Good morning. Thank you for joining us on Banco Sabadell's Q1 2023 Results Audio Webcast. Please be welcome. In the next hour, our CEO, César González-Bueno, and our CFO, Leopoldo Alvear, will present the main highlights and details of the commercial and financial performance in the quarter. The presentation will be follow up by a Q&A session. Let me now hand it over to our CEO, César González-Bueno.
Thank you, Gerardo. Good morning, everyone, welcome to Sabadell's Q1 2023 results presentation. As we will explain today, the bank keeps doing well. I would like to start by sharing the key messages in slide four. First of all, in the current environment, we are focused on managing margins versus volumes. In this context, our loan to deposit improved by 60 basis points in the quarter and stands at 95%. Second, NII increased by 28% compared to first quarter 2022. Our customer spread increased by 51 basis points year-on-year. Third, TSB continued to deliver positive results and posted a profit before taxes of 77 million GBP, 67% up year-on-year. Fourth, group's net profit reached 205 million EUR in the quarter.
This represents an increase of 69% year-on-year if we exclude the EUR 157 million of the new Spanish banking tax recognized in full in this quarter. Finally, our core Tier I reached at 12.78%, increasing 33 basis points year-on-year. Return on tangible equity is to that 9.9%, 11.4% if we exclude the new banking tax. On slide five, we'll talk about volumes. Starting with the quarterly evolution of performing loans, volumes decreased by 2.2% quarter-on-quarter or by 2.5% at constant FX. This is mostly explained by the usual Q1 seasonality as well as by weaker demand, slightly weaker demand for loans particularly, and that is more acute in the U.K.
On a year-on-year basis, lending volumes decreased by 1.4% or by 0.5% at constant FX. There are different dynamics by geography. In Spain, we had the maturity of a EUR 2.1 billion loans to the Spanish treasury. Without considering the maturity of this loan, the rest of the lending book grew by 1.6% year-on-year. In the U.K., the mortgage market remained weak in the year following the mini budget episode last October, performing loans at TSB decreased by 5.2% in EUR or by 1.5% at constant FX. In other international activities, we delivered a solid growth of 5% or 2.7% at constant FX. Moving now to customer funds. On the balance sheet, funds declined by 1.1% in the quarter.
Off-balance sheet funds increased by 2.7% in the quarter, driven by positive net inflows and markets performance. As a result, total customer funds decreased by 0.4% in the quarter. Finally, our commercial GAP improved by EUR 1 billion in the quarter and by EUR 3 billion year-on-year. In slide six, we take a closer look to our deposit base. 61% of our customer deposits at group level are insured by national deposit insurance and deposit guarantee schemes. Furthermore, our deposit base is granular. 76% of the total deposit base are retail deposits. This figure has remained stable in the past year. Looking at the breakdown by type of deposits, almost 90% are sight accounts. This quarter, we have seen a flow from sight accounts into term deposits, which includes also commercial paper.
This is in line with the deposit beta we forecasted for the year. Our loan to deposit ratio improved in the quarter and stands at 95%. It's a very stable deposit base. On slide seven, we review the commercial activity in Spain. Mortgage origination fell by 19% year-on-year, broadly in line with the market. We also decreased on a quarter-on-quarter basis due to both a market slowdown and seasonality in Q1. New consumer loans continued to perform well, growing by 32% year-on-year and by 12% quarter-on-quarter. Moving to business banking, in the lower left-hand side of the slide, new loans and credit facilities in Q1 remained broadly stable in the quarter and on a year-on-year basis. Working capital financing fell slightly versus previous quarter due to seasonality, increased 10% year-on-year.
Slide eight. Payment-related services continued to perform remarkably well, both in terms of turnover and number of transactions. Cards and point of sale turnover posted a strong increase on the year-over-year basis, 11% in cards and 19% in point of sale. Quarter-over-quarter turnover decreased in both cases, but that's due to seasonality. Regarding mutual funds, we had a positive net inflow in Q1 of EUR 125 million. Despite having net positive inflows, these were lower than in previous quarters. Allow me, please, to elaborate a bit on this. We have a broad portfolio of investment products to suit the needs of each customer according to their investment profile.
Lower net inflows of mutual funds in the quarter were offset by higher net inflows in other investment products, such as structured deposits, commercial paper, or savings insurance, which altogether increased by EUR 2 billion in the quarter. Finally, in the lower right-hand side of the slide, in new protection insurance premium, there is a downward trend as expected and as previously explained in previous results presentation. In life insurance, we are moving from single premium insurance to renewal, renewable premiums, which results in lower upfront payments by the customer. The downward trend will continue for the coming quarters. Slide nine. On the X-axis of the graph, you can see the year-on-year variation of business origination for all products in Q1. On the Y-axis, you can see the year-to-date stock market share variation. All products in the A group are performing well.
In consumer loans, cards, business banking, and point of sale, we are increasing our origination volumes while maintaining or increasing our market shares. Good performance there. Mortgages. Despite increasing marginally our market share, origination volumes are decreasing. As explained before, this is due to a softer mortgage market. In the C group, protection, insurance, and mutual funds. As I explained before, the performance in protection insurance is in line with our expectations, mainly due to shift from renewable premiums in life insurance. As I also explained, the lower net inflows in mutual funds in the quarter were, when compared with the previous year, is offset by the performance of other investment products such as structured deposits, commercial paper, or savings insurance. In summary, a good commercial performance in Spain. In slide 10, I will share an update on the progress of our transformation.
In retail banking, we had three clear strategic priorities: more digital customers, more digital processes, and more specialized service model. Regarding digital customers, remarkable progress here. In 2021, digital onboarding wasn't even available, while currently we're acquiring more than 50% of our new customers digitally. Regarding digital processes, we are also progressing notably well. For example, digital entry. Finally, we are deploying a more specialized service model. As we have shared in the past, we have already deployed around 800 specialized RMs for mortgages, investment products, and insurance, and we launched a new private banking model earlier this year. Of course, we have not finished our transformation process in retail banking. The degree of execution of each strategic priority is different. In all cases, we have specific projects and initiatives to be delivered in the upcoming future.
A sample of them have been included in the right-hand side of the slide. Moving on to business banking, the strategic priorities are different to retail banking. Verticalization of our value proposition for businesses, deployment of enhanced risk ranking processes, and offering a better day-to-day experience to customers leveraging on technology. I will not expand for the sake of time into the details of this, but I can assure you that here, again, we are seeing good progress to date and clear initiatives to be delivered in the upcoming future. In short, the results of our transformation, I firmly believe that they are already visible and having an impact, but we still have a clear roadmap looking forward. Moving on to slide 11. Well, the question is: How have we been able to accelerate the delivery of our transformation initiatives without increasing IT CapEx?
The solution is relatively simple. As you can see in the slide, we have transformed our IT model and reduced unit costs of IT projects by 38%. We have upgraded our data centers and implemented a new infrastructure architecture which deliver a 10% cost avoidance in the total cost of our IT infrastructures and data centers. As a result, we have been able to double our capacity to invest in digital customer solutions while maintaining the total IT CapEx broadly stable. We have also organized our teams to work on a more productive way with a higher degree of integration between IT and the business units, which results in faster and more efficient time to market in our transformation initiatives. Moving on to slide 12. In January, we announced the disposal of our merchant acquiring business.
This took place in the framework of a long-term strategic partnership with Nexi, a leading industrial partner. This has been certainly an industrial transaction. That has been the rationale. The perimeter sold includes 80% of Sabadell's merchant acquiring assets. The transaction includes entering into a 10-year distribution agreement. This transaction will allow us to further build on our position in the payment business in Spain, where we had already acquired a 20% market share in point of sale devices. Moreover, it will reduce our investment needs, and it will provide cost savings in the future. It will also help us accelerate growth by providing our clients access to more advanced payment systems. The total value of the transaction amounts to EUR 350 million, adding 14 basis points to our core Tier one.
Additionally, it is expected to be P&L accretive from the first year of the agreement. On slide 13, performing loan book by segment ex-TSB. Consumer loans grew by 3.6% in the quarter. Mortgages, as well as SMEs and corporate lending, remained slightly subdued in the quarter because of seasonality and lower demand for loans in the current macroeconomic scenario. Performance of lending to the public sector in the quarter was impacted by the maturity of EUR 1.4 billion in the Spanish treasury loan. Excluding this effect, it would have posted positive growth. Looking at the year-on-year dynamics, we have managed to grow both mortgages and consumer loans. Lending to SMEs and corporates declined slightly as companies are still delaying long-term investments.
Regarding our international business, we delivered quarterly negative growth in all geographies, although we still see robust growth in Miami and Mexico on a year-on-year basis. Let's move now to the U.K. in slide 14. New lending volumes in TSB in the first quarter of 2023 were impacted by low levels of mortgage applications in Q4 2022, in line with market dynamics. TSB's mortgage book declined by 3.5% in the quarter, driven by a weaker market. Mortgage applications have started to recover in Q1, and the volume of applications in March is close to the average monthly volume of the first months of 2022. Moving to TSB's financial performance in slide 15. TSB posted a net profit of GBP 54 million in the quarter, which represents the highest quarterly net profit since 2017.
NII grew by 18% year-on-year and benefited from a higher customer spread, as well as a higher contribution of the structural hedge. Core results increased by 59% year-on-year, thanks to NII performance that offsets lower contribution of fees and slightly higher costs, as you can see on the right-hand side. In slide 16, financials on a group basis. We recorded a net profit of EUR 205 million or EUR 361 million excluding the payment of the new Spanish banking tax. These results entailed a return on tangible equity of 9.9%, 11.4% if we isolate the impact of the new Spanish banking tax. In addition, our core results, which include NII plus fees minus total cost, grew by more than 46% year-on-year on the back of the NII performance.
In terms of solvency, our capital ratio stands at 12.78%, which implies a solid increase of 33 basis points year-on-year. With this, let me hand over to Leo, who will cover the financials of the bank in more detail.
Thank you, César, and good morning, everyone. Moving on to the financial results. Net profit reached EUR 205 million, posting a quarterly increase of 37% and 4% below Q1 2022 figures. It is important to take into account that these quarterly results include the full impact of the Spanish banking tax, which in our case amounts to EUR 157 million and is non-tax deductible. In other words, without this extraordinary impact, our net profit would have increased by more than 140% and by 70% on a quarterly and annual basis, respectively. The aforementioned net profit represents a return on tangible equity of 9.9% or 11.4% when the Spanish banking tax is excluded, and this is well ahead of our guidance.
In terms of P&L, we will take a closer look at the figures in a minute. Before we do so, I would like to say that overall, the quarterly evolution was healthy, which reflects the good momentum that the business is undergoing. NII grew by 2.2% Q and Q, mainly driven by the current positive interest rate landscape, while on a year-on-year basis, the increase is north of 28%. Fees were down 5.9% in the quarter, driven by seasonality in decline of both service and asset management fees, as we will see later. From a year-on-year perspective, the evolution has been -2.4%, in line with our low single digit decline. Costs increased slightly in the quarter by 1.4%, which is actually below our budget.
This, combined with the downward trend in provisions, consistent with an asset quality backdrop that is holding up very well, boosted the aforementioned net profit figure. Let's go through the different P&L items in more detail. Starting with NII in slide 19, group NII increased, as mentioned before, by 2.2% on the quarter and by 28.3% year-on-year. On the top right-hand side, we can see the drivers that explain the quarterly evolution. Moving from left to right, customer NII contributed with EUR 71 million. Within it, customer margin added EUR 107 million, underpinned by faster increase of interest rates on the loan book than on the cost of deposits. Mostly due to the fact that EURIBOR repricing is coming through.
On the other hand, as you can see, volumes had a negative impact of EUR 30 million as new lending volumes remained subdued in the quarter, as César has just explained. The higher ALCO contribution, driven by the repricing of the hedged portion of the portfolio and more expensive wholesale funding, broadly offset each other, producing a combined impact of minus EUR 5 million. Additionally, TLTRO was the main headwind in this quarter, and as the end of the related income represented a negative impact of EUR 58 million QOQ. As you can see, part of this impact was offset by the excess of liquidity deposited at the ECB. Finally, day count represented an impact of minus EUR 13 million. Now, when we exclude the impact of TLTRO and the calendar day's difference, NII would have grown by 9.2% in the quarter.
The good evolution of the customer margin can be seen in the performance of our customer spread, which by definition excludes TLTRO, that increased by 20 basis points to 2.73% in the quarter. This is driven, as mentioned before, by the repricing of a variable rate portfolio with a higher yield on new originations and by a contained evolution of our customer funds costs. On the other hand, NIM, which does include TLTRO impact, grew 15 basis points in the quarter, up to 1.79%. Moving on to fees. This posted a quarterly decrease of 5.9% QOQ and 2.4% on an annual basis. This underperformance was driven by both service and asset management fees.
Regarding service fees, this declined due to the usual first quarter lower seasonality and lower revenues from forex transactions, while asset management fees were impacted by the fact that, as we've already announced, we now sell regular premium insurance instead of single premium insurance, meaning that this fee stream will now be recorded more broadly. Additionally, the quarterly comparison is affected by the fact that Q4 includes the positive contribution of insurance success fees that are recorded at year-end. In any case, we had already anticipated this performance in a low single-digit decline guidance for the year, and therefore we are confident that we are within budget. Leaving the revenue lines to one side and moving on to costs, this quarter, total costs increased by 1.4%. On a year-on-year terms, costs increased by roughly 0.7%.
As you can see on the right, compared with the situation one year ago, efficiency has improved significantly, thanks to the different restructuring plans undertaken both in Spain and the U.K., and also supported by the solid evolution of gross margin elements, and now stands at group level at 53.6%, while it's 48% ex-TSB. At this point, four months down the road, we feel confident to revisit our guidance for the year and to reduce the expected increase in the cost line from a +4% to a +3.5% year-on-year. On the next slide, we take a look at our core results, which include NII plus fees, minus costs.
As you can see on the left, the year-on-year performance of recent quarters is very substantial, as core results continue to grow at a high speed quarter after quarter. On the top right-hand side, you can see the bridge of this year's evolution. The increase of this metric is supported by NII, which added EUR 242 million. The contention of costs made possible that we only must deduct EUR 5 million from this line, while fees had a minor negative impact of EUR 8 million in the year. Going forward, we expect NII to be the main contributor to the further improvement in core results. Moving to the bottom line of the P&L, we cover the cost of risk and other P&L items between pre-provision profit and profit before taxes.
The group's credit cost of risk for the quarter stood at 45 basis points. As you can see, very much in line with 2022's average at 44. The stability in credit cost of risk is related to the low levels of delinquency that we are observing, and therefore to the good evolution of asset quality. Total cost of risk reached 57 basis points, posting a quarterly decrease. Taking a look at the breakdown of total provisions on the top right-hand side, from left to right, we can see that we booked EUR 186 million of loan loss provisions in the quarter, equivalent to the 45 basis points of credit cost of risk that I've just mentioned. There were no provisions related to foreclosed assets, as some foreclosed assets were sold at a premium in the quarter, and the sale proceeds upset the related provisions.
NPA management costs amounted to EUR 36 million. Finally, other provisions, which are mainly related to litigations, stood at EUR 14 million. Moving on to the next section, I will walk you through asset quality, liquidity, and solvency. In the first slide of a section, we can look at the group's non-performing loans, which showed a slight increase in the quarter, while on a year-on-year basis, the stock has nonetheless been reduced by over 5%. Gross net entries were very much in line with previous quarters, we're not seeing any deterioration of advanced credit risk indicators. As a matter of fact, the final numbers for the quarters exceed our budget. This is the total NPL portfolio is lower than what we were expecting at this time through the year. NPL ratio advanced 12 basis points in the quarter.
Of these, five basis points are related to the above-mentioned increase in Stage three exposures, while seven basis points are explained by the loan book reduction. Finally, it is worth noting that coverage ratios remained stable, standing at 55% when considering total provisions over Stage three. Furthermore, although you do not have Q4 2022 information on the screen, Stage three coverage increased slightly in the quarter. Moving on, in terms of foreclosed assets, it is worth noting that the stock continued to decline both quarterly and on an annual basis. As a matter of fact, year-over-year, we see a reduction of 14% of the stock in foreclosed assets. The portfolio still benefits from having a sound risk profile, as 95% of total foreclosed assets are finished buildings, while coverage remains unchanged at 38%.
Overall, total NPIs, which include both NPLs and foreclosed assets, were down 7% year-on-year. Gross and net NPA ratios stand at 4.2 and 2% respectively, while total coverage remains stable at 52%. Turning now to liquidity. As you can see, we are operating with substantial liquidity buffers over both the short and long term, which can be seen in the LCR ratio, which stands at 220%, or the NSFR ratio, which reached 141%. Loan-to-deposit ratio improves 0.6% in the quarter to 95%, while total liquid assets amount to EUR 58 billion, of which EUR 52 billion are high-quality liquid assets. In terms of central bank funding, let me elaborate a bit on the different geographies, which you can see in the bottom right-hand side of the slide.
As per TLTRO III, of the EUR 32 billion that we drew down as of today, EUR 13.5 billion are outstanding, EUR 8.5 billion mature this June, while the remaining EUR 5 billion mature in March 2024. In other words, we have already repaid close to 70% of the borrowing due to be matured this year. Our LCR hasn't undergone major fluctuations as a result of the TLTRO repayments, this is due to the fact that when we repaid the facility, the collateral backing this lending was returned to us, and these collaterals are high liquid assets. Furthermore, at the end of Q1, the liquidity deposited at the ECB is equivalent to 2.2 times the outstanding TLTRO. In the U.K., we prepaid GBP 1 billion of TFSME, leaving GBP 4 billion outstanding, most of which will mature in the second half of 2025.
To end with this slide, I would like to highlight the recent improvement in the outlook assigned to our rating by S&P, which has been revised to positive from stable. This action reflects the view of the agency that Banco Sabadell will continue delivering and gradually improving the strength of profitability of our franchise over the next 12-24 months. Turning to the next slide, we can see our current MREL position. Sabadell is already compliant with the requirements that need to be met from first January 2024 onwards, in line with our funding plans. We comply both in terms of total RWAs, leverage ratios, subordinated RWAs, or subordinated leverage ratio. It is important to highlight that the funding plan for the year has been mostly deployed this first quarter.
As a matter of fact, the vast majority of the MREL subordinated issuances have already been executed. We have no need to issue any further ATI or Tier two in the medium term. The next AT1 call date is not due until September 2026. Moving to the next slide, and to end my part of the presentation, let me share with you our solvency situation. At the end of Q1, our CET1 fully loaded ratio reached 12.78%, having increased 24 basis points in the quarter or 33 basis points year-on-year. We look at the quarter's evolution in more detail, we can see that the organic capital generation was 13 basis points, even assuming a 10 basis point impact linked to the Spanish banking tax, and after accruing a dividend payout of 50%.
Fair value reserve adjustments had a positive impact of seven basis points. Finally, lower RWAs derived from the lower volumes and better risk profile in the quarter, as well as other deductions such as the IFRS 17, added 4 basis points to our CET1 fully loaded ratio. From a regulatory perspective, the CET1 ratio, phase-in ratio stood also at 12.78%, which implies an MDA buffer of 413 basis points, which comfortably beats our target of maintaining a buffer above 350 basis points. Finally, in terms of shareholder value creation, tangible book value per share increased by 5% year-on-year, including the distribution of a final dividend of EUR 0.02 per share that was paid to shareholders in March. With this, I conclude my part and hand over to César.
Now to finish our presentation, and before opening the Q&A session, I would like to recap on the quarter's development. And you can follow the details in slide 31. I think it's important to stress that the results of our transformation are already visible, and that we still have a clear roadmap. The transformation is not done, but it's progressing very well. Looking at our financial performance, NII grew by more than 28% year-on-year. This makes us more confident that we will meet our now very high teens growth target for the year. Fees decreased by 2.4% on an annual basis, as anticipated, and in line with our low single digit decline guidance.
We reported a total cost of EUR 730 million, which means that we are even more comfortably on track to meet our target. As Leo just mentioned, stating it at a 3.5% increase for the year. Cost of risk reached 57 basis points, which is below our target of less than 65 basis points, which again gives us comfort. All this has brought our return on tangible equity up to 9.9%, or 11.4%, if we exclude the banking tax. In both cases, pre or after banking tax, this new metric is aligned with our year-end profitability target. With this, I hand over to Gerardo to kick off the Q&A.
Thank you, César, and thank you, Leo. We will now begin the Q&A session. Please remember to press star six to unmute your line. Operator, could you please open the line for the first question? Yes, we will now open the Q&A session. Just remember that you need to press star six to unmute your lines. Operator, could you please open the line for the first question?
First question is coming from Maksym Mishyn from JB Capital. Please go ahead.
Hi, good morning. Thanks for the presentation, and taking our questions. Sorry. The first one is on outlook for loan book growth. I was wondering if you still expect loan book to grow slightly in 2023. The second one is on NII in Spain. Could we look beyond 2023, what kind of normalized customer spread should we expect for Sabadell going forward after rates re-fully repriced? The last one is on capital. I was wondering if you factor in any additional headwinds this year, and if not, would you consider distributing excess as you are currently generating? Thanks.
In volumes, yes, we maintain our view for the year. The evolution of performing loans is slightly below our guidance, which was flattish. You have to take into account, as we mentioned, that there was, and this was expected in our budget, that is a slight decline in the quarter because there is a maturity of a EUR 1.4 billion loan to the Spanish treasury. In the case of TSB, yes, it is below expectations, but as we mentioned, we, let's see if it materializes or not. We see the applications recovering in the Q1 , which could mean an improved performance of the volumes towards the future, no?
As we've mentioned several times, from a strategic perspective, we believe that in times when the markets are not that strong and the volumes are not growing strongly, it is much better to focus on returns. The yield that you obtain by focusing on returns instead of trying to gain market share aggressively in times of softer markets, I think leads us to follow that strategy very clear. A good sign also is that the commercial activity continues healthy, no? With number of transactions in cards and point of sale growing very handsomely. I don't know, you want to add anything to this question, Leo?
No. I think it's all covered.
Okay. I think the second question was around NII.
Yeah. I think, well, NII for the quarter is going to be the bottom of the year. From now onwards, we shall see, Q on Q, that NII will be higher. This is actually driven by the customer spread, which will also be the lowest of the year. Therefore, we see that it will keep on improving throughout the year, towards probably something above 3%.
Yeah. I think, just to complete, only one-third, 30% of the credit book has repriced.
Correct.
Of the EUR 70 billion. Of course, we expect the beta to increase over time. It's quite low. The Q1 has behaved very well.
Yep.
We have increased to around 15% ex-TSB, coming from a 10%. We remain with our expectation of 20%-25% for the year and the guidance. We expect-I mean, we are even more confident at the behavior of the NII.
Yeah.
I think there was a question also on the capital, no? I think any decision, we believe that the capital is going to behave in a healthy manner. You've seen the significant decrease during the year to the 12.78%, and we expect a continued increase supported by the results in the course of the year. As to what would then happen, I think I have to be very clear on this one. This is a board reserved material, the decision around payouts, around the structure or the volume and the structure of the payouts. The board makes this decision much more towards the end of the year or even with the books closed.
We should not expect any guidance on this respect until much, much later in the year.
Yeah. Just about whether we have any headwind in capital, regulatory headwind going forward. No. The answer is no. We're not expecting any in due course.
Thank you. Operator, let's please move on to the next question.
Next question is coming from Ignacio Ulargui from BNP Paribas. Please go ahead.
Hi. Thanks for taking my questions. I have two questions, coming back a bit on NII and capital. I mean, in terms of deposit betas, you have said that the performance has been much better. Could you give us some sense on how the deposit beta evolved in March? Is there significant change between the first quarter and the evolution in March? Linked to the NII, I mean, I just wanted to get a bit of a sense on the deployment of the ALCO portfolio, whether you have invested partially or not, and whether the plans remain to continue increasing the size of the ALCO book.
On the capital front, I just have one question about whether there is any chance to do any other decision rather than shareholder remuneration, like for instance, potentially buying back part of any of your JVs. I mean, I was thinking particularly on whether there is a chance to buy from Intrum the servicer, which spends around EUR 130 million of costs every year, if that could happen or because of a contract that cannot take place. Thank you.
I'll just take the last one. No, there's no, there's not on the table any analysis or negotiation to purchase back any of the JVs. They are working fine.
Yep. On the betas, what we saw is from the, from January, an increase, no, in the three months. Has it been exponential in March? No. It's not been neither in April, no. I think it's been, as I said, as César was mentioning before, it's actually below what we budgeted, you know? Therefore, we remain pretty confident that at this stage, and given the trends that we have seen in the first four months of the year, with our guidance for NII, no, I think, all things being equal, our NII should grow in the very high teens this 2023. As per the ALCO, no, we have not reinvested. We had around EUR 3 billion to reinvest in the year.
As you can see in the numbers in Q1, the ALCO book was almost the same. I think it grew EUR 300 million. We have not gone through that yet. There is a chance, yes, that we will do it through the year.
Thank you. Let's please move on to the next call.
Next question is coming from Borja Ramirez from Citi. Please go ahead.
Hello. Good morning. Thank you for taking my questions. I have two questions. One on wholesale funding. The NII guidance that you provided in January, which high teens growth, since then, you did a lot of front loading in February wholesale funding at low spreads. Was this better than expected in your original NII guidance? My second question is on the U.K. It seems that TSB has recently lowered rates for new fixed mortgages. Could you please provide more details on the competitive environment in the U.K., as well as volume and market share outlook? One quick follow-up, if I may. When you define deposit beta, could you please explain how this is calculated?
Is it the final cost of deposit divided by the final Euribor? Also, what is the Euribor expectation in the deposit beta? Thank you.
Shall I take the first and the third?
Mm-hmm.
In terms of wholesale funding, yes. The truth is that we made a good strategic decision, and we anticipated most of the MREL issuances of the year in the first couple of months of the year. We did so because there was a good market, there was a lot of appetite, and we were able to print at lower yields. It is a little bit better than expected. Although, I mean, in terms of yields, although, it was earlier than expected also in terms of the funding plan. It's positive for 2023, and it's more positive for 2024, if you wish, you know? Because the yields were lower than the budget, no?
As per the third, yes, it's precisely as you mentioned. The way we are defining the beta, it's the final cost on deposits on the current Euribor, no? On the Euribor. That is on the market right now.
On the U.K., I think, the market has been very soft. Very soft because the last, the last quarter of the last year of 2022, the demand was very low. When the market is very low, it's also very low in terms of pricing. In general, in general, I think we are defending reasonably well the margins there. It is certainly a market that probably should not remain in the same situation as it has been recently. It adjusted downwards very quickly. We see the demand growing in the first quarter as we covered during the presentation. It's very hard to make a prediction, but we think it's going to go to more normalized levels in the course of the year and certainly in the years to, in the years to come.
Thank you. Let's move on to the next question, please.
Next question is coming from Carl Fischotte from CaixaBank BPI. Please go ahead.
Yes. Yes, hello. Good evening now. Yes, Carl Fischotte from Caixa Bank. Just a question on cost of risk. As you mentioned, first you've been below your guidance for the full year.
My apologies. We are not hearing you as clearly as we would like. Can you get closer to the mic or whatever, please?
Better. It's better now?
Yeah. Thank you.
Is it better now?
Thank you.
Okay. Yeah. Again, thank you for taking the call. As I was asking, as I was saying, the cost of risk in the Q1 came below the guidance for the full year, as you already mentioned. I was wondering here what type if you see here scope for upgrading this guidance, whether you think that the upcoming quarters could be a bit tougher. Well, basically, what type of insights do you have in terms of how vintages have been evolving and overall quality indications? A second question, a bit of a follow-up on the NII, very high teens growth.
If you could split it between your expectations for Spain and TSB, I would appreciate it. Thank you.
Okay. In the cost of risk, I think we mentioned already, both Leon and myself, that the cost of risk at 45 basis points in credit and 57 for all concepts is slightly below our original expectations for the year, which gives us confidence for the rest of the years. We are seeing no signs of credit deterioration. That doesn't mean that they will happen or not happen in the course of the year, but we are not seeing them in all the events and early indicators, both on retail and in SMEs and even in corporate. We are confident that our guidance is achievable and we are even more comfortable than we were with our guidance, and it could be slightly better.
Regarding NII, yes, so the guidance is, as you mentioned, a very high teens. This is gonna be driven mainly, obviously, by Spain because of all the repricing that we've mentioned several times. Of the asset side, I think the repricing in Spain will be well over 20%. While the evolution of NII in TSB is obviously gonna be more mild, milded, because we've, we already saw quite a lot of it in the last couple of years. It's gonna be in the region of the mid-single digit.
Thank you. Let's please, operator, move on to the next caller.
Next question is coming from Sofie Peterzens from JP Morgan. Please go ahead.
Yeah. Hi, here is Sofie from JP Morgan. I was just wondering if you could kind of give details around what your Euribor levels you would still need the high teen net interest income guidance for 2023. Also kind of the very high teen net interest income guidance that you now have. What Euribor are you basing that on? Is it the forward curve, or is it a lower level than that? Yeah, that's it. Thank you.
Sure. We budgeted on the basis of 3% Euribor, so it is below the current curve. It was well below the curve that we saw in February, and now, although the curve has gone down, it is still below. I think this will not print a major difference for... I mean, it will be positive for certain, all things being equal. This is if we reach the deposit beta that we are aiming for in 2023. I think it should have a further impact in 2024 because of the average of the repricing of all the asset side, you know, which doesn't happen from 1st of January.
As we said, we are only 30% done with the repricing, and therefore, this, better Euribor than the one that was included in the budget will be positive for 2023, but moreover for 2024.
Thank you. Let's please move on to the next question.
Next question is coming from Ignacio Cerezo from UBS. Please go ahead.
Nacho, if you're hearing us, remember to press star six to unmute yourself.
Hi, sorry for that. I was saying actually, thank you for taking my questions. I've got three, if I may. The first one is on NII, following up on Leo's comment right now around 2024. In Q4, actually, you said that you were expecting NII growing as well in 2024. Are you still confident that is going to be the case, or you think there's a bit of front loading of that growth in 2023? Second question is on the buyback of the results of last year, if you have already applied for the ECB authorization, how long can it take? The third one is if you can give us a little bit of color on the deposit cost per segment in Spain, breaking it down between retail, corporate, and institutional large corporate CIB. Thank you.
Sure. Let me start with our view of 2024. I think it's a little bit early, but we are four months closer than what we were in December. I think we are still seeing NII growing in 2024, you know, moreover, because of the rates that Sergio has mentioned, you know. There's a bunch of a variety of reasons why we think this should happen if we meet the deposit beta guidance that we have shared with you know. On the one hand, there's a part of the loan book which will still reprice next year.
We have to take into account that most likely, the rates will end up or the end of the year rates will be the higher of the year, the highest of the year. Therefore, there is a space for repricing the book in 2024 towards those higher rates, you know. I think the ALCO book will have a higher contribution because of the rates also, 40%. Remember, 40% of the book is hedged, and therefore it's floating. This shall give us some good news also in 2024.
If we are able to make the replenishment of the ALCO book, which was basically 3.5 billion EUR, also the contribution of this replenishment will be higher, obviously, in 2024 than in 2023 because of when we buy it, you know. The structural hedge results in TSB shall also be positive given that the back book of the hedge is around 1.2%, and the five-year swap is, I don't know, 3.7-3.8, something like that, in the current standards, you know. Then the negatives would be the deposit beta, which we believe that it will increase in 2024, obviously, and potentially the wholesale funding, a little bit of wholesale funding, you know.
All in all, we are still positive with 2024.
In terms of the payback, we have already, of course, we did, so immediately after the announcement of the results or soon after. The response should come between the end of the second quarter or the beginning of the Q3 . Therefore, we will implement soon after. As per the cost per segment, allow me here to be qualitative. I don't think we would like to disclose with all the color and the detail that insider information. From a qualitative perspective, and this only makes common sense, so you could have deducted this yourself, retail is moving slower, although we are there, as we said, offering alternative products. SME is marginally in line with retail. Private banking, a little bit more aggressive.
Little conversion into fixed term deposits, more alternative products. Wholesale, very scattered. Some much more demanding, others more scattered. Certainly the public sector, and there the payments are mainly due in current accounts, have been among the most aggressive. If you allow me, I would leave it at that.
In any case, I think it's worth remembering our structure of deposits, you know, because we are mostly retail and SMEs, but we have very little of CIB deposits. It only represents 2% of our deposit base, and that's where the broadest sensitivity is, if you wish, you know. For the remainder segments of deposits, what we are trying to do is offering alternative products because the world doesn't end with savings, you know. Therefore, we've been able to commercialize over EUR 2.5 billion or more of different alternatives to our clients based in mutual funds, guaranteed mutual funds, structured deposits, insurance savings, commercial paper, treasury bills, et cetera, et cetera, et cetera, you know.
That's why, while still offering profitability and profitable products to our clients, the beta is still managing better than what we expected. Finally, I think you asked about the buyback process. Yes, we did start it. We started after the submission of our ICAAP, therefore about a month, basically a month ago. Not even a month ago, so a few weeks ago. Everything's going as it should.
Thank you. Let's please, operator, move on to the next call.
Next question is coming from Britta Schmidt from Autonomous Research. Please go ahead.
Yeah. Hi there. Two questions, please. One is, could you give us a little bit of detail on your commercial real estate exposure? What is the total volume? What are the LTVs and what's the share of office and retail, please? The second one would be a little bit more conceptual. Do you think that there's going to be any impact from the new housing law and rent controls on the Spanish mortgage market?
Shall I take the first one? Our exposure in CRE, it's fairly small, around EUR 2.5 billion out of total loan book of 155. Of which in the U.S. is extremely small, it's 0.3%. EUR 0.3 billion. The breakdown by sector is split evenly among logistic, industrial, offices, retail, very low exposure to shopping centers and as well as hospitals, geriatrics, et cetera. It's a very atomized portfolio, very well distributed into sectors, non-concentrated and very little in the U.S., as I mentioned.
The impact of the new law. First, it's still not final. Second, it's hard to predict. Certainly it could have a little bit more impact on the buy to let, but that's not the core of the Spanish market. We don't think it will have an impact.
Thank you. Let's please move on to the next question. Next question is coming from Carlos Cobo from Société Générale. Please go ahead.
Hello. I hope you can hear me now. Just a couple of follow-ups. One is on the payments sale, and if you could elaborate on your math around that being net accretive from year one, how are the math working? And the second, if you could elaborate a little bit more on the structural hedge in the U.K., if you basically think on the sentence of UKe banks and swap everything to floating, and then you have this fixed leg of the swaps are repricing, what federation, average federation of that swap, over how long does it reprice and what would be the remaining contribution to NII on a certain spiral basis. Thank you very much.
On the why is it net accretive, the Nexi transaction, is basically because the cost reduction, which is slightly below EUR 100 million, will be compensated by the more or less similar amount in fees. Which means. That's for the first year. We get the proceeds from a financial perspective. We get the proceeds of the sale, plus we will be more or less neutral or marginally positive during the first year, and from then on, it should be positive. Let me remind, and I will always stress it, that this is mainly industrial transaction. We have grown to a 20% market share with that segment, with the point of sale, in the point of sale market.
We think, and we have done it with worse solutions than the ones we will have next year, thanks to this agreement.
If I may add, I mean, the magic behind being able to make this agreement net accretive in year one, it's basically driven by the fact that, as I just mentioned, you know, it's industrial and therefore we're not seeking for a capital upfront. What we're seeking is for higher fees and commissions going forward next year. We have that's a big part of what we have negotiated. On the other hand, it's a reduction of costs. Doing this on our own is very expensive when you look at the amortization that you have to put through the PNL because of the machines, if you wish.
Indeed, Leo, you're absolutely right. The thing further is that going forward, it would have required a level of investments to keep up with the caliber of evolution, technological and others, of this element that, I mean, we are delighted with the transaction. Makes all the sense in the world.
As per the second one, the structural hedge basically is a hedge over EUR 25 billion of deposits. It's a five-year hedge. It's a caterpillar hedge. The backbook is around 1.2% and the frontbook is basically the five-year swap, which today is at 3.6%. In other words, one-sixtieth of these EUR 25 billion of deposits reprice every month, okay? Or EUR 5 billion per year. We are changing this 1.2% for this 3.6%. In other words, we shall see good news coming out of this hedge, not only this year, but also in the following, in the years to come.
Thank you. Let's please move on to the next question. Next question is coming from Fernando Hildis Santibañez from Bestinver Securities. Please go ahead
Hi, good morning, thank you for taking my questions. A question on costs, please. I think that the cost guidance is EUR 3 billion for the year, and I think I heard that you improved a little bit the guidance on cost from growing 4% to 3.5%. Any comment on that would help a lot. Following up on costs, I still see that on Spain, the costing on rates is still at around 48%, which ticks a little bit high compared to peers. I am wondering if you're looking at this and thinking maybe this is an issue for next business plan, potentially coming next year. Finally would be, well, your targets are pretty much on track or exceeded during this actual business plan.
are we gonna see an Investor Day or something at the end of this year, for the next 2, 3 years, please? Thank you.
Okay. No, I think, what we're showing to ourselves is that despite the fact that we continue to invest in digital solutions, and I think during the presentation it was more or less clear that we have doubled our investments there or our cash outs there, that nevertheless we are maintaining the cost of technology flat. In all the rest of the costs, I think we are confirming with this guidance that we're giving of 3.5 instead of the 4% that we gave at the beginning of the year, that we are being very careful on the cost side, despite this higher investment in development of client solutions. This is a myriad of things. It's not in one place. It's just being careful everywhere.
The 48% is not bad, we think at, in Spanish level, and we hope to continue to increase it, or improve it, rather to increase it, which would mean to decrease it. I'm sorry. It will become mainly from a low growth on the cost base, which we will continue very focused on, and a higher pace on the income. That's where we would expect it to come. The other question was?
Investor Day.
Investor Day. No Investor Day. No Investor Day. Let me be very clear here. When we did the Investor Day at the beginning of 2022, it was under very special circumstances. The bank had just come out of the expectation of a merger that didn't happen, and I think with in hindsight for the good reasons. It had a very low market cap. That doesn't mean that the one that we have now is high or that we are satisfied with it, but it's a completely different one. There was major changes in strategy. I don't think it is sufficiently visible, but the change in the organizational structure, the change in metrics, the forward-looking in terms of digitalization.
As I mentioned before, 50% of our customers are now acquired digitally from zero two years ago. It's a very major change of strategy, and we are pursuing that strategy, and we are going to continue pursuing that strategy. There's also no change in the perimeter. We are happy having in our books and in our perimeter TSB. We are happy having Mexico, and we are happy with the structure that we have in all fronts. The thing that we also did two years ago was to establish a forward view of three years. That made sense at that point in time.
It made sense at that point in time because there were, I would say, more doubts about the visibility. There was a new team. We wanted to share that we saw a clear future for Banco Sabadell . We were wrong, not by not seeing a clear future, which we continue to see, but by projecting a return on tangible equity of 6%. As you heard today, we are projecting now at 10%. It is true also that the market conditions have improved. It's not only because of a better management of the bank, which I think is also there. No, we have no plan. From now on, we would continue to give guidance as we are doing it lately, which is with one year of advance.
During the year, we will fine-tune the guidance that we give for the year. Let me say that the strategy in the stricter sense of the word is to continue executing. You saw before in the slides that we are in the process and on our way.
If I may add.
Of course. Always.
I think on what César was mentioning, guidance, you know. We're giving you guidance every year-end, but also every quarter. For example, this quarter, we have revisited a little bit our guidance, and we have made a point that NII will be in the very high teens. Fees and commissions should be around our guidance. This is in the low single-digit decline. Costs will be or should be better than what we expected at the beginning of the year, 3.5% increase instead of four. Provisions probably at or better than our guidance in Q1. We are seeing that our return on tangible equity, which in Q1 stands at 10%, should be more or less the level for year-end.
This is well above our north of 9% guidance that we gave you 1 quarter ago, no? I think things have changed a lot in the last couple of years. Now, we had a return on tangible equity of zero, and now we have 10. We were not distributing dividends, now we are accruing 50% of payout. We had a capital CET1 of 12%, now we stand at 12.78, despite accruing 50% of payout. The evaluation of the bank has improved, but we are still trading at 0.5 tangible book value, no?
When I look at these numbers, and I take into account this return on tangible of 10%, this payout of 50%, and the 0.5 times book value, well, we are offering the market a dividend yield in the range of 10%, no? Which I think it's.
The, the, the-
An interesting proposition from my point of view.
That's used to say to that type of numbers, it could have been worse.
Yes.
Also to emphasize that we are very comfortable with the strategy that we defined. The organizational structure, the bank is reacting very well, and it's very aligned, and these are again, intangibles. We are all aligned behind the main lines of development, which is the strategy that we defined two years ago, and we just want to persevere.
Thank you. I believe we have one more question. Operator, could you please give access to the last call of the day?
Next question is coming from Jacques-Henri Gaulard from Kepler Cheuvreux. Please go ahead.
Yes. Yes. Good morning. Thank you very much for taking my question. Jacques-Henri here. Just following up, gentlemen, it would be a shame if you didn't do another Investor Day, considering, and I was perusing through your presentation, how much things have changed, how much you have evolved. You've disposed of a lot of things. You've partnered with a lot of people. You could consider that you may want to actually reinvest somewhere else and just, you know, I don't know, try to, I would say, put in stone for the progress from indeed your percentage book value, which has already been multiplied by two and a half, and just not be simply, you know, another interest rate play. Just, you know, challenging you a little bit on that. Thank you.
Thank you.
Thank you very much.