Good morning, and thank you for attending Unicaja Banco fourth quarter results presentation. Our CEO, Isidro Rubiales, and our Chief Financial Officer, Pablo González, will be the ones presenting quarterly and annual trends, but also providing some color into 2024. As you know, we will hold a Q&A, a live Q&A, after the presentation. So that said, I leave the floor to our CEO. Good morning, Isidro. Whenever you want.
Thank you, Jaime, and good morning to everyone. As you probably know, these are the first annual results following my formal appointment, and this is my first time presenting the results in person. So, as you can imagine, it is quite exciting for me. I have been working at Unicaja Banco for more than 30 years in different roles and with different responsibilities, and I have assumed the CEO role with a huge motivation. I believe there is a lot of value in the company, which, under my view, is not reflected in current valuation. I want to reconfirm that profitability and shareholder remuneration will continue to be one of the main focuses of the bank, and this quarter results are an example and a good starting point.
If we move to slide four, I would like to start the presentation with some of the most important milestone of the year. For us, 2023 has been somehow a transitional year toward becoming a more profitable bank. Let me start with governance. One of the most important milestone of the year has been the governance changes, mainly at board of directors level, moving toward a best-in-class composition with a non-executive independent chairman. As you know, last week, the board of directors agreed to appoint as independent director, Pepe Sevilla, foreseeing his appointment as chair, as chairman of the board of directors, as from his ratification at the next General Shareholders' Meeting . You all know him, and I am sure that he's going to contribute with his highly valuable experience.
On top of that, I believe that we have a very strong and experienced board of directors that will remain stable and committed with the future of Unicaja Banco. Moving to profitability, the provisioning effort of the year has limited the improvement of net income. However, such provision will enable us to show a structural profitability going forward, starting from the first quarter 2024. It is worth noting that banking margin trend has been quite positive, growing by 40% in the year. All three lines improved in the year. Net interest income 26% growth, almost 2% growth in fees, and a small decrease in costs, supported by 4% decrease in personnel expenses. CET1 fully loaded stands at 14.7%, one of the highest of the sector after generating 173 basis points in the year.
This capital position give us flexibility and will allow us to continue analyzing different options to improve profitability and maximize return for our shareholders. We have improved our solvency position, while achieving an NPAs reduction of more than 30% in 2023. This is something remarkable and will play a key role in showing our structural profitability and positioning of the bank. We reiterate our cash dividend target. The Board of Directors intend to submit to annual general shareholder meeting a proposal to pay 50% of 2023 net income in cash. Our intention is to maintain this cash payout going forward. Finally, I am very glad to confirm you that we have requested a formal regulatory approval to implement a share buyback program of EUR 100 million, limited to maximum of 3.8% of total share capital.
With the comfortable outstanding solvency, the further reinforced balance sheet position after 2023 results, and current market valuation of the bank, we believe that it is very positive to invest part of our capital in the acquisition of our own shares. Moving now to slide five, let's review the main business highlights. Starting with business activity, the deleveraging of private sector in Spain is reflected in overall lending trends. New loan demand remains below the amortization of the book, which continued to be affected by the strong decrease of ICO loans, among other. On the other hand, customer funds remain more stable throughout the year, and we have seen much better commercial dynamic by the end of the year.
In terms of profitability, it's worth noting that net interest income grew more than 6% quarter-on-quarter and 26% year-on-year, boosted by customer spread that grew 120 basis point in 2023, and 13 basis point in the quarter. Fees also grew by 1.6% in 2023, while the costs, total costs, sorry, were slightly down. All this together have improved our banking margin by 40%. This is also reflected in our cost-to-income ratio, that improved from 54% in 2022 to 48%. Asset quality delivered a very strong quarter. The cost of risk has remained stable, slightly below 30 basis points throughout the year. Non-performing loan ratio has fallen from 3.5% to 3.1%, despite the decrease in loan book.... explained by 19% decrease of non-performing loans.
We have decreased the stock of real estate assets by more than 30% in the year. Overall, non-performing assets fell by around EUR 1 billion in 2023, which represents an impressive 31% decrease in net terms. Finally, in terms of solvency and liquidity, the trends were also very positive. As I highlighted before, CET1 fully loaded grew 173 basis points in the year to 14.7%, while MREL ratio reached almost 27%. Liquidity ratios also improved in the quarter, with LCR above 300%. Overall, I believe that 2023 result will leave us in a very good position to show you our higher structural profitability going forward. Pablo will now go in more detail. Pablo, whenever you want.
Thank you, Isidro. Let's continue with customer resources in page 7, where you can see the overall customer funds grew 1.5% in the quarter. On-balance sheet funds grew 1.4%, supported by an almost 2% growth in private sector deposits. As you can see in the breakdown of private sector deposits, the weight of term deposits continued to grow throughout the year. At the end of 2022, they represented less than 10% of private sector deposits, while it now stands at 16%. However, as we show on the right of this page, total cost of deposits continues to be relatively low at 60 basis points. This is a clear consequence of the type of deposits that we have, with a large weight of transactional, stable, and granular deposits, where around 75% are household deposits.
Regarding off-balance sheet funds, the trend was also positive, with a 1.6% growth in the quarter and 4% in the year, achieving EUR 21 billion of assets under management. If we move now to lending on slide eight, you can see how the lower demand and higher amortizations translated in a 2% decrease in the quarter. This trend is also explained by an active risk-reward commercial strategy to maximize offered spreads. In annual terms, household loans fell by 4%, while corporate loans fell by 17%. In the case of corporate loans, the relative higher decrease was mainly explained by amortizations. This is especially high on ICO loans, which decreased from EUR 2.1 billion to EUR 1.4 billion in the year, a 45% drop, representing almost one-third of total corporate loans decrease.
Early amortizations in mortgages were also significant, which, together with the lower demand after the increase in rates and very strong previous years, explain the decrease in households. Regarding the lending yield, its evolution remained positive one more quarter, with an additional 26 basis points improvement, supported by the continuous positive repricing of our floating mortgages, that, as you know, they reprice every 12 months, and also a higher front book, which will also play an important role going forward. On the next slide, we show new lending trends. As you can see in the slide, the new lending volumes in the fourth quarter of 2023 remain below one year ago, but we have seen an improvement on dynamics at year-end. When you look at the charts, the improvement is clear in corporate and consumer lending, which should continue to perform better than last year.
Mortgage demand has continued to be relatively muted. We expect it to improve as the year goes on. On slide 10, you can see that 30% of our new customers come from digital channels, with overall digital activity remaining strong. As you can see, almost half of customer lending and one-third of our mutual funds activity was done through remote channels. All this was supported by the recent update of our banking application at the beginning of the last quarter of 2023. Moving to slide 11, we have an update on sustainability, where the progress we have made over the last quarters is very significant. In the slide, we show you some recent milestones. We have approved a new exclusions policy for environmental and social risk, and we continue to include new products in our sustainable product offering....
We are making progress in financial inclusion with new agreements and specific projects to facilitate access to finance and digitization for disadvantaged groups, while maintaining our successful financial education programs. Finally, in terms of governance, as already mentioned, following the recent chair changes in our board of directors, has a structure in line with the best market recommendations. Moving to slide 13, we show the regular P&L details. Net interest income is up 26% in the year and more than 6% in the quarter, leaving final 2023 NII slightly above our 25% guidance. This positive trend remained strong in the fourth quarter 2023 because the continued repricing at higher rates of our assets more than offset the higher funding costs.
Fees grew almost 1% in the quarter and 1.6% in the year, showing resilience despite the decreased lending activity and a challenging environment for asset under management with higher rates. Other revenues and expenses include an EUR 88 million charge in the fourth quarter, coming from the contribution to the Deposit Guarantee Fund. Total costs fell 0.4% in the year, despite the inflationary context, thanks to the crystallization of the merger synergies. Loan loss charges improved significantly, with the cost of risk very stable, slightly below 30 basis points during the last four quarters. Regarding other provisions, we have made a significant effort throughout the year and mainly in this quarter. This provisioning effort is partially explained by the impact in part of our real estate assets of inflation and higher rates.
This has also enabled us to accelerate the decrease of the problematic asset exposure. Following this provisioning effort, we now expect real estate provisions to not be material going forward. All these trends led to a pre-provisioning profit above EUR 900 million, which is 23% above 2022, despite the introduction of the new banking tax. However, the mentioned provisioning effort left net income at EUR 267 million, that is 4% below the previous year, 19% higher if we do a homogeneous comparison, and we exclude the EUR 64 million of the banking tax that was charged in the first quarter of 2023. Now, we will review in more detail the P&L, starting with the net interest income in slide 14.
As you can see on the slide, the ongoing repricing of the loan book and a contained cost of deposits enabled the customer spread to continue expanding during the quarter. Loan yield improved by 26 basis points in the quarter and 125 basis points in the year, well above the cost of deposits that increased by 13 basis points in the quarter and 55 basis points in the year. As a result, the customer spread grew by 120 basis points in the year, reaching 275 basis points at the end of 2023. I would also like to highlight that, as you can see on the right, new lending yields remain more than 100 basis points above the overall back book. If we move to slide 15, we have the main moving parts of the NII in the quarter.
First, driven by what we were explaining in the previous slide, lending contribution more than offset the higher cost of deposits. The fixed income portfolio contribution improved by EUR 14 million in the quarter, as we have a short-duration portfolio, and we have slightly increased its size. Finally, the higher liquidity of the bank more than offset the minimum reserve requirement impact and a small increase in wholesale funding. All this together left the fourth quarter 2023 NII at EUR 380 million. That is more than 6% compared to the previous quarter and 28% above the EUR 297 million of the fourth quarter of 2022. In slide 16, as you can see, total fees were quite resilient in the year, growing 1.6%.
Transactional fees fell 1% this year, and non-banking fees were very stable, with a small decrease in insurance and pension funds that was compensated by higher fees in mutual funds. Other fees that include a combination of different small items also improved, leaving total net fees at EUR 533 million. If we now move to slide 17, we have total cost trends. Total operating expenses decreased by 0.4% in the year, which is very positive considering the current environment. While general expenses grew by 6%, driven by the inflationary context, personal expenses fell almost 4%, mainly explained by the reduction in the number of employees that was agreed after the merger.
As a reminder, you have, on the right of the slide, the evolution of employees and branches, where you can see that the number of branches was already stable this year, while employees continued to decrease by more than 4%. Total cost trends, together with the already mentioned improvement in NII and fees, led to a significant improvement of our efficiency ratio from 54% in 2022 to 48% this year. In the next slide, we show the evolution of cost of risk and other provisions. Regarding loan loss provisions, the cost of risk has been stable below 30 basis points since the beginning of 2023. In annual terms, it went from 39 basis points in 2022 to 29 basis points in 2023, which is below the low range of our guidance that was between 30 and 35 basis points.
We feel very comfortable with our loan book and its coverage level, and we expect the cost of risk to remain very stable in the coming quarters. In the bottom of the slide, you have the details of other provisions and other profit and loss. The latter include mainly the real estate assets provisions. As you can see, and I explained before, these provisions significantly increased at the year-end, but we expect them to become not material going forward. On slide 19, on the left, you can see what we call the banking margin. That includes NII plus fees minus operating expenses. It grew 40% in 2023, and 77% in the last two years. In other words, it went from EUR 580 million in 2021 to above EUR 1 billion in 2023.
On the right side, you can see that the return on tangible equity, despite the significant improvement in our banking margin, it was very stable at 4.2%, owing to the high provisions booked in the year. However, if we adjust the return on tangible equity to the CET1 of 12.5 and excluding the bank tax, it improves to almost 6%. These are not the figures that we are aiming for, but we are optimistic about the future, among others, because total provisions will decrease significantly. Let's move now to asset quality, where we have made significant progress. In the year 2023, starting with NPLs in slide 21. On the top left-hand side, we have decreased by almost 10% the stock of NPLs in the quarter, and more than 19% in the year.
Such a positive outcome in 2023 is explained by some disposals and relatively low entries. However, in the fourth quarter, it is supported as well by some written-off loans that were already highly provisioned. The significant decrease is also reflected in the NPL ratio, that fell from 3.5% at the end of 2022 to current 3.1%, despite the drop in lending balances. Finally, it is worth noting that despite the significant decrease of Stage Three loans, coverage has remained at circa 64%, which is a very comfortable level when considering that 53% of NPL balances are residential mortgages. In page 22, we show foreclosed assets and overall NPAs. Foreclosed assets decreased by 21% in the quarter and 32% in the year. This is a very important reduction.
As we have explained, we have made a significant provisioning effort in 2023. This year, we have reduced our foreclosed assets significantly. As you can see in the bridge, total exits represented more than EUR 700 million in the year, mainly through disposals, but in the fourth quarter of 2023, we have also taken the balance around EUR 220 million of assets that were highly provisioned already. In net terms, foreclosed assets fell to EUR 327 million, with a coverage ratio of 74%. Total NPAs fell by close to EUR 1 billion in the year, and its coverage improved from 65% to 68%. The NPAs ratio improved from 6.6% to 5.5%, or 1.8% in net terms.
Following the decrease in current coverage, we now expect real estate provisions to become not material in P&L, something that will significantly improve results and allow us to show the structural profitability of the bank going forward. Let's move now to solvency in page 24. CET1 fully loaded improved by 173 basis points in the year and 54 basis points in the quarter. Let me start confirming that we have received the approval of the IRB models for the Liberbank retail portfolios, something that at the end, as we anticipated, does not have a material impact. The CET1 fully loaded continued to improve in the quarter, supported by the decrease in risk-weighted assets and improvements in valuation adjustments. On risk-weighted assets, we had different moving parts in the quarter.
On the negative side, we had an increase from the mark-to-market of equity stakes and operational risk that was more than offset by the decrease led by lower NPAs and the lending book decrease. The CET1 fully loaded reached 14.7% at year-end, which includes the accrual of cash dividend of 50% of net income. On top of this, as Isidro has explained at the beginning of the presentation, we have requested authorization for a EUR 100 million share buyback, with a maximum of 3.8% of total shares. As you can see in the chart, the buyback, once approved, would leave the CET1 fully loaded at around 14.3%, assuming EUR 100 million, which is still above the level that we had in the last quarter. On slide 25, you have our total MREL position.
As you can see, following a couple of years being more active in the primary market, we have increased our MREL liabilities from around 21% to 26.8%, a level that includes a comfortable buffer over our 24.5 requirement. In the right-hand side, you have some additional info, including our MDA buffer, that has grown to above 600 basis points. In the next slide, we have the fixed income portfolio details. This quarter, the size of the ALCO portfolio has grown a little bit to EUR 27 billion, similar size that at the end of 2022. The increase was explained by higher liquidity, among others, because of the commercial gap evolution.
The yield was 2.6% at the end of the quarter, the same as in September, but well above the 1.9% we had at the end of 2022. On wholesale funding, in page 27, very little to add. We had the maturity of EUR 450 million of covered bonds in the fourth quarter, with the rest of the wholesale funding structure remaining the same. That said, let me highlight something that, under my view, is very important. After a few years in a building mode to meet our subordination and our MREL requirement, we're now in a completely different position. Going forward, we will be able to manage more actively and with much more flexibility, our wholesale funding and our MREL liabilities, which is a very positive news. Finally, on the following page, we review our liquidity position.
As you can see, we continue to have a leadership position with a loan-to-deposit ratio of 74%, the NSFR at 149%, and the LCR at a significant 308%. All of them, very strong liquidity metrics. Now, I leave the floor back to Isidro to finish with some important final remarks.
Thank you, Pablo. Let me finish the presentation reiterating that 2023 results leave us in a very good position to improve two of our main priorities, which are profitability and shareholder returns. Regarding profitability, following the increase of our banking margin in 2023, together with much lower provisions, among others, will boost net income in 2024. We expect that the return on tangible equity adjusted, but for CET1 fully loaded of 12.5% to grow above 9%, which compares with 4.7% in 2023. On the shareholder remuneration, as we show on the right-hand side, the potential return in terms of dividends and buyback are also quite important. The mentioned level of net income, together with a stable 50% cash payout, implies around 10% dividend yield when considering current stock price.
And on top of it, as we have announced today, we are planning to implement a share buyback of around 4% of our stock. It is very positive to run the business with a solvency buffer. It give us optionality and flexibility. That said, we have started to put to work part of our excess of capital this quarter. First, the additional real estate provision that we have booked in the quarter. During last months, the environment has changed, and consequently, we have reviewed our expectation for part of these assets, the ones with lower quality. Following this provisioning effort, we have reduced our foreclosed asset balance. So going forward, provision for this asset will become not material. This will allow us to improve the result of the bank and show the structural profitability.
Second, is our shareholder remuneration, because as I said before, it is our solvency position what has enabled us to continue to pay cash dividend and to execute a new share buyback program. Finally, there are other potential alternative that are not so specific, but I wanted to reiterate that our idea is to continue to look for different option and potential investment that could further improve our profitability and shareholder returns going forward. Before finish the presentation, let me reiterate one more time that we are fully committed, and we are really believe that we can continue to improve our profitability and shareholder return, while keeping a relative conservative approach, thanks to our strong balance sheet fundamentals and comfortable solvency position.
Thank you, Isidro, and thank you, Pablo. We will now move to the Q&A. Please, in the interest of the time, and in order to allow as many questions and also analysts as possible, remember to ask only two questions, each one, please. Also, remember to mute your line after the questions. Operator, please open the line for the first question.
Thank you. Ladies and gentlemen, we will now begin the Q&A session. If you'd like to ask the question, please press star five on your telephone keypad. If you change your mind, please press star five again. Please ensure that your device is unmuted locally before proceeding with your question. Our first question comes from the line of Francisco Riquel from Alantra Equities. Please go ahead.
Yes, good morning. Thank you for taking my questions. First one is on asset quality. I mean, your coverage ratios have typically been up above the peer average, but you came with the top-up provisions this quarter, as you anticipated. So the question is: How can you reassure us that these are that you now have the right markdowns in the balance sheet? A big part of the reduction in the legacy real estate assets are write-offs, but do you plan to sell NPAs or increase the rotation of the stock to prove that the coverage is right? So also, if you can shed light on how old have the legacy assets have been here in your balance sheet to date.
And then what are your guidance in terms of provisions for 2024, in terms of loan losses, real estate assets, and other provisions, if you can clarify the, the, the breakdown here? And then the second question, your nine percent ROTE target for 2024 is based on a denominator of twelve point five percent CET1 ratio. I wonder if this is just a theoretical exercise, or do you really plan to reduce the denominator to those levels? And how do you plan to allocate capital in 2024? I mean, between organic growth, which has been depressed, or further top-up provision, cost-cutting, shareholder returns. Thank you.
Thank you, Paco. I'm going to go for the first question, the asset quality and the higher provision that we have. I think it's clear we have made a strong effort to mark to market all the foreclosed assets and to reduce our NPL in the quarter, as you can see from the numbers. The reduction in the quarter, as you can see, it's EUR 170 million, almost EUR 170 million in NPL and EUR 324 million in foreclosed assets, so almost EUR 500 million, and the reduction in the ratios, as you know. H
ow can I or how can we be sure these are the final needs for provision? You never know, Paco. We have made our best effort to make sure that we can forget about the legacy and the foreclosed assets level. Obviously, some of the NPL will become foreclosed assets, but the trend will be very small compared to the previous level. And in that sense, we are quite confident. We have done the exercise. We don't expect rates to go up a lot again, construction costs to go up a lot again, and the demand to come down in the real estate market. We have a slightly better view for real estate demand next year, so we're confident that we have a good level.
So I think the important is—I'll give you some details on the guidance that you asked for, for provisioning this year. I think the first one, regarding cost of risk, we expect to be in line. We are confident with the level of coverage that we have, so it's going to be similar to last year, so between 30 and 35 basis points in terms of cost of risk. In terms of legal provisions, I think we expect a reduction again this year, between 15%-20% reduction in legal provision, but obviously will depend on how things evolve, and which I think is the more, the most relevant one is the real estate provision.
I want to be quite clear here, we don't expect any material provision coming from the real estate assets. I think we have done a very thorough analysis, going item by item and double-checking on what we think is the market expectation for pricing on the different assets, so we're confident that we will not have any material real estate provision again in the coming quarters. Regarding... There's another question on-
I think we can move to the following operator to the following question, please.
The next question comes from the line of Maksym Mishyn from JB Capital . Please go ahead.
Hi. Good morning. Thank you for the presentation and taking our questions. I have two. The first one is on the NII. Could you please share your views on what kind of evolution you expect for 2024, and perhaps on 2025? And then if you could break it down in the evolution of customer spread and loan book growth, that'd be fantastic. And then the second one is a follow-up on the previous questions on capital. I was wondering, you still have a solid excess over the 12.5% threshold. What kind of ways to deploy it could we think of? And maybe you're planning to present new strategic targets sometime in the coming quarters. If you could share your thinking, that would be very helpful. Thanks.
Thank you, Max. I'll go for the NII guidance. I think in the NII, there's a lot of moving parts, and you know, but I think the key point is we still expect the NII to grow in 2024, at a low single digit, at least, which we can see it's a growth compared to this year, to 2023. And on top of that, I think I'm going to give you some guidance on what's the assumption that we have. And we see the customer spread to be higher than on average, than on 2023. The ALCO contribution, we think it's going to be slightly lower, but very similar to this year.
And which is the key point, is the cost of deposits. We still think it's going to increase. On average, we have 41 basis points this year, and in the fourth quarter, it was 60 basis points. And we expect this to still go up a little bit, to around 75 basis points for 2024. So, and you have to consider that the average twelve-month Euribor in the forwards it's around 100 basis points lower than the one that we have on average in 2023. So even considering this downward trend, at least from the forwards, we still consider that the cost of deposits will go up this year.
Even with this increasing cost, we still expect to improve our NII in 2024.
Okay, in terms of excess of capital, let me say that having an excess capital is a strength of ours that give us the opportunity to undergo different initiatives to generate value for the bank.
The use of that excess of capital will depend on different conditions, but we expect to continue regenerating capital going forward, which will give us additional flexibility and optionality. As I say in the presentation, we have already started to use part of our excess capital this quarter. We have booked additional provision to improve our NPA exposure, which will help us to improve results and show our structural profitability. We have requested the formal authorization to buy and amortize our own shares of around 4% of our current share counts. These are two value-creating initiatives for our shareholder, and we will, of course, continue analyzing alternatives to use our capital on the benefit of our shareholders. Thank you.
Thank you, Pablo and Isidro. Operator, please, next question.
The next question comes from the line of Ignacio Ulargui from BNP Paribas. Please go ahead.
Thanks very much, and good morning, and thank you for the presentation and for taking my questions. I have two questions, if I may. I'm linked a bit to the comments of Isidro just right now on what kind of build-up do you think that the bank can deliver in 2024? And what will be the regulatory headwinds that we should expect from Basel IV at the end of the year? The second one is on the EUR 1.2 billion of foreclosed assets that you have with a net gross value, net value of EUR 327 million, if I remember correctly. What is the strategy that, I mean, you want to accelerate uploading? I think that the best way to really validate that you have done your best efforts is that this, the stock gets offloaded.
I mean, is there a strategy to reach a certain level at the end of the year, or it will depend a lot on market conditions? Thank you.
Thank you, Ignacio. I think the idea is we still expect to maintain capital generation for next year. We don't have an explicit guidance for the capital generation, but we still are. You know, we expect higher profitability. We still don't expect the risk-weighted assets to grow next year. So overall, we still believe that we are going to maintain our build-up in capital, and obviously will depend on how the loan book evolves. But we're quite comfortable with the level of capital and the optionality that, as Isidro mentioned, that we have with the capital.
In terms of Basel IV, what I can say, it's very limited impact, almost negligible, so we don't expect any impact from Basel IV.
Pablo, I think there was another question on the foreclosed assets or real estate assets strategy and expected disposals going forward.
Okay. We have a strong commitment on reducing our NPA exposure, and we think we have the right level of provision to be able to do so. So we maintain our strategy to reduce NPAs, both NPL and foreclosed assets.
Thank you, Pablo. Please, operator, next question.
Next question comes from the line of Carlos Cobo from Société Générale. Please go ahead.
Hi, thank you very much for your presentation and for taking our questions. I have a couple. The first one is on net interest income. You guided for NII to grow by 25% in 2023, which implies probably flat Q4. But you've done a very strong 6% growth in the quarter, when Euribor started to trend lower in December. So could you explain a little bit what outperformed your guidance? What did better than you didn't expect in Q3 results? And also for 2024, your guidance of low single digits, what's the driver of that growth? Because lending is not improving. You said the customer spread to be probably flat, same as the ALCO contribution. What is the driver? Is it simply the higher base effect from Q3 2023?
And the second question is on capital. It's just trying to understand a little bit that reference of 12.5% CET1 ratio for the profitability guidance. How do we reconcile that with the 14.7% reported ratio? Is that your intention to drive gradually the capital position to those levels? Or it's just a reference of a capital that you consider reasonable for the bank, but for the time being, as you have discussed in the past, it's not a target in the short term, it's more of a theoretical level. Just wanted to understand how do you really see that number, for us to understand how much capital can be deployed going forward. Thank you.
Thank you, Carlos. I'm going to go for the NII. I think, regarding why we had an increase of 6%, as I said, we have several moving parts. The first one is the lending repricing, the loan book repricing still have significant positive effect in the quarter. And obviously, we had a clear view on that, but always, what has been the major unknown for the quarter was the cost of deposits. And even if it increased by EUR 22 million, the level of increase in the loan book was EUR 28 million. So it had a net positive also in the fixed income portfolio.
Although the Euribor was coming down, we already switched some of the portfolio to short-term fixed rate, so it helped to improve the quarter-over-quarter contribution from the fixed income portfolio. So net and the liquidity position, the asset gathering in the quarter, and the deposit grew significantly. And as you can imagine, we have now a better NII position from the liability than in the past, because the excess liquidity that we built in the quarter also helped to improve the money market contribution. So I think basically it's better liquidity position, better deposits than initially expected, and lower cost of deposits than we had expected. So altogether, we outperformed our initial guidance.
In terms of the return on tangible equity and the guidance, and we obviously... You can work the numbers compared with the 12.5 and what we—you think our capital position will be at the end of the year. But we think it's clearer if we have a fixed reference on capital, because that gives a clear idea of the profitability of the bank. And we think that given the risk profile of the bank, the 12.5% reference that we have always mentioned, or above 12.5, it's a good reference for the level of risk that the bank runs.
We still. We have been doing a lot of MREL issuance, as you know, and the ratings agencies are catching up with the right level of risk that we have. So we still want to maintain some excess above the 12.5%, as we said, and this will be shown in lower cost of funding in the future and a better profitability. But in terms of seeing how profitable is the business, the structural profitability, once we get rid of the excess provisioning that we have done in the past for foreclosed assets, now we're getting close to our cost of equity, and we will keep working on improving that.
Thank you, Pablo. Operator, please, next question.
Next question comes from the line of Ignacio Cerezo from UBS. Please go ahead.
Yeah. Hi, good morning, thank you for taking my questions. I have two around NII. If you can be a little bit more specific on the volume outlook in the first place, especially around those plans you have communicated around, building up a better corporate SME franchise. Yeah, a bit of color, basically, of how you expect the volumes to evolve in 2024, and how quickly do you think you can turn around actually the SME and the corporate franchise? And the second one is on the updated rate sensitivity. And if you can give us information basically on fixed versus floating on credit, ALCO, and wholesale funding, please. Thank you.
Thank you, Ignacio. In terms of volumes implied in our guidance for next year, I think in mortgage we expect if the interest rate that the market and the interest rate cuts that the market is expecting are realized, we expect to have a certain pickup in volumes in mortgage for the sector and for ourselves. So we will start with a lower level and picking up in the second half of the year, so the net is a flattish evolution for mortgage book for the year. That's within our guidance numbers. In terms of consumer, we still think we can perform and improve, and we think we can grow at around mid-single digit for the year.
I think the question that you said, we still keep working. As Isidro has mentioned in the past, he deployed one specific general manager for corporates and SMEs, and we keep working on developing the franchise. This requires some time, and we still want to build a profitable and in risk reward parameter, so we will be very focused on ROROC and not grow just for the sake of growth. So we will want to grow in a profitable manner, and developing this takes time. And so still within our numbers, we still have a decrease in our loan book for the next year, and we have to be prudent in this sense.
There are. You know, it's around mid-single digit decrease in the corporate book for next year. And even with this decrease, we still consider that we can grow the NII.
Pablo, there was another question on NII sensitivity.
Okay. In the NII sensitivity, I think for next year, it's better if we do the NII by the guidance, because the, obviously, the cost of deposits, which has some lag, will influence, and it's always hard to explain. But if we move forward, if we consider a constant balance sheet and with a 100 basis point parallel downshift scenario, we expect, compared to 2023 full year numbers, a small negative impact of low single digit in year two. What I can say, we have been decreasing our sensitivity to interest rate throughout 2023, and we still have tools to maintain this process.
But obviously, we cannot completely reduce the sensitivity, because although our base case scenario is that rates are going to come down, there's always unknowns that can change the evolution of rates, and we have to be in a balanced position. So as I said, it's small negative in the low single digits for the second year after the whole book has repriced.
Thanks, Pablo. Operator, next question, please.
Next question comes from the line of Borja Ramírez from Citi. Please go ahead.
Hello, good morning, and thank you for taking my questions. I have two. Firstly, on the 2024 outlook, and if I compare versus the consensus, I... It seems that the, the, the implied net profit is, is broadly in line, maybe slightly higher than consensus. So it seems that the total provisions seem to be in line and the NII may be slightly better. Could you give the details on the costs and the fees guidance, please? And my second question would be, given we ha-- we are in a, in a decreasing interest rate, most likely this year, and you have a very comfortable capital position, maybe, are there any, any additional levers you could use to improve your recurring profitability?
For example, you could do any cost restructuring or any further cleanup of, for example, of other provisions? Thank you.
Okay. Regarding the comparison between the outlook and the consensus, and I think you have some missing parts to work out the guidance. In terms of the cost, we think we have to build and improve our product offering, our customer experience, so we will have to do some investments and in people and also in our people and process and in technology. So the guidance will be around mid-single digit increase for operating cost. Also on fees, we have to keep the balance between NII and cost of deposits and maintenance fees. So we expect some impact of that balancing that we are doing, and we will keep doing.
So we expect to have a low single-digit decrease in fees. Regarding the other potential measures that we can take going forward, we are not looking at the moment at any another cost restructuring process and reduction. I think we have to work on our revenue side more than on the cost side at the moment. We have done quite a lot on that in the past, and I think we have to keep building on that. In terms of other measures to improve, I think we are going to focus on ways to improve our revenues rather than our cost. Regarding the other provision, I-...
effort, we already have done what we think it's the right level of provision for foreclosed assets. We don't think we need more extra provisioning on that sense. And obviously, the other provision, the cost of risk, we think we are in our average medium-term level. Obviously, you cannot do provision expecting what is going to happen in the future, so you have to comply with accounting rules and with the-- So I think, to sum up, we will focus on revenues to improve our revenues, and we will improve our product offering, our policies, our customer satisfaction-
Mm-hmm.
Rather than any cost control measures in the short term. Obviously, always focus on cost to income, but I think the focus at the moment is, will be more on revenues.
Isidro, there was an additional question on, again, on the excess of capital. I don't know if you want to say something else on it.
Well, yes. As I mentioned, and I say before, we have already started to use part of our excess of capital this same quarter. And as I also explained, we will continue analyzing different alternative, you know, that we think could add value, you know? As I say in the presentation, we can also invest on a specific segment, businesses or opportunity where we might see some attractiveness.
Thank you, Isidro, and thank you, Pablo. Operator, one more, one more question, please.
Next question comes from the line of Carlos Peixoto from CaixaBank. Please go ahead.
Yes. Hi, good morning. Very quickly, the first question would actually be on the share buyback. What's the rationale behind the 3.8% of share count limitation on the share buyback? I'm just asking this because it does seem that there could be a risk that limitations exceed the maximum amount. So just trying to figure out why such a low threshold. And then, on the NII guidance, apologies for asking, but I understood that you expect it to grow in 2024. Could you give a bit more color up to it? Are we talking about low single digits or a bit more than that?
And then on the cost of risk, did I understood 30-35 basis points for next year? If so, do you see here the company segment as the main driver, consumer? What areas are the ones that will be contributing for cost of risk to remain at levels which would be more or less similar or actually slightly higher than in this year? Just to have an idea on the rationale behind those figures. Thank you very much.
Thank you, Carlos. Regarding why we have the 3.8, we have this limit because you always have... When we decided that we wanted to have the EUR 100 million, that was the number that came from the actual price of the stock at the moment. So there's now not really any other measure. We started with this EUR 100 million, and obviously, it will depend on future evolution and how this works at the moment. So I think there's nothing really behind that 3.8%. It's only the number of shares, the EUR 100 million divided by the price of the stock at the time, so it was 3.8. So nothing more than that.
And regarding the NII, going back again to what I said, why we have this low single digit, I think that the major driver will be the cost of deposits. And I think we have been very clear, it's rather than the beta, obviously, the beta will grow. We, if you consider what the market interest rate forward will be realized, so the Euribor will come down significantly, as I said, more than 100 basis points. If it doesn't come down, it will be better. If the cost of risk is not 75, it's lower, it will be better. If it's higher, it will be less than that, so we can be close to flat.
But, you know, I think I've gone through the points. We expect to maintain a better customer spread on average than in 2023, between 260 and 270 on average for the year. And I think the contribution from the ALCO portfolio, obviously, there could be some opportunities in the market, and we will be closing and still managing as actively as we can and try to improve our guidance. But as I said, we expect to be a slightly lower contribution, but very similar. And as I said, the key point and the major driver probably, because we expect slightly lower volumes in loans.
In deposits gathering, we still maintain our good momentum, and we expect to be quite flattish compared to this year. So the only missing or less uncertain, less known is the deposit, depending on how the market evolves. And I said 75. It depends on what you think. And the cost of risk, the latest question, I think the drivers will be very similar to this year. I think it's going to be some coming from the mortgage and some... and the big bulk or will still come from SMEs, corporates, and so on. So very similar to this year.
Thank you, Pablo. I think, in the interest of time, we have time for a couple more question if we're quick. So please, operator, can you please open the line for the next one?
Yes.
Yes.
Yeah. Yes, the next question comes from the line of Hugo Cruz from KBW. Please go ahead.
Hi, thank you for the time. I just wanted to ask a bit more on NII, if you could talk about the hedging strategy that you have in place, you know, in the different, you know, parts of your balance sheet. Also if you could give guidance on the taxes, because I think the tax rate is a bit lower than I expected for this year. What do you expect for 2024? Thank you.
I think the hedging. Thank you, Hugo. Regarding the hedging strategy, as you know, we have a fairly large share of the loan portfolio at fixed rate, and we manage that with some hedges to floating, as we mentioned in the past. And the other part that we hedge, the duration of the balance sheet, is the ALCO portfolio and the issuance, the wholesale issuance, the MREL issuance, mainly where we have also a significant hedge. Going forward, probably it will imply some hedges on the deposit.
At the moment, we don't have any hedges for the deposit, so it's mainly the ALCO portfolio, the mortgage book, the corporate loan book as well has some hedges to floating as well, and the market issuance. The way we work is we have a view on the NII sensitivity that we want to have, and with the limits that obviously that we have from regulatory views and the risk appetite of our board. We have some limits, and we don't want to have a very strong interest rate risk, and we manage with these different items.
Hugo, I think on the tax rate, just very quick, just to confirm you that there is probably explained by a small loss of the quarter that it changed it this quarter. But on going forward, and if you want to do the math for your models, we will continue to pay slightly below 3%. The tax rate is 30%, but there are two lines of the P&L that come in net of taxes, that are the dividend income and equity method. So that's the way that is probably the best way to estimate it. So, we move to the last question, please, operator.
The last question comes from the line of Fernando Gil de Santivañes from Bestinver. Please go ahead.
Hi, thank you for taking my question. Just a quick one, please. Can you please remind us of the level of unrealized, unrealized losses on the ALCO portfolio and held- to- collect other parties? Thank you.
Fernando, as you can imagine, with the evolution of interest rate in the year, especially in the last part of the fourth quarter, the reduction on the unrealized losses has been one third. But I think, this is important to have a clear view. The held-to-maturity portfolio, it's held to maturity, and it's like the loan book, it's like the deposits, it's like any other items on the bank. What I can say is in the last two years, our EVE, so the value of the discount cash flows of the assets and liabilities, has improved significantly, and that's what we care. We manage the whole book of the bank, not only one item on isolation.
I think it hasn't got much point to look. The only problem that some banks in the U.S. has in the past is that they have a very weak deposit base and very concentrated, and it's not our case at all. We have the largest share of deposits that is guaranteed by the guarantee fund, and you know it's a really diversified. We have more than 300 LCR. We have the best-in-class liquidity position, and so we don't think we will ever have to sell any of our held-to-maturity for liquidity reasons. So we look at the valuation of the different items, and obviously we have good news in the last quarter, but I don't think it's important.
Still, we had some improvement in our EV, or the valuation of the different items in conjunction, considering all assets and liabilities.
I think that's all from our side. The IR team is available for additional questions, so please do not hesitate to contact us, and we'll see you next quarter. Thank you very much.
Thank you.
Thank you.