Good morning, welcome to CaixaBank's results presentation for the fourth quarter of 2022. Joining us today are the CEO, Gonzalo Gortázar, and the CFO, Javier Pano. For first-time viewers, just a reminder of the logistics, we plan to spend around half an hour with the presentation and up to an hour with the Q&A. Of course, if any questions remain unanswered, the IR team is at your disposal after the event. With that, let me hand it over to the CEO, Mr. Gortázar.
Good morning. Thank you, Eddie. Thank you, everybody. Let's get into the presentation immediately. It's been certainly for us, a very solid year, and I think we finish it with a very strong operating momentum. Not just because of the activity you see, given the relatively low growth in the Eurozone, for us to see performing loans up 3.3% and having had also positive net inflows in our long-term savings despite the market volatility is pretty good achievement. That's how we see it. Beyond that, I think particularly on the P&L front, the momentum is very strong.
NII, in particular, this quarter, has helped us to post a 5.5% growth in revenues. That's combined with a 5.6% decrease in costs associated to the bank integration, means that our pre-impairment profit is growing close to 20% this year. Together with that operating momentum and profitability momentum, we made good advances in terms of asset quality. For a year like this, we have reduced our non-performing loan ratio from 3.6% - 2.7%. We have done that in combination with a very prudent provisioning policy so that coverage for non-performing loans is now at 74%, up 11 percentage points during the year. Keeping our cost of risk in line with our guidance at 25 basis points. Capital-wise, very strong year.
We obviously completed the share buyback during 2022. We end up the year with a 12.5% Core Equity Tier 1, excluding IFRS 9 transitional adjustments. It's a buildup of 40 basis points of capital this fourth quarter, very strong one obviously. Beyond that, MREL ratios with ample margin and liquidity at a 194% liquidity coverage ratio, having paid back 80% of our TLTRO, speak by itself. That's why we have obviously set up a payout at EUR 0.23, EUR 0.2306 per share for this year, at the middle of our 50%-60% payout range. We announce that we will repeat that 50%-60% range for 2023.
I'd like to announce at this point that we feel comfortable with our EUR 9 billion target for our capital generation, or excess capital generation in our plan of 2022 to 2024. Net income, as you know, has grown by close to 30% to EUR 3.145 million. In terms of our activity, I will go quickly through a number of points. First of all, clients. This is the first year after our integration, the first full year after our integration. It means that in this year and we tend to forget it very quickly, but this year has been very intense, very busy year for us.
Our retail branches have come down by 17%, number of employees down by 10%. We've restructured our insurance business, which is so important for us. We have achieved our cost savings target. In fact, bringing it forward again in terms of the synergies co-cost savings that we have achieved already in 2022. All this is now a chapter, I would say, closed, but it's obviously kept us busy during the year. At the same time, we have made good progress. You see some of our client related activity in terms of relational clients. Percentage is now above 70%. Digital clients, imagined clients, transformation of our also customer attention model at branches through inTouch, growing all very strong.
Yet, as you see, we have plenty of potential to continue or to increase the penetration of various products among our client base. We have done so since the merger. You can see that on the right-hand side. Obviously there's many more, much more progress that we can do. Our NPS that we measure internally at branch level is up 10 percentage points over the year, indicating a very strong advance after the integration, which is obviously very satisfying for us. Moving on to loan production. New loan production, up 23% on the business front, 16% on the consumer front, and doubling on the mortgage front, speak by themselves. I think you have some statistics there.
I think it's very relevant to see that our loan expansion is being done with very prudent levels in terms of the target clients, both in business lending, consumer lending, when 90% of our consumer clients have the source of income paying into CaixaBank, which obviously historically has proved to be very attractive from a risk reward point of view. On the mortgage front, keeping mostly the fixed rate mortgage, hence protecting, as we have done over the last seven years, protecting our clients and our own asset quality from increases in interest rates.
I would say most notably on the mortgage front, after the MyHome sort of full-year effort, we have now put back our market share of new mortgage lending at 24% in line with the market share we have on stock, which was the objective, even exceeding the objective we had put in our three-year plan. In terms of the stock of loans, as I mentioned earlier, 3.3% of the performing loan book up business at 7.6%, consumer 4.1%, and even mortgages at 0.7%. The total loan book is growing slightly lower. We have had some very, I think, timely and good non-performing loan disposals through the year, which mostly explain these differences. Look at the customer funds.
Obviously, the year has been marked by market volatility. When we look at performance, we wanna look at it ex markets where we have seen 1.1% growth year-to-date, particularly 1.6% in long-term savings. Obviously, when we include the market impact, which is the real reality, we have a fall of 1.7%. You have all that on the right-hand side here. I would again highlight the fact that every quarter of this year, we have had positive inflows in our long-term savings, as you know, including long-term life insurance, plus mutual and pension funds. Basically, for the whole year, we have that EUR 3.7 billion. By the way, January, we have had significant inflows.
The figures were published yesterday in terms of mutual funds. A very good performance for us, which vindicates our strategy on basically advising our clients in terms of their investment horizon investment needs and asset allocation. No, it's not been an easy year for anyone, and certainly not for our clients, but the fact that we've maintained positive inflows speak by itself. Protection insurance up 8% with a stronger growth from MyBox, which is now over 77% of total protection sales and yet, I would say another year of very good activity and success on protection insurance in line with our targets. BPI, fantastic year.
You can see in terms of activity up 6% on the asset side, 5% on the liability side. Market share wise, gaining share across the board, be it total loans, mortgage business, loan mutual funds, a very good year. Obviously, this is showing in terms of operating ratios, a strong growth in core operating income. As you can see, efficiency is now at 50% when you see this, the graph there from 2017. In fact, the previous year before we acquired control, it was at 70%. We're talking about 20 percentage points of cost-to-income improvement over a six-year period. A structural improvement, which makes us obviously very happy with the performance. Asset quality and capital continue to be pristine, as you can see also on the, on the slide.
With that, the net income for the year is a pretty simple story. Story of 5.5% gross income growth and a reduction of costs of 5.6% due to synergies, hence that pre-impairment profit growing at around 20%. Below that line, while loan loss provisions have been in line with last year at 25 basis points, we have managed to reduce other provisions in a significant manner so that net income actually grows by 29.7% on a comparable on a comparable basis. A very good performance coming from integrations in 2021, I would say. With return on tangible equity just below the double-digit level, which we certainly expect to achieve very soon.
In terms of the environment, macro environment, we have slightly improved our expectations for the economy, following the positive indicators that we have seen over the last couple of months. We still see GDP for Spain growing by 1.3% in 2023, slightly more than the 1% we had before. 2022 has been stronger. We've had 5.5%, is a significant slowdown from 5.5%- 1.3%, certainly staying in positive territory. One of the great news is that employment is behaving very well during this period. Hence, we're not seeing a deterioration on unemployment, which would have obviously an impact on asset quality.
Equally on house prices, we're seeing basically a flat market, slightly below what we were expecting a couple of months ago. Still in nominal terms, flat, obviously in real terms with, that means a single digit reduction. All in all, an environment that is consistent with a fairly good asset quality behavior. Inflation coming down, as you can see, still average inflation for 2023 at 4.2%, which suggests to us that rates are possibly going to have to stay at higher levels for a bit longer than the latest that we have seen from market movements. Anyhow, time will tell.
What is undoubtedly big news is the major movement on the right-hand side of rates and obviously the very different environment we are facing now that we were facing a year ago, and obviously a much more positive one, no doubt. On that note, just a couple of comments on our financial resilience. The major news is obviously pre-impairment income. Obviously the gap between pre-impairment income and cost of risk is increasing, widening, and that gives us obviously a lot of comfort for absorbing any bad news and also for keeping good remuneration for our shareholders. NPLs at historical levels, coverage at historical highs.
Liquidity associated post, post-TLTRO, you can see it would come now to 162% if at year-end we had paid all TLTRO. We had paid, in fact, 80%, as Javier will explain in more detail. But it means we have basically a liquidity position is already adjusted to world post- TLTRO, which I think is going to be a significant competitive advantage for us vis-à-vis some other players in Europe. Capital-wise, I mentioned at the beginning, fairly positive development, ample MDA buffer, and hence, fairly good prospects on this front. Precisely on that note, again, just re-emphasizing our payout and dividend policy, which I mentioned at the beginning.
We're very pleased to have seen a year that has been positive for shareholders. When we add the dividends and the share buyback, it's basically EUR 3.5 billion that we have returned to shareholders this year. We are comfortably on track to achieve our EUR 9 billion target, which means obviously that there's further good news for shareholders on this front to come. With that, Javier, it's your turn. Thank you.
Okay. Thank you, Gonzalo, good morning, everybody. Let me now focus on further details for the fourth quarter, starting with the consolidated income statement. The most remarkable is net income, EUR 688 million. That's 2x net income of last quarter of last year. Well, this is supported basically by a strong contribution from core revenues up by 16% year-on-year, with costs negative, with cost synergies obviously having a contribution on that front, core operating income up by more than 40%. On revenues, clearly NII is the main driver, 33% year-on-year, also 23% quarter-on-quarter. Clearly, loan index resets already having a very positive impact.
On fees, we are affected by the end of corporate deposit fees. Also, during this last quarter compared to the last quarter of last year, also market impacts on AUM, obviously, clearly, much lower average AUM balances. On life insurance, I would say that we continue to have a very positive trajectory, with you may see on a quarter-on-quarter basis, up by 7%, so this is, as is, quarter-on-quarter figure not being impacted by the consolidation of Bankia Vida. On non-core revenues, just to keep in mind that we have this fourth quarter, the impact from the Deposit Guarantee Fund. We have on costs, nothing much to remark, a flat quarter-on-quarter.
As you know, we have reached our targets on that front for the year. Below the line, loan loss charges reflecting a prudent year-end approach with cost of risk that at the end of the day has met also our guidance. All in all, as I say, that net income at 688 million EUR. Let's continue with NII, which is a key part of our results today. It's on upper left, you may see the evolution of NII, but also disclosing the impact we have had every single quarter from TLTRO. We have quite a significant contribution from TLTRO this fourth quarter as the ECB changed the terms last November.
As you may see, excluding TLTRO, also we have quite a positive organic evolution up on a quarter-on-quarter basis by close to 18%. On upper right, you may see the NII bridge with this extraordinary contribution of EUR 161 million from TLTRO. You may see that it's client NII, the main driver, EUR 325 million, and it's still having some negative impacts from ALCO, basically from the wholesale funding impact. Remember, it's at floating rates and also other foreign exchange money market funding. Bottom left, you may see the evolution of yields. Very remarkable improvement on the back book yield, 50 basis points to 234 basis points.
At the same time, the front-book loan yield at 315 basis points, up by more than 1 percentage point in one single quarter, basically reflecting the new environment and the new yield environment in the new yield production. On customer deposits, you may see that the cost is at 16 basis points. Here, let me remark that excluding some structural hedges and also foreign exchange funding, that cost is 6 basis points. As a result of all that, margins expand significantly, up by 36 basis points, this fourth quarter, and also the net interest margin also increasing by 26 basis points.
On the ALCO, we have been on standby this fourth quarter, with relentless increase in yields, but we have ample margin to add to the portfolio. You have the maturity profile, EUR 7 billion this year, but also remember that we have a long-term target for that portfolio to reach up to EUR 90 billion. In due time, I'm sure we will expand the portfolio taking market opportunities, taking advantage of market opportunities. You may see the average yield of the portfolio, 0.8% by the end of December, with an average life and duration, pretty much unchanged this fourth quarter, around five years. We continue with the diversification of the portfolio.
Now the weight of Spain in the Spanish government bonds is 67%, down by 11 percentage points year to date. In terms of wholesale funding costs, I would remark here that we have a slight increase to 83 basis points. This is the result of, well, the new issuances, clearly, with a cost spread that is above the historical average. A few words on our balance sheet sensitivity. You know that we are geared towards higher rates. You know well about the percentage of our assets that are at floating. Remember, approximately two-thirds of our loan book at floating. The main difference, in our case, probably compared to some of our peers, is on the liability side.
Here you may see that on our deposit base, this is a very stable and highly granular one. We have 79% of those deposits from retail deposits. Those are basically customers with a strong relationship with us, with plenty of operational accounts. This is a figure that is well above the figures compared to our peers, also in Spain, but also in the Eurozone. We have been working on our models for our deposit base, and now we assess that we have approximately 40% of our core deposits that are considered core deposits or deposits that are considered core deposits that are actually not sensitive to interest rates.
This is the result of basically 10 million payroll and pension deposits that are actually. Sorry. Deposit beta is expected to be, by the end of the year, circa 20%, and the terminal deposit beta is expected to be in the high 30s by the end of 2025. The sensitivity to NII is expected to be between 5% and 10% for a move of up or down 100 basis points. On fees, we show a clear resilience this quarter. You may see here that we are in a situation where. Sorry, I'm not feeling well.
Okay.
Yes. Okay. Well, sorry for this. This Javier is not feeling well now, so I'm gonna try and take on from him. I'm sure he'll be back with us soon. Okay. This is going back to my old to my old job. In terms of fees, as you can see, we have had a quarter where we're slightly up from the third quarter with a difference between this year and last year, which was an exceptionally good year in terms of fee performance.
All in all, when we look at the yearly evolution, very satisfying performance, particularly taking into account that in the fourth quarter, we have obviously removed the cash custody fees, which is a significant part of that impact. In terms of AUM, our markets have been weaker and hence we have had an impact this quarter from the lower value of our AUMs and this is likely to be reflected as you can see into 2023 figures. It all will depend on market evolution. Obviously, we have had a good, a very good market in January, which provides us some hope, but time will say. Credit cards, very good performance in terms of payments, growing up. We expect some positive news on that front within the overall sort of fee environment. I would say, in the quarter, very good performance, and both in the quarter and the year from wholesale banking in terms of recurring fees as or non-recurring fees. I apologize. As you can see as well on the slide. Some pressure on recurring banking fees.
This is mostly associated to our loyalty program, so clients either become relational or they exit, and hence the pool of clients that are non-relational and are hence being subject to these fees are reduced. This explains why the recurring banking fees mostly are slightly down as you can see, together with the cash custody I mentioned before. Good performance on insurance. This is obviously not news to anybody. Very solid and consistent. I would say life risk in particular this year also associated to the increase in on mortgage production, but a lot due to our MyBox policy, which continues to be very successful.
On the fourth quarter versus the third quarter, obviously, there's an impact on the equity accounts as part of revenues. This is associated to the seasonality at SegurCaixa Adeslas, where the third quarter is always very low in terms of claims. You can see that performance as well last year, and some other non-organic impact. On a cost side, nothing new. Basically, we have had, I would say, very good execution on our integration and cost savings, and that has allowed to offset obviously inflation pressure, which is widespread, and which explains also our guidance for next year.
We have managed to keep that EUR 6 billion round terms, finishing at EUR 6 billion and 20 million with this 5.6%. Obviously, we're going to keep making sure that our cost base is under control despite the inflationary pressure. The cost-to-income ratio has made a substantial improvement, as I mentioned, from 58%- 52%. Cost savings have, or the vast majority, 84% of the cost savings have already been booked by year-end 2020. Cost of risk flat at 25 basis points. Again, a very prudent provisioning exercise at year-end. As you can see, even more prudent than we did at the end of 2021.
I think that's the only way to read it. We have seen actually no deterioration on asset quality in the fourth quarter. Quite the opposite, as you see, we have reduced non-performing loans substantially and built up coverage. We feel we enter 2023 extremely well prepared from this point of view. In terms of NPLs, as I mentioned, this very strong reduction, it includes the impact of some portfolio sales, but it also includes basically a non-organic reduction trend. For the whole year, more than half of the improvement in non-performing loans come from actually organic and approximately 40% from asset sales. No? The ICO portfolio is doing very well.
98% of the portfolio is repaying principal. Only 4.2% of the portfolio is as a Stage 3 and over one-third, 34% of the ICO portfolio has already been amortized. Basically, this is another sort of question mark that we had at some point and the market had at some point. This is actually behaving extremely well.
In terms of mortgage portfolio, we provided some detailed statistics last quarter in terms of the loan-to-value at 54% on average, and the fact that actually most of the portfolio that is being granted in the last seven years, over 70% has been granted at fixed rates, and hence it's fairly well protected from increases in interest rates and the impact on our clients' ability to pay. Obviously, there is going to be some impact. We still expect some deterioration in terms of non-performing loan during 2023. Given the quality of the portfolio and obviously the substantial provisioning exercise that we have already made, we actually feel comfortable in meeting our targets that we explained in the Investor Day.
Liquidity and capital, not much more to elaborate. You have all the numbers here. They indicate a very strong cash and ample margin. In terms of capital, total capital, MREL, and liquidity indicators, it's really for us a very good starting position into 2023. I think I would highlight, Javier and his team have made very successful issuances during the year, with a significant part of that in sustainable bonds, either green or social bonds, as you can see on the right-hand side.
Already in 2023, we have accessed the U.S. market with $1.25 billion senior non-preferred, and the sterling market with a Tier 2, also confirming our ample ability to fund ourselves globally and diversifying sources of funding, which is obviously always good. You have some details here on our ESG issuances. This is the statistics for the last three , four years, where we actually have issued EUR 9.6 billion, both in green and social bonds, topping the league table out of Europe, consistently, I would say certainly on a cumulative basis.
On this slide, I also want to highlight that even though there are many agencies following different, slightly different criteria, and results are not always too consistent, we are actually ranked very highly by all participants in the sustainability rankings, and obviously, very happy to have stayed in the Dow Jones Sustainability Index as one of the top players and FTSE4Good at a very high level as well. Capital generation during the quarter up 40 basis points. You have three components here, the organic generation, 26 bips, dividend and coupons from AT1 of 15 bips. I would say that's the normal.
Markets and other, and in other, we include the impact of BPI moving on to IRB models, which is slightly above 10. It's 10, 11 basis points positive impact that has already been booked in this year 2022. We still have an extra 30 basis points from the transitional adjustment to 12.8. Obviously very comfortable. Certainly, even better performance than we were expecting some quarters ago in terms of how quickly we are rebuilding capital or how quickly we're generating capital again post the share buyback, which certainly is something that all of you would be very interested. Good increase in tangible book value per share associated with our profitability and also positive impact from the share buyback.
With that, I'll finish with our guidance for 2023 NII. We expect to finish the year at around EUR 9 billion, circa EUR 9 billion NII. That is close to 30% growth from the figure in 2022, and obviously even higher if we exclude the TLTRO in 2022, which we should. You have seen our very strong growth in this fourth quarter, and I think, and I hope that gives you comfort to see how we can move from this EUR 6.9 billion to almost that 30%, and reaching the EUR 9 billion number during 2023. In terms of fees and insurance, we're grouping there the two categories together with NII create core revenues.
We're expecting to have a flattish to slight growth, as you can see, from EUR 5.1 billion this year to EUR 5.1 billion-EUR 5.2 billion in 2023. You have to bear in mind the cash custody fees, which are approximately EUR 100 million, which obviously we'll lose in the year on year comparison. It's a bit less because already in the fourth quarter, obviously there's been very limited contribution from custody fees, closer to EUR 75 million contribution in 2022. It's obviously AUMs that are given the market developments that are going to moderate growth in AUM related fees.
As I mentioned before, what's our loyalty program and the fact that our clients are becoming more and more relational or, if they are, just marginal clients, leaving, no? Costs, here's where inflation is hitting us, EUR 6.3 billion-EUR 6.4 billion. That gives you obviously a range of 5% to slightly over 6% growth. Here we have a number of factors. I think this is a very exceptional sort of cost growth for 2023 that we certainly should not predict going forward.
A combination of the inflation pressures that built in 2021 to 2022, together with the fact that 2023 is still a relatively high inflation year in all expectations, means that altogether we have this impact. There are some others that are worth mentioning, including the effect of our sort of loans to employees that are made at subsidized rates. The subsidy really is capturing this in this cost of statistic, and that is obviously then adding to NII, but it means that costs are somewhat artificially higher this year because of the increase in interest rates, which is something that we do not expect.
We expect possibly that these levels are maintained, but we certainly don't expect another 300 basis points of increase in rates into 2023. Finally, cost of risk, we expect to be below 40 basis points, and that's based on very conservative sort of assumption of how the economy and clients may behave in this environment. On the other hand, the reality that we have a very good level of provisions, cumulative provisions with EUR 1.5 billion of unassigned provision in our financial statements. If you add the Bankia PPA and the post-model adjustments, the macro sort of provisions that are not yet reflected in our typical IFRS9 provisioning system.
That gives us a lot of confidence that 74% coverage ratio eventually is another way to look at it. That even if the environment deteriorates strongly, our cost of risk is not going to be above 40 basis points. Certainly, I think any of us can think that if the economic situation is better, we could have some upside on this on this slide. That's all. Apologies for not being as good as Javier is, I've been told he's feeling much better now. Don't worry about Javier. I think we can now get.
We can, yeah.
Q&A.
We can go straight into Q&A. Just to reassure everyone, Javier is fine. He felt dizzy, he's getting a checkup. That's all. Let's move now, operator, into Q&A. Please ask the name and company of the person that's asking the question. I believe we have a big queue, around 12 people lining up for questions, please keep the questions brief. Thank you.
Thank you. Anyone who wishes to ask a question may press star and one on their touchtone telephone. The first question is from Maksym Mishyn with JB Capital. Please go ahead.
Hi, good morning. Thank you for the presentation and taking my questions. I have one question that has a couple of them inside. It's on the NII. I was wondering if you could give more color on your guidance, how much of your loan book has repriced so far, and how much of it do you factor in for 2023 in the guidance? Do you think that following 2023, after the loan book is repriced to current rates and the beta is increasing, there could be a stall or a decrease in NII in the following years? I just wanted to hear your thoughts on this. What kind of loan book growth expectations do you have by segment? That would be very helpful. Thanks.
Okay. Shape of NII and loan book growth. Thank you. Thank you, Max. In the meantime, while Javier recovers, we have been joined by Matthias Bulach, who is responsible for as a member of the management committee, and he's responsible for capital accounting and business planning. He will help me in some of the questions, so it doesn't become a monologue. Alternatively, you, Eddie, can join up because you know the stuff very well. In any case, I'll leave the first question in terms of how much of the loan book has repriced for Matthias to give any clarification.
I would say, we do not expect 2024 to be a year where NII falls because obviously it will depend on the rates environment, which you're seeing that almost every day changes in interest rate curve are very significant. We need to be prudent on that front. We still feel that in 2024, pricing of asset pricing and activity are going to be more beneficial than a further repricing of deposits because beta continues to go up. Do not think of 2024 as a year of falls in NII, at least with information we have today.
In terms of loan book expectations for 2023, I would say generally, we expect a slowdown in mortgage in new production and hence a fall in the mortgage book. Obviously, single digits and low single digits fall, but clearly there's going to be an impact from the current interest rate and real estate market. Again, not so much in terms of pricing, but in terms of activity, I would say it's logical to think that the loan book for the market and for us will shrink during 2023. We're gonna try and keep our share of the market in line with what we did this year.
I would look maybe at slightly a larger decrease for us because we have a slightly, sort of more, aged, book, and hence higher share of, principal repayment. On the consumer side, we have actually seen growth every single quarter of this year. When you look at the macro and the slowdown, you think that that's likely to mean a small fall in the loan book in 2023. That's how we are at least, that's what we are incorporating into our numbers. I have to say consumer has surprised us positively, consistently for the last 12 months, I do not discard that the environment eventually is better. We're having, again, a small decrease in consumer lending books.
We're expecting to still grow, I would say slightly. Maybe it's flattest or slightly positive growth, what we see on the business on the business front. Continue to be fairly liquid. I think it's also a market that is going to be different and where asset spreads should be more attractive and assets should reprice as liquidity is a bit more scarce. Hence, we're not going to be too aggressive in terms of volumes because prices are quite relevant to the business. Well, everywhere, but on the business side certainly are very critical. We expect to actually gain both in terms of asset spreads and slightly increase in volume. That's the 2023 outlook.
With that, maybe Matthias, complete on some of the other aspects of the question. Thank you.
Sure. Thank you very much, Gonzalo, good morning to everybody. On the question on the repricing of deposits, recall that around two-thirds of our mortgage book. Recall that about two-thirds of our mortgage book are referenced to Euribor 12-month and repricing every 12 months, and around one-third of the mortgage book is repricing every 6 months. If that pretty much evenly spread across the year, so there's even repricing each and every months of the year of these two books. That means the repricing and positive rates started around April, May this year. Two-thirds of the mortgage book has already started repricing.
It's true, obviously, that this repricing has been going up. It's not up until now, November, December, that we see significant repricing. Obviously, a significant repricing will be going on throughout the entire year of 2023 most definitely. Hence, we'll have also a carryover effect on NII in 2024, as repricing that is happening in the later next year. Obviously, then we'll have a carry-on effect on NII year-on-year evolution, 2024 with respect to 2023. Remember that the repricing typically happens with a lag of two to three months. We are typically repricing using Euribor reference of two to three month before.
Hence, there's a certain lag when they started to reprice in a positive manner and means that repricing will be going on as well for a little bit longer than Euribor implicit rates would actually suggest.
Okay. Thank you, Matthias. Thank you, Gonzalo. Just to add to Matthias's point, remember TLTRO is an extraordinary in Q4. We will not have that in Q1 of 2023. Next question, operator, please.
The next question is from Francisco Riquel with Alantra. Please go ahead.
Yes, thank you for taking my questions. I'm glad to hear that Javier is recovering. My first question is about the deposit beta. You can share with us your thinking process behind the assumptions for the deposit beta. You expect 20 by the end of 2023. Previously guided to 30 in 2024. You are now pushing out the terminal beta to 25, in the high 30s. What interest rate scenario and what customer behavior do you expect? How big a shift from side to time deposits? What pass-through of the interest rates? You can please elaborate on the deposit beta assumptions. Second question is on the cost target for 2023. You are projecting 5%-6% growth.
It's above, it's in line with headline inflation. I thought you were still benefiting from some major synergies left because the restructuring was made during the 2022. You mentioned some costs related to the subsidies for the loans to employees, if you can quantify just to assess the underlying inflation in the costs. For that, if you can also detail of how much is any investment in business initiatives or wage inflation or catching up in spending. You can please elaborate on the drivers of the cost growth. Thank you.
Thank you, Paco. Yes, we're all pleased Javier is feeling well indeed. I would say, let me make a few comments, and Matthias can elaborate. On beta, obviously, it's something we've looked at it in a lot of detail. Obviously beta depends on what's your view of the deposit facility rate. Beta would be different depending on whether we're talking about 3%, 4%, 3.5%, 2.5%.
At this point, based on the rate curve at the end of the year, which was fairly similar to the one just before yesterday's movement, what we see is, based on obviously having looked at very different scenarios in different countries over history of what has been the evolution of rates and then what has the evolution of deposits, what we see is that the likelihood is that we will get to these high 30s, but that the repricing or the timing in terms of number of quarters that are needed to get to that level is slightly larger. That's why we're saying high 30s by 2025. We obviously have no certainty on this.
It does depend a lot on competition. I think competition is gonna depend a lot on overall picture of liquidity in Europe, and obviously particularly on loan-to-deposits. You know, there's a very different behavior of betas, deposit betas, depending on the loan-to-deposit in the overall system. It's our base case that certainly the loan-to-deposits remains, and the liquidity position of banks remains, even if obviously not as comfortable as in the past, remains, I would say balanced, rather than comfortable. Hence, we think this is the reasonable assumption to make. Obviously, one thing is the system, and then is our particular case.
We're different from the system, we are convinced we will have a lower beta than the system, I have no question, because we are 80% of our deposits are retail, and we have a very large proportion of transactional deposits, you know. When we look at our payrolls market share above 35% or pension market share or even on the business side, what's our market share in at point of sale, clearly the sort of merchant acquiring, we are above 35%. As Javier mentioned before he left, actually core deposits that are going to be transactional and not remunerated under any circumstances are estimated to be 40%. This is also a very significant factor.
When we look at what we have already published and as vis-à-vis our competitors at year-end, we're actually having a 5 basis points, once you exclude, 5 basis points payment on deposits, once you exclude hedges and foreign currency, basically, which is certainly below some of our peers. This is because the mix of our deposits is actually very, very different, you know. Actually, current beta, if you look at the fourth quarter, for us is 4%. You should expect that this grows during the year to that to that 20%.
In terms of costs, and again, Matthias, if there's anything you want to add, I'll answer the cost question and then please elaborate as you see fit. In terms of costs, there's a good combination of factors here. Almost half of the increase comes from, let's say, external and non-organic factors. The one I mentioned is the cost from employee credit facilities. These are mostly mortgages. This is part of the collective agreement. Not the collective agreement, actually, of agreements that date back to decades, where they have a significant subsidy versus Euribor on the mortgages.
Then as Euribor goes up, this custody, which because it was floored at 0%, it tended to be not very significant. When Euribor increases, this becomes a significant subsidy, and it's accounted reclassification from costs to NII. This is approximately EUR 100 million. So you have that in mind. Another important part is the social security contributions. Norm has been revised this year again, what we call the destope, removing the ceiling on social security contributions. The rest, I think, well, I'll let Matthias because he knows this stuff also inside out as Javier does, you know. Please, Matthias, go ahead.
Thank you very much, Gonzalo. On the second issue on the social security contribution, as Gonzalo said, this is another EUR 40 million, EUR 40 million-50 million approximately. Actually 45% of what we've been guiding for the increase from the level of EUR 6 billion by the end of this year into EUR 6.3 billion-EUR 6.4 billion as the guidance says next year. 45% actually is stemming just from these two, from these two factors, you know. Very important as they are to some extent inorganic factors or difficult to manage obviously.
On the back of this, obviously, you know, we've reached an agreement with the trade unions on remuneration, on this 4.5% increase, which obviously is taken into consideration into the cost evolution into next years. We do see obviously some inflationary impact on general and on depreciation expenses. On depreciation expenses, this always takes a little bit longer to flow into our cost line, as investments are done, are done now or have been done this year, 2022 or will be done throughout 2023.
Capturing some of the inflationary consequences, will generate a certain upward pressure on depreciation and also on general expenses. Investment in business obviously is continuing. We continue to invest in business. We continue to invest in our digitalization strategy as we pointed out in the strategic plan. Investments done this year obviously generate also more depreciation expense over the next year. On the positive side, obviously next year, with respect to this year's levels, there is still the tail end of cost synergies and on phasing of cost synergies.
We actually had a better year this year, 2022, than we expected, in terms of realization of those. We realized approximately EUR 800 million this year of cumulative synergies in 2022, versus what we previously estimated and guided, which was a 755 of our overall target of 940. That means they're pending synergies into 2023 of around EUR 140 million, which are the positive side obviously of this evolution.
Okay. Thanks, Matthias. Paco, I hope that answers all your questions. We need to move on to the next one operator, please.
The next question is from Sofie Peterzens with J.P. Morgan. Please go ahead.
Hi, here is Sofie from J.P. Morgan. I hope Javier feels fine. If you could remind us of your capital tailwinds and headwinds in 2023, and kind of in which quarters those headwinds will come. Is it still 60 basis points, or has that changed? My second question would be, if you could also remind us of the IFRS 17 impacts on P&L, and also what does IFRS 17 mean for your guidance? Should we just assume sort of IFRS 17 adjusted, lever NII on fees and on costs? Thank you.
Thank you, Sofie. On in terms of capital, no change. I, we, still expect impacts, negative impacts, of circa 60 basis points. That includes IFRS 17. We expect the bulk of this impact to be in the first quarter. In any case, we expect to keep Core Equity Tier 1 at or above 12% during the year. Second question on IFRS 17, we've decided to not provide at this stage the guidance or the detailed impact of IFRS 17. We will do so in due course, obviously. We have to report at least in the first half of these semiannual accounts under IFRS 17.
We will see if we have numbers and all clear enough for that to be communicated properly when we present the first quarter results, and certainly it will be by the first half. In order to make our message simple, not to break trends and not to play with too much complexity, all the guidance we've given to you is pre IFRS 17. As you know, our expectation is that IFRS 17 is not gonna impact the bottom line, but it's going to be a reclassification, where we will have some revenue lines, both in NII and in fees, moving into other insurance results, basically. Also some of the costs associated to insurance also move into that to that line.
We will have an impact that is a neutral in the bottom line, at least non-material on the bottom line. Where both revenues and costs will decrease, and that will have a positive impact on cost on cost-to-income ratio. That is the direction of the trend that we obviously Javier and Javier Ibarz the team presented in December in that investor meeting you had. Nothing has changed, I would say. We thought that trying to provide all that detail at this point would be sort of too early and a bit more confusion.
We've rather today speak about no accounting change, and obviously at the time when we move from the current system to IFRS 17, we will provide you the full detail so you can see the impact. The most important thing are the trends. The trends are as per our guidance and the results today. Having said that, I don't know if there's anything you should know. But those are the big messages, Sofie.
Just Sofie, to be clear, remember that the 60 basis points is as a result of 10 basis points being applied positively this quarter related to the BPI adoption of advanced models. Net, it's 50 basis points, as we said in the last quarter. Okay? Let's move on to the next one.
Great. Thank you.
Let's move on to the next one, please.
The next question is from Alvaro Serrano with Morgan Stanley. Please go ahead.
Hi. Good morning. Two questions, one on deposit flows and another one on capital returns. On deposit flows, term deposits were down in the quarter. Maybe you can comment on, and the total deposits are down the last couple of quarters. If you can comment on what the dynamics are there, and also as we think about next year, what do you think of the, for example, in the U.S., we've seen the QT has driven shrinkage and deposit balances are actually coming down. Javier has mentioned in the past that that's a possibility with QT. I don't know if there's any sort of estimate you can give us of what part of your deposits could be.
You might lose at some point or some color in the general flows. The second question is on my numbers, your guidance points around 12% ROT for this year, post AT1, so it's about EUR 3.5 billion. If you're not growing loans or very limited growth in loans and you're already at 12.5%, can we assume the bulk of that EUR 3.5 billion can be distributed? I'm just conscious you've been quoted in Bloomberg that there could be capital, sort of further capital returns, extraordinary capital returns considered. I don't know if that's an interim decision that could be made or we've got to wait until next year. If it's EUR 3.5 billion, the total distribution we can look forward to on 2023. Thank you.
Thank you. Thank you, Alvaro. In terms of term deposits, I would say nothing out of the ordinary in the quarter. Obviously within that, you have sort of wholesale deposits that are more volatile and where there's some large movements that are not really generating any trend. They come and go, and we're gonna be very disciplined there. When they come and go because of right decisions, they may go more than come. Anyhow, that's something that's part of the business quarter on quarter. You will see swings on that on that front.
We're going to continue to see as you know, many of the banks, we've been launching funds that are sort of short-term treasury-based funds, or sort of treasury bill-backed funds. That is just a shift from deposits to AUMs that has had some impact and may have some impact. Overall for 2023, we do not see significant movements in deposits, I have to say. I would say we'll probably be stable, slightly up on our deposit base for 2023. In terms of Core Equity Tier 1, obviously we have a EUR 9 billion target. We have had a very good year in 2022 from that point of view.
We now have this impact of circa 60 basis points, most likely being front-loaded to the first quarter or the majority of it. The 12.5% is gonna come down very soon. When we look at our capital distribution plans, rather than thinking that the starting point is the 12.5% this year, or this last year in December 2022, I think we need to look at sort of two, three quarters from now to see that excess capital being built back again. Then, yes, we have obviously taken no decision, but in order to get to EUR 9 billion, clearly our 50%-60% dividend payout is not enough.
You should expect, and that's what I expect, that we will undertake another capital distribution that is going to be more likely at the end of this 2023 or even more likely in 2024. That's the overall environment. We haven't made any decision yet because even if we have 12.5% in a quarter, this is going to be back at close to 12%. As we see capital generation very strong, I have to say, because we are going to be fairly profitable and we are not expecting high growth in RWA, you correctly said so, obviously there's going to be capital generated. Again, our commitment is absolutely clear, crystal clear. We want that capital to go back to our shareholders.
Anyhow, it gives us a few quarters until that sort of plan for the future is actual capital, excess capital on balance sheet. If I may take the time to say Javier is 100% recovered. He's in pretty good shape. He, he's maybe come back and kick off Matthias, I don't know. He said thank you to everybody for taking an interest in how his health was evolving. Thank you.
Okay. Thanks, Alvaro. With that good news, let's move on to the next question, please.
The next question is from Ignacio Ulargui with BNP Paribas Exane. Please go ahead.
Thanks. Thanks very much. I'm glad to hear Javier is recovered. Just have two questions focused on credit quality and the guidance of 40 basis points. If I just look to the fourth quarter, gross inflows into NPLs has been a decline of 17% year-on-year, and in the year you have reduced around EUR 3 billion of NPLs. Why you are guiding for such an increase in cost of risk? I mean, is there any kind of tangible deterioration in credit quality in early indicators that you see? Is just an effect from the Good Practice Code approved by the government in December? Just trying to get a bit of a color on that. Linked to it, where do you see the coverage going forward?
I mean, you have a 74% coverage, which looks too high for the, for the credit portfolio that you have. Just to try to square the below 40 basis points cost of risk guidance. Thank you.
Thank you, Ignacio. Let me be very clear. On the credit quality, we feel extremely pleased where we are. It's been a major achievement to reduce non-performing loans to 2.7% this year. It means we have really the organization everywhere very ready and prepared to deal with asset quality issues in the right way and very decisively. If we feel pretty good. Now, we are extremely conservative and if you look at our guidance historically, we've always been very prudent in asset quality because it's something that we do not really control. We look at the year and, obviously, there are some reasons to be concerned.
I would say, three quarters ago, nine months ago, there were even more reasons to be concerned, but actually nonperformers have come down, and we've done very well in terms of cost of risk. Hence, if you look at the asset. Sorry, at the glass half full, you can be very upbeat. There is nothing we see today in our numbers that indicate that the problem has already surfaced. Early non-payments, early defaults, we look at the between 1 and 90 days, are at historical lows. Even the month of January, which is always a tough month, has gone very well on that on that front, very well. No indication whatsoever today in anything that we see that we have a problem.
You look at the environment, you know that rates have increased, that this is certainly gonna mean, an extra effort for some clients. Obviously, that inflation is an issue for some companies. They cannot pass on in full, sort of cost increases, and you have to conclude logically that things are going to deteriorate, and hence our guidance is prudent. It's prudent not just because we're not running today at 40 basis points, but because we have EUR 1.5 billion of unassigned provisions. That is why we have a 74% coverage rate. If we didn't have this EUR 1.5, obviously you would have a very significant decrease on that non-performing coverage. Even despite that, they will still be in the 60% area.
Very, very high, considering the high proportion of collateral that we have on the real estate portfolio. Time will tell. I think it's reasonable to be prudent at this point because there will be some deterioration. I think we have no doubts. That's not prudent, that's being reasonable, that there's going to be some deterioration. Because the deterioration may not be that tough, and particularly because we have all these provisions, I think that less than 40 basis points is safe, is safe for us. We will, we will see. Thank you.
Okay. Thanks, Nacho. Let's move on to the next one, please.
The next question is from Carlos Cobo with Société Générale. Please go ahead.
Hi. Thank you very much, and hope Javier has a good, long rest this weekend and fully recovers. Questions from me. One is if you could give us a quick update on the low-income mortgage renegotiations. How many requests are you getting, and if you still think that it could consume a big part of the COVID overlays, in terms of cost to risk, because it feels that it's not gonna be that high. If you could update on your base case there. It'll be good if you could share your front book term deposit yield. How much are you paying to the new deposits, term deposits in Spain? Lastly, about your outlook for mortgages, is this related to the fact that you don't wanna pay for deposits or that you see some contraction?
When customers face the decision between getting a yield on the deposits, if they don't get it, they're gonna decide to amortize their more expensive mortgages. Is that a trade-off that is included in your forecast? It'd be interesting to know your thoughts. Thank you.
Thank you, Carlos. Let me just respond to part and then pass it on to Matthias. In terms of the new Code of Good Practice, it's early days, but as of the end of January, we had approximately 800 requests of approximately EUR 100 million from clients. This is the first month where we would have expected a significant demand. The numbers are, I think consistent with our view that this is a Code of Good Practice. Again, we have 800 requests and round numbers, EUR 100 million of principal affected by these requests. It's consistent with what the purpose of this code is. It's a tool for those people that cannot pay their mortgages.
These people, obviously we want to help them. Certainly, we will do. It's not a tool for people that do not want to pay their mortgages, but they have the ability to do so. Hence, it's going to be limited because the reality in Spain is that the resilience of our, of the economy, of businesses, and in this case, of families, is very strong. They are actually being able to muddle through this economic environment. The first thing they want to do is to pay their house, their home, and the mortgage.
Because, obviously, the alternative is not to live in the house and not pay it, but have to pay it at the end of, I don't know, adding an extra three, four, whatever number of years to the mortgage, sort of payment period, and that doesn't make sense. The take-up is likely to be moderate, but it's likely to be hitting exactly the target audience of people that we want to help. Hence we feel very good, both from the point of view of our the impact on our financials and of our ability to help the people that really need it, in this moment. In any case, we have had significant increases in rates in, from November, but particularly December and now January.
We're gonna still have months where these increases in rates are going to be impacting our clients. Hence, we are expecting certainly some deterioration on or some increase in the number of requests and some deterioration on asset quality. Mostly, this would be mostly unlikely to pay, sort of a Stage 3 that in due course we're helping someone that cannot pay for a year or two or three. It is our expectation that these mortgages, in most cases, will eventually be repaid. We should have an impact. I think it's moderate, but it's part of the explanation which we were giving for, yes, we expect some deterioration, cost of risk below 40 basis points.
This is one of the factors we are obviously expecting to have an impact. The numbers from January are obviously modest at this stage, but we need to be prudent and wait. On mortgages, I wanna say we expect a lower mortgage production because rates have moved. It's not because we may remunerate or not deposits, but I think the main factor is new production is going to come down because prices are stable. Clearly, the number of transaction is going to be much lower, significantly lower because of obviously interest rates reducing the purchasing capacity of people that want to buy a house.
There is some impact from obviously people that had excess cash that take the opportunity to repay their mortgage. I think that is unlikely to be impacted by the B term deposits. There, there's natural and we had some impact. In fact, I'm sure Matthias can also elaborate on that beyond the topic of the term deposits on the front book. Matthias?
Yeah. Thank you very much. To finish up with that question in terms of the impact of increasing rates or not passing on deposit costs on early repayments, we do see a very limited impact as of Q4. Remember that Q4 always is a seasonal quarter in which the early repayments for tax reasons, people are canceling in the last quarter, typically of the year, to make sure they reach the maximum amount or the total amount that they can deduct from their tax bill. That's always a seasonal effect on the fourth quarter. That's why this quarter, actually, the mortgage book has been slightly down.
We don't see any significant impact or increase of that early repayments in this quarter. There's a little bit of an increase, but it's not to any point significant. On the front book, term deposits, on euro deposits, we are not paying. The front book is zero. We recall actually we are down EUR 2.3 billion Q on Q on term deposits, 8% reduction. We are down EUR 7.5 billion year-on-year on term deposits. This is 23% reduction. What is euro-denominated term deposits, we're not paying at that moment.
Obviously, there are some term deposits in foreign currency, which then generates some impact, but this is obviously, then against different rate levels and with a very positive margin. Including those, and if we compare with the sector, and sectoral data has just been out this week, we compare very favorably with overall deposit rates clearly below those that the sector has seen over the last three months.
Okay. Thank you, Carlos, for your question. Let's move on to the next one, please.
The next question is from Andrea Filtri with Mediobanca. Please go ahead.
Yes, good morning. One question on insurance and one on capital, if I may. On insurance, could you please remind us the level of life, traditional reserves at VidaCaixa and the amount of the unrealized capital gains it has today, possibly before and after policyholders' interest? Linked to that, what is the lapse rate in Q4 2022 versus Q4 2021? On capital, if you could just update your expected impact from Basel IV. Thank you.
Thank you. Thank you, Andrea. I'll, I think there's nothing new in Basel IV, but Matthias, if you wanna take that and on the question on life insurance.
Sure. On Basel IV, there's no update to the guidance that we gave. There is a very limited, we expect a very limited impact overall on the different elements of Basel IV once it reaches impact. No update on that front. On the life insurance reserves, we are holding approximately EUR 66 billion of life insurance reserves currently on balance sheet. This includes unit-linked reserves obviously, so part of that being mark-to-market. The part which is not mark-to-market, it's somewhere below EUR 50 billion. That currently holds EUR 1.8 billion of unrealized losses before policyholders.
Okay. Andrea, I hope that asks your replies to your technical question. Moving on to the next one, operator, please go ahead.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Yeah. Hi, good morning. Thank you for taking my questions. I've got one on overlays. If you can tell us to what extent the release of those overlays is included within the cost of risk guidance of the year. What happens if you don't use those overlays, how quickly do you have to release them? The second one is in the banking fee discussion. I mean, if you can break down the EUR 2 billion ex-BPI by segment and give us some color basically about how you expect each of those segments to evolve in 2023. Thank you.
Thank you. Let me start with the first question. Yes, in the cost of risk, implicitly, we would be using the overlays. That's what they are there for. That's why I was mentioning that even if there's a significant deterioration, we still have a EUR 1.5 billon o f unassigned provisions. This is including over EUR 1.1 billion of macro provision funds and over EUR 300 million from the Bankia PPA. This is the EUR 1.5 b illion which we expect part of which we expect to use.
Depending on how the year goes, the expectation of how much of that provision is used or not, obviously will depend. But it is our view currently, assuming our conservative and prudent scenario, that we will be using a large part of this unassigned provision during 2023, even if it's only because we need to update our provisioning models under IFRS 9, which we run twice a year, and we still need to incorporate the current projections versus the last update that we did, no? We will be certainly releasing these overlays. To what extent? At this stage, we expect to a large extent.
Time will tell depending on how tough the current environment becomes, no? On fees and any other comment you wanna make on this point, Matthias, please go ahead.
Sure. On fees of the EUR 2 billion, approximately that we have on banking fees ex-BPI, you asked for the breakup. Half of that approximately is in transactional, what we call transactional fees, i.e., including maintenance fees of deposit accounts, including also the corporate custodian fee that we that we charged last year, and which obviously will be reduced and eliminated by, or has been eliminated already, and hence will generate a negative impact next year. Including also exchange differences, exchange rate differences fees deriving from from those, as well as obviously bank transfers, no? This is most probably the part of banking fees which is under most pressure going forward into 2023.
As we said, the fees that we charged from corporate deposits, obviously we have abolished them when rates moved into the positive territory. Hence, there will have an impact of approximately EUR 75 million year-on-year next year with respect to this year. On the other hand, obviously our loyalty program, as we sometimes commented here, our loyalty program, in the way that people start as they are charged fees, if they are not loyal or not customers with a significant amount of products, they might move into being more loyal or having more products.
That means that we move and shift away fees from those loyalty program fees into asset under management fees or other fees of other services. As a capture, the transactional fees are the ones definitely under most pressure into 2023. The other half of recurrent fees is evenly split up again between fees derived from assets, from credits. Whereas there might be from the risk business basically on contingent assets and liabilities and teach fees charged thereof. Where we actually expect into the economic environment that might be getting some more complex into next year. We should be getting some tailwind from that side.
The other quarter of the, of this EUR 2 billion then is economic electronic banking fees, credit card fees, where we expect as there are still year-on-year some positive impact from increases in transactional levels and in levels of credit card payments. We do expect year-on-year still to have some tailwind from that side, even though if you're looking into Q and Q evolution, if economy really gets into lower growth rates and getting into some slowdown, there obviously might be looking starting from Q4, some slowdown on that on that part.
EUR 2 billion split into half of it being transactional fees and a quarter each related to risk or related to credit card business.
Okay. Thanks, Matthias. We'll move on to the next one. I realize we've around five people on the queue.
The next question is from Britta Schmidt with Autonomous Research. Please go ahead.
Yeah. Hi there. Thanks for taking my questions. I was wondering if you could provide a little bit more color on the asset quality outlook with regards to NPL balances and what you expect, what share of unlikely to pay versus NPLs should we be counting on? How are you forecasting recoveries next year? Are you seeing any changes in, for example, the NPL sales markets, either with regards to demand for volumes or pricing? I've got two clarification questions. Could you tell us what the share of your deposits in FX is? On the market and other moves in capital in this quarter, I know there was the 11 basis points from BPI in there, but could you give us a breakdown of the rest, please? Thank you.
I think, Matthias, I'm gonna let you yes comment on asset quality. Obviously we expected deterioration of non-performing loan ratio in 2023. A limited deterioration, but rather than having something that is at 2.7, we expect the non-performing loans to start with a 3, maybe around 3.5%, we will see. Obviously, again, based on a fairly conservative view of the future. Part of this is our assumption that 2023 is going to be a year where executing portfolio sales will be probably not economical or not attractive enough.
For that reason, we precisely brought down NPL to a very low level to be able to make sure that we have no pressure of having to do portfolio sales when the market is not there. The market for portfolio sales is still open, particularly for non-collateralized, non-performing loans. For mortgage loans, collateralized loans, people used to require funding to do these purchases, funding has become much more expensive, hence prices are likely to be lower. Part of the reason why we expect some deterioration on NPLs is precisely that even though the market, I think, is gonna still be open, we are likely, rather than be aggressively pursuing that market, to be a bit more selective to make sure that we get appropriate pricing on that front.
If the market is even better, then obviously, I think, we will do even better. Certainly, this is one line where I am being very conservative, and I think that's what we should use for planning purposes. At the same time, deep in my heart, I think, there's quite significant upside. No? Time, time will tell, no? Having said that, Matthias, if you want to complete the answers, please go ahead.
Sure. On the capital side, we have this 29 basis points of increase in what we call markets and other, as we said, approximately 11-12 basis points stem from the IRB implementation in BPI. There's a small positive impact from the cancellation of the equity swap that we had on the Telefónica shares. As you know, in the beginning of this quarter, this generated a slight positive impact through the RWA reduction of approximately 2 basis points. The reminder are the sum of little bits and pieces.
There's one that by the end of the year, as we had a very positive evolution of profits and of recurring profitability, we are updating in a much finer, in a much more detailed manner our DTA and DTL estimations, obviously into a final year close. Out of that update, actually we were able to also register a small positive from that side. About half of this capture, as I said, IRB from BPI, small positive on Telefónica, other bits and pieces, and a positive also from DTA, DTL update by the end of the year.
On your question on foreign exchange, it's a very little share in our overall time deposit is around 6%, and in sight deposits around 2% share over the portfolio. Very small share.
Okay. Thank you, Britta. Let's move on to the next one, please.
The next question is from Daragh Quinn with KBW. Please go ahead.
Hi. Good morning. Thank you for taking my question. One would be on the outlook for Euribor and the current level of, you know, 3.3.4. You know, you're seeing that as provoking a slowdown in loan growth to lower house prices, but not necessarily asset quality issues. What level of Euribor would make you more concerned about the outlook for asset quality? Is it 4.5? Maybe just if you could give some commentary on that. A second question on the outlook for deposits. How much are you expecting a shift within the existing deposit base, i.e. from sight to term versus outflows from AUM into term?
Maybe if you could just make a comment on that as well. Thank you very much.
Thank you. Well, on the first point, I think it's important not just to look at rates, but why are rates. If rates are rather than being at 3.5% are at 5%, this obviously means that there's a very different inflationary environment, and this also means that probably our clients are having a different degree of inflation in their salaries and other income they have, no? I think it would not be realistic to think of very high rates and all other things being equal. To be honest, we are not looking for higher rates than the current ones.
I think the current ones are adequate or in a zone where obviously they benefit our NII, but they do not severely affect the economy, and they are conducive to some, I think, soft landing. In the case of Spain, that soft landing, as you've seen, is with growth rate above 1 and 1%, no? There's, I think, not much more upside from beyond 4%, because I think increases in rates would obviously be beneficial to NII but hard hurt cost of risk, I would say.
I don't see that it becomes sort of a big problem because when rates are higher than that level, it means that actually we will have inflation much more serious entrenched inflation. Our clients will be obviously being paid at nominal salaries that would be increasing and the actual increase in nominal salaries and the nominal growth of the economy is going to be higher than the increase in rates. For good or bad, our clients paid in nominal euros. Hence we think we have some protection. Again, beyond the level of 4%, I don't think that's a net benefit from for us at all. No?
Yes. On the, on the question on deposit and the shift or some more color on the shift from sight to term, we've been guiding for beta, and we are looking at remuneration on the deposit side, actually on a, on a, on a whole picture. It's very difficult to pin that down into concrete levels of movement from from sight to term deposits. Recalling that when we are looking into into corporate clients or into business clients, we are mostly thinking more of a remuneration via sight deposits, which is what is typically happening at first and which is typically already starting to happen. Competition is around is around some remuneration on that front.
On the households and household clients, there are very many different ways of reaching, obviously, this expectation of getting some more remuneration on their savings. On the one hand, as we said, asset under management as well as fixed income funds might be one way. We would be on the strong position of liquidity that we are holding. We are very flexible in the way that we are offering the additional remuneration to our clients. It's very, very difficult to really pin down an exact number. What we always expect is that we are clearly below historical levels and historical trends.
I mean, if you're looking into the last 10 years of history, if you wish, first of all, none of the years over the last 10 years has been an ordinary run. We are looking into obviously a liquidity crisis in the last financial crisis at a similar rate levels as we have today. Hence nothing of what we have seen, we do expect to be repeated. Especially when we are sitting on a 90% loan to deposit currently and back at those times, the sector was around 150 or 160 even. Definitely a very different scenario.
I need to leave a little bit more with the global message of overall deposit remuneration that we are seeing based on the models that we commented before, and not pin that down to exact numbers of movement between sub parts of those deposits, I'm afraid.
Okay, thanks for the question, Derek. Let's move on to the next one, please.
The next question is from Borja Ramirez with Citi. Please go ahead.
Good morning. Thank you very much for taking my questions. I have two quick questions. The firstly is on capital. The EBA published a forecast for the 2023 stress test this week, and the GDP assumptions seem to be somewhat more pessimistic. I would like to ask if you could kindly comment on this. Related to capital distribution, I would like to ask regarding your latest discussions with the regulator, if there's any change in their stance with regarding banks' capital return. My second question very quickly on NPL ratio forecast. Thanks. Thank you for giving that guidance. Could you kindly comment in which areas you expect an increase? Is it more in the SMEs or consumer?
Thank you.
Thank you. On ECB's attitude on capital distribution, I've seen absolutely no change. On EBA's stress test, I would ask Matthias to give this simple summary because he's the one who runs the stress test for us. He's actually very knowledgeable. NPL, I think you, well, Matthias will answer better, but it's going to be across the board, consumer mortgage and small SME, self-employed, where we'll have, we expect to have sort of the weakest part of these, of these portfolios being more likely to suffer, no? Matthias.
Thank you very much, Gonzalo. A few to add on the NPL question. I mean, SMEs and probably small enterprises being most hit by inflationary pressures and potential difficulties of the cost base. On the other hand, obviously in the mortgage portfolio, this is where the pass-through of the increase of Euribor is then impacting. Consumer loans obviously probably being earlier non-repaid than the mortgages, no? These are the three segments, but across the board, I think this is the message.
think they are scenarios which are very much in line with what we expected from looking into a history of stress test scenarios. And reminding sometimes now we have the headline that it's very, very big dives in GDP if you compare to the stress test, last stress test of the EBA. But we need to recall that the last stress test was just coming out of a COVID crisis, and hence the central scenario was one of a clear recovery, and the stress with respect to that central scenario is actually higher in the last stress test than is expected to be in this stress test in terms of a macroeconomic scenario.
Even though the accumulated reduction is clearly higher off the GDP, is clearly higher than the one in the last test, the shock with respect to the central scenario actually is not as high. We do not see this as a very significant and very relevant downturn scenario, but rather than one that we would have expected in that range. For internal capital stress test purposes, as you know that we are running yearly, we are using similar types of scenarios. In that sense, I think no concern from that front.
Okay. Let me. Sorry. Let me be clear. We do think it's a tough scenario. The only thing is we do these scenarios internally on very tough and conservative prudent basis. I think we are prepared. It is certainly a tough scenario, right? That's not.
So-
No doubt about it.
Not surprising.
Exactly. Okay. Borja, thanks for your question. Let's move on to the last question for the day.
The last question is from Fernando Gil de Santivañes with Bestinver Securities. Please go ahead.
Hi there. Thank you for taking my questions. I'm glad to hear that Javier is okay. Two questions, please. One is on ALCO size and the repricing. I see there are maturities this year coming about EUR 7 billion in 2023. What is the year you're forecasting for this portfolio, embedded in the guidance for this year? The second question is a question on the, i f you can please provide some comments on the exit of the executive member, Mr. Alcaraz, and if there is any change in any kind of policy, commercial policy considered behind this. Thank you very much.
Thank you, Fernando. On ALCO, this is one that is Javier's very much at core. Let me say what we see, and obviously Javier is leading the thinking on this front together with his team. We are in a bit of a wait-and-see mood in ALCO. Obviously, it's going to be market dependent. What may be very attractive, and sort of terming out maturities at some point, may be less attractive, certainly, at least with today. We do not have a carry when you go long term now versus 12-month Euribor. That's pretty obvious.
Hence, I think even though our plan is to reach that EUR 9 billion target for the ALCO book and the medium term, that is a medium-term target, and it's going to be market dependent. You know? That's clearly we'll continue to diversify the ALCO portfolio. Again, I think if we do more ALCO, it should be upside to our e-expectations, to be honest. Because again, it would mean that sort of longer-term figures are for rates are more attractive. That doesn't seem to be the most likely case after how the market has taken the ECB's actions and the Fed actions this week.
Obviously, here is a, is very, very long, no? With respect to the change in the management committee, it represents no change in strategy. What we have done is replace someone who is Juan Alcaraz, who's done a great job for us for the last 15 years. Starting this new cycle where certainly rates look very different from what we have seen in the last 7 years, and taking the opportunity to specialize— or not specialize, I would say reinforce the strategy and the direction of two parts of the business, advanced analytics, with digital transformation.
Payments and consumer, naming responsible for those areas, putting them in the management committee together with obviously replacing Juan in the management of commercial portfolio with Jaume Masana. The idea is to keep going in the same direction we're going, but hopefully accelerate because we want to be ambitious and certainly try to be better year after year and adapt to the new environment. No change, and I have to say, almost a month into the changes, I feel very good about sort of the progress that we have already made by these new responsibles with their respective responsibilities. They are sort of old-timers, 10-20 years in the group, well-known by the whole organization and well-received.
Everybody understands that from time to time, we have to move on to new cycles. Management changes are part of sort of the life of every organization. What's important is the strategy actually keeps being exactly the one that we have had for a pretty long time. Obviously we will adapt it to the different circumstances that we see now in the market and the many opportunities we see associated with higher rates or at least structurally positive rates, which is obviously critical for our for our liability side of the business, no? Thank you.
Okay. That's all we have time for today. Thank you for watching one more quarter. We'll reconvene next quarter. Again, thank you and goodbye.
Thank you very much.
Thank you.