Good morning, and welcome to CaixaBank Results Presentation for the third quarter of 2023. We are joined today by our CEO, Gonzalo Gortázar, and our CFO, Javier Pano. In terms of logistics, just a brief reminder that we plan to spend about 30 minutes with the presentation and about 50 minutes to one hour with the Q&A. As you know, the Q&A is live, and you should have received instructions by email on how to participate. Let me finish by saying that my team and I will be at your full disposal after the call. And without further ado, let me hand it over to the CEO, Gonzalo Gortázar.
Thank you, Marta, and good morning, everybody. Pleasure to be here reporting third quarter results, which we're obviously very happy with. And title of the highlights of today's results is twofold: is a step up in profitability, the numbers that speak by themselves, but also the sustainable nature of this step up in profitability, I think is as important as as the actual increase. Net income, as you know, is up 48% year-on-year, and at the third quarter, net income is actually 70% year-on-year to EUR 1.5 billion. Obviously, this responds to a new normal. I would say it's a new normal, which is also the old normal, when interest rates were at normal levels at which they are, they are back.
So clearly, we need to look at our current status of profitability and operations as a new base on which to further build the business, no? We have gone past through our targets for 2024. We are planning to update those targets for next year, when we present final results, the annual results for 2023. But obviously, at this stage, return on tangible equity is 14% versus the +12%, and cost income at 42.6%, well below the 46%, once adjusted downwards for IFRS 17. From a balance sheet point of view, we keep very strong fundamentals, and actually, we have further reinforced our balance sheet during the quarter.
We can talk about that later in terms of evolution of asset quality. Obviously, we're seeing that increased profitability is turning into increased tangible book value per share and also turning into a higher capital distribution capacity compared to what we had indicated in our strategic plan for the period 2022 to 2024. We are taking the opportunity of this presentation to improve the guidance we're giving for this year on NII. We're confirming the rest of guidance that we have given for this year. We feel NII will be at or above EUR 10 million in 2023, and most importantly, we're targeting to maintain that level into 2024. A few words on macro.
Obviously, both Spain and Portugal are doing fairly well, certainly relative to what we're seeing around in the Eurozone, 0.5% growth versus 2.4% estimated growth for this year. Moving into next year, we see a slowdown in Spain and Portugal. Eurozone staying around that level from 0.5% to 0.7%, Spain and Portugal coming down as a result of higher rates and also the fact that our main trading partners are growing at a lower level, but still a significant positive gap vis-a-vis the rest of the economies. You see that in the outlook, you see that in employment evolution. Actual figures in Spain that were published yesterday were very good, much better than what we were expecting.
We keep seeing a fairly low level of indebtedness in Spain, as you can see, below the European levels and well below what it used to be when we had trouble in the 2008, 2012 period. And the real estate continues to show no signs of bubble at all. In fact, prices are still, as you know—as you see in the slide, well below what was the case in 2008. And hence, we're still seeing some nominal growth in real estate prices, both this year and even into next year, even if adjusted for inflation, it's slightly negative in real terms. But obviously, from the point of view of asset quality, nominal is what is most relevant.
I was saying the step up in profitability. I was saying it's sustainable, and obviously, there's been a huge change, which you know very well, in terms of the level of rates. We're seeing a normalization of rates, and obviously, the forward curve points towards that normalization as a sustained one. In terms of our balance sheet structure, I would like to highlight that over the last few years, we've made significant progress towards a higher proportion of business and consumer loans, which now account for 50% of our portfolios with a more balanced portfolio. Obviously, the trend continues to be of deleveraging on the mortgage front and better trends both in business and consumer lending, so that the mix will continue to change.
In terms of long-term savings, obviously, there's been a very significant move from on-balance sheet to off-balance sheet, and that is, despite the fact that we have had integrations, which generally have had a mix of more on-balance sheet rather than more off-balance sheet. So the process we expect to continue. This year, we have stable business volume. We'll see it later, a slight contrast between lending slightly coming down and offset by customer funds, which are growing, particularly those off-balance sheet. You see the lending evolution here on this slide. And obviously, it contrasts on both business and mortgages, with a fall versus the previous nine month.
But we wanted also to show you where we were in 2021, so that you can obviously have the full picture that there is no question a slowdown in lending demand, both in business and mortgages, less so in on the consumer side. But we're still producing new loans at a faster pace than it used to be the case in 2021. Obviously, with much more attractive yields, given the new level of of rates. On the deposit side, I think it's worth highlighting, we've been gaining market share during the year. Both if we look at just deposits and if we aggregate it with long-term savings. Continue to benefit from a different position.
Market share in payroll is 37% in round numbers, slightly lower in pension deposit. It means that 20 million of direct deposits of clients that have direct deposits with us every month. And that means EUR 25 billion that is comes into our accounts every month just as income flows, which obviously is a very significant number and is a good indication of the kind of franchise that we have. Continue to increase the number of relational clients over the year, and all this is resulting in a deposit beta evolution, which you see there, from 11%-13% in the quarter.
The more time goes by, the more we have completed now our customer fund products with also time deposit offering, the more conviction we have in that we are going to clearly outperform the market and also outperform our own expectations in terms of beta development. You can look at the U.S., how different banks are having very different betas. And I'm saying the U.S. because they have had sort of a longer timeframe since rates started to increase. And you can see some franchises are doing much, much better, and certainly we expect to be doing the same thing in Spain. And that has also a lot to do with our improved outlook for NII in 2024. Obviously, in 2023, numbers speak by themselves, no?
So feel fairly well about where we are in terms of our deposit and customer funds franchise, where we're gonna be able to extract the right value that it really has, no? In terms of influence into long-term savings, and you can see here on the right-hand side, the statistic I was mentioning before, we're also gaining market share when we look at deposit and long-term savings, and that's mostly because on savings insurance, we've been very active this year. You see, we have now a 36.3% market share, up 73 basis points year to date.
Obviously, the fact that we have higher long-term rates is making these products much more attractive when you look at them as fixed income in insurance policies, and again, this is playing to our strengths, no? That's why we have this top line of net inflows. As you can see, 56% of those net inflows have been into savings insurance, the rest into mostly mutual funds. So you would have seen this year, inflows into mutual funds are actually generally generating a fairly low fee because of the type of inflows that the industry is seeing into money market guaranteed funds with relatively short-term horizons. That's not the case for savings insurance.
So obviously, we have a product that is yielding, I think, better value, both to our clients, but also to our, to ourselves. Protection insurance, again, a fairly good quarter, 5.4% growth in terms of annualized new production, with MyBox being obviously the star offering. And, as you can see on the right hand of the page, when we look at the total premia, we are actually increasing by a higher number, 9.5%. And, these numbers are not completely comparable, but I think the one most significant reason for that is that actually, our retention rates are better, and to a large extent, thanks to MyBox.
So lapse rates have come down, and obviously, that is, having a positive impact on our insurance profits, which, as you can see, in this quarter, have been particularly attractive for a number of reasons that Javier will comment on later. BPI doing, I'd say, very well. Market share gains in loans, residential mortgage, long-term savings, credit cards. BPI in Portugal is set for a long-term cycle of market share gain and hence revenue growth, and that is, leading to a major step up in terms of efficiency. You see the cost-to-income ratio at now close to 40%, and...
Obviously, a very significant increase in profitability, where return on tangible equity in the first nine months of the year is actually hitting now 15, 15%. Asset quality continues to be very good, as you know, with 1.7% NPL, NPL ratio. So, BPI continues to be one engine of growth and profits for the group, and it makes us feel obviously very good about it. Return on tangible equity at 14%. Obviously, revenues and interest rates have a lot to do with that. We have had some, obviously, impact of inflation on our cost base, and I've had a very prudent loan provisioning policy, particularly this quarter, because actually the outlook remains quite, quite favorable.
And just to finish, before I hand over to Javier, just a few considerations on the next pages. First, going back to sustainability and where we are, I have to say, from a balance sheet point of view, we have not been in such a strong position for the last 15 years. You see a decade in this slide, but it's actually even longer. Coverage on non-performing loans, NPLs, the fact that our clients are much less levered, as I mentioned before. Obviously, pre-provision profit now north of 2% per annum, compared to cost of risk, is a major also line of defense vis-à-vis any deterioration, if and when it comes.
Very much improved cost-income ratio, liquidity, MREL levels well ahead of the regulatory requirements, and with substantial cash on capital. Certainly with a major improvement in return on equity and tangible equity, that is obviously going to flow through to higher shareholder distributions. You'll have the statistics of EPS, tangible book value per share and EPS. Obviously, those are historic. To be honest, again, I think what is most important is that these levels are the new base on which we need to work on, and certainly, that's the way we look at it. We have already distributed, including the ongoing share buyback, EUR 4 billion.
We obviously have our cash payout target, which we are accruing dividends for at the highest level of that range, at 60%. Looking at what remains of this year and next year, it is clear that we're going to be well ahead of that EUR 9 billion initial estimate of how much capital will be available for distribution, which obviously makes us fairly happy about that. Just one final word. We are not forgetting that we're not just about profitability, and that we have a major impact on society, and actually, that impact is quite positive.
We have to make sure that we keep reminding everybody, because in these difficult times, it's important people understand what are our commitments with financial inclusion, for instance, which we have on the slide. And you know well of not withdrawing from places where we're doing banking. Our MicroBank operation is the largest bank or micro credit institution in Europe, and other solutions that you know we are pursuing. I would highlight this quarter, we have also published decarbonization targets for three additional sectors. That's coal, where we want to basically terminate our financing by 2030.
Decreases in how our clients in the auto and iron and steel industry will do or we will do with respect to our Scope 3 emissions based on our lending to these clients by 2030, with a reduction of 33% in one case and 10%-20% in another. As you know, iron and steel is one of the sectors where technology to decarbonize is less advanced, and hence, the lower initial rate. Obviously, we feel that this is very much part of our mission, and we are making fairly good progress on it as a bank, which we think is a reference in Europe for sustainability. With that, Javier?
Okay, so thank you, Gonzalo, and good morning to you all. As usual, from my side, further details on the P&L and the balance sheet. Let me start with an overview on the loan book. I would say that the trends remain broadly the same, although I could remark that on a quarter-on-quarter basis, we have the impact of a very positive seasonality during the second quarter. And the other aspect that I would like to highlight is that on business lending, we have had a softer tone during this third quarter. But, well, all in all, the loan book down by -1.7%, year to date, in line with our expectations. And you may see on the bridge below that is a positive evolution on businesses, consumer, the leveraging on mortgages.
Although, I will mention that in terms of prepayments, the pace is abating a little bit. And on other, we have had some maturities on lower-yielding public sector loans. On the right-hand side, you may see the evolution of the floating mortgage book, where the index resets. You may see that we have already 50% of the loan repriced between 3%-4%, but it's still over 30% below 3%. Already, 19% over 4%, and this is a process that is ongoing, thus further supporting the back book yield of the loan book in coming quarters. Moving to customer funds, those are up by 1.3% year-to-date.
I will remark long-term savings, as Gonzalo was commenting, doing well, +5.3% year-to-date. On deposits, slightly down, less than 1% year-to-date, but gaining market share. So the overall pool of customer deposits in the system is also shrinking. And also quarter-on-quarter, the usual seasonality we had in the second quarter. On the bridge below, you see +EUR 57 billion of positive market effects on long-term savings, the same figure of net inflows into long-term savings, and that a slight decrease in deposits, -EUR 3.4 billion. With that, I move to the P&L, the consolidated income statement. The most remarkable net income, over EUR 1.5 billion. This is close to 70% year-on-year, close to 19% quarter-on-quarter.
Strong revenues, generally speaking, but particularly NII, that is increasing strongly on the back of continued margin expansion. We will focus on that in a minute. But also, we have strong growth in insurance revenues and already a recovery in asset management fees. That is all overall more than offsetting lower banking fees. Not much to say this quarter on non-core revenues. Costs in line with our guidance for the year, no surprises there. And on provisions, we have an annualized cost of risk at 25 basis points and also in line to meet our guidance for the year. Note that on other provisions, this third quarter, we have a one-off. And with that, to the details, NII now expected stronger for longer.
You see a clear, positive evolution quarter on quarter, up by 12.2%. Margins expanding, the customer spread already over 350 basis points, 352, +32 basis points in a single quarter. On the bridge on the right, you see, clearly, quarter on quarter, a positive evolution, cannot be otherwise from client other way, but also from ALCO and other, in this case, lower, negative, index resets on our floating, wholesale funding, but also, strong cash balances, clearly yielding, much higher. So this is, a clear positive. Below, you have the evolution of, the loan, the loan book, and the, and the customer funds. On the loan book, now yielding, the back book, 423 basis points.
On deposits, our customer deposits, ex-foreign exchange and hedges, now at a cost of 48 basis points, up 14 basis points in a quarter. And that moderate evolution of the deposit beta, Gonzalo has already commented, now at 13%. And, as a reminder, that guidance that has been upgraded for the year, we expect at least EUR 10 billion for 2023, and targeting that to be stable, eh? That's our guidance for next year, stable at the levels of 2023. The remainder of the core revenues, here on this slide, you have the combined evolution of net fees, insurance service result, plus the equity accounted by our insurance subsidiaries.
I would say that the most remarkable here is that ex cash custody fees, the performance is positive, up by 3.6%. Remember that cash custody fees account approximately for 50% of the fall on fees this year and should be seen more as an NII impact instead of a fee impact. We reiterate our guidance, circa EUR 5.1 billion for the combination of those revenues. On the right, you may see the evolution of our core revenues, up by 34%. A strong contribution by NII, but also excluding cash custody fees, also a positive contribution. You have all the details on this slide, plenty of information. On the left, you have the evolution of insurance revenues, remarkably, plus 26%.
You have also the details for life risk insurance over 23%, life savings insurance plus 27%. Remember that this year, we're having more than 50% of the inflows into long-term savings, precisely on annuities, and this is having a very positive impact on that P&L line. We have also a positive contribution from equity accounted, although in the first quarter, we had some inorganic positive impacts. And on the right, you have the evolution on fees. I would say that on recurring banking fees, we have the headwind from lower current account maintenance fees, trying to strike the right balance between charging for those current accounts and maintaining a low funding cost. On asset management, we are starting to see a gradual recovery.
You may see the average AUM balances on the top right that are gradually trending up. Insurance distribution with strong organic growth, but with some non-recurring factors having an impact. And finally, wholesale banking, always more volatile, but despite a more difficult year, I would say, generally speaking, delivering close to 6% improvement year to date. In terms of cost, as I have said, not much to say. On track to meet our guidance, and as has been already commented, the very positive trajectory of our cost to income ratio at 42.6%.
This is more than 15 percentage points in less than two years, although it incorporates the impact of the banking tax, approximately close to two percentage points. Cost of risk, a prudent approach in terms of provisioning in the third quarter, as always. With that, we have an annualized cost of risk at 25 basis points, on track also to meet our guidance of less than 30 for the full year. We keep a strong coverage ratio at 76%. We keep also our EUR 1.1 billion of unassigned collective provisions unchanged for the quarter. Back to the balance sheet. Our NPLs are broadly stable in euro terms. In terms of the NPL ratio, I would say the same, although we have a slight denominator effect.
You have all the breakdown by segments, and nothing material that is surprising in the evolution for us. Finally, a few words on ICO. 50% of the original loans granted have already amortized. The current outstanding balance is EUR 13.1 billion, all repaying principal, and I would say only 3.8% of those classified as a Stage 3. A few words on liquidity. Well, ample liquidity is clearly a competitive advantage, and we see this every quarter. And this, at the end of the day, has a positive impact on this low deposit beta evolution. You have plenty of metrics here. I would remark a liquidity coverage ratio pro forma TLTRO close to 190%, along with deposits at 90%.
Strong liquidity reserves, EUR 200 billion. An update on an interesting benchmarking, comparing the top 10 banks in the Eurozone by market cap. On the first chart, you may see that we continue at the pole positions in terms of liquidity, despite we have had plenty of TLTRO redemptions across the sector. On the right-hand side, also a chart that tells you about the differences in the mix of our deposit base, 79% of retail deposits, and obviously this also having a positive impact on our deposit beta evolution. Those are figures updated as of the end of June. Finally, capital. A strong capital build, 70 basis points.
We have also the full deduction of the share buyback on regulatory capital ratios, minus 23 basis points for the EUR 500 million share buyback that is ongoing. Then, accruing a 60% cash payout, that is minus 40 basis points, together with 81 coupons, and then minus 28 from markets. Another that basically includes, sorry, the well flagged regulatory impacts that we're expecting for this third quarter, together with some other basically OCI negative impacts. With that, the CET1 ratio ends the quarter at 12.16%. And I would like also to remark the very positive evolution of the tangible value per share this quarter, already reaching the EUR 4 mark. So thank you very much, and I think that we are ready for questions.
Yes, let's open it up for the Q&A. Operator, can you let in, let in the first question, please?
The first question is from Maksym Mishyn with JB Capital. Please go ahead.
Hi, good morning. Thank you for the presentation and taking our questions. I have three, and the first one is on the loan book growth outlook. I was wondering if you could share some light on what you expect per segment and which segments you see as more attractive. Also, what kind of loan book growth is baked in, into your new guidance for 2024 for the NII? Then, a second is a small follow-up on this. What kind of beta you assume in the NII guidance? And if you could, remind us, what is the NII sensitivity to interest rates right now? And the last one is on the recent proposal by the Spanish government of reducing labor hours. I was wondering if, if approved, it can have any impact on your cost base whatsoever. Thank you very much.
Thank you, Max. Good morning. Let me say, in terms of the reduction of working hours, we already have working hours that are in practice in terms of annual hours below that level. So the answer is no, we do not expect any impact. Another question is whether this is approved, because it will generate a lot of discussion in terms of impact on productivity in other sectors, but it will not affect us in any material way.
With respect to the loan book, book outlook, you've seen that, obviously, the market, you saw some statistics that, in terms of the survey, the bank, central banks do, demand is fairly low, particularly in mortgages and, and businesses, and that's affecting evolution of the market in this third quarter, and I would expect that to continue for a few quarters. Consumption is fairly resilient, and, to be honest, given how inflation seems to gradually be, if not close to 2%, at least not growing, and with the kind of agreements we have, I think there is going to be some purchasing power recovered. So I would expect consumption to keep, to keep doing, keep doing well.
Certainly in, if we look at next year, we should be having positive numbers there. Housing should continue to go down well, slightly or clearly a bit less than this year, where the main impact of prepayments and significant increase in rates is taking place. But still, mortgages should be coming down in 2024 in terms of the stock. And on the business front, I would expect that a year starts to be a bit weaker, but gains strength during the year, and actually, by the end of the year, we'll be in positive territory. But I think it's a bit too early to say how things would evolve at this time. T he kind of flattest evolution for 2024 is something that would be certainly consistent with our NII targets, no? But on that front, Javier, please, can you take from here?
Okay, well, yes, thank you. You asked for betas, no? Yes, we have reassessed a little bit our, well, not a little bit. I would say that performance is being better than modeled expectations. So this is, to say the summary, we were expecting betas to end the year circa 20%, and we are now expecting to be clearly well below that. And into 2024, we expect the average beta to be in mid-20s%, eh? So this is what we are considering. It has to do with plenty of things, eh, but I would take the opportunity to mention a little bit what is behind our upgraded guidance for the year.
So it's from less to more important is higher rates. Remember that ECB finally decided to hike rates to 4% after the summer. We were not. The market, I think, was not expecting that. And during the month of September and into October, what we are seeing is more disinversion of the yield curve, and this is actually a clear, a clear positive. Now, this is first thing. Second is about liquidity conditions in general. So they are better than our initial expectations, not for us, but also for the system. So as a consequence, we see a less tight situation in terms of liquidity from our peers. So this is also a positive in terms of beta evolution, and also for in our side a better evolution in terms of deposit balances, no?
I understand that there is always a strong focus on the loan book in order to project NII, but I would say that also, the projection in terms of deposits is really important, because deposits, obviously, are at a margin, no? Well, at the end of the day, we realize, as the quarters pass, that our, I would say, our value relationship with clients is, at the end of the day, resulting into lower betas. And we have reassessed our expectations according to that guidance I have already given you, no? You asked also about sensitivity. You have here a situation where sensitivity naturally is gradually being reduced, and it has to do with two effects, basically.
First thing is you have higher rates. With higher rates, you have higher betas. Having higher betas is like having more, let's say, floating rate deposits, and as a consequence, sensitivities are, generally speaking, lower. And second is that at the same time, we keep originating fixed-rate assets, basically, mortgages, although less than I would-- we would like, for sure. But at the end of the day, this is having a natural trend, reducing our sensitivity, that so far is kept, positive, no? Now we have... And the measure we are using, and we think is the best way to see this, is, which is the change in, on NII after one year.
Remember, this kind of 12-24 months impact to 100 basis points shift in the yield curve, and this is now circa 5%. This is circa 5%. And we are happy to keep that slight bias towards higher rates, which actually is what is going on in the market, no? And so far we are having this this positioning and happy to keep that for the time being. So thank you very much.
Thank you, Max. Operator, next question, please.
The next question is from Ignacio Ulargui with BNP Paribas. Please go ahead.
Thanks, thanks very much for the presentation and for taking my questions. I have two quick questions, hopefully. One is on capital. I mean, given the strong improvement in profitability and the buildup that you are generating, what would be your preferred usage of capital besides improving the distribution capacity? I mean, there are things that you can invest in your business where you see opportunities for revenue growth. Also a link on the capital front, if you could update us a bit on what would be the Basel IV impact.
I think that you gave around 10 basis points hit in the capital ratio today, whether that is still the case. And the second question is on insurance revenues. That has been a very good performance so far. Could you just help us to understand the trends going on there going forward, and whether this is just kind of the benefits of bank merger and the benefits of increasing penetration of insurance into the bank customers? Thank you.
Thank you, Ignacio. On terms of uses of capital, our business is very simple. We are obviously in financial services in Spain and Portugal, and we're going to use capital to pursue organic opportunities in those markets. But the lending growth, which is the main driver of capital in terms of our RWA, is very limited. So our growth is going to be in other businesses. You mentioned insurance. I'll let Javier comment on trends on insurance, but insurance requires capital, but as you know, given the Danish Compromise, it's a very capital-light business at the consolidated level. And the growth we expect in payments is another example. So we expect growth, but not a capital-intensive growth, and we're not looking for acquisitions.
There is no capacity we do not have, or we cannot create organically in our markets, and we're not looking to enter other markets. So basically, profitability is gonna turn into distributable capital. That's, that's as simple as that. And that does not mean we're not going to be doing the investments we need to do to create value. We'll do all those. But still, the numbers are very clear at this part of the cycle. We don't expect any impact from Basel IV, so that's not gonna be a negative on capital either. And in terms of insurance trends, Javier, maybe you want to?
Yes. Hi, Nacio. Well, Bankia synergies are progressing gradually. Remember that this was a long shot, no? That was a long-term plan. It's doing according to our initial expectations. Remember, our three basic key areas, which is insurance, long-term savings, and consumer lending. And what the penetration rates are well known. We have disclosed those in the recent past, gradually improving. But it's not only about the number of products that those Bankia clients hold, but also about the added value, added value added of those products that is clearly higher compared to what was distributed in Bankia times, no. So this is ongoing. This is a tailwind, eh, that is always gonna be there.
But, on the other hand, you should not expect a significant step-up, year on year, no. So it's a gradual process. We are doing things wisely, professionally, and you know that is part of the overall relationship with clients that we are building, and this is usually taking some time, no? But, we are online with our initial targets. Thank you.
Thank you, Nacio. Operator, let's move on to the next question, please.
The next question is from Alvaro Serrano with Morgan Stanley. Please go ahead.
Good morning. Thanks for taking my questions. Two kinds, one kind of follow-up and a question on capital distribution. And on your. You've obviously given the EUR 10 billion guidance for next year as well, and Javier, you were explaining that you've got more confidence now. But in regards to the visibility you have on the term deposit mix, can you maybe elaborate a bit more on why you now feel confident on that 2024 guidance and talking about the mid-20s beta, because Bankinter seems to be saying the same, that the 25% is where the mix is gonna stay. Have you seen the flows now, the transactional, or you have a better understanding of what transactional balances are, what people are doing with their money?
Just elaborate a bit more on that to give us a bit more confidence, please. And second, on capital, just wanted to confirm that there's no more capital headwinds, regulatory headwinds, you expect now the trim, the 60 basis points is done and dusted and no more to expect. And as we think about distribution in Q4, and medium term, it's more a question for Gonzalo, more around your thoughts. Would you risk, given how strong the earnings are, having to cut the dividend in a couple of years' time? Or would you lower the payout and prefer to do more buybacks to avoid that risk? Just a general philosophy of how you think about the mix between dividend and buyback. Thank you.
Thank you, Alvaro. Let me address both questions in terms of beta. Obviously, we are making a significant change to the guidance we've made based on our experience, and a strong view we have that we are going to deliver a lower beta. And this obviously has to do with time. This is obviously now third quarter, where we have had positive rates, and it's also third quarter, where we will have where we would have completed our offering, including a time deposit product. And hence, now we have, I think, most of the unknowns knowns.
In that respect, we have a higher confidence, a higher degree of ability to give guidance that is obviously better in terms of its impact on profitability. Yes, we've seen how people are when they look at the current environment, the various investment options they have, the fact that interest rates are even higher, and hence we can create products that are very attractive for clients and are not based on time deposits. All that is giving us confidence in us and obviously not just Javier, myself, and the management, but also the people that are running our business units are clearly confident that we can be there.
And again, when we look at other markets, we start to see very significant differences between various banks, depending on the structure of the deposit franchise, no? And the U.S. is one very clear example, no? Without giving you specific names, anyone who looks at that market can see very different betas depending on the structure. And when you look at Europe and Spain, and you look at us, we're clearly at the top of a kind of, customer fund structure, that would deliver the lowest beta. So that's why, we're coming with a fairly, degree of confidence that we can, do better.
And obviously, we're already showing it, because our beta in, in this third quarter was, 13%, basically. And, and obviously, as Javier said, we're gonna be well below the 20% in the fourth quarter. That was our original, original guidance. So not only what we are seeing now, but also what-- based on what we're seeing now, we expect for the next quarters, that's why we see, that, that lower beta than, than earlier. And and in, with respect to, to capital, obviously we have, booked this quarter the, expected impact that we had, pending on, on regulatory risk.
This means that for the foreseeable future, we do not expect any further impact associated to our internal risk models and the return to compliance after the bank integration. That's done, and hence, when we look at the fourth quarter, but particularly next year, because you may have some volatility in any given quarter, what I'm saying is basically, our profits are going to translate into distributable capital, no? The RWA growth is unfortunately, because we'd love to have a healthy, growing lending business. It's healthy, but it's not gonna be growing in the short and medium term. So we're gonna have a substantial capital generation in the next quarters.
And that's why obviously we're saying we're gonna be well ahead of the, of the EUR 9 billion. In terms of how do we return that capital to shareholders, we are going to, obviously, retain that, 50%-60%, this year. That's clearly. When we look at, what do we do with next year and, with the capital that is going to be, available for distribution on top of the, let's say, ordinary payout level, I would not like to comment on it, because obviously it's something that we will have to decide at the right time, and, and the board will have the ultimate word. But, may have no doubt it will be coming back to shareholders, no?
Okay. Thank you, Alvaro. Next question, please.
The next question is from Sofie Peterzens with J.P. Morgan. Please go ahead.
Yeah, hi, this is Sofie Peterzens from J.P. Morgan. Thanks for taking my question. So, just a quick question, on your hold-to-collect portfolio, could you just remind us how large your unrealized losses are in this book? And then my second question would be on the ALCO yield. It looks very low, at only 1.4%, and the book is pretty large. So, kind of, could you just talk about the repricing of the ALCO portfolio book and, and kind of the NII benefits that we should expect maybe beyond 2024, assuming rates stay above 3%? Thank you.
Okay, if I may. Sophie, the fair value of our hold-to-collect portfolio is now at a loss of EUR 6.6 billion pre-tax. I just take the opportunity to remind you that you should look at this with a broader view, you know, considering the fair value of other assets and other liabilities. We have a slide on the annex of our presentation with all the details, but all in all, that accumulates a net gain of EUR 34 billion, eh? Just to keep that in mind.
Towards the ALCO portfolio, well, what I have been saying in recent quarters is that we thought that the yield curve was too inverted, and that actually adding to the portfolio was not being accretive in terms of short-term performance on NII. The market is moving towards our view, I would say. And, as I mentioned to a previous question, we are retaining a slight positive bias towards higher rates, approximately a positive sensitivity of circa 5%. And, we're happy for the time being with that positioning. And, remember that as the time passes, just because we originate assets at fixed, is gradually being reduced, and we are monitoring that sensitivity, obviously, closely.
As I say, we have a view that, for the time being, we are fine with that positioning. Once we decide to hedge more, we can do it by using cash products. That means fixing securities, or we can decide to use swaps. Let's say, swapping floating assets into fixed or also acting on liabilities, no? Time will tell, no? It's a little bit about market views and the way we see things going forward, no?
Thank you, Sofie. Next question, please.
The next question is from Andrea Filtri with Mediobanca. Please go ahead.
Yes, I'll start with a follow-up on the elaboration you've done on capital usage and organic growth. Does this mean that we can rule out M&A in Portugal? And can you confirm that you will not breach the 12% CET1 level in any circumstance? The second question is on the digital euro. What do you see as risks and opportunities of the digital euro implementation? Have you budgeted the impact to your business model, and can you share it with us? Thank you.
Thank you. Thank you, Andrea. I'll start with the digital euro. You may know that we were the sole bank that participated in the prototyping exercise that the ECB launched some months ago. The other four partners, including some big techs, were not banks. And as we have been very involved on this matter, have been six months working with the ECB. Particularly, we were in charge of the P2P module. Kind of equivalent for those of you who are familiar with Bizum in Spain, is a similar kind of proposal. So we're thinking hard about the digital euro, and we think the digital euro can be a threat and an opportunity.
At this stage, what we are most focused on is to make sure that it becomes an opportunity generally for the industry and certainly for those banks like us that are fairly advanced in digital matters and fairly much willing to take advantage of the world that is constantly changing. And at the same time, obviously, there are issues around financial stability. What are the limits? What the costs associated to implementation, who bears them? And all that, those are important things. In terms of budgeting them, as you know, this is a long term in our budget. We're in the process of finalizing it, and certainly there's not going to be an impact associated to the digital euro in 2024.
When we prepare our next strategic plan, which is 2025-2027, obviously, we will be taking into account what the digital euro is going to imply, even if it will be sort of, in my view, backloaded. But certainly, the work that needs to be done, which we have started already, will gain pace during that period. In respect to capital, I would say rule out M&A is something that I would change into saying it's very unlikely that we will do M&A. That's how I would guess, and certainly we do not have any plans currently. And, maybe you want to complement any-
No, you mentioned if-
Go ahead.
You asked about the 12% CET1 ratio. Well, I would remind that our formal target is between 11 and 12, and that from 12% is when capital devolution accelerates, no? And we are happy with maintaining those targets, strong MDA buffers. So I think that there are no changes on that, on that front.
Thank you, Andrea. Operator, please, next question.
The next question is from Carlos Cobo with Société Générale . Please go ahead.
Hi, good morning, and thank you very much for taking the questions. One is a quick follow-up. I know you've been very specific about M&A, but I was wondering if this is more focused on big acquisitions. When we look at bolt-on deals, small deals to complement your current businesses, insurance fee-generating businesses, we haven't really seen much in Spain, probably because the sector was still building capital, but now you have the capacity to complement those good fee-generating businesses, and I was wondering why you are not considering doing that.
And the second question is about the new deposit campaign. If you could comment about the attractive 2% rate on term deposits, how do you expect to affect the evolution of the deposit beta next quarter? If you see that accelerating a little bit or it's going to be managed and not going to have such a big impact on the evolution of betas. Thank you.
Thank you, Carlos. In terms of M&A, again, we do not see any opportunity that makes sense for us. Like, we are present in all the value chain in financial services in Spain and Portugal. It doesn't mean we cannot do better and that we're best at everything we do. Obviously, that's not the case. But clearly, we have the basis to compete everywhere on the basis of our own organic development, no? And, my feeling, and obviously, I personally have been involved in M&A for a long time, is that very often people tend to relax the discipline that we have in managing our P&L when talking about M&A. It is much easier to make assumptions of what may happen in the future associated to transactions, and these generally tend not to be then materialize. So, we are fairly conservative.
You know, we've done M&A. Obviously, Bankia is a recent example, but we've done others. We did BPI, we did Barclays, Banca Cívica, et cetera, Banco de Valencia. But, the bar has to be very, very high for us to move. And clearly, with our position now in our markets, and with a view that we do not want to go beyond our markets, for retail banking, then, it's just, in my view, just very unlikely that we will find some sort of bolt-on transactions that make sense for us. We do not see that as a good use of capital as a rule?
In terms of the new deposit campaign, this is all incorporated in our guidance for beta for this fourth quarter and for next year. In fact, it's not just incorporated, it's one of the reasons why we now have gone through this new step of having a full offering. We know now how our clients are reacting to it and have a much higher degree of confidence to say we're gonna do better. So beta is gonna outperform, NII is going to outperform, it's all incorporated.
Okay. Thank you, Carlos. Operator-
Thank you.
Next question, please.
The next question is from Britta Schmidt with Autonomous Research. Please go ahead.
Yeah, hi there. Thanks for taking my questions. On the net interest income, could you provide an update on your deposit hedge with regards to the size and also the maturities? And then on asset quality, there was a slight increase in NPL inflows. Are there any discernible trends by segments here? And do you expect there to be an IFRS 9 update in Q4? Maybe you can give us an idea of size. And also, the third question would be, there are some troubles in the renewable energy sector to which you might be exposed. Can you give us any reassurance here on your exposure? Are there any ICO guarantees, or could you deploy some overlays here as required?
On asset quality and then Javier will complement and talk about NII. In terms of asset quality, things are developing much better than we had anticipated. That is clear. But it doesn't mean that there's absolute no impact. If you look at the figures that are public for the market, and particularly the mortgage front, you see some deterioration starting at the middle of the year, and that makes sense. Rates have gone up in a big way, and we have been discussing in these calls in previous quarters, what would the impact of that be? And we're seeing some very moderate impact.
In fact, again, it's something that now is giving us a bit more confidence, because now we're starting to see what logic says, that if rates go up and installments from clients are much more, are higher, and particularly for some clients, there's going to be some impact. But the good news is that rather than have a curve with that's just sort of going up in a very steep manner, it's actually a very low increase, a very low rate of increase. So we have seen a bit of deterioration on the mortgage portfolio. And we have also decided, because as you know, there's this Spanish Code of Good Practices, we have received around 6,000 applications.
On that front, we have done another, give or take, 10,000 restructuring of mortgage. Much less than what you would expect at this point. We're in September, and basically, our mortgage book has largely repriced, as you've seen in the presentation. Again, there's still some further repricing, but the bulk of it has already happened, and the majority of our mortgages are now above a 3% Euribor plus the spread. So, some deterioration, some refinancing. We have actually decided to reinforce and make even more conservative, and we're unlikely to pay sort of criteria. So we have taken some decisions to consider Stage 3 additional mortgages that are actually obviously performing, but have some clear weakness associated to it.
In fact, that's part of a very prudent approach. We're having a very good year, obviously, compared to last year. We want to make sure that this is not a one-off. The main message from this presentation should be our profits are sustainable, NII is sustainable, certainly asset quality is sustainable. Even though we have an increase in cost of risk, this in absolute numbers, this quarter versus previous quarter, when you look at the annualized cost of risk, it's 25 basis points. Last year, we had a very sort of significant increase in the cost of risk in the fourth quarter. We're not expecting that this year, certainly not to the same extent, so that we maintain our guidance.
But actually, a lot of what we're doing in this front is anticipating potential problems if they materialize, associated to next year. The usage of our unassigned provisions has been much more, much lower than we had anticipated also for this year. So again, we have a pretty good buffer for next year. So in summary, there is some deterioration on the mortgage book. It's very moderate, it's much lower than what we were expecting, and certainly is one that we are very well provided for. And in terms of renewable, we are actually not concerned. We have been being extremely prudent and continue to be extremely prudent. We have a very good profile, and at this stage, we are certainly comfortable with our exposures. I cannot comment on more details affecting individual names, but certainly we're not concerned, Britta.
Hi, Britta. You had a question on hedges. We have those EUR 20 billion of deposits hedged to floating. We have 5 billion of those hedges that are maturing by the end of the first quarter. So from then, we are gonna have a positive impact on NII of slightly over EUR 40 million on a quarter-on-quarter basis. So the second quarter will already have less negative impact, slightly over EUR 40 million, compared to the first quarter. So that's it. The remainder of the hedges are maturing later, basically, end 2026, early 2027.
Okay. Thank you, Britta. Next question, please.
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 three. The first one is on, on NII. If you can give us some color around the percentage of your deposit base, which is being remunerated around the Euribor levels. So what is, again, the amount of deposits which you need, you need to pay close to market rates right now? Second one is on asset quality. There's been, I think, it's EUR 1.4 billion increase of the Stage 2 in the quarter.
Maybe you can elaborate actually or explain what has happened, and also tell us what is the pace you're expecting in terms of using your EUR 1.1 billion overlays. And the third question is on costs. The context of collective agreement and trade union negotiations, etc. Can you give us some color, basically, about how to think about costs into 2024? Is mid-single digit growth still a good benchmark, or you think you can do better than that? Thank you.
Thank you, Ignacio. On costs, I want to be prudent because negotiations with unions will start early November. And obviously, we need to be. It's a sector negotiation. Well, sector in terms of the former savings banks, but a sector negotiation, not just our negotiation with our own unions, and I need to be prudent in making statements there. I think we've been saying that we have an agreement at sort of the level of the economy, where the recommendation agreed with the unions was 4% in 2023, and then 3% and 3% each of 2024 and 2025. That is going to be obviously a reference in the negotiations.
What I would say in terms of costs, I like to think of them as again as how our growth is going to evolve, and we certainly are setting a new level of efficiency, cost-income ratio in 2023. This has to be the base, the reference on which we need to keep improving. Certainly our aim is gonna be to keep having positive years going forward. Once we reach this level, which in 2023 is obviously going to improve in a very significant, in a very significant manner.
You can also project the improvement we're having and look at what may be the end of the year, which, given the guidance we've given, is now fairly simple, and it means further improvements. From that basis of 2023, certainly, our target is gonna be to keep improving years. But we're gonna have this uncertainty on the negotiation, and we are going to be very prudent on what we comment ahead of that negotiation for reasons that I'm sure you understand, well, no? Asset quality and NII, Javier.
Yes. Hi, hi, Ignacio. Well, I will try to answer your question, giving some data. I think that probably what is more useful is to see the percentage of our deposits that are being paid an interest, okay? Because we have also some sight deposits that are paid an interest, and time deposits are still a few that are legacy deposits that are paid zero, no? So, the percentage of our deposits that are being paid, it stands now at 16%. That has moved up from the previous quarter at 12, slightly over 12. And the average cost of that 16% that is being paid is between 2.8%-2.9%. Okay, so this is... Those are the numbers.
I would say that in Portugal, you have a slightly higher percentage of time deposits than those that I mentioned you. In Portugal, you don't have sight deposits or current accounts paying an interest. But on the other hand, the average cost in Portugal is lower. So it's a little bit different, a different mix. An additional comment I can make is that in terms of the breakdown of the deposit beta, that is approximately a beta of 5% for retail and circa 30% for corporates and the public sector. So as you see, we have we hold still a high percentage of, let's say, corporate deposits that are still being paid zero. So this is the summary.
I think that that helps, because, also the portion of sight accounts that are being paid an interest is also increasing gradually... and this is part of the beta development process, no? You had a question also on the Stage 2. Yes, we have a slight increase this quarter, slightly over EUR 1 billion. You should think as this as something normal, no? And I think that probably the key message here is that you should not think that an increase in Stage 2 automatically results into an increase of the same amount into Stage 3 further down the road. So has nothing to do with that.
It's about the evolution of internal models, obviously reflecting the new circumstances in terms of affordability, in terms of increasing rates and other impacts. And I think we should get used to higher volatility in Stage 2, upwards and downwards, no? And considering our loan deposit balances, EUR 1 billion up or down, I would say is something non-material, and in any case, is not the precursor of a deterioration for sure, of the same amount, no? And about the overlays, well, I think that Gonzalo has just mentioned also, we are expecting to use part of those overlays. And there was a previous question from Britta about IFRS 9 models update.
That is, this fourth quarter, precisely for that, we expect, and we are working now, precisely on which is the end result for that recalibration of internal models. We are expecting that part of that, those overlays will be used. Unfortunately, I cannot give you much guidance, because we are just working on that, and until we have the end result, I don't know. But the message is that we are gonna keep quite a significant part of that, those EUR 1.1 billion unused and available further down the road. I think that we have covered all your questions, Nacio. Thank you.
Thank you, Nacio. Operator, next question, please.
The next question is from Marta Sanchez Romero with Citi. Please go ahead.
Good morning. Thank you very much for taking my questions. I have two follow-ups and another question. On capital, the generation, your underlying capital generation this quarter has been quite stingy, given your profitability and the deleveraging of the book. So what's going on there? Have you been shrinking low-density books? Has there been a retweaking of models? And if you can give us a sense of what you expect to generate pre-dividends and buybacks on capital per quarter over the next, I don't know, 18 months, that would be very helpful.
The second question is a clarification on your hedging strategy and your guidance for NII next year. I gather that you have not swapped in to fix your floating rate mortgage book yet. We've seen that happening in places like Portugal, quite intensely, actually. So, but is that possibility already embedded in your guidance? So that would be an additional, positive impact. And then a third question on, Angola. A few months ago, you were almost, about to sell your 50% stake there, or your 48% stake there. Any update here? Thank you.
Thank you. Thank you, Marta. On Angola, nothing new on which we can comment at this stage. On capital generation and hedging, Javier, please. Hi, Marta. Well, on capital, we have had this quarter the loan book coming down, but basically on low density segments, because we have had the leveraging on mortgages, we have had basically public sector, we have had also ICOs coming down. So, that is probably the reason why you have a different mix or result on the evolution of risk-weighted assets on the quarter.
No, but absolutely nothing beyond our expectations, and I would like here to remark that not any sign of, I would say, rating migrations or whatsoever. On hedging strategy. Sorry, and you had a question about organic capital generation. So the message is clear. So net income, at the end of the day, we're expecting to flow into organic capital generation. Then, depending on the final decision on our payout for next year, there will be a net accrual every quarter. But basically, the message is that we are not expecting any material risk-weighted asset inflation into next year. And as a consequence, it's quite easy to do the math, no? On hedging, no, we have not hedged anything this third quarter.
To your point, to what extent this is incorporated in our guidance, the answer is no, because actually, hedging is not adding NII, and I insist on that. The yield curve is negative, so hedging is not adding, it's not accretive. And to what extent are we gonna do it or not? Well, it depends on the overall organic sensitivity of the balance sheet, the evolution of the sensitivity of the balance sheet. I commented before, and the view we may have at some point about rates going forward. And this is obviously an ongoing discussion, as you can imagine, no? We have our views, and as I said before, happy to hold these positive bias towards Caixa, although much smaller than one year ago, towards higher rates for now. Thank you, Marta.
Thank you, Marta. Next question, please.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi, thank you. Just a quick question. The NII guidance, if I assume just the EUR 10 billion for this year, it implies actually a decline in Q4 of 4%. I wonder if you think that's something we should assume, and NII peak was really in 3Q or actually we should assume something a bit better and some stability. If you could clarify, that would be great. Thank you.
Well, for 2023, thank you, we set at least EUR 10 billion. We didn't say ten billion, at least EUR 10 billion. Mm, to be honest, it's difficult to tell you now if NII for the fourth quarter will be exactly at the same level, slightly over or slightly below, third quarter NII. No, it's difficult, it's difficult to say. So far, the evolution in the quarter, as we are already by the end of October, is doing according to our expectations. So I think that we can really deliver a much lower beta compared to that 20% we guided last quarter. And we'll see, eh? But just to be clear, that is at least EUR 10 billion for this year.
Thank you, Hugo. I believe that was the last question. So, thank you, Javier. Thank you, Gonzalo. Thank you everyone for watching. Have a wonderful weekend.
Thank you very much.
Bye-bye.
Bye.