Good day, and thank you for standing by. Welcome to the Millennium BCP 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Miguel Maya, Vice Chairman and CEO. Please go ahead.
Good afternoon, Miguel Maya speaking. Welcome to BCP earnings conference call. As usual, I will mention the highlights of our performance, and then Miguel Bragança and Bernardo Collaço will follow, providing additional detail. Despite being a complex year with significant macroeconomic and geopolitical uncertainties, 2023 also carried relevant positive factors, namely, those coming from the normalization of the monetary policy. Against this backdrop, our intense commercial activity, coupled with a robust business model, resulted in EUR 856 million of profit, compared with EUR 197 million last year.
Although it should be noted that profit in 2022 was negatively influenced by some specific Swiss francs related effects in Poland, namely, credit holidays, contribution for the institutional protection scheme, and the impairment of the bank, Bank Millennium's goodwill, which altogether had a gross impact above EUR 270 million. The earnings in 2023 were mainly driven by a strong increase of 32% of the core profit, having reached EUR 2.4 billion, supported by an increase of 23% of core income, coupled with a rigorous cost management that allow us to contain the cost increase of 8.3% in a still markedly inflationary context.
The group's net income was still notably affected in 2023 by legal risks in Poland related to FX mortgage, which had an unfavorable impact of EUR 780 million, more than EUR 250 million above last year's impact, driven by the significant increase in provisions, which stood at EUR 623 million, following the application of a more conservative assumptions after the decision of the European Court of Justice. On the positive side, still in Poland, it should be mentioned, the one-off effect of EUR 139 million from the sale of 80% of Millennium Financial Services.
Nevertheless, with five consecutive quarters of profit, Bank Millennium have been consistently confirming the ability to simultaneously manage the significant costs related to Swiss francs, while successfully implement measures to strengthening the capital position and steer the business model to generate additional value from the activity in Poland. Net income in Poland stood at EUR 127 million, compared with a loss of EUR 224 million last year. Despite the high provision for risks related with the Swiss francs mortgage, the capital ratios in Poland have been reset above regulatory requirements, following a rigorous and successful implementation of the recovery plan and positive evolution of core income. In Mozambique, having a very good commercial franchise, high operational efficiency and a prudent risk management, our operation continues to show relevant profitability levels.
The net income in Mozambique amounted to EUR 105 million, showing a sustained and adequate profitability, proven to be resilient in several contexts. In Portugal, the activity showed remarkable growth, having achieved a profit of EUR 725 million, more than doubling last year's net income, and confirming the leadership of BCP in multiple business fronts in the Portuguese market. These results confirm the strong ability of our business models to steadily generate organic capital, which has allowed for the substantial strengthening of our capital position, standing at a very robust levels. We have capital ratios comfortably above regulatory requirements, with a common equity one at 15.4% and total capital at 19.9%.
Especially in the current interest rate context, in which several clients use part of their savings to prepay loans, and in an environment of intense competition for balanced funds, its evolution is a very good indicator of the client's preference. On-balance customer funds reached EUR 79.2 billion, showing year-on-year growth of 2.5% and confirming the quality of our franchise. We developed specific competencies, and they have a solid track record in managing and enhancing the quality of the balance sheet, consistently reducing the volume of non-productive assets. In 2023, we have managed to reduce almost EUR 400 million in non-performing assets, of which EUR 266 million in NPEs and EUR 83 million in foreclosed assets.
These capabilities, combined with a sustained business growth, have led to a continuous trajectory of reduction of NPEs ratio, which stood at 3.4%, having decreased 40 basis points in 2023. The 90 days past due NPL ratios stood at 1.3%, and the NPL cash coverage reached 81.8%. Considering real estate collaterals, the coverage is above 120%. Despite the challenges and the uncertainties in the operating environment, including the significant provisions related to the legal risk in Poland, we have maintained a very rigorous balance sheet management, keeping cost of risk roughly around 50 basis points. Last year's sound earnings marked the end of a transition period for BCP.
With the normalization of the bank going forward, in 2023, we have achieved adequate profitability levels, supported on an outstanding core income performance, having consolidated a strong capital position, complied MREL requirements, both in Portugal and Poland, and obtained investment grade notation from the four major rating agencies. The vitality and growth potential of the bank is also shown by our ability to attract new clients and steadily expand the customer base. We have more than 6.7 million clients at the group level, of which nearly 2.7 million in Portugal. Last year, mobile customers grew 10% at the group level and 12% in Portugal, with mobile customers already accounting for 68% of the group's customer base, which is a good indicator of the success of our digital transformation journey.
The quality of our franchise is widely recognized by clients, who continue to select us and award us. Individual clients distinguish BCP in Portugal as the preferred bank of households for the fourth consecutive years, confirming the bank's ability to meet customer expectations. BCP is also the main bank of companies in Portugal, particularly in the SME segment. Our permanent focus on customer-centric innovation is driving the increased relevance that mobile app gained as the preferred channel of the clients for their daily transactions. Besides continuing to lead the rankings on the most relevant platforms, Millennium app is being intensively used by the clients. Last year, customers carried out 26% more transactions through the app, significantly increasing the number of transfers, savings, personal loans, and payments.
The priority we gave to the investment in the transformation and modernization of the bank is also reflected in the importance that digital channels play in sales figures. Last year, 82% of the sales were performed through our digital channels, and the number of sales through the app has increased 37%, with the emphasis to saving solutions, which increased 39%, and sale of cards, which increased 29%. The year of 2023 marked the end of the transition period of the bank. Currently, BCP is a reference brand in terms of service quality, both in the physical and digital channels, a reference in terms of operating efficiency, has a healthy balance, developed excellent competencies in managing risks, and has robust capital ratios.
Our profitability already exceeds the cost of, exceeds the cost of equity, and the effect of the eventual reduction in interest rates will be mitigated by the expected reduction in impairment charges, which in 2023 were still at a very high level. We exceeded the main targets defined in the strategic plan more than a year ahead of time. We intend to present a new strategic plan together with the, this year's third quarter earnings, as I, I have already said. The Executive Committee already decided to present a dividend proposal to the board, considering a 30% payout over 2023 results to be submitted to the shareholder general meetings. As a working assumption, we will consider 50% payout ratio from 2024 results on our interim reports going forward.
I stress that this is just a working assumption, and that any decision has been taken first at the board level, and then by the general meeting, at the general meeting. These, I concluded by highlighting that shareholders represented on the board have expressed high appreciation and full support for the path we have taken. The success achieved in transforming the bank allow us to face with confidence the fact that we now have a higher level of free float, closer to what is normal in the main banks in the eurozone. Miguel, the floor is yours.
Thank you. Thank you very much. Starting here in page 8, in our simplified PNL, we see a growth of the net interest income of 31.4%. Our net interest income, as we have commented, has peaked in Q3, but it still proves resilient in Q4. It's still at a very high level when we compare with the level it had some years ago. What we have seen is that going forward, we expect the net interest income to decline somewhat and to normalize. I had commented beforehand that our expectation is for the 2024 net interest income to have a growth rate over the 2021, over around...
Over the twenty-two, I'm sorry, of around 2%....slightly above 40%, i.e., a cumulative annual growth rate of around 20% in the last, in these two years, from 2022 to 2024. Commission is very resilient, in spite of the good net interest income evolution. And as you know, there is a trade-off between these two lines, so that the core income increased by 23%. The operating cost mainly driven by our international operations, in which countries there is a higher wage inflation, grew 8.3% . Still a very positive jaws, which made the core operating profit increase by around 32%. We had some extraordinaries in 2022 and 2023, as Miguel Maya has just commented, which implied a very strong, I would say, positive evolution of the other income, is effectively extraordinary.
This is what explains that the operating net income is growing 46%. Results on modification, impairments, and provisions and going forward, we see here still a very important year because of the decisions of the European Court of Justice in terms of the provisioning for the Swiss francs. The loan impairments still above what I would say is the normal trend for the industry in Portugal, which, of course, gives us some leeway of improvement, so that effectively the net income improved from around EUR 200 million to around EUR 850 million. How does this translate into our two different parts, so the Portuguese part and the international operations?
The net interest margin, very healthy in 2024, growing from 2.46% to 3.36%, and a very good print in the several geographies, with the net interest margin in Portugal going from 1.53% to 2.59%. And this is an important point, because we try to differentiate ourselves through service quality, through customer loyalty, and what we see is, of course, the upside in terms of the net interest margin, in terms of what it can grow in these years is, of course, lower than for other institutions. But on the other hand, the fact that we are very much a customer-focused, retail-focused bank, helps us also in terms of protecting the downside of the margin.
In the international operations, both in Poland and in Mozambique, we also have here a net interest margin that is clearly above what is expected in these markets, with values close to 5% in 2023. Fees and commissions in all the different lines, very, very stable, which of course is particularly important in such a year. In terms of other income, we had a special capital deal of the sale of Millennium Financial Services in Poland, which had an impact in terms of other income of around EUR 140 million on one hand. And of course, we had also regulatory contributions that were lower this year, significantly lower this year than what they were last year by more than EUR 124 million.
And this is because in Poland, we were under a specific plan that waived these regulatory contributions. As you see here, international operations, in 2022, we have regulatory contributions of EUR 121 million, and in 2023, this value was only 13 million. Going forward, these we expect these regulatory contributions to reduce, because, as you know, in terms of the European resolution fund, in 2024, there will be no special contribution, which in our case, was somewhat above EUR 10 million. Cost to income, very important. This is the strength of our franchise. A cost to income of 32% that we all agree is extraordinary. 30% in Portugal, as we see here.
Still, even with some conversion to more normal levels, what we can see is that we will be clearly, one of the top performers in this area, in the retail banking market in Europe. Impairment and provision charges. This very, very strong pre-provisioning profit came together with a special effort to make our balance sheet even more robust and, with some prudence and conservatism in terms of the impairments and other provision charges. What we see is that the cost of risk in Portugal, the pure cost, was stable at around 54 basis points, which for the present situation, I would say is a prudent ratio. Here we see, of course, some improvement potential when we look at twenty, at 2024.
We still have overlays of around EUR 100 million in Portugal, which gives us some comfort that we will converge in this variable with the remaining of the sector. And in the international operations, what we see is also a very low cost of risk as a proof of the resilience of our business model. And then the Swiss franc provision was particularly high this year because of the negative news coming from the European Court of Justice. But what I would like here, also like to comment, is that we are not seeing, and we have not seen, a particularly, say, strong development in terms of new cases coming to court. So, they have stabilized at a somewhat higher level.
We expect still to have a high level of provisions in 2024, but absent any special news which we are not expecting, we would say that the Swiss franc provisions have clearly peaked in 2023, and 2024, we still have a significant number, but clearly below 2023. The NPE is still going down, so the loans past due already at 1.3%, which is, I would say, a good level for any bank in Europe. If we consider also the unlikely to pay the ratio, if we only consider loans, is at 3.4. If we consider the EBA ratio, that considers securities and off-balance sheet exposures, we are at 2.2. So in spite of the challenging macroeconomic environment, a very positive development in all these asset quality metrics.
The business activity. Here in Portugal, we have suffered, so to say, from two effects, I would say. In terms of credit, mainly from the more restrictive monetary policy and with the app, and with what it implies in terms of the reduction of demand of good quality credit. In terms of customer funds, as we are seeing in this graph, from some competition, mainly in the first three months of the year, from the retail public debt product, that was clearly that. I mean, generated outflows from the system, out of the system to this product in excess of EUR 14 billion.
In any case, we have been able to maintain our market shares, which is, I would say, the most important variable in these scenarios of contraction of volumes. In terms of capital and liquidity, of course, when the loans don't grow and when we are really very focused and disciplined in terms of management, and when we have a good business model, the capital continues to accrue. So we printed a number for core equity one of 15.4%, which compares with a SREP ratio of 9.41%. On top of this SREP ratio, we still have to comply with the sectoral systemic risk buffer, which represents on a pro forma basis, around 28 basis points.
But in any case, I would say a very comfortable position that compares well, I would say, somewhat below what we see in Europe, but clearly above what we see here on average in Iberia and even in France. Leverage ratio, no news. I would say very strong ratio as you see here in the slide, 21, which of course is also connected with our high RWA density. Because a good capital ratio, in spite of a high RWA density, generates, as we all know, an even better leverage ratio. MREL MREL position. Our MREL ratio that we have to comply by, in the first of January, is 28.15. We printed 32%, so a very important also evolution. We are executing in a very proactive way, our funding plan.
We don't need the funding, but of course, this is an integral part of our balance sheet management, and we will issue what is needed to remain with a sustainable buffer above the minimum MREL requirements. The pension fund coverage, in spite of the reduction of interest rate, that of course, have a negative impact in terms of the liabilities of the pension fund. As you all know, the reduction of the rates was very, very important. We were able to partly offset this with the good performance of the pension fund. So the actual difference in liabilities had an impact, so to say, of 11.6%, and we were able to compensate this partly with a fund profitability of 7.1%.
Effectively, I mean, reducing the risk, and we still have an important excess over the pension fund of around EUR 400 million. This means that there will be no impact from potential reductions of interest rates on the pension fund for the first EUR 400 million of surplus. This is effectively a buffer for our capital ratio. Liquidity ratios, very, very comfortable, as we see here on page 24. Nothing to write home about, and I will pass now the floor here to Bernardo.
Okay, thank you, Miguel, and good afternoon, ladies and gentlemen. Starting on page 26, with Portugal, net income increased significantly from EUR 343 million to EUR 724 million in 2023. Profitability went up more than 111% and was driven by the stronger net operating revenues that increased almost 30%, and the strict cost management that went up just 2.5% compared with 2022. It should also be noticed the positive contribution to net income from the reduction of 13% in total provisions in Portugal. On page 27, looking to NII, at the end of 2023, it stood at EUR 1,466 million, meaning 54% up compared with the full year of 2022.
The normalization of interest rates provided a positive effect on the repricing of the loan book, that together with a higher yield from securities portfolio, more than compensates the negative effects related with cost of deposits and wholesale funding, resulting in a net interest income increase of more than EUR 550 million on a comparable basis. Moving to page 28, that represents the evolution of fees and commissions, as well as other income. Banking fees and commissions were stable year-on-year, although there was a small reduction on banking fees that were compensated by a small increase on market-related fees. Looking to other sources of income, other operating income were EUR 11 million above 2022, and this positive evolution is explained by the reduction of mandatory contributions. Regarding equity earnings and dividends, the contribution was EUR 60.6 million in 2023.
That compares with EUR 67 million in 2022. Regarding trading, results in 2023 were significantly lower than in 2022, mainly driven by lower results from sovereign debt gains, sovereign debt trading gains. Going to page 29, regarding costs, and still in Portugal, the bank continues to apply a strict policy on cost management, and total costs just grew 2.5% year-on-year. Evolution on operating costs in the Portuguese activity, not considering the effect of specific items, reflects the increase of 5.4% in staff costs and 2.6% recorded in other admin costs. Depreciations, in turn, contribute favorably to the evolution of operating costs in the activity in Portugal, standing 7.6% below the amount recorded in 2022.
Regarding employees, the bank was broadly stable, and there was a reduction of 10 branches in 2023. Moving to page 30, which refers to asset quality, and as it was highlighted before, there was a significant reduction of NPEs. NPEs reduced 18.7 year-on-year, 18.7% year-on-year, meaning more than EUR 250 million just over 2023. In the last quarter, there was also a reduction of EUR 85 million, and this clearly shows that the bank is still committed with the NPE reduction. In 2023, reduction was done mainly through sales that was responsible for 55% of total NPE reduction. NPEs as of December 2023 stood at EUR 1.1 billion, compared with more than EUR 1.35 billion in December 2022.
Cost of risk stood at 54 basis points, which is similar to the cost of risk in 2022, and NPE coverage by loan loss reserves stood at 89%. That compares with 69% in 2022. Now let's move to page 31, which looks at the NPE coverage breakdown, and as you can see, total coverage of NPEs stood at 142%. NPE coverage by loan loss reserves at 89%, and total coverage for individuals with high levels of real estate collaterals stood at 100%, and for companies at 162%. On page 32, which shows the evolution of foreclosed assets and restructuring funds, there was once again a relevant reduction over 2023. The net value of foreclosed assets stood at EUR 100 million.
That compares with EUR 183 million one year ago, meaning a reduction of more than 45% or a decrease of more than EUR 80 million. Regarding property sales, there was a significant reduction in terms of number of transactions, compared with 2022, which was somehow expected due to the reduction of real estate assets in BCP balance sheet. Regarding restructuring funds, there was a reduction of 11% that is related with mark to market of those funds. Now moving to page 33, total customer funds decreased 2.33%. Total deposits went down almost 3%, and off-balance sheet funds were stable year-on-year, even taking in consideration that in 2023, there was significant maturities of insurance products. It should also be mentioned that customer deposits registered an increase, quarter-on-quarter.
In terms of gross loans, there was a decrease of almost 4% year-on-year. Loans to companies went down 7%, somehow influenced by the reduction of the NPEs, EUR 250 million, and the early reimbursement of credit lines that with guarantees that were provided by the Portuguese government during COVID. Remember that BCP, by that time, had a much higher market share than its natural market share on the first wave of COVID lines, and loans to individuals were almost flattish year-on-year. I should also highlight that mortgage loans were stable, and personal loans increased more than 6% compared with 2022. Going to page 34, it is possible to see new loans origination by segment and the recognition of BCP as a main bank for Portuguese companies.
Performing loans in Portugal went down 3% from 2022. Loans to individuals were stable year-on-year, and loans to companies, due to the high interest rate environment, went down 6%. Let me also reinforce the leadership of BCP in SME program for the sixth consecutive year, as well as the Inovadora COTEC program for the third consecutive year, and the recognition of BCP as the best bank for companies from Data E, among others leaderships, achievements. Now, moving to page 36, regarding international operations, results were again impacted by specific effects related with Bank Millennium. Although, and once again, it's important to reinforce that Bank Millennium registered the fifth consecutive quarter with positive results after several quarters with losses.
Net income of Bank Millennium is stood at EUR 126 million, that compares with a loss of more than EUR 220 million one year ago. Contribution from Mozambique was aligned with the last year, with a contribution roughly above EUR 100 million. In summary, contributions from international operations after impacts from discontinued operations and non-controlling interests stood at EUR 131 million, which compares to a loss of EUR 44 million in 2022. It's also important to remember that in the first half of 2022, it was registered in the impairment of Bank Millennium goodwill, that had a negative impact of EUR 102 million in 2022 results.
Excluding specific effects from Poland, as costs related with the FX mortgage and the sale of 80% stake in Millennium Financial Services, and goodwill and the goodwill impairment, contribution from international operations would have stood at 30.7% higher than one year ago. Now on page 37, which refers to Bank Millennium in Poland. Net income in Poland continued, as I said, to be impacted by costs related with CHF mortgage loans. It's important to highlight that since the fourth quarter of 2022, Bank Millennium have positive results, as I said before. In 2023, net income in Poland stood above PLN 126 million, which compares with a loss of PLN 223 million in 2022.
Excluding these specific effects, net income would have stood at EUR 659 million, 34% above the same period of last year. Net operating revenues, excluding the impact of credit holidays on NII, increased 26%. Operating costs, excluding mandatory contributions, went up 14%, and if we consider the reduction of mandatory contributions, total costs in Poland went down by almost 5%. Regarding capital, CET1 and total capital improved significantly and stood at 14.7% and 18.1% respectively, and comfortable above the minimum requirements of 8.1% and 12.2%. On page 38, some detailed information about Bank Millennium. NII, without credit holiday impact increased 13% to almost EUR 1.16 billion. That compares to EUR 1 billion one year ago.
This movement, it's mainly driven by interest rate hikes since the fourth quarter of 2021. NIM increased year-on-year from 4.43% to 4.60%, and it, and as it was anticipated by Bank Millennium, there was a reduction on NIM on the fourth quarter compared with the third quarter of 2023. Fees and commissions decreased 3% year-on-year to PLN 172 million, and the other income was strongly impacted by the positive result from the sale of 80% of Millennium Financial Services in the first quarter of last year. Total costs, excluding mandatory contributions, went up 14% due to high inflation registered in Poland in 2023. As I mentioned before, mandatory contributions in 2023 were much lower than in 2022, and that was due to the activation of the recovery plan by Bank Millennium.
Moving to page 39, related with asset quality in Poland, and taking into consideration the high level of interest rates and inflation in 2023, cost of risk stood at 39 basis points, which is a lower level than it was initially projected by Bank Millennium for 2023, taking into consideration market conditions. Non-performing loans, more than 90 days past due ratio, steady year-on-year at a level of just 2%, and coverage by loan loss reserves of non-performing loans stood at 157%, which is fully aligned with the level of December 2022. On page 40, customer funds grew 10% in EUR, year-on-year. Off-balance sheet and deposit funds increased significantly in 2023, and once again, in EUR terms.
In terms of loans to customers, gross books stood at EUR 17.5 billion, less 3.6% than in December 2022, and this reduction is explained by the strict capital management policy in place by Bank Millennium during last year. On page 41, regarding FX mortgage portfolio, it's important to start saying that Bank Millennium have continued the efforts to reduce the weight of the FX mortgage portfolio.... on an yearly basis, there was a reduction of 15%, and by 5% quarter on quarter. At the same time, Bank Millennium increased provisions against legal risk, and at the end of December 2023, reached an amount higher than EUR 1.67 billion. It's important to mention that during 2023, Bank Millennium made some adjustments on the provision methodology to incorporate more conservative assumptions.
It should also be noticed that by the combination of the creation of these provisions and the decrease of the loan book, Bank Millennium brought the ratio of total provisions against legal risk versus the gross mortgage book of CHF loans to 82.5%. At the same time, and as part of the strategy of Bank Millennium, there was the continued efforts to reach amicable settlements with clients, and in the fourth quarter of 2023, Bank Millennium was able to achieve, once again, more than 1,000 extrajudicial agreements. Now, turning to page 44, and related with Mozambique, we can say that Mozambique, that once again, and still under a challenging environment, Millennium bim continues to be an important and stable contributor for BCP results at group level.
Net income stood at EUR 105 million, which is similar than 2022. Net operating revenues increased almost 1.6%, and operating costs were 13% higher than last year. Capital ratio stood at almost 37%. Still in Mozambique, and on page 43, NII, and once again, here in euros for a comparable purpose, went up year-on-year 2% to more than EUR 200 million. Means to that 8.5%, that compares with 8.3% in 2022. Commissions went up 3%, and other income decreased by 7%. Moving to page 44, non-performing loans, 90 days past due at, three percent, which compares to 8% in 2022, and almost 5% in September of last year. Non-performing loans 90 days past due with coverage at 133%.
That compares with slightly less than 100% in 2022. Cost of risk in 2023 was influenced by an impairment reversal that was booked in the fourth quarter of last year. Regarding volumes on page 47, you can see that customer funds registered a decrease of less than 4%, and loans to customers were stable year-on-year. Although, I should highlight the increase in loans to individuals that was not enough to compensate the decrease in loans to companies of more than EUR 50 million. Although, the loan book of Millennium bim is at, it's at, stood at EUR 650 million. So I have to, I, I should also thank you for your attention, and before we move to Q&A, I will return to Mr. Miguel de Bragança for some final remarks.
Thank you very much, Bernardo. As we always do, we present here how we are performing vis-a-vis our commitments to you, our commitments in terms of the plan. Broadly, I would say we have met the commitments, one year ahead of the schedule. Our cost to income is slightly above 30%, whereas our target was 40%. Of course, this has benefited from the tailwinds associated to the new interest rate environment, but still, we're prepared, we were prepared to take benefit of it. Our cost of risk are already at 42 basis points in consolidated terms, when we had a target of 50 basis points, in spite of a more challenging environment.
Our ROE in 2023, of 16%, cost to income ratio of 15.4, when we had in our previous plan that was designed in 2021, a minimum target of 12.5%. Overperforming also in the NPE ratio, on the share of mobile customers, on the growth of high engagement customers. In the average ESG rating is the only area where we have not overperformed yet. We expect to be very close to this value by end of 2024, as it was our original plan. This has enabled us to to normalize the bank.
As Miguel Maya, our CEO, has commented, the ExCo has prepared a proposal to the board of a dividend payout of 30%, and we are also working with an assumption of a payout of 50% for the purposes of capital calculations for the years to come. Thank you very much, ladies and gentlemen. Let's open the floor to questions.
Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will now go to your first question. One moment, please. And your first question comes from the line of Ignacio Ulargui from BNP Paribas. Please go ahead.
Thanks very much for, for the presentation, gentlemen, and for taking my questions. I have two questions and one clarification. In terms of-
... NII, I would just like to get a bit of a sense of how do you feel NII will perform in 2024 in Portugal, Poland and Mozambique, in your key geographies, with a particular interest in Portugal and Poland, to be frank. Second point is on credit quality. I think the, if I just look to the coverage ratio and the decline in the NPE ratio, I would just like to get a bit of your feeling of what should we expect in terms of cost of risk for 2024, with an 89% coverage ratio and an NPE ratio below 3% at this stage, shouldn't we expect, relevant decline in the cost of risk going forward in Portugal?
Linked to that a bit, what is the view that you have, Miguel, in terms of other provisions for 2020, 2024? And then, a clarification: you said during the presentation that CHF provisions in Poland are likely to decline substantially, I think is the word that you used, in 2025. But I would just like to get a bit of a sense of, provided that nothing changes in terms of, claims and the regulatory, necessarily the pressure from litigation, what does substantial mean in terms of profitability for, Bank Millennium in Poland? Thank you.
Okay. Thank you, thank you very much for your, your questions. Starting with your first question. Effectively, in terms of the NII performance in Portugal, we were able in Portugal to leverage very much on the good interest rate evolution in 2023, but these, the dynamics of the repricing of the term deposits somehow normalized the Portuguese market by the end of the year.
So when you look at the sum of the two years, the year of 2022 and 2023 and 2024, what we would expect is to be broadly aligned with other Iberian banks, i.e., to have a growth of around the cumulative annual growth rate of 20%, in these two years, which means slightly above 40% from 2022 to 2024, which is more or less aligned with other Spanish banks, as you know. Some have benefited a little bit more upfront, others a little bit later, but I would say very much aligned with other banks in similar markets.
Of course, this means that the margin in Portugal from 2024 to 2023 will have a decrease, which we are expecting, if we do the numbers, to be around mid to high single digits, so to say. So there will be a decrease in NII. But as you correctly pointed out, this normalization of the net interest income that we will see on the top line will also be followed by a normalization of the cost of risk and of the costs of the other provisions. So we do expect, with what we see right now and with the resilience of the unemployment of the Portuguese consumers, of the Portuguese companies, to have a normalization on our cost of risk.
So we would expect our cost of risk to decrease to levels, I would say, mid-40 basis points in 2024. And the other provisions which this year have been quite high, there has been also some compensation between other provisions and mark to market of assets and trading gains. We will not expect this to occur in 2024, so we would expect the other provisions also to normalize to levels closer to EUR 20 million, to EUR 20 million per quarter. This means that our profit before taxes in Portugal will be, I would say, it's always difficult to say, we are still the beginning of the year, but we expect it to be broadly constant during the year in Portugal.
I think may decrease a little bit, may increase a little bit, but we expect one effect broadly to compensate the other in Portugal. In terms of the other geographies, as we have commented, our balance sheet in Poland is very, very close to interest rate risk, so we are not expecting any material decrease of NII in Poland. There may be some decrease based on the futures of the interest rates, but nothing material. We are speaking about, if anything, low single digits. And of course, in Mozambique, we are also expecting it to be broadly, broadly stable.
In terms of the modeling of the Swiss francs, as you know, Bank Millennium is listed, so we have to be extremely careful with what we say at this moment, and I would not want to go much further beyond that, what I'm really saying. We think that the Swiss franc provisions have peaked, and in 2024 it will be lower. Exactly how much lower? Let's see by the middle of the year, exactly, how much lower it is. So if for whatever reasons, the inflow of cases stops or the customers start to negotiate much more, it could be much lower. If the inflow of cases increases somewhat, this has some leverage effect.
This will be, I would say, a value that can be lower than 23, more aligned probably with 21 or 22. Okay?
... Thank you. We will now go to the next question. Your next question comes from the line of Maksym Mishyn from JB Capital. Please go ahead.
Yeah. Hi, good afternoon. Thank you very much for the presentation and taking our questions. I have three. The first one is a follow-up on the NII guidance, and I was just wondering if you could share some more color on what kind of loan book growth you include in the guidance for NII in Portugal in 2024? And also, if you could kindly remind us the sensitivity of the NII to moves in interest rates, that would be great. The second question is on trading gains in Portugal. I was just wondering if you could explain the components of the trading gains that you had booked in the fourth quarter. And the final question is on costs. Could you please share your view on what kind of cost inflation should we expect from Portugal in 2024? Thank you.
Okay. As we have said several times, regarding to the sensitivity of the margin to interest rate shocks in Portugal, typically, our margin in Portugal has a sensitivity between EUR 50 million-EUR 100 million for each 1% of interest rate shock. But this is a theoretical shock. This means that if everything reprices immediately at 1%, what is the impact in terms of the margin? It is a low sensitivity in terms of the margin itself and in terms of the interest rate itself. What...
The variable that is here a little bit more complex to model is not so much the impact of the market interest rate, which is low in our case, but how the market for deposits and how the spread of deposits will evolve over time. And for this, I would say more than sensitivities, what we can have here is more scenario analysis, because a lot of it is dependent on the rivalry and on the competition and what different players in the market may do.
And that's why I think it's better to assume that we are working with mid- to high-single-digit degrees from 2023 to 2024, than to, I mean, be very much based on this type of metrics that in the present situation are probably less relevant because our key risk is not so much the interest rate risk, is more the deposit spread risk, if you want. In terms of the working assumptions, the working assumptions that we are having here for Portugal is a very, very low credit volume growth, low single digits. We realize it's difficult, but the margin, because the value is so low, is also not very, very sensitive to it.
In terms of trading gains, I mean, the trading gains encompass a lot of different gains. It was an extraordinary quarter. A part of it has to do with customer-driven business linked to effects to portfolio mark to market of some of the funds, real estate funds and restructuring funds that we have in our books, and this part to sales of trade portfolio, so it is a large part of it. A part of it, so to say, is also interconnected with the impairments and with the other provisions.
When we sell a portfolio, if the portfolio is more provided, of course, we have a higher trading gain, a more positive trading gain, but on the, we had, we have before, a more negative impairment. And that's why I'm commenting that is some, I would say, compensation between the trading gains and these other provisions. In terms of costs, costs for sure it is an important variable, this year, this year in Portugal. We are expecting in Portugal, after this years, these years of inflation and of cost containment, amid the single-digit increase, of course, of course, in Portugal.
Still, all of this is, I would say, consistent with the stability of the profit before taxes in our Portuguese operations.
Thank you very much.
Thank you. We will now go to your next question. Your next question comes from the line of Carlos Peixoto from CaixaBank. Please go ahead.
Yes. Hi, good afternoon. The first question would actually be on the fees outlook for 2024, so basically how, what type of solution we expect to see there. I'm thinking particularly in this, as we saw the emissions coming down a bit, whether-
Carlos, the sound is very poor. If you could speak up closer to the mic, I would appreciate.
Is it better now?
Yes. Yes, yes.
... Okay, sorry. Sorry. So, I believe you should be hearing me better now. As I was saying, so basically, on the first question would be on the fees outlook, and namely with the higher interest rates environment, relatively higher vis-a-vis where we were in the past decade, whether you expect to see a further pressure on commissions. I'm thinking about account maintenance and those type of of fees. Then, the second question would be related to basically, a more M&A-related fee. So, looking at the valuation of Bank Millennium in Poland, I was wondering whether the disposal of this unit could be an option that BCP could consider.
Within that context, what would be the alternatives for capital allocation in here? I'm thinking on the possibility of the bank being interested in those banks or not. And then if I may, just a final question, we're at a given point in the political cycle, so I guess this is a bit delicate, but in any case, do you, how do you see the risks, or do you see any risk of additional levies on the banking sector being imposed by a new government? Or how should we look at that? Or how are you looking at that? Thank you very much.
Carlos, you are, we know each other. You are Portuguese, and you know the uncertainty around the elections in Portugal and what the new government will be, and I think that the last question is particularly difficult to answer in the present moment. So we have to be prepared for everything. What I can say is that, up to the moment, even the governments that, in theory, are less capital-friendly, have shown a very responsible attitude vis-a-vis the investments and vis-a-vis the companies in the market.
We have to assume, I would say, responsibility of our politicians, but I would not want to say a little bit, because they have shown that in the several parties, they have shown a responsible attitude in different circumstances, even when we compare with situations in other countries that were less investors-friendly, I would say. So I cannot say much more than that. I don't have any special information on the subject. In terms of of Bank Millennium and so on, I mean, Bank Millennium is an integral part of the group. We work together a lot. We have joint meetings every month. Our ExCo meets the ExCo of Bank Millennium to discuss the results every month. There is a lot of interchange of best practices.
And we are very satisfied with the management of Bank Millennium. And if you see, this year, I mean, Bank Millennium has a capital, and it is already above the threshold of around EUR 1.6 billion, and the net income before Swiss franc is above EUR 800 million. So it is a very. If it were not for the Swiss francs, it would be a very profitable unit. And we are now close, close, I would say to the end, I hope, of this Swiss franc saga. So we are very satisfied with the operation. We think our team is generating a lot of value in terms of of Bank Millennium. And, I mean, I would like, not like to comment on theoretical M&A, M&A possibilities.
So, of course, in life, you have to analyze everything, everything. But in this specific case, where we have a good management team, where we are generating a lot of value, a lot of value, we think if we are not the natural owners, we are close to being the natural owners of Bank Millennium. In terms of fees, when you, when you approach customers in, in, in a certain, I would say, commercial strategy, there is a trade-off between fees and NII. And of course, when current accounts are very profitable on the interest rate side, you can waive more fees, or you can be when more transaction fees.
When you make a lot of money in deposits, and when the customers make a lot of money in deposits, the more you, of course, there is less incentive for the customers to buy our asset management products. So the two lines, at least in commercial terms, they have to be seen together. So in this scenario, where our interest rate is still normalizing, but where the balance sheet solutions are very good, both for the clients and for the banks, we don't think it's the moment where we could expect the fees to grow a lot.
So we expect the fees to grow, I would say, low to mid single digit, based on more penetration of customers, more loyalty for customers than price increases, because what we are good at is serving customers, getting the customer preference, and serving the clients with more products than more of our competitors. And this, I mean, naturally, makes us earn more fees from our customers because we serve them in more needs, not necessarily because we aim to have price increases.
Okay.
Thank you. We will now go to the next question. Your next question comes from the line of
... Álvaro Fernández Garayzabal from UBS, please go ahead.
Yeah, hello. Thanks for taking my questions. I have three. So first, on capital, in 2023, you generated almost 300 basis points, but almost half of that came via RWA optimizations. So basically, my question is: How are you thinking about capital generation in 2024 and 2025, and different moving parts? And specifically in terms of earnings, if consensus is right, it would be reasonable to generate around 200 basis points via earnings per annum, so pre dividends and pre RWA inflation? And related to this, your capital is already at 15.4%. You don't anticipate major regulatory headwinds. Your MREL is no longer a constraint, and more importantly, your capital generation will continue to be strong. So basically, your excess capital accumulation will continue being quite high.
So my question is, what needs to happen, or what do you need to see to take a more generous stance when it comes to capital distributions? I don't know if you're considering extraordinary distributions, maybe share buybacks or whatever. Or perhaps you're waiting to see what happens with Novo Banco, maybe in Portugal, before returning that excess capital. So please, if you could share your thoughts on this regard, that would be great. Second question would be on NII in Portugal. If you could please provide the details on the average loan yield and the average cost of deposit in Q4, and also December standalone. And how do you see both evolving in coming quarters?
And third, on the cash flow hedge, also in Portugal, if you could please update on the size, duration, and tailwinds you expect coming from this portfolio in 2024 and 2025? Thanks.
I would say, in terms of NII, I would not like to go into further, into further details from what I have already said. I don't want also to give more information to my, to my competitors. I think we have been given the appropriate level of, of information. In terms of capital, of course, when you do the numbers, you get to, broadly, to these numbers that, that you are saying, that before, before extraordinaries, before RWA inflation, and before dividend distribution, we are close to levels of around 200 basis points. I can confirm that, these are more or less the numbers, that we are getting to. Of course, if we, if we take a 50% payout, the 200 go to 100.
If we have some RWA inflation, probably these 100 go to maybe 80, 80 basis points or something like that, 80-90 basis points. So this is something that, absent a strong change, we could expect. In terms of the capital distribution, we have... I mean, we don't have any prejudices here, I think it's important to say. What we have commented is the following: We wanted to be a benchmark bank in Europe. What we are saying is that when you look at our Common Equity Tier 1 ratio, even in spite of the very strong improvement that we had this year, we are still somewhat below the average ratios in Europe. So I think it's important for us to keep this in mind.
So the improvement were very strong. We are still below the benchmark or the average ratios in Europe. Of course, above the ratios of Spanish banks on average, but below the average ratios. What we have commented is the following: Beyond a certain hygienic minimum, that I would say, it's around the 50%, that we are commenting as a working assumption, of course, the decision will have to be taken by the board and by the general shareholders meeting. Beyond that, we have to check what our, our, what are our strategic alternatives, how much, how much do we want to grow in different business lines?
What will be our capital consumption of investing in new businesses, in unsecured loans, in mortgages? In which business lines do you want to invest more, and with what type of profitability? Because this is, I would say, and with what timeframe, because at the end of the day, the decision on whether to distribute beyond these hygienic levels, I would say, or not, will depend on the business opportunities that we will have, that we will develop. And this is certainly a question, certainly something that we will discuss with you when we present to you the strategic plan, with the results of Q3.
Right now, what I can tell you is that we are working for 2024 on a working assumption of 50%, and that you are broadly in line with your, with our assumptions of capital generation.
Thank you. We will now go to your next question. Your next question comes from the line of Noemi Peruch from Mediobanca. Please go ahead.
Good afternoon, and thank you for taking my questions. I have a few on NII. So, clearly, the forward curve changes on a daily-
Noemi, I'm sorry, the sound probably it's, it's our fault, but the sound is...
Uh,
- is not very good. If you could speak closer to the mic, I'm sorry.
Can you hear me now?
Yes.
Okay. Oh, fantastic. So, since the forward curve, it's kind of changing every day, I would like to ask you for some help in terms of positioning your guidance in Portugal, by asking what your assumption are in terms of rates and in terms of EURIBOR? And then, we have seen indeed our competition increasing in Portugal in terms of deposits from Q4. And so I would like to ask you your comment here, and what kind of deposit beta that you expect for 2024?
And then, in terms of Mozambique, I've seen that in 2024, the central bank started to ease its monetary policy, so if you could give us some color on your rate sensitivity here, that would be great. And then finally, on systemic charges in Portugal, if you could give us a sense of what you expect for 2024. Thank you.
By charges you mean fees, and commissions?
No, contributions to-
Uh.
-the resolution fund or, deposit guarantee scheme. Thank you.
Okay. Okay, so starting with the last one. In terms of contributions, we expect a positive evolution as I was commenting, because the contribution to the European Resolution Fund will be EUR 0 this year, where last year was slightly above EUR 10 million, so there will be at least this positive evolution. In terms of rate sensitivity, I think I have already commented that the pure interest rate sensitivity in our case, in Portugal, is quite low. We are typically between 50 and 100 million per each 100 basis points of rates, which is quite low for our balance sheet. Right now, I can tell you that we are closer to the 50 than to the 100.
The betas. The betas, I think when interest rates go up and then they go down, the concept, the whole concept of beta is a little bit strange. It depends a lot on how you measure it. What I can tell you is the following: the beta right now in the, for us, very much aligned with the Portuguese market, is, for the sum of term deposits and demand deposits, is slightly below 20%. Okay? We are expecting our average cost of deposits using term and current deposits and current accounts is around 0.7%, and we are expecting this value by year end to decrease around 10 basis points. So December 2024 vis-à-vis December 2023.
But before it decreases, it may increase somewhat, so it depends a lot on the timing. In terms of the competition in the market, the market in Portugal is very, very competitive, but aligned with, I would say, other markets in Europe. In the first moment, I would say, when the interest rates were increasing, it took some time for the Portuguese markets, the banks, to respond to these interest rate increases. They have increased. It took. There was probably a higher lagging effect, but now they are still below, I would say, European rates. What I can expect now is also to have some lagging effect, or in the decrease.
I would say, if something in the Portuguese market, maybe, at least in this specific case that we are living right now, the lags between the interest rate in the wholesale market and the interest rate deposits, are somewhat longer than what you see in other markets. In any case, what we are commenting here, is that by 2024, we are expecting these low decreases on the NII, that I commented, and then on 2025, even a stabilization or a growth. So we expect then that the NII- of course, it's difficult right now to speak about 2025, but that's, that's our working hypothesis. In terms of the assumptions of interest rates, the assumptions behind this, are that the book reprices at the present forward rate implicit in the market prices.
That's the way that you do the calculations. Okay?
Thank you. We will now go to your next question. Your next question comes from the line of Fernando Gil de Santivañes , from Bestinver Securities, please go ahead.
Hello, thank you for taking my questions. Can you hear me okay?
Yes, yes. Thank you.
Okay, good. Three quick ones, please. First one is on the bond portfolio and strategy. Have you done any actions during the quarter to decrease sensitivity to NII? I see that you have changed a little bit the mix, decreasing Portuguese bonds and increasing Poland bonds.
Mm-hmm.
Following on that, what is the level of the unrealized losses on these bond portfolios? So second question would be on capital. I see that Poland bank, Bank Millennium, is at 14.7% CET1. What is the level of capital target you want to operate the bank? That's the second. And the final one is on the Swiss franc provisioning and trends. What are the trends that you are seeing since the ECJ ruling in terms of new law cases and agreements? If you can just elaborate a little bit, will help a lot. Thank you very much.
Okay. I mean, I don't want to go too much into the detail on what we do in our positioning, in the same way as most asset managers also don't do. But what I can tell you is, yes, we have been reducing our interest rate sensitivity, given the risk of decreasing interest rate, as I was just commenting. I mean, our interest rate sensitivity of the margin in Poland is around 2%-3% of decrease in the NII for each decrease in of 1% of 1% in the variable rates.
In Portugal, we are here, between, I would say, 3%-6%, with EUR 50 million and EUR 100 million for each increase in 1%, but we are on the lower part of the interval. So in terms of pure impact of interest rates, we are now with a more closed balance sheet than when we were, when the interest rates were increasing. In terms of the capital level, I think, I have already commented that, we will present a plan by the third quarter, and in this plan, we will of course decide the plan in the appropriate governance bodies of the bank. In this plan, we will highlight what is our capital ratio.
Of course, an important part in this definition are our opportunities of generating value for our shareholders and the capital consumption of these commercial strategies, I think it's important to say. As where the other banks in Europe are, and what we need to have, a rating that is, I would say, a rating aligned with what we think we deserve. But we will present this by the results or together with the results of September.
The ECJ.
In terms of the ECJ, what I can tell you is there has been no tsunami of new cases. That's what I can tell you. So everybody was very much concerned that in the context of the decision by ECJ, there would be a potential mega inflow of new cases. And what I can tell you is that the month where we had the highest inflow of new cases in Poland was in August. And the new cases that we are having right now, we are typically between 500, 630 and 640 per month. Some months a little bit more, some months a little bit less, but they have stabilized at this type of level.
In terms of negotiations, we're even having more negotiations than what we had before. The message that I would like to highlight is the message of, for the moment, a message of stability.
Thank you.
Thank you.
Thank you. Once again, as a reminder, if you would like to ask a question, please press star one and one on your telephone keypad. That is star one and one to ask a question. We will now go to our next question. Your next question comes from the line of Francisco Riquel from Alantra. Please go ahead.
Yes, thank you. 2 questions for me. First one is, trying to elaborate a bit more on the, NII sensitivity analysis. Sorry to, to insist, here. So you have been very clear on the, on the, on the sensitivity, 2-3% in Poland, around 5% in Portugal, but this comes after a big jump in NII, over 2021 and 2023, over 90% in Poland and over 75% in Portugal. So, you mentioned also stabilization in 2025. So my question is, how can you reassure us that there's not going to be a cliff in NII when interest rates go down to normal beyond 2024, if there is a major letdown to come?
I understand you are well hedged, but I don't know how big is the hedge, and what's the duration. So if you can be more transparent here, would be also much appreciated. And the second question is in loan demand. You mentioned repayments or corporates on current loans, so is left here, and you can update over on the loan growth expectations for 2021 category. Thank you.
Okay. I mean, I think, I see you've joined this conference. I want to congratulate you. I think you are a new name, at least, and you have not profited probably from the degree of conservativeness that we have been having in terms of the guidance to the NII that we had last year. So I would say, the reassurance that I can give you is more linked with our track record in terms of guidance to the market, and in terms of not being too optimistic in terms of NII. And if you see our last conference calls, you can see from these conference calls, that if anything, we were not too optimistic in terms of the NII modeling. You were not here, but it is as if you were.
So, jokes apart, I think it's our track record on trying not to disappoint the market that I can tell you. Of course, it's difficult to model the NII, because as I was commenting, we don't have a balance sheet that is fully indexed to market interest rates. If we had a balance sheet that is fully indexed to market interest rates, it would be very, very easy. But the problem is that the NII is as much influenced by the level of interest rates as much as it is influenced by the competitive dynamics and by the spread of deposits. So I think, I think this is the important issue. And of course, we are coming from a situation in which in the past, I mean, we had negative interest rates.
So of course, we could have cliff events if the interest rates become negative again. Because in Portugal, contrary to what happened in some other countries, when we have negative rates, we actually have to give money back to customers, so I think it's important. So all of this is based, of course, on an interest rate scenario. That is, an interest rate scenario of decrease of interest rates, but broadly aligned, broadly aligned with what is implicit in the market futures, in the market forward rates. So that's what I can tell you.
So based on this, if you see, if you model our deposits this way, you can see that this type of evolution, when I say mid to high single-digit decline, is totally normal because there is a, I mean, the amount, the value that is implicit in the decrease of interest rates in the forward rates, is also not so high as that would bring us to a scenario as we were two years ago. Also, when you take a look at the type of guidance that we are giving, mainly when you take a longer horizon, I'm saying that in the last two years, broadly, a cumulative average growth rate of 20% per year.
This is broadly aligned with what most of the banks in Iberia are giving, and the business models in Spain and Portugal are similar. So the weight of mortgages and floating rate credits in the balance sheet of Spanish banks is not very different from what you see in Portugal. So another level of comfort that you think can take is that if you take both years together, our guidance is broadly aligned with the guidance of all other institutions. Of course, we can all be wrong, of course, but it's less probable that this occurs. Okay? In terms of, I think, loan demand. The loan demand. The loan demand right now, we are not seeing a lot of loan demand, effectively.
But we are hoping that this may change as the funds from Europe come, well, due to the multiplier effect in terms of investments. So we are expect the beginning of the year is broadly stable in terms of the total book, so the loan book is not growing, mainly in companies. We expect as all these new projects get approved through the multiplier effect of the economy, we will have some loan demand, so that we expect to grow our loan book of companies in the low single digits. Let's see. So of course, we are living in moments of uncertainty. In any case, what I can tell you is that our NII in 2024 and 2025 is not extremely sensitive if instead of growing our loan book by 0.5%-2%, we don't grow.
So it will not be a drama, at least short term, if we don't grow in the loan book. Okay?
Okay. Thank you.
Thank you. We will now go to the next question. Your next question is a follow-up from Noemi Peruch, from Mediobanca. Please go ahead.
Hi again. Thank you for taking my follow-up. Just one clarification. Indeed, you said that your NII guidance included a forward curve, just to make sure we are talking about the same assumptions. It is basically 100 bps of rate cuts from June 2024. Thank you very much.
I mean, I will send you the forward curve as of today. I don't have it here with me, but I will send you the forward curve of the EURIBOR as of today. But it is the forward curve, okay? Our sensitivity is of the NII to the EURIBOR, is somewhat lower than what we had six months ago. So as I commented, typically, our sensitivity of the NII is between EUR 50 million and EUR 100 million. In June, we were closer to 100, now we are closer to 50, for each 100 basis points.
Thank you. There are currently no further questions. I will hand the call back for any closing remarks.
I would like to thank you very much for following up on the BCP equity story. We are very proud of the results that we are showing. We are very proud on what we are achieving in terms of the development of our franchise and the sustainability of our net income and, or, of our capital accretion. We hope that you, as participants in the market and, the, the investors, which we all serve, will benefit over the, over the long term also from the development of the franchise. Thank you very much, ladies and gentlemen.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.