Please take a seat. We're very pleased to be joined, this afternoon, with Gonzalo Gortázar, CEO of CaixaBank, as well as Javier Pano, Group CFO. Thank you both for taking the time to join us.
Thank you for having us. Thank you.
So, why don't we start with sort of where we left things? You know, you, you're now making more than 16% RoTE. That's one of the highest levels in Europe. The key question that always comes up when it comes to European banks is how sustainable is this level for you to defend in the out years?
Sure. Well, obviously what we're seeing is conditions that are attractive and that are more attractive than the conditions we could foresee when we presented our three-year plan back in November, and that plan had a target for us to be over 16% by the last year of the three-year plan. That was 2027, and on average about 15%. To be honest, everything is going better than expected. As I said, external conditions, growth has come back faster than foreseen, margins, asset quality. So I would say, rather than think about 16% as a sustainable level, it's clearly a level on which we wanna grow our return on tangible equity, and the conditions currently suggest that we can be above that level. Is it sustainable? I'm saying above that level, from 2027 onwards, in particular when we have that target.
Obviously today we're already well above that level. Is it sustainable? I think it is. To be honest, the most important thing is we are in a situation in which we have had 10 to 15 years of pretty difficult times in Spain. I know generally in Europe when we have negative rates, but we have had deleveraging for more than a decade. Now we're seeing that our clients have less leverage than ever. And so there's more potential for loan demand to pick up, which is happening. The economy is among the large economies in Europe the one that is growing faster. Portugal is doing very well at the same time. Yes, we feel pretty good, not just about the current conditions, but about the sustainability of the conditions for us to continue growing and continue growing our profitability.
Now, when I look at one of the key drivers of profitability, of course, NII, is on top of mind, still, and you got it to NII to be around EUR 11.5 billion in 2027. Now, can you remind us the key moving parts that are affecting your NII outlook from here?
Actually, we guided over EUR 11.5 billion.
Over 11.
Just to be more specific, no? Well, basically, we, you know that this guidance for 2027 is coming from when we presented a three-year plan one year ago, no? November '24, that, well, we knew that rates were coming down. This would be impacting NII, but over time, thanks to volumes, hedges, legacy portfolio maturities, et cetera, would gradually recover. Back one year ago, we said that would be circa EUR 11 billion. Now we are saying clearly above EUR 11.5 billion, no? So that's basically where it's coming from. Improvement is coming from better volumes. So we were expecting loan growth circa 4% for the three years. We will probably talk about that later, no? But we are already having better momentum than that into 2025. Also, deposits doing better. So volumes are doing clearly better. Sorry, you have a steep yield curve.
So basically, you know that we lend long, we borrow short. So any rollover of legacy portfolios, et cetera, is gonna be at better yields than initially expected. And well, that's the summary, no? So we have guiding for 2025 NII to come down by mid-single digit. We already called the trough for NII in the second quarter. So in the next few quarters, we are gonna have better NII quarterly than the second quarter, further accelerating into the second half next year. So 2026 is already better NII than 2025. And then even further accelerating as we have a more impact from well the compounded effect from volumes, plus particularly some specific legacy maturities in fixed income and also some hedges that are maturing and that will boost NII further into 2027, no? So that is basically the summary.
And at the same time, well, we are managing well pricing in terms of deposits, no? Which is a key contributor for NII.
We come to that, but if we can focus a little bit more on loan growth, because this time last year, very few would have anticipated the sort of pickup in loan demand that we've actually ended up seeing. And as you said, both Spain has been one of the fastest growing economies this year in developed markets. And so can you give us a little bit more color around the outlook for loan growth? What are you seeing both from clients and from your competitors on the ground in Spain?
As you said, we've seen a strong rebound from a sort of basically flat level for close to 15 years. And that was something that at some point it had to happen. But I remember maybe having this conversation five, six years ago and saying it has to happen, but it never came. And now it has come. The leverage of Spanish families and businesses is approximately half, as a percentage of GDP, half the level that it used to be in 2009, 2010. You know, incredible deleveraging in the country. Same thing when you look at the net external debt for Spain was close to 100% of GDP. Now it's below, clearly below 50%. So the private sector is in a completely different situation. 30-32 percentage points below the average levels in the Eurozone.
So that gives you the indication that the potential for growth is there. Our families and our businesses have a low level of leverage, which is also great news in terms of if there's ever a downturn for asset quality. But now clearly they have the potential to take on more debt. And this cycle is finally started. Clearly we now have three, four quarters of accelerating loan growth. We saw retail consumer lending growing 6-7% last year. This year is growing a bit higher. But now we've seen the mortgage sector growing and particularly the business one. Year on year we have a growth that is just below 5% on the loan demand, and an accelerated one.
I think we'll obviously see some seasonality in this third quarter, but still we have a good chance to have a pretty decent growth in lending. We had assumed 4% for the compounded annual growth for the three-year period for our plan, but it was always kind of will start slower and then gradually will pick up, to get closer to sort of evolution of nominal GDP. Nominal GDP was upgraded today both by the government and by Bank of Spain. But anyhow, we are already going in 2025 so far in line with nominal GDP. I see no reason whether that would change. Obviously there can be a big shock to the economy, global, worldwide, some shock to the confidence that you can never discard it.
Actually we didn't have the great or the greatest environment for business confidence over the last quarters. Even in those circumstances we had pretty decent lending growth. It's, I think, something pretty robust and something that even if it's just along nominal GDP growth at close to 5%, 4.5-5%, which is a good level, it would still mean that we have again lower the level of debt that we used to have and 30 percentage points lower than the Eurozone. There is plenty of room to see a fairly resilient lending demand in the next years. Here, obviously what we need to ensure is that we do that profitably, because we're not here to lend more. We're here to lend more, but profitably. Certainly you can expect us to do that.
Now we've come a long way and I think it's remarkable to see that level of growth. Now, when everyone sort of thinks of banks and growth, the first association I think the market does is to think of loan growth picking up. One tends to overlook, I think the importance, especially in the case of a bank like yours, of deposits growing and how meaningful that is in terms of liquidity management for some of the points on NII we've talked about earlier. Now, can you give this audience a little bit more context around the initiatives that you've taken here and really what sets you apart from your competitor, from your competition when it comes to deposit franchise?
Okay, thank you. I try to summarize this by saying that we are being successful on three things at the same time, no? So when we talk about customer funds management, we are being successful first on keeping our deposit interest bearing balances, let's say contained. Now I would say stable while at the same time being able to reprice those non-interest bearing balances according to market prices, no? Which have been obviously down in recent times. Second, also we are growing on non-interest bearing balances. We are disclosing very clearly that on our quarterly reporting. And this is due to the increase of the transactionality of the clients with the bank. So that means that we have more clients. We are gaining year to date like 360,000 clients, no? So year on year, 360,000 clients.
We are gaining payrolls. Spain is generating, circa 500,000 new employments, year on year. We have a 36% market share in payrolls, no? So that means that we are acquiring, payroll accounts. That means that, you have more transactional balances, let's say, liquidity buffers, for households, et cetera. So we are gaining that part. This is, really important in terms of, NII. And third, at the same time we do that, also we are being able to have inflows into wealth management that basically are, off balance sheet, no? So basically, here it's, mutual funds and also, savings insurance, no? In terms of, non-interest bearing, balances, if you look at our recent, performance, it has been already a few quarters, approximately EUR 5 billion on average every quarter, increase. And, we are having inflows into, asset management approximately, EUR 1 billion per month, no?
So that means that per quarter it's like circa EUR 8-9 billion improvement of high quality customer funds, no? Some of those having a direct impact on NII, but others also on our let's say fee-related business, wealth management mainly, no? So I think that being successful on managing all those three parts is the key for our success. So we have I would say the right internal framework to do so, the right fund transfer pricing system, the right incentives. So we are being able to fine-tune when necessary. Obviously client first always, no? But it's something important. And we are being successful at that, no?
Now we've got to that come down, of course. Non-interest income growth has been a market focus, I would say, and you've upgraded your revenues from services in terms of guidance. And now markets are always difficult to predict, but you've had a strong year so far. Can you talk a little bit more about the outlook for non-interest income across different products and particularly emphasizing those opportunities you see as greater?
Sure. Well, non-interest income has been traditionally our, I think, most successful, sort of, P&L revenue line. It's only the last three, four years that NII and rates have moved. That obviously the main actor has been NII. But traditionally we can rely, really we went through this very difficult period for banking in Europe, and particularly in Spain, by growing very strongly our non-interest income line. And that was by obviously focusing on asset management, payments, and to a very large extent wealth management, including insurance. That is our competitive advantage, I would say. NII is a question of finding again what's the right level. And as obviously Javier said before, there's quite a lot of upside there. But in terms of structural growth, here's where we have our advantage with our 38% market share, for instance, in life savings.
And that means when we have 25% yearly, it means we're doing something that is different from others. We basically crack the code on having the right product, so the right factory, but at the same time, most importantly, the distribution, part of the bank that understands and is comfortable with selling products that are obviously more sophisticated than time deposit, but they are critical given the longevity needs of our clients, no? And this is structural, no? The one thing we can be certain of is a year from now we will be all one year older, no? That's one of the easiest predictions. The fastest growing segment for our clients is obviously over 65. And there is where we have probably the strongest position.
Certainly the strongest position in Spain when you speak to customer surveys, FRS In mark recently. 50% of banking clients say there is one bank particularly specialized in senior citizens, which is CaixaBank. By the way, they also talk about imagin Bank being in the same situation for the younger part. So it's not that one thing is exclusive of the other. But wealth management is clearly gonna be a big factor. And the protection side, we still have a relatively low level of protection vis-à-vis our European peers. And again, we have a great position, the health business in particular.
The health business, by the way, is gonna be aided this year, because of the renegotiation of the terms with MUFACE, the civil servants, which was a loss-making part of the P&L, which is no longer gonna be, and is no longer affecting our P&L. Pretty good growth there. This would be somehow offset on more traditional banking fees. People in Spain and many other places, but particularly in Spain, don't like to pay fees. They don't understand why they pay fees. But while they have their money with us and we can make profitability on the balance sheet because of not remunerated deposits and some other transactions, that's fine with us. That is the picture.
I think it's probably going to be with us for some time, gaining market share in insurance and protection as sort of key levers for a pretty good non-interest income performance.
That's very clear. Now, capital returns is and has been and continues to be an important pillar of your investment thesis. You have a payout of 60%. You've increased the frequency of those payments as well as the frequency of share buybacks. You're at 12.5% now, and you've been basically committing to pay 100% of your organic capital generation. Now, with balance sheet growth and the magnitude that you've talked about and the returns that you now make from deploying this capital towards additional business, how should investors think about sort of the return investment here versus the appetite for additional buybacks, for example? And related to that, if I may, and maybe this is a question for Javier, what flexibility do you retain to sort of further optimize RWA densities?
Well, we have a very well-established framework for our capital devolution. So you already mentioned, no? Cash payout 50-60 interim dividend November, final dividend April. And, well, we have a very clear threshold above which we accelerate capital devolution via share buyback. This has been the case already for some years. And now this threshold is established at 12.25 for the CET1 ratio, moving up to 12.5% for next year as we are incorporating some of the new countercyclical buffer requirement into our, let's say, capital management targets, no? So it's very clear. So, well, look, when we disclosed our three-year plan back in November, we were expecting loan growth circa 4%. And we said, okay, you can assume that risk-weighted assets would grow circa 3%. I am talking 4% CAGR, 3% CAGR. So, well, some, let's say, management actions, no?
In terms of risk-weighted asset management, SRTs, other tools that we can use. Now we face faster loan growth, but you may think that we are gonna be also accommodating our toolkit in order to absorb that additional loan growth. You should always expect our risk-weighted assets to grow below the pace of new lending, no? That's clear, no? The market is there. We are quite active. We have even reorganized things internally in order to be more efficient in this, let's say, capital management tools. That's the situation, no? We think that in any case we are gonna be generating capital organically beyond, let's say, this 50%-60% cash payout. From time to time, we will continue to have share buybacks. We are executing a share buyback as we speak.
We already have a CET1 ratio at 12.5% as we closed in June. So the threshold for additional capital distributions this year is 12 and a quarter. So we already have the buffer in place. So, we think that we are in the right position.
Now, maybe we touch on costs and IT investments because I think it's an important part of your plan. You're targeting over EUR 5 billion in CapEx and OpEx related to IT and digital over the plan period. Where do you see the biggest returns in terms of efficiency gains and how much of these investments have already been front-loaded?
I would say back to your first question about sustainability of ROTE. We're doing a great effort now in making sure that our profitability long term is sustainable, our profitability our growth. That means we have to invest now, no? Also, over EUR 5 billion, there's EUR 1 billion that is really discretionary where we took a conscious decision. We could spend this billion or not. I don't think you would notice a lot if we hadn't spent that extra billion. This is again through 2025 to 2027, but we thought we owed it to obviously our shareholders longer term to take advantage of strength to make sure that we again future-proof the bank.
And that means some investment now, this year, next year, 2027. This year we're growing costs around 5%, as you know, which indicates some inflation pressures associated to labor and others from the inflation period that we had before. And 1% of that growth is again this IT program. We are going to be obviously collecting the results or harvesting the fruits in the future. I don't think that means 2025, 2026. It will probably be 2027 onwards. Investments are associated to just upgrading legacy, increasing resilience, cybersecurity, a lot of it to AI, particularly generative AI, and a number of other things that you can imagine. We're seeing already the benefits of that through the organization.
Customer service, clearly, whether it's call centers, it's opportunities for our relationship managers to be more effective when they call clients to make sure that they have the push of the button or what they need to have an intelligent conversation with a client on what their issues have been, what their opportunities, maybe what's the next best offer to make them operationally. Obviously, there's a lot that we can automate. We're really aiming for zero operations, all obviously automated. It's gonna take time. We're investing heavily in people, but that means in technology. It means we're gonna have more people in our payroll, but much less that we have to depend on. Through outsourcing of sort of software programming development, et cetera, a very significant effort.
We have already launched a number of initiatives, which I'm not gonna explain in detail for the benefit of time, but it's a platform for secondhand used cars, which has been a total success, a platform for housing, where we have already 50,000, and we launched this earlier in the year. It's been very, very quickly. We are launching now a cashback program, which is absolutely new in Spain and a number of other things, so heavy investment, and again, what this is is about making sure that we can increase our profitability over the longer term and certainly make the bank resilient in an environment where obviously competition or entrants are part of the picture. We have no reason to think that new entrants are better equipped than us.
But in order to be better equipped than them, we need to make sure that we invest and match and surpass the capabilities where we can.
We've covered, of course, a number of line items, and you seem to be, you know, the message has been particularly positive and much better than you had anticipated as part of the plan. So I'm gonna ask you the question on asset quality, nonetheless. But even though I've heard you say in one of the meetings that credit risk is one of those risks that is subtle, things generally look good until they don't. And the provision so far turned out to be, you know, much better and much lower than probably any of us would have anticipated. I think you've got it to 25 basis points cost of risk this year. How sustainable is this level, going forward? And maybe it's a philosophical question, but what do you think this credit risk is if it's not in bank's balance sheet?
How do you want to figure it out? It's a really agonizing environment, as you say, no? But it's macro-related, no? We have here plenty of positive things impacting. You have, as I said before, now employment growing, disposable income. On top of that, we have rates coming down, short-term rates, no? But you know, still plenty of legacy portfolios, mortgages indexed to short-term rates. It's really a benign situation, no? I would say that employment is the key. If you ask me what may happen for this to go wrong, it's macro-related, no? Something coming from wherever, no? I don't think it's gonna be something specific in Spain or Portugal. It may have more to do with any kind of geopolitical or other impact that, well, we have had a few examples, no?
Recently, at the end of the day, not having much impact, no? But eventually something may happen, no? If it's not for that, honestly, we are quite a bit, no? We are reducing our NPLs. We are being able also to dispose in the market. So there is a liquid market for NPLs, well, that's trending down. We have a nice coverage ratio for those NPLs. Also we hold unassigned provisions, no? So circa EUR 350 million that are still pending to be assigned, no? It's really a comfortable situation, no? We don't observe any material pocket, or industry or sector, no? That is worrying us, no? Not even those early signs of deterioration before it's 90 days past due or 30 days, 60 days, et cetera. Nothing, nothing at all, no?
So, we think that in this environment, we are gonna be able to keep reducing gradually our NPL ratio. And, well, as a consequence, our cost of risk is guided for 25 if nothing wrong happens around the world. So I think that is sustainable, no? So if you ask me, okay, this is a through-the-cycle cost of risk, no? This is not a through-the-cycle cost of risk because eventually we'll have a downturn in the cycle and the cost of risk will be higher, no? But if things continue the way we are having today, I think that yes, that is sustainable.
There are two things I would add. One is just the Great Financial Crisis was very hard in Spain and very long, right? We have short memories, but not that short. And certainly at Caixa, we have absorbed quite a few institutions that basically went under one way or the other, no? So actually the prudence in risk underwriting for us now, but also in the previous year has been very strict. And that gives us an additional degree of comfort. And back to where the risks are, you have to think that generally, obviously the banks are being more and more regulated, have been so. Hopefully there will be some simplification coming from the new program from the EU. Banks have been losing market share to non-banking financial institutions. And obviously risk is not to all non-banking financial institutions.
There are some that are very sound and great, but are accumulating in that part of the space. We talk a lot about SRTs. SRTs are a great tool, but basically this kind of risk transfer works best when you sell a regulatory risk that is a lot of capital for you, but it has a lower economic risk. Hence there's someone else that is a better holder of that instrument. The converse of that is that what you're keeping is assets that have higher economic risk than regulatory risk, right? And I think that is why we will be doing, as Javier is saying, SRTs, and we will be doing much more than the ones we've done, even though we've done that for a few years. It's a tool to use with care, right? But no use would be bad.
I think there's an extreme where it won't be good for the system either because you will end up not knowing where the risks really are and thinking the risks are in one place and they are in another, no? In this case, being kept by some financial institution. That will tell.
Thanks for that. I'm gonna ask you one last question and then we'll test the audience for any Q&A for you. M&A. I've gotta ask you about M&A. I mean, you probably know the idea that, you know, you're able to pursue M&A opportunity when this come available. BPI, of course, has taken a lot of management time. In Portugal, we've seen Novo Banco was acquired by Lone Star at a very high valuation. So what's your stance on M&A? Are there also, if I can broaden that question, any product factors that you'd like to strengthen further or any markets you'd like to add?
M&A is not something we're considering. We're clearly very focused on Spain and Portugal. We believe in domestic consolidation and we have proved that in the past. We do not believe that today there is value in cross-border consolidation, at least as a rule and certainly for us. Lots of premiums to be paid for, no synergies and quite a lot of complexities around that. We're not spending much time. We haven't spent it while, as you said, we did well and we're very happy about having grown our market share in Spain. Actually we did acquire in Portugal. BPI was a cross-border consolidation where we made that deal in 2016, but it was quite special.
We already had 45% of the bank and obviously in some very closed markets like Spain and Portugal. I think there are some good logic for that kind of consolidation. There's no factory or segment or something. We're not great at everything, of course. We're not the best in everything, but we are sort of good enough either to be there or to develop organically what we need, no? Bear in mind that our system is one where a bank or a financial group like us is present in every part of the financial system arena, and it's not that we don't know asset management or payments. We like, see, we are everywhere.
We like to dominate our market and in the same way that we're not focusing on doing things all over the world, we are absolutely 100% determined to make sure that we exploit every single opportunity in Spain. When we do not have the capabilities, we develop them if need be, and in this new world, we would partner up with sort of startups or whatever to do something specific, maybe in technology, maybe in product know-how to make sure that we develop quickly rather than wait and do everything internally. But we're not, at least at this stage, seeing that there's any capability or any part of the market where we're not present and we need to buy. Where we're not doing well enough, we'll partner up or grow organically.
Thank you for that. Any questions from the audience? Please raise your hand. I think there's one there. Yeah. Thank you.
Probably the toughest part of your operating environment right now is new business mortgage margins. Could you talk a little bit, please, about why you think they are so tight and how you think about the trade-off between market share evolution and the ROE hurdle that you're running the group for?
Mortgages have been very competitive in Spain for as long as I remember, certainly before the financial crisis. They used to be floating-based, with spreads of 20 basis points and things like that. Today, the market was some sort of cycles, but today the market is most primarily fixed rate mortgage. But still, it is not a product that per se usually meets cost of capital. And that's why, the reason why, banks can either not be in that product if you took an isolated product or took a view as to what does the mortgage bring? If you gain a client with a mortgage, normally you're gonna cross-sell.
In fact, in our case, contractually, we will have a number of conditions for the mortgage rate to come down, having the payroll, having home insurance or risk insurance or an alarm or a certain amount of savings in a way that when we lose that part of the revenue, if the client decides to take that insurance away, immediately the spread goes up. So it's not just wishful thinking. It's actual contractual profitability. On top of that, we know that beyond the products that the client has contractual right to have or we have those businesses by contract. On top of that, there's obviously even more.
As long as banks perceive a situation in which the overall client with the mortgage is profitable and the market continues to be extremely competitive, and bear in mind, people shop around for their mortgage, you know? They may not shop around for some other financial products, but I mean, most of you, whenever you got a mortgage, you would have consulted and made sure you got a very good price, very good rate, no? So, you have many institutions with 3%, 4%, 5% market share that are very competitive. Without pricing, any bank if they are not taking what the market rate is, which is anyhow, it's not observable, but in practice, if you are not in the market, you immediately start losing volume. There's a very high correlation of volume, profitability for us. Obviously is an attractive business when we look at the overall client.
It's a core part of the business, so we will continue to be a participant in the market where we still meet our return on our risk adjusted return hurdles, but not on the specific product, but on the bundle of products that comes with a mortgage, no? My expectation is that this is probably likely to be the pattern in the market based on how it has actually performed in the past.
Thank you for that. We might have time just for a very final question if there's any from the audience. Otherwise, it's always super insightful to hear you both. Thank you, Gonzalo. Thank you, Javier, for joining us today once again.
Okay.
Thank you very much. Thank you.