a fixed rate ALCO, which is what we are thinking about, we are to some extent locking the current rate situation. Because if you look at the yield curve, it's not actually that steep compared to, let's say, short-term forwards. There is not quite a wide, for example, sovereign spread. So, actually what you are capturing is more than margin. You are actually locking, let's say, the sensitivity of the balance sheet, no? And you are reducing that sensitivity to higher rates, but also to lower rates, no?
Well, this is quite an important decision we can take, no? In terms of volumes, what we have commented in the past, about EUR 90 billion is still in place. We think that this is the go-to figure at some point. When to really take a step forward has more to do with the fact that we see that we are really done in terms of this rate hike cycle, no? What this obviously is not easy. Obviously, we will not be lucky enough to be successful just one time. This is gonna be a gradual process, and we will decide according to our better view on that front, no? On deposit beta corridor.
Well, I already hinted a little bit, our views, no? We think that beta will gather pace slowly. This is our view. Starting with large depositors, corporates and so on. It's gonna take a while in retail, no? Basically because we have a different profile, we have explained it in detail, no? With first thing, we have a very large deposit base from retail. This is the first thing. Even within retail, our deposits with, let's say relational clients, our operational accounts, and we think that there is a very large part of that pool of deposits that is actually not sensitive at all, no?
There will always be at some point where, for sure, we may be starting paying also for some retail deposits, but we think that it's gonna take some time. This is why I mentioned that probably the terminal beta is probably more to be in 2024 than in 2023 in this cycle. Actually, according to all the models we have been analyzing, this is also what has happened in the past, not only in Europe, but also in other jurisdictions. In terms of rates versus asset management and insurance, well, I think that insurance is a business that is very shielded, let's say, with very local correlation to the rate situation. Insurance in terms of protection.
Insurance in terms of, savings insurance, actually is positively correlated because so far in the past, we have not been able to, construct products attractive enough because of the, low levels of long-term yields. With the current situation, this is something we can start doing again, no? This is positive, no? In terms of protection, we don't see much correlation. We don't see much correlation, and you can see that, we have been doing well, this Q3 and this year in general, and we think that this positive momentum is set to continue. On asset affecting, let's say, stocks, but also affecting fixed income, is unhelpful. That's clear. Despite this being the case, we have been able to keep having inflows.
We have a very well-established business model, advisory model, as you know, quite unique in Spain, to be said. Well, once this volatility settles, or at least this correction settles, we think that the pace of inflows will restart again because we think that, well, people and clients already understand that this is the best way for them to save. Not saving into short-term deposits that actually with current levels of inflation or even if inflation is at, let's say the ECB target at 2%, what deposits will be actually not offering positive real returns, you know.
I think that the message from our side will continue to be that, for long-term savings, AUMs and the different even insurance solutions, et cetera, is the right thing to proceed, no? You had a question, very specific one, about the custody fees in Q3. We were making approximately EUR 10 million per month before ECB removed negative rates. This in the second half has been half of that. Actually, we have had a positive impact on fees of approximately EUR 50 million. Well, in the fourth quarter, this is gonna be 0 for sure. Thank you.
Okay. Thank you, Javier. That was very comprehensive. Thank you, Andrea, for the questions. Let's move on to the next one.
The next question is from Maksym Mishyn of JB Capital. Please go ahead.
Hi, good morning. Thank you for the presentation and taking my questions. I have one on mortgages. Your new production increased again. We don't have the data for September for the sector, but it looks as if you're already above in new production market share, above your back book. I was wondering what's the reason, if you could remind us, you're able to grow your market share so fast. Do you see less competitive pressure? Also, how does cross-selling of new clients compare with the back book? Thanks.
Thank you, Max. The market share we estimate in the last three months, where we have public information, is around 30% in terms of new production. That compares to 25.6% market share in the back book. It's slightly above, which is good news. We have not changed our credit standards. In fact, if anything, we are slightly tightening them. We are just tightening them slightly because we had very strict policies and in terms of affordability and loan to value and a number of others, you know?
From a risk point of view, we feel very good, and we look at the expected loss and probability of default of the new vintages that we do track them month by month. Those are actually very good. We have no concern on that front. We have produced over 90% of these at fixed rate. I think this has also been a reason for our success. We are very associated with the fixed rate mortgage in Spain, because of our size and the push we've made, not this year, but over the last seven years, as Javier pointed out in his slide. Certainly word of mouth about us being competitive in the long term sort of mortgage fixed rate has certainly helped.
We also started this year with a strong focus on the product as we thought it was the right time. Remember we launched MyHome which we have talked about and you know, and you know well. Basically it started to get aligned in that front. My expectation is that going forward, this market share is going to be lower in terms of the share of new business. As you remember, we said that we wanted a market share that would be at 12-20% above, but not in our strategic plan as a target. I think that range of 20%-25% is probably more likely as a sort of final destination.
Those are the comments I would make. We're very pleased again on how we've done here and how our people, our branch network reacts to the right incentives which we have put in place, because the target was to grow, and we're meeting that target in a very conservative manner, you know? Now, you had a second question I couldn't really hear related-
It was on whether the cross-selling on the front book is the same as the cross-selling in the back book.
I don't have the exact figures with me, but generally, I would say the cross-selling is better. The fact that because typically cross-selling had been more associated to price competitive household insurance and obviously payrolls and other things that are not profitable by itself but generate revenues of another type. We have developed this ecosystem of MyHome now, where the cross-selling is not related to insurance only. It stays, and it's actually obviously very profitable from that point of view, and very effective. We are also doing, as you know, solar panels. We're doing alarms. We're doing some of the sort of white appliances and electronics for houses. We're now moving into mobility electric chargers, et cetera, for the car.
The ability or the range of products we can actually cross-sell is much higher. Certainly all this is happening in the front book, and increasingly so, versus not in the back book because we didn't have the same number of products. Some of them, like alarms, we've been doing for 5-7 years. But others we've been adding more recently, okay. Okay. Thanks, Max. Let's move on to the next question.
The next question is from Ignacio Ulargui of BNP Paribas. Please go ahead.
Thanks very much. Thanks for taking my questions. I have just two questions. One on the liquidity coverage ratio. What kind of buffer you think you should have over the minimum level? What would be the comfortable level for you at this stage? Second question, it's related to the NPL formation. We have seen a very good quarter in terms of NPLs, and Gonzalo, you commented during the call that indicators are very constructive, very positive. Could you just give us a bit more color on that and what should we expect in terms of NPL formation and NPL evolution in the coming quarters? Just one very small detailed question. The decline in ICO loans in the quarter had something to do with the deposits.
Have you seen corporates using deposits to repay ICO loans? Thank you.
Thank you, Ignacio. Let's deal with the last two questions, and then Javier can comment on LCR. On decline on ICO loans, we haven't seen any particular sort of unusual activity. Certainly, deposits have kept fairly stable on the business side. There are some changes in deposits that are associated to very large movements, some of them associated to temporary collection of taxes and some specific large items. Okay? So, not changes from that point of view. There's some seasonality because we have deposits that are higher at the end of June, due to extraordinary or the total sort of payment of salaries and the pensions advance.
Nothing there but obviously what you are seeing, what we're seeing is that businesses have been able generally to pass on cost increases to customers. They are in a fairly stable situation. Where they have cash, they've repaid ICO loans early, you know. As you know, we have now a figure close to 30%. I think it's 28% that has been already repaid. But no particular impact on deposits. On NPL, yes, we have had an extraordinary year, to be honest, looking into all that has happened. The fact that we have been reducing non-performers in such a way is EUR 2 billion in a year and 0.6, so 0.6%.
Here we have had both, sort of portfolio sales and organic improvement, which is very significant, no? To be honest, what we see for the fourth quarter is at this stage the same trends. No? Including the month of October with no sign whatsoever of a change in payment behaviors. Again, with early defaults, including month of October up to date, at historically low levels. There's very good feeling from that point of view. We have to see whether there's any deterioration in the last two months of the year.
Probably not, but I think at the end of the year, we'll always make some judgment on overlays and all those other considerations, depending not just what's happening in the last two months, but how do we see 2023. To be honest, all what we see so far has been so positive that I think gradually the market is going to be coming to the view that we have. There will be a deterioration in asset quality, there's no question, but this should be a modest deterioration.
If we end the year at around these levels of 3%, we will look at 2023 or ending 2023 with a higher number, but a number that would still start with a 3. This is what we're seeing. It allow us to continue to think that given the resilience of the portfolio, the fact that we think Spanish businesses and families are gonna suffer less than other places in Europe, and the fact that we have built this very large provision in unassigned provisions or what's coming from the PPA, you know, we feel fairly comfortable with the guidance we gave on the whole period, you know, for the whole strategic plan on asset quality.
When you look at, if that is contained, then obviously this very significant increase in net interest income, as Javier explained, and I would emphasize the word very, is going to have a significant impact on our profitability going forward. Now, we need to be alert, because obviously the situation is fluid, volatile. We have been alert now for some time, and we've been very effective in containing any damage. Because actually the situation has not deteriorated, our efforts have resulted not just in not seeing a deterioration, but in seeing a notable improvement.
We will see, I would say in terms of confidence, this is obviously an area of difficult outcomes, but I would say our confidence is very high on being well prepared for this deterioration, Javier.
Well, there was a question about our comfort level on liquidity coverage ratios. I think it's circa 150% is the go-to area.
Thank you. Nacho.
Thanks, Nacho. Let's get the next one please, operator.
The next question is from Carlos Cobo of Société Générale. Please go ahead.
Hi. Thank you very much for taking our questions. A couple from me. One would be on the ongoing negotiations with the government for low-income families, and according to the media, you have proposed a slightly different approach in terms of freezing the installments. I want to understand how much of the potential portfolio that could be affected is already restructured, if you could give some numbers around that. What could be the difference in potential provisions between one option in terms of freezing the mortgage or restructuring, it'll be helpful to understand. I know it's not gonna be very sizable, but it's good to understand before the agreement is confirmed. Secondly, the cost of risks.
You have a run rate of around 33 basis points in the nine months, but you still maintain that 35 basis point guidance for the year. Why not up, you know, lowering the guidance? Are you still considering a top-up, which wouldn't make sense based on what you just discussed about asset quality? It'll be good to understand that. Just a clarification, sorry, about the regulatory capital impact. Maybe I have the numbers wrong, but I have 20 basis points from IFRS 17 and another 20 basis points from other regulatory impact, and you've now said 50 basis points for IFRS 17. Would that be on top of the other 20 basis points? Could you clarify what's the total regulatory impacts ahead? Thank you.
Thank you, Carlos. Let me respond. I think on the last one, it's 50, no, Javier?
It's 50 combined.
50 combined IFRS 17 and the other regulatory impacts. On the cost of risk for this year and the 25, obviously, as you correctly said, if we were to move to 25, it means that in Q4 , there will be a higher level of provisions than in this quarter or previous quarters because we're saying we're at 23 basis points, but as that is on the basis of the last 12 months, no? We had some higher charges in Q4 , which, as you know, you may well think that banks tend to do that generally when Q4 comes. We've said around 25. It doesn't mean it's precisely 25. If we look.
That obviously gives us the ability to accommodate a lower number. At the same time, while we are not seeing a change in patterns now, I think by the end of the year we probably will have a better degree of visibility of what is the likely deterioration in 2023. That given the way that provisioning rules work may or may not have an impact, no? I would say on this front we feel comfortable with that around 25 basis points. I don't think it's too relevant what is finally the charge in Q4 versus the 2023.
I think we feel very confident now in this environment that I'm describing. We're gonna contain the provisions to the levels we said in our strategic plan. In fact, we can accommodate a fairly significant degree of additional deterioration and still meet our guidance based on how things have evolved in 2022, much better than what we expected. In terms of the impact of the negotiations with the government on solutions for mortgage affordability for more vulnerable customers, this is a discussion that has to be had by the banks among themselves and with the government.
I think it's in the benefit of everybody to keep that discussion in this circle and not speculate on different solutions, different costs for different institutions, depending on which solution. Again, there's a lot of discussion, and eventually, we need to have all these discussions and reach an agreement with the government. I think that while that doesn't happen, it's better not to each bank start saying what is best from their own point of view or what impact it may have because it's not gonna be helpful to find an agreement that is positive for all. If you allow me, I will not comment on the specifics.
In any case, I go back to what we were saying is, with a combination of fixed rates for the majority of our customers in the last seven years, and very seasoned portfolio which we have for most of the floating rate portfolio. We're talking about some moderate numbers, you know, which are consistent with what I said. We should have a deterioration in non-performing loans, but the figures should start with a three during next year. We don't see further deterioration. A part of that is not going to be because you mentioned refinancing and restructuring. We're looking at this crisis as a crisis where job destruction is going to be very limited.
Generally, we're gonna be looking at clients that can pay, but they cannot pay in full now. Typically these would result in changes that if there is a significant increase in credit risk, which there will be for a part of the portfolio, will move to non-performing loans, but likely to pay will continue to pay a reduced amount. Our experience is that eventually they will be back, obviously, after a cure periods, et cetera. After a couple of years, three, they will be back as performing loans in the majority. We will have some reclassification on that front during next year, limited.
Obviously would like to make sure that we agree with the government what do we do because that will also sort of position the industry as on the right side in terms of helping the economy, being part of the solution and not part of the problem. Whatever happens, whether we have an agreement or we do not have an agreement, we're gonna do the right thing. That's clear, and again, with an impact, but less marked than certainly what we had in the past.
Okay. Thank you, Carlos. Let's move on to the next one, please, operator.
Thank you. The next question is from Ignacio Cerezo of UBS. Please go ahead.
Yeah. Hi, good morning, and thank you for taking my questions. One is on costs. You're sticking to the EUR 6 billion target in 2022. If I remember correctly, your business plan target is around EUR 6.3 billion. In 2024, you still have some synergies coming through next year, according to the plan. I mean, how comfortable are you that those synergies can compensate underlying inflation next year, or we need to think about absolute cost growth in 2023 and some pressure into the business plan target? The second question is on capital return.
I mean, given those 40-50 basis points impact from IFRS 17 and regulation, considering that you're closer to 12% CET1, how comfortable are you actually on being able to distribute the kind of 80%-90% payout actually that you have left in the rest of the business plan? Or you think there's gonna be some restrictions around that coming from either the regulator or your profits actually being lower? Thank you very much.
Thank you. Thank you. I would say in terms of the cost base, we are going very well into meeting our cost targets for synergies, which as you know, we reviewed upwardly last year, and that's sitting in place. There's no question that we're having inflation at higher levels than what we expected, and hence we're going to have, over the life of the plan, a higher cost pressure. This year we are actually, as you pointed out and Javier mentioned, we are keeping our guidance, and we expect to deliver EUR 6 billion, but the risk is of upside pressure vis-à-vis our targets in 2023 and 2024.
This is, I would say, quite obvious. I think what really is relevant here is how does this compare to our revenue potential. The reality is that this inflation is putting and will put pressure on 2023 and 2024 in terms of the cost base, but is providing us with an increase in revenues that more than offsets any potential inflationary effect. We are certainly going to keep our targets in terms of efficiency, even if we eventually do have, which we will try to resist, but do have some impact on the cost base associated to the inflation situation. Okay?
In terms of capital, I would say we continue to see the group as highly capital generative. We do have these around 50 basis points that Javier mentioned. Obviously, as it will impact us during 2023 mostly, it means that beyond our payout, which we have committed to for the three-year period, not to stay above 51% on these 50 basis points, the further additional capital build-up in the short term during 2023 is going to be limited.
When we look at the whole of 2024 and our targets, we see obviously increased profitability, certainly accelerated, i.e., 2023, we're gonna see a lot of the good impacts that we were expecting to have in 2024 are being brought forward to 2023, given the evolution of rates, in a very significant way, as Javier mentioned. Therefore, we're gonna have
A higher capital buildup because we will be more profitable. We have the famous tax, the unexpected banking tax, which, as I said, is EUR 400 million-EUR 450 million because revenues are going the right direction, more likely to be in the EUR 450 million for 2023. This, again, in 2024, it's obviously something that we need to accommodate. When I look at the whole picture, there's some things that are better, others that are worse, like the banking tax. All in all, we're certainly at this stage remain committed to deliver this this ambition in terms of of capital. I think it will be done in a nicer way.
We will have a bit more growth and more profits, which obviously will generate, even if we maintain the same payout, a higher cash distribution for shareholder. There's some uncertainty because of the economic environment. To be honest, if you ask me today how do I feel about the future compared to when we presented our plan, I would say I feel better, despite the short-term challenges.
Okay, Nacho, thanks for your questions. Let's move on, please.
The next question is from Britta Schmidt of Autonomous Research. Please go ahead.
Yeah. Hi there. Thanks for taking my questions. I've got a couple of clarifications, please. Could you help us with a couple of numbers from the year-on-year comparison? What amount for deposit tiering, tier two or three, and excess liquidity fees will drop out year-on-year? Another clarification on capital, do the minus 50 basis points include anything from BPI models as a positive? My second question is on the NII sensitivity. What is the incremental sensitivity to where the rates are now, and what would it be with the terminal beta? Thank you.
Hi, Britta. Well, I don't know if I have all the figures you ask for, but I will try. On TLTRO, which has been the impact from TLTRO year to date, it has been circa EUR 250 million. Okay? Still on Q4 , as the benefit from TLTRO goes from the end of November still into Q4 , we have some positive impact. From TLTRO, what is gonna go is well slightly over EUR 300 million. You asked also about tiering.
I don't have this figure with me, but well, this is approximately six times our, let's say, reserves. This is approximately 27-28 billion. Probably, you can do the math, you know, that was, let's say at zero instead of at minus 50 basis points. Then about cash custody deposits, we were making like EUR 10 million per month. I said before that in Q3 , we had 15. So probably this is approximately EUR 75 million that is going away into next year. Then you had a question on the those minus 50 combined. Well, where we said before 40-45, now we have refined the figure to 50.
Your question is, does this include positives from internal models from BPI? Yes, this is part of the positives, and there are positives and negatives. Yes, I gave the overall impact, no? On NII sensitivity and deposit beta, I am not gonna be able to give you a specific figure. Well, a specific figure. I try to be as qualitative, helpful as possible. What I said is, what we presented in May is valid. What I say is, as rates are higher, betas are gonna be slightly higher. But at some point, betas do have a cap, even if rates are at, let's say, exaggerating at 5%. There is always a cap. You don't have a linear trend upwards.
What I said is what we are actually assessing, and this is why I'm not actually giving you a figure, is that we think that probably the slope of the beta increase is gonna be slightly flatter, and probably the terminal beta is gonna be more into 2024 than in 2023. Sorry for not giving more specific figures. I tried to give you our qualitative thoughts now. In any case, I would like to reiterate, I would have done so several times today. The expected growth for NII next year is very significant. I think that this is the summary.
Okay. Thank you, Britta. Operator, I believe we have one last question. Please, push it through.
Next question is from Esther Castro, Banco Sabadell. Please go ahead.
Hi. Good morning, gentlemen. Thank you for your presentation. I only have one more question remaining, if you don't really mind. I'm interested in knowing the sensitivity provisions for every minus 100 basis points on GDP. Thank you so much and have a great day ahead.
Thank you. Eddie, help me out.
Yeah. It's basically the sensitivity of cost of risk.
That is in the annual account, I think.
Yeah. Yes.
That figure is approximately EUR 125 million. Obviously, a change in GDP is different depending on what's the impact on employment and real estate in particular. Those are two variables that have a significant role here. The figure that we publish is that one, EUR 126 million.
Okay. Esther, I think you are the last one. Thank you very much for your attention and catch up with you next quarter. Bye-bye.
Thank you.