Good day, thank you for standing by. Welcome to the Millennium bcp first half 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will 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 hand the conference over to your speaker today, Mr. Miguel Maya. Please go ahead.
Good afternoon, Miguel Maya speaking. Welcome to BCP earnings conference call. As usual, I will mention the highlights of our performance, followed by Miguel Bragança and Bernardo Collaço will provide additional detail. The profit of EUR 423 million on the first half of this year was based on a strong operational performance from the activity in our main markets, all having contributed positively, notably in Portugal, where the net income grew 118% and stood at EUR 354 million. The strong increase of the consolidated net income this half was also influenced by some one-offs in Poland through last year's first half and in the Q1 of this year. However, these one-offs were not the determining factor of our strong performance in this first half.
What I would like to underline is the significant improvement on the recurring core operating profit, which stood at EUR 1.2 billion, having increased more than 40%, a figure that highlights the quality of our business model and the increased relevance of our franchise in the main markets where we operate. The core income evolution has been driven by the positive jobs dynamic, with the NII growing above 28%, combined with a lower increase of the operational costs below 9%, achieved thanks to a very rigorous and strict cost management that has been crucial for containing the growth of operational costs in a high inflation environment. Our earnings are still heavily influenced by the legal risks in Poland.
Costs related with the FX for mortgage loans reached EUR 399 million this half, including provisions of EUR 332 million, that already incorporate more conservative assumptions in the provision model, therefore, increasing the FX portfolio coverage to 65%. Bank Millennium performance has been showing the resilience of the business model, model of the bank and the potential of the franchise in the Polish market, having recovered the capital position well ahead what was planned. On a consolidated level, our capital position has been improving consistently for some quarters now. Our strong capital build-up has been achieved through a very strict discipline and rigorous implementation of specific measures, such as securitizations, most importantly, because of our business model proves resilient and capable of steadily generate capital.
In the last 12 months, Common Equity ran increased to 168 basis points, and total capital increased 304 basis points, standing at 14% and 18.3% respectively, having achieved a strong capital position that give us confidence to successfully steer the bank throughout the still challenging macroeconomic context. Also important in the current context is the fact that our robust capital position is complemented with a strong liquidity situation. We have liquidity indicators clearly above regulatory results and a conservative loan-to-deposit ratio, and a high level of eligible assets to discount at ECB in the amount of EUR 24.2 billion. Monetary policy changes were the trigger for a new competitive landscaping deposits, in which our relationship-based business model has been standing out.
On balance sheet, customer funds grew 2.9% since June last year, stable in Portugal, being the increase mainly driven by the activity in Poland. We remain committed with our trajectory of reduction of non-productive assets. Since June 2022, we have managed to reduce more than EUR 900 million, namely EUR 361 million in NPEs, EUR 162 million in foreclosed assets, and EUR 400 million in restructuring funds. On the first half, we reduced EUR 59 million in foreclosed assets and EUR 76 million in NPEs, continuing the downward trajectory of the NPE ratio, which stood at 3.7%, and with non-performing loans past due for more than 90 days, representing 1.4% of the loan book and less than 40% of the NPEs on the stock.
The rigorous management of the balance sheet risks enable us to reduce the cost of risk, despite the challenging environment in which we are operating. At the group level, the cost of risk decreased 11 basis points since June last year, standing at 50 basis points, with a significant improvement also in Portugal, where cost of risk came from 69 basis points to 53 basis points. At the group level, our customer base expanded 4% since June 2022, reaching almost 6.6 million, of which nearly 2.7 million in Portugal. Most notably, mobile customers grew above 13% during the same period, accounting for 66% of the group's customer base. 55% in Portugal, which is a good indicator of the success of our digital transformation, transformation journey.
Our digital capabilities are also widely recognized by customers, which make us the bank they must spontaneously nominate as the best digital bank. Customers' recognition of our digital capabilities is also reflected in the use of they make of the app, which has gained increasing relevance as their preferred platform to interact with the bank. On the first half of this year, customers carried out 30% more transactions through the app than on the first half of 2022, with a significant growth in the number of transfers and payments. The number of sales through the mobile app has increased 26% in the same period, with the emphasis to cards and savings solutions, which increased 28%.
The investment and the priority we give to mobile solutions, solutions, with a clear focus on customer-centric innovation and permanent, permanent improvement, means that our app continues to lead the rankings and deserve top reviews of the most relevant platforms. Overall, in this year's first half, we have solid earnings than further strengthen the franchise, the asset quality, the capital ratios, and the operational efficiency of the bank. With rigorous planning and bold actions, we have managed to achieve the main targets set out in the strategic plan more than one year in advance. We are confident that the options we have taken and the results that we are consistently achieving quarter after quarter, contribute in a very positive way to the valuation of the bank, which is evident in the evolution of the share. Miguel, the floor is yours.
Thank you. Thank you very much, ladies and gentlemen. Focusing now on the consolidated income statement, what we can see is that the NII has grown, at consolidated level, has grown 40%, almost 40%, and the core income 28.3%. Whereas the operating costs, that of course, were influenced by the high inflation environment that is seen in mainly in Poland, have grown 8.8%. These very positive draws made core operating profit increase 40%, which coupled with some extraordinaries that we had last year and some of them this, this year, namely the sale of Millennium Financial Services, allowed operating net income to grow almost 70%, 70.
There is... In, in terms of the loan impairments, we, in spite of the challenging macroeconomic environment, we were able to show a decrease of the cost of risk. We have used all these very, very sound operational performance to be additionally prudent in terms of the CHF risk in Poland. Namely, following the decision by the European Court of Justice, that basically pointed to the no remuneration in case of annulment of the contracts to the bank. This made it possible to grow the, our net income that was very, very marginally positive last year, to EUR 423 million in the first half of this year. In terms of the group evolution, what we can see is that, that the net interest margin has grown almost 40%, 39.5%.
I'm sorry, the, the NII grew 40%. The net interest margin grew from 2.29% to 3.34%, and it has done so in the, in both in Portugal and in our international geographies. In Portugal, we are able to show a NIM above 2.5%, coming already from levels that are quite high, and growing 64%. This is not totally, I would say, this sustainable, I would say, this, this NIM, and reflects the fact that the repricing of the deposits, as I, I have commented here in the previous quarterly presentation, is following at a slower pace than, of course, the almost immediate repricing of credit that are indexes to the euro. As time goes by, we expect this to normalize.
In terms of the international prices, we also have seen a positive evolution of the net interest margin when compared with last year, so that the NIM grew 20%. In terms of fees and commissions, I would say stability, with a small growth in Portugal and a small decrease in the international operations. In terms of other income, a lot of moving parts. First, I would here highlight the strong decrease in terms of regulatory contributions, mainly because we had last year some extraordinary regulatory contributions in Poland.
Also because of the contribution to the European Resolution Fund, and I would say to some balance sheets, balance sheet management and balance sheets shrinkage, that allowed us to decrease our mandatory contributions in the international operations, more than EUR 110 million, and in Portugal, more than EUR 16 million. We. The net trading income, marginally positive, as we see here in, in Portugal. It's normal in this low interest rate environment. This net in the trading income is ancillary to our business model, so we are not a trading house, so we don't take significant positioning, positioning views. In terms of the equity earnings and dividends, we show here mainly a stability.
In terms of costs, cost-to-income in the low 30s, as you see, both in Portugal and in the international operations, with costs growing significantly below inflation in the several geographies. Impairment charges, in total, stability, however, with a, with a specific composition, the, the credit risk impairment charges showing a decrease, which are more recurrent and which is healthy, relatively to the consideration of our business model. The cost of risk went down in our consolidated accounts from 61 basis points to 50 basis points, and in Portugal from almost 70 basis points to 53 basis points. On the other hand, as it was already communicated to the market, our provision for the CHF legal risk increased, increased materially, in the first half of this year, for reasons that I've already commented.
In terms of credit quality, I would highlight here, our NPE ratios, including the, the EBA criteria, i.e., all the securities and off-balance sheet criteria, and off-balance sheet positions that is already at 2.5%. Considering only loans, it's 3.7%. However, in terms of composition, it's, I would say, a better composition than what it used to be in the past, because most of our NPEs are not 90 days past due loans, but unlikely to pay loans, that are typically healthier than the 90 days past due. If we only consider the 90 days past due, of course, with the attached capital, our ratio is only 1.4% at consolidated level, which for a bank of our size, with our business model, is already an important achievement.
The NPE stock is continuing to reduce, in spite of the challenging environment in which we are in, namely due to the high interest rates. As you see, in Portugal, we have been able to reduce EUR 373 million, year-on-year, and international operations, basically stable. In terms of business activity, at consolidated level, we have been focusing more on the income statement and on the capital generation. You see here that customer funds have grown year-on-year, 1.5%, which when you compare with what happened with several of our competitors, is clearly accretive from a market share point of view. In terms of deposits and balance sheet items, which are more stable because they are not affected by the mark-to-market, we have here a growth year-on-year, at consolidated level of 3%.
In Portugal, what we see is a stability in terms of the deposits year-on-year, which compares very, very favorably with the data from our main competitors that show a decrease. In terms of the total for customer funds, international operations, here we show a very, very healthy increase of almost 10%. Loans, as, as we all know, this more restrictive monetary policy is shrinking the monetary aggregates, this makes it more difficult and more challenging to, to grow in healthy, in healthy loans. What we see in Portugal, in terms of year-on-year, we see, I would say, stability. We see a slight decrease in terms of the performing credit, but it's really not material, EUR 320 million in a portfolio of EUR 40.6 billion, and the same in international operations.
The message here is a message of stability. In terms of capital and liquidity, we were able, this quarter, once again, to increase substantially our capital ratio, so that our Common Equity one reached a level of 14%, which compares very favorably with our Iberian and French counterparts. I would highlight here the special dynamics, considering that one year ago we were at 11.3, and we were able to achieve this value without any type of demand to the shareholders. Leverage ratio is always very, very positive, and quite conservative RWA density that is still influenced by a more, I would say, conservative or by more conservative data that influenced our models due to the economic history of Portugal in the last 10-12 years.
In terms of MREL, we were communicated a new MREL requirement. We are clearly above the present non-binding MREL requirement that is 24.9%, so we are at 27.9%. In terms of 1st January of 2024, we are basically on top of it, so we are marginally below, which is easy to fill the gap only with the result generation. However, as it's here pointed out, in spite of not needing it, we have the intention, if the conditions are right, to do a senior preferred issue in the second half of this year.
In terms of pension fund coverage, I would here highlight that the discount rates of the pension fund came down from 4.17% to 4%, which made, of course, which had a negative impact in terms of the liabilities that grew 3%. At the same time, the fund's profitability grew 3%. This shows the quality of our ALM strategy within the pension fund, which makes it possible for us to still keep an excess of EUR 568 million. That is not considered in our own fund calculations. I mean, we, we could afford, so to say, to have an adverse shock on the pension fund, on the liabilities or the assets of this value without having any impact, so to say, on our capital ratio.
This is another side of the coin, if you want, of the reduction of interest rates that we had over the last year. Another side of the coin, I'm sorry, of the increasing interest rates that we had in last year. Another side of the coin, was the reduction of the present value of the liabilities of the pension fund. That really constitutes a kind of hidden reserve to absorb possible shocks. Liquidity ratios, after having fully repaid the TLTRO, very healthy ratios. The liquidity coverage ratios at 214%, the net stable funding ratio at 255%. On top of it, we have eligible assets that we can discount without any stigma, without any problem, in excess of EUR 24 billion in Portugal.
Just for you to have an idea, so our total deposits are EUR 50 billion. Our demand deposits are, 60% of it. So our eligible assets almost cover all our demand deposits. I'll pass now the floor here to my colleague, Bernardo Collaço.
Okay. Thank you, Miguel, and good afternoon, ladies and gentlemen. Starting from page 26, that relates to Portugal. Net income increased 118% from EUR 162 to 353 million. This positive evolution was driven by stronger net operating revenues that went up more than 30%, and strict cost management, allowing costs just to go up 4.4% compared with the first half 2022. It should also be noticed the positive contribution to net income arising from the reduction of 24% from credit impairments. On page 27, which we have a detailed information of NII in Portugal. At the end of the first half 2023, NII stood at EUR 707 million, meaning 64% year-on-year, or EUR 277 million above the previous year.
The favorable performance of NII in Portugal largely reflects the higher income generated by the loan book and the positive impact from the securities portfolio, both resulting from the current interest rate environment. The other side, the rise in interest rates have a negative impact on the remuneration of deposits and the higher costs supported by the bank on wholesale funding. Moving to page 28, which shows the evolution of fees and commissions and other income. Banking fees and commissions have a slight increase of 1.4%, driven mostly by the higher transaction ability over this period, and market-related fees were flattish year-on-year. Total fees and commissions were EUR 3 million higher than one year ago.
Looking to other sources of income, other operating income went down around EUR 5 million and is mostly explained by the reduction of mandatory contributions to the Single Resolution Fund, as well as to the Portuguese Resolution Fund. Equity earnings contributions stood at EUR 28 million in the first half of 2023, and trading gains were much lower than in the first half of this year, compared with the first half of last year, mainly driven by lower results from sovereign debt trading activity. All in all, other income, including equity, accounting, earnings, trading and other operating income, stood at minus EUR 36 million, which compares to EUR 22 million positive in the first half of 2022. Going to page 29, regarding costs.
Bank continues to apply a strict policy in terms of cost management. Total cost grew 4.4% compared with the first half 2022, and at a much lower level than inflation that was observed during this period. It should also be noticed, the non-recurrent cost, that includes mainly the compensation for the temporary reduction of the remuneration in the period 2014, 2017, that reached the final reimbursement, so it must be seen as a one-off that will not be repeated. Branches and employees stay at the same level than one year ago. Moving to page 30, which refers to asset quality. As highlighted before by Miguel, there was a significant reduction of NPEs. NPEs reduced 23%, meaning more than EUR 370 million in one year.
In the first half 2023, there was a reduction of EUR 9 million. EUR 90 million, sorry. Clearing and showing that the bank is committed with the continuation of the reduction of the NPEs. As you can see on the top left chart, year-on-year reduction occurred both on non-performing loans, 90 days past due, and other NPEs. The NPEs as June 2023 stood at EUR 1.26 billion, compared with EUR 1.6 billion one year ago. Cost of risk stood at 53 basis points. That compares with 69 basis points, showing the convergence of the cost of risk to normalization. Now let's move to page 31, which looks in more detail to the NPE coverage. As you can see, total coverage of NPEs stood at 131%.
NPE coverage by loan loss reserves stood at 75%. It should be highlighted that total coverage for individuals with high levels of real estate collaterals stood at 100%, and for companies at 142%. Coverage by loan loss reserves on companies at 92%. Coverage by real estate collaterals at 48%. If you look at the top right chart, coverage of NPLs, 90 days past due, related with companies, stood at a level above 255%. On page 32, which shows the evolution of foreclosed assets and restructuring funds, there was a strong reduction year-over-year on both of them. Net value of foreclosed assets stood at EUR 124 million.
That compares with EUR 286 million in the first half of last year, meaning a reduction of more than 56% or a decrease of more than EUR 162 million. On the first half 2023, bank achieved a reduction of more than EUR 60 million in terms of real, in terms of foreclosed assets. Regarding property sales, there was a significant reduction in the number of transactions compared with the first half of last year. To what regards to restructuring funds, there was a reduction of 47% year-on-year. That, as explained before, or on the previous quarters, it was mostly related with the sale of a private equity entity and the funds that were managed by them, although there was a slight reduction as well on the Q2 of this year.
Now moving to page 33, total customer funds decreased slightly, driven mostly by the decrease of off-balance sheet funds, as balance sheet funds were stable year-on-year. Off-balance sheet funds decreased 11%, still influenced by market conditions and the significant maturities of insurance products. It's worth mentioning that it's worth mentioning the stability of deposits of the Portuguese operation. In terms of gross loans, there was a decrease of 1.7%. Loans to companies went down 4%, this is somehow influenced by the reduction of EUR 500 million of NPEs. Loans to individuals, almost flattish year-on-year. Going to page 34, analyzing the evolution of the performing loan book in Portugal by segment, once again, it's also highlighted in this slide, the recognition of BCP as the main bank for Portuguese companies.
I should say that performing loans in Portugal went down less than 1%, supported by the stability on loans to individuals. It is worth mentioning that as of the end of the first half of this year, guarantees provided by the European Investment Fund and Portuguese entities represent around 30% of loans to companies. Let me also reinforce the leadership of BCP in this, in this SME program for the fifth consecutive year, as well as the Inovadora COTEC program for the third consecutive year, and the recognition as the best bank for companies from Data E. Now, moving to page 36, regarding international operations, and as mentioned before, results were again impacted by specific effects related with Bank Millennium. Although, it's important to highlight that Bank Millennium registered for the third consecutive year...
For the third consecutive quarter, sorry, positive results after several quarters with losses. Net income of Bank Millennium stood at EUR 77 million. That compares with a loss of EUR 56 million one year ago. Mozambique contribution, more or less, at the same level of the first half, 2022. It should also be highlighted, the quarterly contribution that have been stable over the last quarters. In summary, contributions from international operations stood at EUR 69 million, which compares to EUR 2 million in the first half of last year. In the first half of last year, as you know, it was also registered the impairment of Bank Millennium goodwill, that had a negative impact of more than EUR 100 million in the Q2 of 2022.
Excluding specific effects from Poland, mostly, related with costs associated with the FX mortgage portfolio, also excluding the sale of 80% of the stake in Millennium Financial Services, of course, the goodwill impairment, contribution from international operations would have stood at 41% higher than one year ago. Moving to page 37, which refers to Bank Millennium, net income in Poland continued to be impacted by costs related with CHF mortgage loans. Once again, let me also reinforce that, this is the Q3 that Bank Millennium had positive results. In the first half of 2023, net income in Poland stood at EUR 77 million, which compares with a loss of EUR 56 million in the first half of last year.
As mentioned before, excluding these effects, the net income would stood at EUR 313 million, meaning 50% above the previous year on a comparable basis. Net operating revenues increased 43%, and operating costs went 17% down due to lower mandatory contributions that were suspended since the activation of the recovery plan in July 2022. Operating costs, excluding these mandatory contributions, went up 15%. To what regards to capital in Poland, CT1 and totally, in total capital were at the end of the first half of this year, above regulatory requirements, and the CT1 stood at 11.7% and total capital ratio at 14.8%.
It should also be remembered that Bank Millennium was able to bring back capital above requirements at the end of last year and prior to what was initially estimated. On page 38, some detailed information about Bank Millennium, NII increased 21% year-on-year to EUR 561 million. That compares with EUR 462 million one year ago. This movement was mainly driven by interest rate hikes since the Q4 of 2021. NII was 9% above the Q1 2023. NIM increased from 4.14% to 4.71%, and it was 13 basis points above previous quarter.
Fees and commissions decreased 5% year-on-year to EUR 87 million, and, and other, and other was strongly impacted by the positive result arising from the sale of 80% of the Millennium Financial Services that was mostly booked on the trading line. As mentioned before, mandatory contributions in the first half of this year were much lower than last year due to the activation of the recovery plan and the one-off registered in the first half of last year related with the Institutional Protection Scheme. Moving to page 39, related with asset quality in Poland, and taking into consideration the high level of interest rates and still high inflation, cost of risk stood at 45 basis points and at a lower level than that, than it was initially projected by Bank Millennium for this year, taking into consideration market conditions.
Non-performing loans, more than 90 days past due, steady year-on-year at a level of 2%, Coverage by loan loss reserves of non-performing loans stood at 159%, meaning an increase of 12 percentage points compared with the first half of 2022. On page 40, customer funds grew almost 5% year-on-year. In terms of loans to customers, gross books stood up to 17.3 billion, 6% less than one year ago. It is important to highlight the significant decrease of mortgages in foreign currencies that, deducted by provisions for legal risk, went down significantly. This reduction, of course, influenced the decrease of gross loans compared with 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 a yearly basis, there was a reduction of 15% and 4% quarter-on-quarter. At the same time, Bank Millennium increased provisions against legal risk, and at the end of June, reached an amount higher than EUR 1.37 billion. It is important mention that in the first half of this year, Bank Millennium made some extraordinary adjustments on the provisioning model, incorporating a more conservative approach on the model. Most important is that by the combination of creation of these provisions and the decrease of the loan book, Bank Millennium brought the ratio, brought the ratio of total provisions against legal risk versus the gross mortgage book, to close 65% at the end, at the end of June this year.
At the same time, Bank Millennium continued the efforts to reach amicable settlements with clients, and in the second quarter of this year, Bank Millennium was able to achieve 924 amicable settlements. Now, turning to page 42, and regarding Mozambique, we can say that Mozambique, even under a challenging environment, continues to provide an important contribution for the group. Net income increased 3.3%, mainly due to higher NII. Net operating revenues increased more than 8%, and operating costs were 13% higher than one year ago. Capital ratios stood at almost 42%. Moving to page 43, NII went up 13% year-on-year to more than EUR 105 million and was influenced by interest rates. NIMs stood at 8.9%.
That compares with less than 7.8% in June 2022. Commissions went up 6% to almost EUR 20 million, from EUR 18.5 million, EUR 18.5 million. Other income decreased 25%. Moving to page 44, NPLs 90 days past due stood at 7%, which compares to almost 10% one year ago. Coverage by loan loss reserves of 90 days past due stood at 117%, compared with slightly less than 100% one year ago. Cost of risk stood at 153 basis points, which compares with more than 210 basis points one year ago.
As a final slide and regarding volumes, you can see that customer funds registered a reduction and loans to customers an increase of 11%, although the level of the total loans to customers, it's about slightly more than EUR 700 million. I will thank you very much for your attention, and before we move to Q&A, I will return to Mr. Bragança for some final remarks.
Thank you. Thank you very much, ladies and gentlemen. As always, I present here exactly where we stand vis-a-vis the strategic plan that we presented to the market, three years ago, three and a half years ago. As it's clear, the targets that we have set for 2024 are basically already, already met. This shows the very strong franchise and execution capability of, of the bank. We really would like here to highlight, that on top of meeting these targets, the bank now is in a materially different position than where it was some years ago. What always made BCP different is the strength of its franchise, the customer relationships, and the ability to generate value for customers, employees, and shareholders.
However, this very strong flow of value creation was being absorbed during many years, effectively, to improve the financial situation of the bank and to improve the balance sheet of the bank. Once we get to a normalized status, and our plan was to get there in 2024, we are basically there now. What we see is that this capability that the bank has of generating pre-provisioning profit and recurrent results, is showing already in terms of capital creation, in terms of net income generation. This is a quantum change, a quantum leap change in what BCP is, and we expect this continue for the future, for the benefit of our employees, our clients, but also our shareholders. Thank you very much. You open the floor to Q&A. Thank you.
Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. We will take our first question. Your first question comes from the line of Ignacio Ulargui from BNP Paribas Exane. Please go ahead, your line is open.
Thanks, gentlemen. Thanks for taking my question. This is Ignacio Ulargui from BNP Paribas Exane. Just have a couple of questions. I mean, the first one is on NII. After the strong performance that you have delivered so far in the first half of 2023, at a group level, what kind of expectations can we have for Portugal, particularly in Poland, for 2023, and if you feel comfortable as well for 2024? The second question is a bit on what you were saying at the end in terms of the ROE the bank has achieved so far is 16.8%, have a target of year around 10%. You have said in the call that NII has been very strong, but as deposits remuneration goes up, that will fade a bit.
What kind of level of profitability you think BCP can deliver, in the medium term, long run, with the current level of rates? A final small question: When should we expect Bank Millennium to exit the recovery plan status? Just trying to understand when all the contributions could come up. Thank you.
I'm, I'm sorry, Ignacio, I have not fully understood your question.
You can explain as well.
Okay. Okay. Thank you very much. Thank you very much. In terms of the NII for Portugal and Poland, starting with Poland. Poland, right now, is in a very complex moment, with, I would say, a high volatility and high uncertainty about the future evolution of interest rates, this affects the bank very materially. Of course, as you know, in Poland, we also have a listed bank, so we have to be very, very careful in terms of the management of expectations there. What we can say, and your expectation in terms of future interest rates is similar, similar to ours, but what we can say is the sensitivity of the NII to interest rate movements, that is quite low.
That is that even if interest rates go down by 100 basis points, the Polish NII goes down by 2%. Which is this, now it depends exactly on what is your expectation of the future evolution of interest rates, and here, the volatility is particularly high, and the uncertainty is particularly high, but I will not go further into it. In terms of Portugal, we are speaking about the Eurozone interest rates. There is also some uncertainty, but I would not say that the current uncertainty is out of normal, and we feel more comfortable in terms of, of giving guidance. We have been quite conservative, as you know, in terms of, of giving guidance, in terms of how fast would the market converge to a more normal level.
We expect the market to converge to a more normal NIM in 2024. For 2024, so 2024, vis-a-vis 2022, we expect to have a growth of low 30s, low 30s for the margin of 2024, vis-a-vis the margin of 2022, based on the current forward rate curve. This year, we expect the margin, the NII, to be above that because of these different speeds at which the, the, the deposit rates for customers and the, the asset rates have moved. This year, we are reviewing our expectation from the last value that we have given you to a value that is on the high 30s, so vis-a-vis last year.
Comparing with 2022, this year, we would expect, based on current information, to have a growth of the NII on the high 30s. Then 2024, not vis-a-vis 2023, but also vis-a-vis 2022, we would be seeing on the low 30s, which we, we will then see as a, a normal level from which we will then grow, more or less in line with, with the credit growth, which, which we expect to be low single digits from 2024 on. In terms of the profitability, we feel, we feel very comfortable that, after, I would say, the, the, the, the Swiss franc saga, so to say, we will have an ROE in the mid-teens after everything that has to do with Swiss francs has been digested. We feel very comfortable with that.
In terms of forecasting exactly, when it will occur, depends on how we anticipate and whether these provisions are more or less anticipated. So it is, it is difficult to say what will be the specific ROE in any quarter until we reach, so to say, the steady state scenario. But I would say in steady state, which in any case, I, I would expect to be there by, by mid-2025 and 2025 at least, we expect clearly to be on the, on the mid-teens or above. Okay? We will be presenting, we will be presenting to the market, a new strategic plan with new strategic objectives once this plan ends, actually a little bit before.
In this context, we will also be presenting new ROE targets, which will, I can say, surely be above these targets, and new targets also in terms of the other variables that you see here. In terms of the recovery plan, this is still being analyzed exactly when we will exit the recovery plan. We are discussing this with the authorities. In any case, in any case, we would expect it not to be this year. In any case, it will be next year. Exactly in which quarter of next year or whether it be exactly at the beginning, is still something that will have to be negotiated with the authorities.
Of course, once we are in a recovery plan and which and once we took, so to say, the hit of being in a recovery plan, we are also benefiting from these savings in terms of the cost that you have referred. We are not particularly in a hurry, so to say. Thank you.
Thank you. We will take our next question. The next question comes from the line of Maksym Mishyn from JB Capital. Please go ahead. Your line is open.
Hi, good afternoon. Thank you for the presentation and taking our questions. I have three. The first one is on the outlook for loan book growth. In the Q2 , the growth in corporate loans in Portugal have been somewhat weaker than expected, and I was wondering if you expect this to reverse and whether you reiterate the guidance of low single digit growth for 2023. The second question is a clarification. I was just wondering why the tax expense in Portugal was lower than expected in the quarter, and what should we think of for the rest of the year? The last one, apologies for coming back on this, but I just wanted to ask you about capital. It keeps on growing.
You have a 150 basis points buffer over your medium-term target, which is around EUR 600 million. How can we think of potential ways you will deploy this capital? When should we expect some news on the deployment? Thanks.
Thank you very much for your question. In terms of loan book growth, effectively, the loan book, mainly on the, on the corporate side, is not growing at the speed at which, at which we were initially expecting. This has a lot of causes. One of them is that the, the European funds that were expected to come into the country and have a, I would say, a multiplying effect in the, in the investment of several companies, are not having this multiplying effect as, at the speed at which we were expecting, so to say. Another fact is that we were extremely successful in some of the special lines and some of the, of the COVID lines with government guarantees.
Some of these companies took the lines without actually needing them so much, so they are repaying, they took, they took them for precautionary, for precautionary motive, so they are repaying these. As we had a higher market share at the time, we are probably having a disproportionate impact in our, in our case. We think that year on year, probably this, this year, the less biased, I would say, estimate will be probably 0, but it may still be low single digit. Maybe low single digit growth, low very, but we close to 0, I would say, except if there is some, but some acceleration.
In terms of tax expenses, the tax expenses depend a lot, on a quarter on which, which, expenses are booked, and mainly which impairments and which provisions are booked in this specific quarter, and whether these expenses are considered deductible or not. What happens sometimes is that when, when you have a provision that's not considered deductible, for, for a certain reason, but then, it becomes deductible, so to say, you have a provision for some assets that when you do the provision, it's not deducted. But when you sell the assets, the capital loss is actually deductible. These transfers from, from, a provision to a capital loss, of course, creates here some, some volatility, I would say, on a quarter by quarter basis in terms of the tax rate.
I would say across the year, I think that having a 31% to 33% tax rate in Portugal makes sense, because this is the normal rate. Of course, you may have there some timing differences that then influence the bank, so to say. In terms of the capital and how it grows and so on. Of course, this is a good problem to have, this and of course, we are very proud of having achieved in such a short period of time, a 14% ratio, probably. This was one of the fastest capital accretion situations that we've seen in the last years, and it was done with a lot of work from all the team.
Looking forward, as we have commented here several times, we want to be seen as a reference investment grade bank in Europe. A lot of our target capital ratio. This capital ratio was fixed as a target three years ago, so we have not changed the target. Actually, what we want really to be is investment grade, which we are already by two of the rating agencies, but not by all. We want to be by all, and to give confidence for our equity, but also for our bond investors, and to have a capital ratio that's appropriate to it. Fortunately or unfortunately, this is to a large extent also relative. It will depend.
When we will communicate to the market our target ratio within the context of the new strategic plan, we will look at our competitors, we will look at the market, and we will fix a new capital ratio. My personal view, but that it's quite irrelevant in this situation, is that probably the banks in Europe are having capital ratios that are well in excess of the risks that they have. This is not what the market is saying. The market is actually demanding this type of capital ratios and higher capital ratios from the banks. I would not take a lot of focus on this target that was fixed three years ago.
I would put our focus in what is the capital ratios of banks that are investment grade, with that are considered excellent within the European context. Most probably, this will be, of course, we will discuss in the board and so on, but most probably this will be our new, our new capital ratio. Looking forward, we think we will be able to... If we have an ROE on mid, once we get to an ROE of mid-teens, so to say, and we find opportunities to grow risk-weighted assets between 5% and 6%, let's say, it is reasonably to expect that we will have a payout that will allow our, our capital ratio then to be, to be constant.
It is reasonably expect to have a payout around the, the type of payout that we see in other excellent European banks. That is, I would say, around 50%, but this is something that we will communicate to the market, and will be, I, I would, in a, in a steady state, this will be something that will be then agreed by the board. This will be presented to the market. What I can say, tell you as a general guideline, is that our benchmark are the best banks in Europe, in any, in all of these dimensions. We think that by being close to this, this benchmark, we will, we will, be able also to remunerate the investors through dividend in an appropriate way.
Thank you very much.
Thank you. We will take our next question. Your next question comes from the line of Noemi Peruch from Mediobanca. Please go ahead. Your line is open.
Good afternoon, and thank you for taking my questions. I have a few on NII and a follow-up on capital. So assume, let's say 40% increase in NII this year. This kind of implies a 12% decline in H2 vis-à-vis H1, which looks harsh. So, could you please share with us your assumptions in terms of deposit beta and rates within this guidance? Also, what is the deposit beta in Q2? And then I would like to ask you about what you're seeing and also what you expect in the deposit market. How do you see competition behaving? And are you seeing customers still moving funds into govies, or are you seeing a higher demand for term deposits?
When it comes to capital, I would like to ask you if you could share with us, the payout you are accruing in, the first half of the year, and when do you see the payout moving to the benchmark level? Could be this year already, as you have already, let's say, achieved a normalized, status? Thank you very much.
Okay. Okay, okay, starting, starting with the payout. As I commented here in our last conference, when we presented the plan to the market, we said that 2024 would be, I would say, the steady state year, and relatively to 2024, we would expect then to have, I would say, a more normalized normalized payout. I also said that this year is a transition year, so 2023, so the dividend is a, is a, a year to go exactly to this, to this new normal. This is what I can say at the moment.
Whether this year goes so well, so well that we can accelerate, and whether we will stay exactly within the normalized level and the last level that we have here, interest rates, I think, I think it's too early to say. I don't think also that from a valuation standpoint, this is particularly important, whether the dividend in one specific year will be very, very different. This is clearly a consensual decision. It's something that will be taken, a decision that will be taken at the, at the board with several, several inputs, and I don't think it's, it's correct from my side to try to anticipate this decision right now. What I can tell you is that I would almost say there will be some dividend this year, important.
This dividend will be probably between the dividend that we had last time, that was a low payout and the 40%, exactly where it will be in this interval, I think this will be something that will be decided at the appropriate forum. I don't want to anticipate. In terms of, in terms of the deposit beta, effectively, what we are seeing right now is that the deposits are having more dynamics, I would say, in terms of their remuneration, mainly the term deposits. What is implicit in our assumption is to get to the end of the year with, to a beta of 40% by the end of the year, for time deposits and for total deposits, around 20%.
If we do the numbers this way, you will get, I mean, the 40%, and the decrease of 12%, it's what you are saying. I said high 30s this year and low 30s last year. The difference between high 30s and low 30s, I mean, can be, can be very, very different from the values that you, that you are saying. It's not between 40 and 30, so to say. I said high 30s this year, low 30s next year. Exactly where we stand, of course, it will depend on these dynamics.
What we clearly are seeing is more competitiveness in terms of the time deposits, as expected, because it's normal that Portugal converges in this issue as well as in other issues to what you see in other countries of Europe. We are a convergence countries in many dimensions. If you do this, with these betas, you will get more or less to these type of numbers that we are saying. Of course, I would like, here, I like to highlight, we are not pushing hard for an increase in remuneration at system level.
We are not starting any type of deposit war. We do what we have to do. We are competitive. We want to preserve our clients and preserve long-standing relationships with our clients. We try to compete more through service, and generate through our service and through a series of other products, the client loyalty. Of course, we have to offer, balanced and good products to our clients also.
Thank you. Could you please share the starting point of the deposit beta in Q2? Thank you.
Right now, this is not public information, okay?
Okay, thank you.
Thank you. We will take our next question. The question comes from the line of Álvaro Fernández-Garayzábal from UBS. Please go ahead, your line is open.
Hello, good afternoon, and thanks for taking my questions. I have two. First, the number of claims in Poland has decreased, quarter on quarter, with a more favorable mix between lawsuits and settlements. But it would be interesting to know if you have witnessed a change in trends after the ECJ ruling on the 15th of June. I would like to ask if you could please give a little bit more color on the trends at the end of June and during July? Second would be on NII in Poland, what's driving the decrease in funding costs in Poland, and what should we expect going forward? Thanks.
I mean, starting with your last question, I mean, Poland started raising interest rates in a sharp way sooner than the remaining of Europe. The Polish start having higher interest rates than Europe. They are in another phase of the curve. They are already in a phase where if you take a look at the forward curve of the Polish zloty, it shows a decrease in interest rates. You have to see the remuneration of the deposits and our keenness to pay for deposits in this context, that the forward rates are clearly inverted. We try to manage our booking in this way. Of course, it's a moment of high uncertainty.
What we- and in moments of high uncertainty, what we can do is to have an NII that is as hedged as possible, so that if the interest rate movement, even if the interest rates movements are high, the volatility of our NII is not excessive. In terms of claims in Poland, it's true exactly what you said. Effectively, in Q2, the number of claims, even after the ECJ ruling, went actually down. I would not read into it that this is necessarily good news, and that because of that, that is any type of causal effect between the negative ECJ ruling for the banks and the fact that customers are demanding less, because this would be illogical. What, what I would do it, is that this is the normal volatility and uncertainty of the market.
As we said, there were some people thinking that the dynamics of the market was already incorporating, so to say, this decision of no remuneration for the banks. The very litigants, agents in the market and law firms in the market that were trying to pitch for clients, were already almost promising this. This information was already out and was already influencing the behavior of the customers before the ruling. The ruling, actually, up to now, has not changed the pattern. What we can tell to you is that we are not witnessing any pattern change. On the contrary, if anything, what we are seeing is a slight, more positive evolution, but I would not read a lot into it, because next quarter may be a little bit different, so I would not read anything excessive into it.
Okay, thanks.
Thank you. We will take our next question. The next question comes from the line of Carlos Peixoto from CaixaBank BPI. Please go ahead, your line is open.
Hi, good afternoon. Thank you, thank you. A couple of questions from my side as well. Sorry to be going back to NII, but I just wanted to be 100% clear, or make sure that I understood clearly. You're expecting NII to grow this year, at high teens, at... Sorry, at high 30's, so 30, 3 something, I mean. Then next year, growing again over 2023, NII by another, thirties, low forties in this case. If this is the case, I was wondering, before you, you didn't mention, well, what the, what was the expectation for deposit beta into 2024? Or how do you see it standing next year?
I was wondering, to give support to this NII figure, what type of loan, or how much of the loan book, has yet to reprice to higher interest rates? What type of repricing backlog we still have feeding into 2024? Do you see here scope for either increase the year one portfolio or taking advantage of bonds that might be maturing to extend the duration of a portfolio at the current higher interest rates, in face of what I think will be a scenario of lower interest rates in the future? Just, just to understand a bit here, the dynamics of the repricing of, of NII and what could lead into this, significant growth, if I understood correctly. Thank you.
Carlos, thank you very much for asking, because this allows me to really make it even clearer. Both values, the high 30s% and the low 30s%, are relatively to 2022. I'm not saying that the NII will grow high 30s% this year, and again, low 30s% next year. What I'm saying is that, as I've already said, after 2022, we would be expecting the margin in 2022, on a steady state, to grow between 22% and 24%, 30-something%. The way we got there, for me, was not totally foreseeable. We could have grown 15% in one year, 15% in another year. There were many ways of getting there that would then be dependent on the dynamics of the deposit market, okay?
The way we are getting to these values in 2024, that will be a low 30s growth vis-a-vis 2022, is that we are going there in a nonlinear pattern, so to say. We will grow very close to high 30s in 2023, and then what we see is that we will have a slight decrease from 2023 to 2024, so that we will get to the normalized level in this way, so that the low 30s is vis-a-vis 2022, okay. I think it is clear. That's why this also will enable me, I mean, it makes then it easy, it is also for you to understand how this matches with the deposit betas.
That we expect in terms of end-of-period betas, as I was commenting, to reach the end of this year with a 40% beta on time deposits and 20% beta on total deposits. This to be, so to say, the new normal, so to say, to be there and to more or less at this level, we are not expecting, I would say, important interest rate movements next year, short-term interest rate movements. We are not expecting for we expect the average betas of 2024 to be also around those levels. Of course, it will depend on the competitive market, so it is not something that we, we totally control.
In terms of the loan book, in terms of the loan book, what we are expecting is this year, as I was commenting, something between low single digits and around zero. Next year, a low in Portugal, so to say, a low to mid single digit growth, depending on how the situation evolves and how the monetary policy evolves in Europe. In terms of the book and the hedges and so on, so how do we see it? It's an important question. If we compare BCP with other banks, besides, I would say, many dimensions that make us different in terms of capital generation, in terms of people raising profit and so on.
One area that also aligns us with, I would say, European best practice, is that we try not to have an excessive risk in, in our, in our operational profit. If you compare our NIM with the NIM of our competitors, what we see is that our NIM is reasonably stable, and has been, in the last years, clearly above the NIM of our, of some of our competitors. Our NIM has been, on average, 15%-30% above the NIM of our competitors, and has been stable, and low risk. We, we would deserve, I would say, half joke, so a lower cost of equity because of this, because we have a really less risk in this, in this dimension.
Of course, in the situations in which we are right now, these competitors that do not hedge the positions show a volatility and the variability of the NIM that is totally different from ours. And I think, and this is normal, but on average, across the cycle, we expect to have at least the same type of NIM or the same level of NIM with less risk, okay? And this fits also your second question, that what will we do with our hedges and with our book? We view our book and our hedges, so to say, as a way to hedge the NIM, the, the, the NII.
Our NII in Portugal has had a quite stable sensitivity, I would say, between EUR 80 million and EUR 120 million for each 1 percentage point of interest rate change, which is a low level, a very conservative level for our NII. We expect also to be at this level, we will, right now we are close to EUR 80 million. We can then go to EUR 100 million. This allows our NIM to be quite stable. We, we will be, I would say, adjusting our portfolio and our other hedges, so as to remain broadly in this interval. When we are more confident that the interest rate will increase, we go to EUR 120 million.
When we think that the, the risks are more tilted to the side, to the downside, we may go to closer to 70 to 80, but that, that's more or less where we move with a, with an average of EUR 100 million per 1 percentage point of, of interest rate increase. We will be adjusting, and we are adjusting our portfolio, both, and, both our government, that portfolio and our, cash for hedge portfolio, exactly to protect the bank from the volatility in interest rates. The type of maturities that we look at are typically maturities between four and five years.
That's the type of maturities that on average with, because these are the type of maturities that way we can have some, some visibility into, and also it matches also some EBA guidelines in terms of the consideration of the maturity of the current accounts. Okay? We are already doing what, what you suggested.
Thank you. We will take our next question. In the meantime, if you do wish to ask a question, please press star 1 and 1 on your telephone. Your next question comes from the line of Sofie Peterzens from JP Morgan. Please go ahead. Your line is open.
Yeah, hi, here is Sophie from JP Morgan. Just very quickly, going back to NII. When do you expect net interest income to, to peak in Portugal? Is it kind of Q4 , 2023? That's how I kind of understood it, but could you please elaborate on this? Second question is, what's your cost outlook for 2024? How should we start to think about cost inflation next year? Last question would be, could you just remind us what your thoughts are on, kind of, inorganic growth and potential M&A opportunities? Thank you.
Okay, I mean, I mean, considering what I've said in terms of the projection for the NII of this year to be in the high 30s, and as it was already commented here, to get from the current level to a level of high 30s, the second half of the year will be lower than the first half of the year. Which month exactly will be the peak month, I think it's a little bit difficult to say when it's got to this detail, but I would say at least that the second half will be lower than the first half, and probably Q3 will be lower than Q2. But there we don't have any special numbers, and we want to say something that can then be..
That's what we, we think will, will happen, and we are conservative here. Of course, subject to the, to the continuation of the dynamics in terms of term deposits rates that we are seeing here. In terms of cost inflation, we try to excel both in the commercial area and also in terms of cost efficiency. We will grow our costs below inflation. We are continuously making an effort to go after productivity enhancements, and we think that with this productivity enhancement, we will grow costs only mid-single digit in Portugal, and also, I mean, below inflation in the other clearly below inflation in the other geographies in which we are in. Of course, this is, this, this is linked to inflation and to salaries and so on. We'll have to, to cope one with the other.
Our commitment to you is that in relative terms, both towards our competitors and, and vis-à-vis the inflation, we will show a very good performance. In terms of organic versus, versus non-organic growth, we don't need non-organic growth. This, that's what we can tell you. We don't need, and the fact of not needing non-organic growth to be, to have a sound business model and to accrue value for our investors and for the society, puts us as in a very comfortable position when we analyze opportunities. Of course, we will analyze all opportunities because this is part of our job, to analyze opportunities. One of the key criterion for these opportunities is whether they enhance shareholder value, not the only one, but this is something that we really feel very important about.
We really think it's very important that to, to feel sure that they, increase shareholder value, and they are accretive from a value and from a net income point of view. That they, of course, don't put the, the capital ratio of the bank in any type of stress, it's also very important. The fact that we don't need non-organic growth enables us to only close, transactions and only close deals when this is clearly in our interest. Our focus is not on non-organic growth. We don't need it. We will analyze what we think is important in the market with this confidence that we will only close the deal if this is very clearly, positive for the bank and its shareholders.
Thank you. That's very clear.
Thank you. We will take our next question. The next question comes from the line of Carlos Peixoto from CaixaBank BPI. Please go ahead. Your line is open.
Yes, hi again. Carlos Peixoto from CaixaBank again. Thank you for the clarification on NII before. Sorry, just another question, now a bit looking a bit into asset quality. This quarter, I, I guess on NPE evolution in Portugal, we, we, we started to see some new entries coming in. Do you see this already as a sort of an inversion in trends in the asset quality performance? Or, or, or, or is this more of a punctual matter?
Basically, what I'm trying to understand here is whether the higher interest rate cycle is already starting to take its toll on asset quality, and how do you see this evolving going forward? Thank you.
Thank you very much for your question, Carlos. Of course, the entries of NPs in a higher interest rate environment, with the type of GDP growth that you are having in Portugal are different from the entries in a low interest rate environment. So I think, namely, when some of our clients even had negative interest rates, where we really paid some of them, the installments. So it was virtually impossible for them to enter into a non-performing status, at least for some of them. So, we do see some entries. What we can also tell you is the following: This is a normal scenario.
What we are coming from, an abnormal scenario in terms of entries of individuals to a normal scenario in which we have some entries, but also we have some recoveries. Our projection going forward is that on average, our NPs will continue to decrease, so our recoveries will be, at least over the year, higher than our entries. Of course, in any even quarter, there may be, I would say, some volatility around it, mainly when we are already at so high, high, low levels as we are right now. But we do think that this is totally compatible also with the cost of risk that we are showing. The type of cost of risk, the type of cost of risk targets that we are showing, around 50 basis points, is totally consistent with this.
I would also here like to highlight one point. At some point in time, when we had here the adjustment program in Portugal, under the Troika, that you may recall, Carlos, we had a very high unemployment, and the interest rate was also relatively high when you compare it with the interest rate in recent years. If you take the cost of risk of mortgages at this time, in this three years period of the Troika, at least for BCP, it was only 50 basis points. Even, and at the time, the unemployment was almost threefold the employment that we have right now. Of course, there will be some entries.
Of course, some families will be in difficult situations, and we have to see who really wants to pay, who will really have the ability to pay sooner or later. We will find solutions for all types of situations, in which the ones where they really cannot pay, of course, we will have to, a certain recovery process. The other ones that want to pay but need more time, there will be another type of recovery process. This is totally. This is normal, so we are not seeing anything that is abnormal. What was abnormal was the negative interest rate.
Thank you.
Thank you. There are no further questions. I would like to hand back to Mr. Miguel Bragança for closing remarks.
We would like, first, to thank you very much for the effort that you have put in following BCP and helping BCP communicate with all the investor base, and communicate with the market that we really take very, very seriously. We are extremely proud that finally we are entering a new phase, and also the shareholders, as very important stakeholders, are benefiting strongly from this recovery of the bank. That has allowed the bank to increase its share price significantly since the beginning of the year. Thank you very much. Nice holidays.
This concludes today's conference call. Thank you for participating. You may now disconnect.