Good morning, everybody, and welcome to Banco Santander's conference call to discuss our financial results for the Q3 of 2022. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. I'm joined here today by our CEO, Mr. José Antonio Álvarez, and our CFO, Mr. José García Cantera. Following their presentations, we will open the floor for any and all questions you may have in the Q&A session. With this, I will hand over to Mr. Álvarez. José Antonio, the floor is yours.
Thank you, Begoña, and good morning to everyone. Thank you for attending to this conference. I should say, to start this presentation, that while we've been developing our activity in an unusual, highly uncertain macro environment. In this environment, we've been able to keep growing our customer base and translating this into volumes growth and revenue growth. The most remarkable change in the quarter probably has been the acceleration of NII with a growth of 5% quarter-on-quarter. Probably this is the main event on the back of activity levels and starting to raise interest rates, particularly in the Eurozone, where our exposure to higher yielding or higher rates is high. Our profitability improved significantly.
Our return on tangible equity stays in 13.6%. EPS is growing at 31% on the back of the profits we got in the quarter, EUR 2.4 billion, after absorbing a EUR 181 million charge net of tax and minorities in Poland. The gross number was north of EUR 300 million related to the new payment holidays regulation. Excluding it, profit grew 11% in the quarter, 10% in constant euros. In the 9 months, our attributable profit we got EUR 7.3 billion, increasing 25% with the positive impact of the currencies being +14% in constant euros. The credit quality on our balance sheet shows no signs of deterioration so far in the quarter.
Overall, the cost of risk remain below 1%, and we continue to generate capital at good pace. Finally, as you already know, we continue to pay value to our shareholders, both in terms of shareholder remuneration with the cash dividend we announced, the board approved last month, and the growth in tangible net asset value per share that provides a combined TNAV plus cash dividend per share of 11%. Going into more detail into the regions, you see the growth is well spread across the board, both loan and deposits. It's fairly balanced growth. We cannot say that we are growing just in 1 part of the business. We are growing well across the board. In constant euros, loans increased 2% quarter-over-quarter, EUR 17 billion, with increases in almost all countries.
Deposits were up 2% also in the quarter, with some shift towards time deposits given the current interest rate environment. In the actual month, loans and deposits grew 7% and 6% in constant euros. Regarding our loan portfolio, naturally this doesn't change quarter-on-quarter. Just to remind you that our portfolio is fairly balanced. 1-third is individual mortgages, mainly UK and Spain by this order, being UK by far the largest, more than 50% of the total portfolio. The other, less than a third, but close to 30%, is consumer lending. The majority is auto lending in Europe and in the U.S. Finally, we have an exposure of north of EUR 400 billion, close to 40% of our loan book, the majority in SMEs and corporates and in CIB.
You see that all the main portfolios are growing, so 7% individual mortgages, 7% consumer, 6% corporate. As I said, balanced growth across the board. Looking at the income statement, we provide you growth rates both in euros and constant euros for you to analyze in the best way you can analyze. As you can see, there was a positive impact from exchange rates of around 5-7 percentage points, partially offset by the FX hedge in the corporate center that is included in gains on financial transactions. In constant euros, revenue grew a faster pace than in Q1 and Q2, and costs face inflationary pressures but continue to grow below inflation.
Thanks to this performance, net operating income reached EUR 21 billion, a record for the first 9 months of the year. In loan loss provisions, that is 1 of the recurrent topics in this particular environment, there were 2 opposing forces impacting the year-on-year performance. In 2021, there were COVID-19-related loan loss provisions released in Q2 and Q4 of 2021 due to better-than-expected credit performance. In 2022, loan loss provisions including an additional EUR 1 billion, circa EUR 1 billion in provisions related to updated macro assumptions, mainly in the U.S., Spain, and U.K. The macro provision, roughly speaking, was EUR 1.1 billion. Spain represents EUR 200 million, U.K. EUR 300 million, and U.S. EUR 500 million, and other countries EUR 100 million.
Of which, EUR 500 million are expenses against P&L, and the other EUR 600 million is reassigned funds mainly coming from COVID provisions that were unused in the balance sheet. We are seeing, and this is an important development in the quarter, some normalization in the US as we anticipate to you, and in Brazil, some stabilization of the cost of risk. We elaborate on this. José will elaborate on this further. Additionally, this year, we record higher charges related to fund contributions and new resolution schemes, plus lower minorities and tax burden. The net results, as you can see, EUR 7.3 billion.
Elaborating a little bit on the P&L trends, allow me to say, while positive trends in customer revenue, especially NII the last quarter, which we expect to continue as the positive impact of interest rate hikes and activity growth are fully reflected in the different regions. The positive impact is just starting in Europe and somehow more advanced in other countries like U.K. and U.S., more so in Poland and in Mexico. The opposite happens, the negative impact has happened in Brazil and Chile, as you know, that they are heading toward low rates. Secondly, our costs grew below inflation in all regions in most countries.
Our efficiency improved slightly to 45.5% compared with full year 2021, but this is being eroded by inflationary pressures in some regions by the lag between the almost immediate impact on cost and the revenue benefit from higher rates coming later. Thirdly, in general, we did not see any deterioration in the cost of risk or in the credit quality variables such as arrears. We have very good cost of risk in Europe and ECB, and also in North America, where both the U.S., in the process of normalization, and Mexico are performing better than expected. In South America, the cost of risk in general was stable. You know that Brazil went up this year.
For now, for 2 quarters in a row, we has been stable, and we believe that we already reached the peak, and some indicators are more, we are more constructive on this going forward. All in all, we are confident for the whole group to achieve our cost of risk target. In relation with the profitability, I mentioned our ROTE is 13.6%. Earnings per share grew 31%, backed by higher profit and share buybacks. We bought back 3.2%, and we amortized 3.2% of our group's capital.
Finally, regarding shareholder remuneration policy for 2022, our intention, the board already approved 40% payout and half of this in cash, EUR 0.0583 in cash, and EUR 979 million in buybacks that we expect to be approved by the ECB soon, and we start to execute as soon as it's approved. As a result, the total remuneration is in this first dividend gonna be EUR 1.9 billion. Positive NII performance, I mentioned before, that is increasing for several quarters in a row, given the performance, the profitability of the group, a more constructive exchange rate environment.
Finally, on capital, we are very comfortable with our Tier 1 core equity, Tier 1 ratio remaining above 12%, a level that we consider to be very appropriate for our business. In the quarter, net organic capital generation of 26 basis points after 8 basis points accrual for the future cash dividend. The increase was partly offset by negative impacts from markets, available-for-sale portfolios, some from models, mainly more markets than models. At the same time, we continue to deliver our commitment of discipline at capital allocation. As you can see on the slide, risk-weighted assets grow well below loan growth, higher book from book profitability, and lower weight of risk-weighted assets with return on equity below the cost of equity. Now our CFO, José García Cantera, will take you through the results in more detail.
Thank you, José Antonio Álvarez, and good morning, everyone. After the CEO presentation, I will go through our performance in more detail in the quarter, and we'll look at the progress in terms of country and the business. Starting with profit, on the right-hand side, you can see the upward trend in profitability, driven mainly by revenue, which increased 5% in the quarter. This increase was supported by NII, which also increased 5%, and which, as we can see, has accelerated in the last 2 quarters, primarily as Spain and Portugal are beginning to benefit from interest rate increases, in addition to the growth that we have already seen in countries like U.K., Poland, U.S., et cetera.
In North America, NII rose 6%, with both countries growing more or less at the same pace. In South America, it was up 5%, supported by strong growth in Argentina, while Chile and Brazil show negative sensitivity to rates, especially Chile, where we had lower inflation in the quarter. In Brazil, NII remained stable following declines in previous quarters. I will explain this in a bit more detail when we go through Brazil. The digital consumer bank was practically flat. Although we have a neutral positioning to rates in DCB, it's slightly negative in the Q1 , couple of quarters, and then it neutralizes, and that's what explains this behavior. Net fee income was flat in the quarter, mostly due to weak performance in Europe due to seasonality.
We had lower fees charged on deposits from CIB large corporate clients and one-off in credit cards in the Q2 in the UK. On the other hand, South America increased 5% with an excellent performance in Chile and Argentina. Gains on financial transactions were higher, driven by CIB. Obviously, quarter-on-quarter comparison in other income was affected by the contribution to the Single Resolution Fund in the Q2 . This is our net interest income sensitivity to rates. This is consistent with what we have shown in previous quarters. This time around, we thought it would be better to look at forward rates rather than a sensitivity to a 100-basis-point change. This is the sensitivity of forward rates relative to rates remaining stable over the next 12 months.
Obviously, you know, it is fully comparable because now forward rates are almost 200 basis points, and the sensitivity we showed in the previous quarter was 100 basis points for the Eurozone, for instance. This is the sensitivity again of forward rates relative to rates remaining stable. As expected, obviously, we have very high sensitivity in euros. In sterling, we have some additional sensitivity from current levels, but obviously the higher the rates, the higher the beta as well. The beta we have here is around 50%, 50%-60% in this exercise. In Brazil, as interest rates remain flat, asset repricings should gradually compensate the increase in the cost of deposits, which, as you know, is almost automatically repriced.
It's important to note that this sensitivity is based on the maintenance of the TLTRO uptake conditions that exist at the moment, and we all know that they will change tomorrow. We don't know what the change will be, so we'll adjust that accordingly in the next presentation. Looking at costs, the CEO has already mentioned that costs are growing below inflation, which as you know, is one of our targets. As you can see on the slide, we are achieving, thanks to the transformation plans underway in all countries, particularly in Europe, a very good performance. We had in Europe 4 percentage point improvement in the cost to income at the same time. Costs automatically adjust with inflation in emerging markets, it takes a bit longer in Europe for that to happen.
As I said, in South America, the rising cost is explained by the automatic adjustment of cost to inflation, particularly in salaries in Brazil, Chile, or Argentina. Even so, cost in the region fell a little bit in real terms, and efficiency remained excellent despite a slight increase. In North America, it's worth mentioning the investments that we continue to make in Mexico to modernize our infrastructure. In terms of credit quality, we are not seeing any significant deterioration. The NPL and coverage ratios have been stable in recent quarters, as has the cost of risk. Stage 3 exposures increase in line with the credit portfolio.
Previously mentioned by our CEO, you can see the COVID-19 related provision releases in the Q2 and the Q4 of 2021, and the additional over EUR 1 billion of macro provisions in 2022. José Antonio already mentioned half of which came through the P&L and half were reclassifications of previously created COVID-related provisions. Compared to 2021, there were loans provisions increases in the UK, in the US, Brazil, and Poland, but very much in line with what we expected. Going into a bit more detail about the quality of our portfolio, we maintain a low risk profile balance sheet. It's mostly concentrated in mature markets, 80% of the total exposure, with approximately 65% in secured lending, mostly by real estate collateral.
Additionally, the main macroeconomic variables that affect our businesses, particularly unemployment, are expected to remain resilient across our footprint. Looking at the main countries, in Spain, 75% of our mortgage portfolio is floating. We have significantly reduced the average loan-to-value and the percentage of mortgages with loan-to-values over 80%. Our corporate portfolio improved its rating. As you know, the ICO portfolio is performing very well, and better than expected. Unemployment is low and stable and is expected to remain so. Housing affordability has improved significantly in recent years, and house prices are on average 30% lower in real terms than in 2008. In the U.K., 12% of the portfolio is floating. The simple average loan-to-value of mortgages is 40%, and less than 5% have loan-to-values over 80% versus 12% in 2015.
In terms of macro, the U.K. has a very low unemployment rate, which we believe will help avoid a sharp fall in prices. Moreover, affordability is currently at 34%, 10 percentage points lower than in 2008. In the U.S., we've changed the mix recently towards more prime, which currently represents 80% of the total auto portfolio, and therefore is a better quality portfolio. Used car prices are clearly above historical levels. They should gradually normalize, but this normalization should take place gradually, as I said, because of the scarcity of new vehicles. Also U.S. unemployment is at very low levels. It's expected to go up a bit, but by no means reaching the levels of previous crisis. Lastly, in Brazil, activity is gradually recovering.
We are growing in low-risk products. 65% of individuals' portfolio is secured. The average maturity of our balance sheet in Brazil is a bit less than 1.5 years, which means that asset quality deterioration surfaces very quickly. In summary, we remain constructive on the future of our asset quality. Now let me go in a bit more detail through the main countries. Starting with Spain, we continue to see a very dynamic market. Net customer, we have had positive net customer growth every month since December 2021. We have increased transactionality, and we've seen robust volumes growth. Year-on-year profit was supported by our efficiency plans. Cost to income is down 2.4 percentage points and the reduction in loan loss provisions.
The 9-month annualized cost of risk is 62 basis points, including EUR 200 million from macro adjustments. In revenue, NII was under pressure in the H1 , but it started to ease in the Q3 , growing 10% quarter- on- quarter, starting to reflect the hike in interest rates. Looking forward for the next few months, we continue to see positive trends in NII, lower cost base in absolute terms, and controlled cost of risk. In the UK, we continue to have positive new lending trends and higher interest rates obviously are supporting NII growth. We had double-digit growth in revenue together with strong cost control. Costs were down 6% in real terms, which resulted in an over 4% improvement in the cost to income and drove the strong operating performance, which was up 20%.
Underlying profit was flat due to higher loan loss provisions versus releases in 2021. We are comfortable we will reach our targets for both return on tangible equity and cost to income with double-digit growth in NII year on year and flat costs. Turning to the US, again, also very solid business dynamics, both in loans and deposits. Underlying profit remained high at $1.5 billion, well above average pre-pandemic levels despite falling year on year following a record 9 months of 2021, affected by competitive pricing and obviously the normalization of the cost of risk. We continue working on normalizing our capital levels in the US. So far this year, over $3 billion have been upstreamed to the corporate center.
Gradually, we will show a more sort of transparent profitability levels in the US, which, as you know, our objective for the long term is to keep returns on equity at around 15%. We maintain our outlook for the year of 2022, lower revenue impacted by leasing, flat costs, and better than initially anticipated cost of risk, well below normalized levels. In Mexico, another excellent quarter. Profit increased quarter-on-quarter, driven by a strong upturn in NII and lower loan loss provisions. Costs were affected by the salary revisions that took place in July. We also delivered higher profit and greater profitability year-on-year, supported by volumes growth, interest rate management, higher fees, and excellent risk behavior. For 2022, again, we maintain our expectations of double-digit growth in NII and fee income.
Higher growth in costs, affected by our investments in digitalization and obviously inflation, and a cost of risk of around 2%. The performance of asset quality in Mexico is excellent. In Brazil, we continue to grow our customer base and volumes, dealing obviously with the pressure on margins coming from repricing. As you know, we tighten our credit standards in the high-risk portfolios, particularly unsecured individual lending last September, and that still continues. We are growing in low-margin businesses more, particularly CIB and mortgages, and that change in mix is obviously affecting NII. NII, as repricing of assets starts outweighing the repricing of liabilities, is flattening.
The quarter-on-quarter NII is basically flat already in the Q3 , and we would expect to see a very gradual improvement until more or less the H1 , Q2 , and starting to grow more after the Q3 of next year. You know, interest rates have already peaked. We have a 12-month repricing gap. So, we would expect to see a gradually increasing NII in the H2 of next year. Costs rose because of the automatic pass-through of inflation to costs in the country. Salary agreement in September for 2023 was 8% relative to the 11% of last year, so we have some positive news for cost in 2023. Cost of risk around 4.5%, very much in line with our guidance.
We would expect this to remain more or less at these levels in the Q4 , maybe a touch higher, but around 4.5%-4.6%, and gradually starting to come down next year. Turn to the digital consumer bank. Here the activity remains strong despite continued market contraction. We are gaining market share, particularly in used cars. We had double-digit profit growth supported by fees, leasing and a very good cost of risk performance. A challenging environment for new cars, but we think we will be able to continue to gain market share and we should be able to maintain a high return on equity in the coming quarters.
In the global businesses, CIB reported its best quarter in its history, gaining market share, you know, in all businesses and products. We expanded in the U.S. and we maintain our leading positions in the different countries in Latin America. We are leaders in sustainability, ranking number 1 in Latin America, Europe, and globally in structured finance in the renewables sector. In terms of results, underlying profits grew 36% year-on-year, with double-digit growth in all core businesses. Underlying attributable profit represented 27% of the group's total operating profits. In wealth management and insurance, the contribution of this unit to the bank was 17% on a like-for-like basis, so very good performance. Private banking is attracting new customers, up 6%.
Also new money, up EUR 10 billion, and profits grew 30% year-on-year. In Santander Asset Management, the asset management business was affected by market volatility, but it increased its contribution to group profits to 8%. Finally, in insurance, we had sustained growth in gross written premiums and the total contribution to profit increased 15%. We expect to maintain double-digit growth in profit contribution in this unit in the coming quarters. In PagoNxt, total revenue increased 75% year-on-year in constant euros, almost 100% in euros, fueled by all 4 main businesses, especially merchants and trade. We are doing better than our guidance of 50% revenue target for the year. Activity is really going very well here.
Finally in cards, I would like to highlight the efforts that we are making to improve our credit card business. We currently manage almost 100 million cards across the group, and thanks to active customer management, 9-month revenue was 25% higher year-on-year in constant euros, 36% in euros, with very positive performance in both credit and debit cards across the regions, particularly in South America. Let me now turn it back to José Antonio for his final comments. Thank you.
Just a few words in relation with the outlook. I should say that we expect significant revenue growth on the back of activity levels that will remain healthy, particularly in our global business with the capacity to generate additional net fee income and while the additional NII growth that are benefiting from activity and interest rate hike. I'm fairly constructive on our capacity to keep growing our revenue in the coming quarters.
On the cost side, while we face inflation pressures, you've seen through the P&L, but I'm confident that we continue to improve in our productivity and efficiency, not only on the back of expansion of revenues that for sure is gonna happen, also for our demonstrated capacity to run the costs well below inflation. On credit quality, I do recognize that the environment is highly uncertain, but when I look at the balance sheet and the loan book, well, I feel comfortable that we are ready and prepared to face a more difficult environment with particularly the 1 in the consensus. As the consensus is today for the macro, it doesn't worry me that much.
Even harder scenarios, we are in good position to manage given the very nature of the portfolio. On capital, while we gonna be above 12%, I feel that we have handled better than the average the impact of the portfolios, available- for-sale portfolios that has affected the capital across the board less for us than our competitors. At the same time, we continue to be extremely disciplined in our capital allocation. All in all, we expect revenue growth to more than offset cost inflation pressures and the potential increase of cost of risk, and on the back of this, improve our profitability and the value creation for the shareholders. That's all on our side. We remain at your disposal for the questions you may have.
Thank you. I forgot to mention that we have an investor day. I probably forgot because I am not gonna be there. On the 28th of February in London, we have an investor day where we update you on the prospects for the group. Back to you, Begoña.
Thank you. We can start with the Q&A session, please.
Thank you. If you wish to ask a question, please press star 1 on your telephone. We already have some questions in the queue, and the first one is coming from Ignacio Ulargui from BNP Paribas. Ignacio, please go ahead.
Thanks very much. Thanks for taking my question. José Antonio, not sure if this will be the last, your last results call, but just wanted to wish you all the best and thank you for the support all these years. I have 2 questions on the numbers. 1 is on the European loan book. How big has been the repricing of the asset side so far? Just wanted to get a bit of a sense of where we are standing in terms of the NII uplift that could come in coming quarters. Also linked to the NII, wanted to understand a bit better what has been the contribution of the TLTRO in the quarter. The second question is basically linked to the cost-to-income ratio.
You have flagged in your final remarks that you aim to keep on improving the cost-to-income ratio. Target is gonna be a bit tight probably for 2022. What can you do to keep on improving costs, which looks to be, to me, very sticky in terms of growth, particularly in Latin America? Thank you.
Okay. In the first question, I mentioned a little bit European loan book. I said that NII expansion is just starting in Europe, particularly in the Euro. When I mentioned that we have, as you know, the central banks have reacted. The reaction function has not been the same across the board. In this particular cycle, Latin American central banks reacted first. We saw Brazil going from 2% to 14%, Chile going from 1% to more than 10%, Mexico reacting along with the Fed but starting at higher levels, and UK and US came later. The European Central Bank, the ECB being the last 1. I forgot to mention Poland, that the reaction was 1 of the first also.
When you go to the different books, I mentioned in the presentation that you've been seeing the impact of higher rates for a while in Brazil, and that particular case was negative. In Chile, that is more complex because it's a trade between inflation and nominal rates, as you know. We saw some reaction coming from U.K., U.S., and Mexico that are not just midway, but somehow midway. Poland is advanced. It's like Latin America. You see the margin expansion. Europe is starting the loan book, specifically in the loan book. Remember, in the quarter, we barely have representation other than the new origination and some loans related to LIBOR 3-month. The mortgage book that everybody follows, we represent in September.
The book that repriced in September was repriced with the Euribor in July. That was not that high compared with the one we have right now. I should say that the big repricing is gonna go along the next 12, 13 months. It's gonna be pretty significant. You asked the TLTRO in the quarter. The number I have in mind is EUR 60 million, EUR 69 million or something like that.
For Spain, yes. For the whole, it's 216-91. For Spain, it's 150-170.
In the quarter?
Yes.
Yeah. Okay. This is the impact of the TLTRO. The cost to income keeps improving. Well, I said in my final remark that naturally the cost to income with the revenue expansion we expect, and keeping the cost growing below inflation, naturally this leads to a improvement in the cost to income. I do recognize that to reduce nominal costs as we are doing in Europe, but CIB is difficult in the current inflation environment, and probably it's impossible. We need to renew some agreements with the unions, and this is gonna put pressure on this. Cost to income, for sure, on the back of higher income is gonna improve.
also remember that in South America at some point with the outlook that we have for Brazil and becoming more constructive on the trends at some point in Chile at some point we will start to recover. Overall, I'm fairly confident that the cost income should go down, but you're gonna have specific details on the investor day in relation with the specific targets for this.
Thank you, Nacho. Can we have the next question, please?
Thank you. The next question is coming up from Francisco Riquel from Alantra. Francisco, please go ahead.
Yes, thank you for taking my questions. I wanted to ask about Brazil, in particular, first of all, about the NII. You mentioned in the past presentation that there was a
2-quarter lag between the peak and the Selic rates and the drop in NII. Now I hear from your comments that the NII in Brazil will not grow fast until the Q3 2023. You can please update the NII dynamics in Brazil, and if you can please update on your NII guidance here as well. Second in Brazil is about asset quality. If you can comment on the unsecured lending for individuals, what is if that is still driving NPLs up this quarter? If you can update on the 4.5% cost of risk guidance for 2022, how much of a deviation, and then where do you see cost of risk normalizing from here and when? Thank you.
Okay, let me give you the big picture on Brazil and specifically the question you raised. We've been in a situation in which we've been suffering a margin compression on the back of 2 things: higher interest rates that the balance sheet is toward lower rates. Second, we changed our underwriting standards back last year, in September last year. That leads to a change in mix with a lower origination in the back end, in the low end of the mass market. This naturally impact the yield of our new origination and the yield of the portfolio. That's the impact on the NII. Where are we right now? We are now more constructive.
For 2 quarters, we've seen the cost of risk in line with our expectations, so that means that we are in a position to start to grow a little bit more, little by little, checking this. Start to offset, as José said, to pass through the growth in activity to some growth in NII. Still, volumes gonna grow faster than NII for a while, but this gap is gonna get reduced over time as we reprice assets in the book. Maybe at some point, if we have confidence, the mix becoming more normalized, like, compared with the one we have today and the one in the past. That's the expectation for NII.
More constructive, little by little, more activity, more pass through to NII in this environment. The asset quality, José mentioned the 4.6%, 4.5%, 4.6%, like the at the end of the year. We were guiding you between 4.2% and 4.5%. We are growing particularly in non-individual sector less than expected. Growth has been limited in corporate sector and in CIB and SMEs, where credit quality is good, and the denominator push us up a little bit, our expectation on the asset quality. Nothing that we see fundamentally wrong in the vintages. We are analyzing on the generation in the mass market, in the low end of the mass market where is where we got the problem.
All in all, I feel I'm more constructive on the outlook for Brazil. Yeah. I think that little by little we're gonna show these trends, I hope, and show to you in the coming quarters.
Thank you, José Antonio. Can we have the next question, please?
Yes, the next question is coming from Alvaro Serrano from Morgan Stanley. Alvaro, please go ahead.
Hi. Good morning. Couple of questions from me. I won't touch on Brazil because I think you've been pretty clear. 1 question on U.K., another one on U.S. In the U.K., you've now raised your 123 account, and you've got pretty competitive remuneration on deposit remuneration. When we think about the next few quarters going forward, and considering what's going on in the mortgage market, do you still have capacity to grow the NII? I'm just thinking your overall ability to grow profits in the region, given the NII potential headwinds from repricing of mortgages, sort of minimum deposit sensitivity and obviously the economic outlook sort of deteriorating. Maybe an update on the outlook on the U.K., or think about next year.
The second question on the US. I think you called out, José, the gradual normalization. Some of your peers have profit warned, some of your competitors in the auto space have profit warned during the results season. Could you update us on how sort of delinquencies are performing? Are we back to normalized levels and it's just about normalizing second hand prices? In that context of normalization, is the 300 basis points provision charge for 2019, that you posted in 2019, a reasonable sort of fully normalized provision charge? Or what's a fully normalized look like for you? Thank you.
Okay. Thank you, Alvaro, for your questions. In the U.K., you mentioned the 123 . Overall, in U.K., as you know, there is a fairly dynamic and competitive deposit market, yeah? We have a large loan book, not only mortgages, but mainly mortgages. While we plan to keep the retail funding in line with the loan book that we have, for that reason we need to react. Your question goes straight, can you grow the NII having to react to the more dynamic and competitive deposit market? Yes, I think we can. José mentioned about the beta. We think that we still enjoy margin expansion. Outstanding that we need to react as we reacted in 123 .
Taking into account all of this, I do expect the NII to keep very constructive in the UK and growing nicely in the UK in the coming year. The market is complex, you know. You re-mortgage basically 1-third of the mortgage book. In our case, roughly speaking, GBP 60 billion along the year. While this may raise some questions because all in all, it's gonna go from 2.5, 3 to double of this as of today. This increase should be more than enough to along with the corporate book that reprice faster should be more than enough to offset the increase in deposit cost that is gonna happen and is happening, okay?
I see margin expansion next year in the UK, all in all. In the US, your question goes in our P&L in the US. Particularly, you are referring to the auto sector. What is happening there is margin expansion on the back of the deposit base of the bank. A fairly competitive market in prices in the auto space. Fairly competitive, more than I was expecting. What we are seeing in the cost of risk, José mentioned that the cost of risk is increasing less than expected. We have several factors there.
1 factor that is fairly negative is the leasing, because on the back of the very high second-hand car prices, we are not having gains on the disposal of the cars that we have leases as we had the previous year. On the other side, the cost of risk, you mentioned 300 basis points up, probably is not gonna be the same than previously. Our book is more prime than used to be. As José said, 80% of the book in the U.S. is prime, only 20% is subprime. We do not expect to go back exactly to the levels we had in 2019 because the mix. It's true that some of our competitors show some increase in risk.
I haven't gone through the numbers and I don't know if they changed the mix or they changed. We are not seeing this. On the back of this, I feel comfortable we are fairly well provided in the U.S., yeah? In fact, we released $500 million of provisions that we build for COVID to the new macro scenario. In that regard, normalization, it will happen. I don't expect to go back to the levels of 2019 just because the mix overall. On a like-for-like basis, it makes sense that at some point we'll get there. Overall, not due to the mix, but this is gonna happen little by little. Now, it's taking longer than we were expecting, yeah.
Thank you, José Antonio, and thank you, Alvaro. Can we have the next question, please?
The next question is coming from Sofie Peterzens from JP Morgan. Sofie, please go ahead.
Hi, this is Sofie Peterzens from JP Morgan. My first question would be if you could just repeat the TLTRO NII benefits. Sorry, I couldn't quite hear that. But then kind of more broadly, the questions are, the first one is on kind of cost growth in Europe. You still have very strong cost performance in Europe, but how should we think about the wage agreements that are coming up? Also higher kind of investments, higher IT costs, the higher general expenses. How should we think about kind of cost growth in Europe going forward? My second question would be, when would you expect the cost of risk for Santander to peak?
It sounds like Brazil will still be relatively high cost of risk. US cost of risk is going up. UK cost of risk is trending up. How should we think about the cost of risk peak for Santander, and at what level could that come into that? Thank you.
I pass the question of TLTRO to José.
Yeah. Let me give you the figures. The group has EUR 88 billion in TLTRO. EUR 60 billion in Spain, EUR 20 billion in Santander Consumer Finance, and EUR 7 billion in Portugal. You can do the math very easily. Thank you, Sofie.
Cost growth in Europe and the wage agreements. Where are we in different jurisdictions? I should say in Poland and U.K., we've been updating salaries along with inflation. I should say BAU, business as usual, is in Spain and Portugal, where we had agreements for several years. In Spain, that is the most important one due to the size till the end of 2023, and we are starting to negotiate a new agreement with the unions, probably mid-2023. Okay. Before that, maybe some minor adjustments, but it will be minor. Because we expect these unions to be quite demanding, naturally. Difficult to forecast the final agreement. Looking into what has happened in Spain, wages in 2022 are growing at 2.6%.
We are growing wages north of 1.5% or 1.6%. Naturally, I do expect the wages in Spain to accelerate a little bit. We've seen the agreement of the government with the civil servants, roughly speaking, 9% for 3 years. This establishes a kind of benchmark because it is an agreement for 3 million people or 4 million people. Along these lines, I do see having a negotiation with the unions. This is my expectation. It's gonna be possible to keep the costs below inflation, I think so. With this kind of agreements, this will be below inflation and probably growing the costs in the region of 3% is something before efficiency.
It should be something 3%-4% will be something doable. Overall, in some countries, less. In CIB, probably as we are gaining share and we are expanding the business, probably we're gonna grow the costs faster than that, probably. As I mentioned in the presentation, or José mentioned in the presentation, CIB as the main driver of positive cost growth in Europe, while the units, the retail units, Spain and Portugal, are deeply in nominal negative growth. CIB, I expect to continue to grow faster than the retail units, where the transformation is gonna go on and overall being in the 3%-4% region for the next couple of years. Cost of risk peak. Difficult to say, yeah. The macro, as you know, we are provisioning due to the macro right now.
We add EUR 1.1 billion due to the macro. Probably overall in the year, if the macro remains the same or the scenario we have remains the same, we're gonna add this year EUR 1.4 billion. Adding this EUR 1.4 billion for this year, the cost of risk remain below 1%. If the macro deteriorates further, naturally, as is expected macro deteriorates further, we may need to increase the cost of risk next year. When it's gonna peak based on the consensus should be next year. Yeah. Naturally, difficult to say, yeah. Based on current expectations, the end of 2023, if 2024 is gonna be the worst period with a significant economic slowdown being predicted.
Having said that, this is based on the scenario, the peak. In any case, our expectation on the cost of risk is not to have anything close to what we had in the COVID. Well below this. Going up, but not that much. That's our expectation. With the current scenario going up, but at very manageable levels. For sure, including what I said before, revenues, increase in revenues will more than offset the potential increase in ordinary costs and cost of risk.
Thank you, José Antonio, and thank you, Sofie. Can we have the next question, please?
The next question is coming from Carlos Peixoto from Société Générale. Carlos, please go ahead.
Hi. Thank you. Thank you for the presentation. A quick question on the NII sensitivity, please. For Spain and Europe, you mentioned that you've updated the way you calculate the sensitivities, but could you touch quickly on where do you see the mix of deposits between sight and term evolving, and what is the term deposit beta that you think is reasonable to assume going forward? The same thing for Brazil. You've already explained how do you expect the NII to evolve over the following quarters, but how that compares with the slide where you show that NII upside in Brazil is only EUR 100 million. If you can explain or reconcile those 2 guidance, it'll be helpful. Thank you.
Okay, NII sensitivity in Spain, well, currently, almost 100% of deposits are current account. It's not 100%, but it's 90 something, yeah. Gradually this is gonna go from current accounts towards, well, a combination probably of money market funds, term deposits, some kind of life insurance products. Overall, what this means is, well, based on the past, this used to have a beta that was between 60 and 80, yeah. In relation with the official rates and which is the percentage that is gonna go to term deposits, difficult to say at this stage. What I said, I can say to you in the past was a long time ago, yeah.
We have had negative rates for so long that probably we almost forgot this. We used to have a kind of 30%-40% current accounts with no remuneration. We used to have another 20%-30%, what we call medium remuneration. That was kind of lower sensitivity and another 30% kind of high sensitivity. Overall, the beta you are using is 25.
25, yes.
25 for the whole deposit book. This is what we are using, and this is what embedded in what José said in relation with expansion of NII. Naturally, you may say that there are some new factors here, difficult to measure. Online deposits is somehow new or the extension of potential players in online deposits is there. Now they are playing, they are the only ones that are offering high rates. I don't know how important is gonna be this. If the rates remain in the 2%-3% area, it's not gonna be that big. If the rates, naturally, the higher the rates go, the more impact of this. You mentioned NII in Brazil, the +EUR 100 million. The +EUR 100 million is an exercise like for like taken into the forward rates.
The forward rates means for 1 year. What we guide to you is being constructed every quarter, the pass-through from volume growth to NII is gonna be higher. That's what we're telling you. In the overall 1 year, using the forward rates and no volume growth is +EUR 100. Okay?
Yeah. Basically because interest rates just stopped increasing. Obviously because you have the 12-month lag, it will be, you know, as we said, we are using end of September figures. 12 months is end of September next year, and you would only have 3 months of full repricing of assets and liabilities. When we look 12 months in advance, the sensitivity is what I say. If you look beyond the 12 months, obviously the sensitivity is greater.
Okay.
Thank you, and thank you, Carlos Peixoto. Can we have the next question, please?
Yes. The next question is coming from Marta Sánchez Romero from Citi. Marta, please go ahead.
Good morning. Thank you very much for taking my questions. The first one is a follow-up on the U.S., just a clarification on the cost of risk. José Antonio Álvarez mentioned that we won't go to 2019 levels, which, if I'm right, is roughly 310 basis points. I think in the past you've guided for a through-the-cycle level of 250. Are we gonna be somewhere in between for next year? How do you see that? Also in the U.S., if you could elaborate as well on the loan growth expectations, your risk appetite generally for the auto lending business. The second question is on deposits in Europe. You have a loan-to-deposit ratio above 200% in the digital bank, 115% in the U.K.
It's true that you've got excess deposits in the Spanish balance sheet, but what are you gonna be doing strategically in terms of deposits? Are you gonna be chasing deposits to balance the books in the digital banks? Are you gonna be setting the price and gonna be potentially pushing prices higher? I think you've already launched a new platform in Germany to gather deposits. So, where do you see the cost of deposits at? If you can give us a little bit more clarity on betas across the different businesses for the next 12-18 months. Just very quickly, if the ECB changes the terms on the TLTRO tomorrow, would you be repaying all your TLTRO funds or you would be holding onto them? Thank you.
Okay. The last question is the easiest one. Depends on the terms, yeah?
Yeah.
No, we are prepared. We were, as you know, planning to repay the full amounts next year. If the terms change and it no longer makes sense to hold on to those funds, we will repay. We could immediately repay almost in full the excess liquidity we have today. The liquidity that we've been building to repay next year would let us pay almost in full that. Again, we need, as José Antonio says, we need to look at the terms.
Okay. Marta, going to the other questions, US cost of risk. In 2019, our cost of risk was close to 3%, was 2.80 or something like that, yeah? Normalization should be lower than that, yeah. On the back of the mix, yeah, growth, the growth in prime and A prime and the Bluestem sale, yeah. We sold Bluestem, where the cost of risk was extremely high. We think that this is gonna be below the levels in 2019 for these 2 reasons, yeah. You asked the loan growth. Yeah. Well, the loan growth, you know that we have 2 sources of origination, 2 main sources of origination and others that are work in progress, yeah. As you say, Stellantis, we are being...
I think last month, our penetration, last month, meaning September, was our best month ever in penetration in Stellantis, so that means that we continue at good pace. Naturally, they sell less cars, and this is affecting the new car sales is affecting this. On the traditional subprime space, our appetite, well, we went a little bit, we increased a little bit the FICOs, and this affect the loan growth. Largely, it's gonna depend on the car market. We are trying to add, and we add some agreements with other OEMs. We already signed Mitsubishi and we are working with dealers association in order to sign agreements with them, in order to diversify our loan growth. We have appetite for this type of loans at the right price.
Naturally, there are some, as I mentioned, the market is fairly competitive now and, but we want to grow this provided that we can obtain the profitability we are targeting for this business. You mentioned deposits in Europe. You rightly said that our loan to deposits is higher than 100% in UK and consumer finance and lower, significantly lower in Spain and somehow in Portugal. What we plan to do? In the consumer finance and the digital consumer bank, we expect to grow significantly. Now the figures are the following: We have a book of, roughly speaking, EUR 120 billion loan, with a deposit book in the region of EUR 50 billion-EUR 60 billion.
In the next couple of years, we do expect to add a couple of billion EUR in deposits, maybe in the region of EUR 20-30 billion. It's a figure to think about in order to close the gap. Not that much, but close the gap between deposits and loans and deposits. We are in a position to do that. As you know, this is a business that we have more or less advanced deposit platforms in several countries, in Germany, the Netherlands, also some in Belgium. In the past, we were active in deposits also in the Nordic countries, and we are reactivating this in order to increase the percentage of funding coming from deposits in this business.
We are in a good position to do that, and we think we're gonna be successful on this. In the other markets, I already elaborated on the UK, where we plan to keep growing loan assets and liabilities. Well, that's the reason we think our beta is higher in the UK than it is in Spain, because this position. Basically, that's it. Thank you, José Antonio, and thank you, Marta. Can we have the next question, please?
Absolutely. The next question is coming from Carlos Peixoto from CaixaBank BPI. Carlos, please go ahead.
Hi, good morning. Thank you for taking my questions. Just a word to José for his last presentation. It was a pleasure throughout these years. My question would actually be on NII in Spain. You gave the sensitivity to a stable interest rate scenarios, but I was wondering if you could complement that with sensitivity to further hikes, considering that the expectations is that we will get some additional hikes this week and possibly before year end.
Finally on NII in Poland, I was wondering what type of evolution you expect going forward, whether you think there could be some margin compression given the higher deposit costs, as the political pressure on that front seems to be mounting. Thank you very much.
Carlos, as I said, this analysis that we showed here is consistent with the previous one, in which we showed that the sensitivity in Spain to 100 basis points is EUR 750 million. That's the sensitivity to additional increases over the forward rates, in Spain only, not in the Eurozone, which obviously is higher. NII in Poland, you've seen, I would say, a very significant margin expansion on the back of increasing rates. It's true that we enjoy the cheapest funding costs in Poland. Naturally, additional margin expansion probably is gonna be difficult, but I remain comfortable that we can keep the NIM, the net interest margin, going on around the levels we are having on the back of repricing assets.
Although we do recognize that the liabilities cost, we should pay more for deposits, given our position having the lower funding costs in the market. Probably working with an assumption of NIM being around where it is is a fair assumption to me. Yeah.
Thank you, and thank you, Carlos Peixoto. Can we have the next question please?
Yes. The next question is coming from Pamela Zuluaga from Credit Suisse. Pamela, please go ahead.
Hello. Good morning. Thank you very much for taking my questions. The first one is on the provisioning outlook. You've now built a EUR 1.1 billion overlay, yet you've been mentioning that you have not seen significant deterioration in credit quality across the majority of your footprints. You flagged also that consensus sees cost of risk peaking next year. However, how are you thinking then about the timing to either use or release these provisions? Are you expecting to allocate some of these provisions to keep some stability in cost of risk in 2023? A question on your capital optionality. You have managed to build capital above your target, now to 12.10% CET1.
Would you be open to increasing your current 40% payout, or is there a particular headwind that you're foreseeing and therefore you're deciding to be more cautious? If I may, 1 follow-up. Can you give us some color on specifically the AEB's negotiations with the trade unions to address the loss of purchasing power in Spain? I understand the last meeting was on Friday. Have we heard anything about the proposals from the unions, and what would this mean specifically for the cost inflation in Spain? Thank you.
Thank you, Pamela. When we are providing based on expected losses, and you are asking me about the use of this overlay, naturally we are providing with a scenario. The scenario we are providing is a scenario that sees some mild recession in some countries in 2023, more towards the end of 2023. If this materialize and our models are right, in theory, we will use this provision. Okay? If we are wrong 1 way or another, we may be in a situation if the scenario deteriorates farther and in 2024, the scenario is worse than the one we are expecting, we need, we keep building. The other way around is releasing. Everything is based on if our scenario is right. Our scenario is not far away from the IMF, just to understand among us.
Yeah, not far away from the IMF that says that second part of 2023, we will see some recession. In that case, we will use this. The 1.1 we already build and the extra 300 we expect to build from now till the end of the year. This is again, this is based on the materialization of the scenario or not, of the scenario, goes into 2024. Capital optionality. Well, we stated clear that the board, when the board approved 40%, expressed the idea of going to 50% at some point. It's a decision that the board is up to the board, and is not a decision taken.
Having said that, I said in the presentation that we think that the 12% is an appropriate level for us and we keep building capital. AEB negotiations. While there have been some negotiations about kind of 1-off for the employees this year, aside from the negotiation from the unions in the future. This is not gonna substitute the big negotiation that is the one who matters in terms of cost. This one is more about some compensation, but a small one. It's not a negotiation of the full agreement with the unions that will come, as I said before, start in 2023, mid-2023.
Thank you, and thank you, Pamela. Can we have the last question, please?
Yes. The last question is coming from Fernando Gil de Santibañes from Bestinver. Fernando, please go ahead.
Thank you for taking my questions. Couple of questions, please. First one on Spain. What is your view on the potential impact that you may have if there's a change on the Code of Good Practice on those vulnerable families that might be implemented? This is 1. Second, on Poland and the payment holidays provision that you have done, are you forecasting or seeing any more coming in the next quarter? Finally, if you can comment a little bit on the ALCO strategy and the mix that you have in the Spanish portfolio, that would be great. Thank you very much.
Okay. In Spain, well, I should say that, this agreement, the way we match vulnerable customers that have a mortgage with us is, I should say, business as usual. The agreement we try to reach is which are the ways that, how do we wanna match this, yeah? The ways, I should say, we are discussing is business as usual. Naturally, the extra provisions, if any, are embedded in our macro scenario. Naturally, the macro scenario, when it comes to mortgages, contemplate the real mortgage book and the capacity of the customers to repay, the affordability, the loan-to-value, and all these things. If this deteriorate as a result of the higher inflation, lower disposable income, this is already included there.
I do not need to change anything because we change this, because supposed to be included in our expected scenario. Naturally, the expected scenario is worse. The most sensitive issue here is unemployment, yeah? Unemployment is the key. Because when I look at the real estate market in Spain, it's not in any dimension overvalued, yeah? It's not the case that we had 14 or 15 years ago. It's more a question of affordability ratios for those customers in the low end with low income or medium-low income with high affordability ratios that suffer in the disposable income. It's more this. It's included, as I said, in our macro scenario. Poland, payment holidays, we need to see what's going on, yeah?
We think we done, I don't know, all or at least the majority of the provisions. In any case, well, if we're gonna assess how many customers come to claim the payment holidays, and we adjust according to this. I don't expect it to be significant, but maybe we need to add more. We will see quarter-over-quarter if we need to add more.
Having said that, the revenue generation of the bank and operating profit that the banks generate, and as I said before to a question of 1 of your colleagues, I feel very constructive that we're gonna keep relatively or very high NII, that allow us to face potential higher requirements from the payment holidays. ALCO strategy, I don't know if I should pass. Well, we start to build our portfolio little by little. So there's more to do. José, you want to elaborate on this?
Yeah. As we mentioned in the H1 results presentation, we didn't have an ALCO portfolio at the time in euros, which obviously was a conscious decision that cost us some net interest income compared to our competitors, but obviously put us in a much better position in terms of balance sheet value and the opportunity to rebuild the ALCO portfolio going forward. We have today EUR 6.5 billion already in the Eurozone. We are building the portfolio through a diversified tenor, through diversified countries. Not only Spain, we have France, we have Italy. We would gradually continue building the portfolio over the next probably 2 years.
We don't have a figure in mind, but clearly we have an opportunity to rebuild the portfolio earning more than 3% yield, which is what we have so far in the EUR 6.5 billion. We will make purchases again, depending on the opportunities that we see. Again, from 6.5 today, gradually growing to a much larger figure over the next couple of years.
Thank you, José and José Antonio. There are no further questions.
Okay. Thank you, guys. Thank you for all these years, following this results presentation. I tried yesterday to count the number of times I face you, and I got a number of 72 times in the last, 19 years. Good luck, guys. Keep following Santander. There is always an interesting equity story, and with improving profitability going forward. Thank you. This is my last message to you. Good luck, bye guys. Bye.