Good day. Thank you for standing by. Welcome to the Millennium bcp 2022 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 one on your telephone. You will hear an automatic 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 Millennium bcp earnings conference call. As usually, I will mention the highlights of our performance, and then Miguel Bragança and Bernardo Collaço will follow with providing additional detail. It is well known that 2022 was a complex year. On top of the pandemic effects on global economies, the turmoil caused by Ukraine's invasion by Russia, the high inflation, and the swift correction in monetary policy, some unexpected adversities with significant economic impact emerged in Poland. Namely, the enforceability of credit holidays on mortgage, which by itself made Bank Millennium to breach capital requirements on the third quarter. We have immediately activated a recovery plan in Poland that has been swiftly and successfully implemented.
The capital measures of the plan, combined with the quality of our franchise, enabled our Polish subsidiary to reset capital ratios above minimum requirements within 2022. Confirming Bank Millennium's potential and execution skills and its ability to weather adversities while expanding current businesses. Operating in a challenging global context, our consolidated net income increased 50%, overcoming EUR 207 million, although this figure was heavily influenced by several factors. On one hand, there was a very positive evolution of the operational activity that confirmed the quality of our franchise in our core markets.
This performance was reflected on the increase of 26% in core income, driven by a growth of 35% in net i nterest i ncome and 6% in commissions, combined with a very strict management of recurring operational costs, which had a controlled increase of just 3% in a markedly inflationary context. On the other hand, some negative items have a relevant impact on net income, namely the extraordinary effects coming from Bank Millennium, which comprise EUR 525 million of costs related with FX loans, EUR 283 million in provisions related with credit holidays, contribution of EUR 59 million for the Institutional P rotection S cheme, and consequently, an impairment of EUR 102 million of the Bank Millennium goodwill.
The intrinsic and steady capacity of our business model to organically generate capital was once again demonstrated, having generated around 50 basis points on the third quarter, which combined with some capital optimization measures we have put in place, including securitizations, foster the significant improvement of the capital position in 2022. Last quarter, Common E quity Tier 1 increased 114 basis points, reaching 12.5% by year-end, 13% on a pro forma basis, subject to the ECB approval of the waiver under Article 352, which I envisage could be approved this quarter. Our rigorous capital management enabled us to have a capital position clearly above regulatory requirements and already aligned with the threshold set for 2024 in our strategic plan.
The core competencies we developed to manage and enhance the quality of the balance sheet were crucial to maintain our consistent trajectory of reduction of non-productive assets and give us a confidence to tackle uncertainties ahead. In 2022, we managed to decrease more than EUR 1.1 billion in non-productive assets, having reduced EUR 535 million in NPEs, EUR 265 million in foreclosed assets, and EUR 376 million in restructuring funds. Our track record in this matter speaks for itself. Let me recall that we have a NPE ratio that peaks at 27% in Portugal back in 2013, having achieved last year a level of 3.4%, with 90 days past due NPL of only 1.3%, and NPA-NPE coverage by credit impairment above 68%.
The additional reinforcement of our strong liquidity position assumed greater relevance following this shift in the monetary policy framework. Although we've gone through a long period of more than seven years of negative interest rates, we always consider that situation to be unsustainable. Being a retail bank with a very close relationship with clients, we have maintained the strategic view on the importance of balance sheet resources for the development of trusting relationships with clients. Customer deposits grew 9% in 2022, mainly driven by an increase of EUR 5 billion in Portugal, revealing our capability to build up customers' confidence. Overall, despite last year headwinds, we ended 2022 with a fortified business model and with a stronger capital position. Our customer base kept expanding. That is a very good indicator of the bank's vitality and growth potential. We have a profitable and very efficient business model.
In fact, BCP is a benchmark in terms of efficiency, having achieved a cost- to- income of 37%. Equally important is our business model's capability of corresponding to customer expectations. Individual and corporate clients continue to choose Millennium as their preferred bank. In recent years, we undergone a transformational journey in our approach to companies in Portuguese market. We became the main bank for companies, particularly in the SME segment, while protecting capital by maintaining a very rigorous risk management policy. Across the geographies where we are present, there was an expansion of 5% on the customers base in 2022, which was an important driver of our good operational performance last year. Not only we are attracting new customers, existing clients are also increasingly adopting our mobile solutions, representing already 63% of total customers at group level and 52% in Portugal.
We continue to be the bank customers most recommended in Portugal. The investment and priority we give to mobile solutions with a clear focus on customer-centric innovation means that our app continues to lead the rankings and deserves the best reviews from customers. We are succeeding in our strategy of standing out in the market with a business model based on the symbiosis between human physical proximity to a high quality network of branches and digital channels that provide seamless user experiences and convenience to customers. Clients' recognition is also reflecting in the use of the app, which has gained increased relevance as their preferred platform to interact with bank. Last year, customers carried out 37% more transactions through the app with a remarkable growth in the number of transfers and payments.
The number of sales through our mobile app also increased 46%, namely in personal loans, which increased 97%, in cards, which increased 74%, and in savings solutions, which increased 41%. Summing up, allow me to briefly emphasize some of the most relevant aspects that market BCP's activity in 2022. Operational activity with a very positive evolution reflecting the quality of the bank franchise with card income growing 26.1%. Successful implementation of a business model centered around the symbiotic relationship between human and technology as driver of BCP's value proposal. The notable improvement in the bank's efficiency reflecting and capturing the implementation of transformations in business model and operational procedures. Currently, we have a cost- to- income below 40% in all operations, exceeding the ambition of the strategic plan.
A very significant reduction of non-productive assets, more than EUR 1.1 billion of reduction, demonstrates the execution capacity of the bank's professionals. For lack of a better description, I would say that insecurity in the legal and economic environment in Poland is the main constraint to the bank's profitability. A loss of EUR 217 million in Poland, with emphasis on total charges of EUR 907 million related to FX loans, credit holidays, investment protection scheme contribution, and consequent goodwill impairment. Nevertheless, it should be noted that in the fourth quarter, Poland's already posted positive net income of EUR 53.8 million, and the minimum capital ratios have already been organically reset.
I conclude by highlighting the significant organic reinforcement of the bank's capital, reflecting the quality of the business model and the discipline in capital management, having surpassed in 2022 the target established in the strategic plan for 2024. BCP is today a bank well prepared for the future. Miguel, the floor is yours.
Thank you very much. Going now to page nine, which highlights a brief summary of our consolidated accounts. As you see, the NII grew 35% with a strong contribution from all geographies. Commissions grew 6%, which made the core income grow 26%. This together with a very stringent control of costs in a high inflation environment, where the recurring costs only grew 3%, made the recurring core operating profit grow 44.4%. Considering also the non-recurring items, we present a growth of the operating net income of 47%.
This was as you know, a year marked by important adjustments due to regulatory factors such as the credit holiday in Poland that had an impact of EUR 300 million that together with other factors, had an income of EUR 309.9 million. Of course, the issues around the legal risk provisions in Poland linked to the Swiss franc mortgages, which had an impact of around EUR 394 million.
However, in spite of all these headwinds, we were able to grow our net income before tax around 171%, which is a very strong contribution that after minority interest and income taxes allows the net income to grow 50%, albeit an ROE clearly below our targets and clearly below what we envisage for the bank on a recurrent basis. Our ROE is still at 4%, which is higher than what we would expect at this point in our business plan, but still shows a lot of growth potential. In terms of the main items of the bank. The growth of the NII was both explained by volumes and by the NIM.
The NIM grew from 1.9% to 2.4%, with a very strong contribution from the international operations, mainly Poland, where the NIM grew from 3.1% to 4.8%. Also in Portugal, of course, with the contribution of the general rise in interest rates in the Eurozone. Fees and commissions, in spite of the more adverse environment due to the market, due to the markets, and due to the higher interest rates, which typically translates in less interest in off-balance-sheet investments, shows a growth of 6%, where Portugal show the growth of 9%, to a large extent explained by credit cards, transactional fees, and current account fees.
In the international operations, namely Poland, the fees and commissions were stable due to an even higher, I would say, impact from the interest rate movements and from the NII. Other income, as we, as you see, were affected by the I nstitutional P rotection S cheme. As you see here, the other income in 2022 had an impact of EUR 59 million, which translates, of course, in a growth of the mandatory contributions. In Portugal, it's quite stable, in spite of a growth in mandatory contributions from EUR 77 million to EUR 88 million. The other income was quite stable at around EUR 70 million. Of course, in our international operations, exactly due to the I nstitutional P rotection S cheme, that we commented at the time, there is here a decrease of around EUR 70 million. Operating costs discipline.
A cost-to- income that went below 40%, both in Portugal and in international operations. In Portugal, our cost- to- income is already below 40% at a level of 38%. In the international operations, the cost- to- income was 37%. A very important discipline here, albeit the strong pressures due to the inflation, inflationary environment that we live in the world. Impairments. The cost of risk contained in spite of the war and the risks associated to the growth interest rates. The cost of risk at 52% in consolidated terms. Quite similar, both in Portugal and abroad, with levels of around 50 basis points.
With some decrease in the total cost in Portugal of 3.4% and a very minor increase mainly in Poland of the cost of risk of 1.6%. Credit quality improvement all in all. We were able to decrease the NPEs, as it was already commented by our CEO, around EUR 500 million, which is, I would say, important in the scenario that we are living. Our 90 days past due loans are already below EUR 1 billion, which is remarkable for a balance sheet of our size. Our 90 days past due are already at EUR 730 million, as you see here in our balance sheet. Our NPE coverage by loan loss reserves still continues high at 68%.
If you add to the cash coverage the collateral, which makes a lot of sense given that a part of this 90 days past due is mortgages, we are clearly covered with a total coverage of 115%. Our 90 days past due ratio below 1.5% at 1.3%, as you see here. In terms of business activity, quite healthy in spite of the war in Europe, with a 3% growth in total customer funds in both in consolidated terms and in Portugal. Excluding the FX impact, mainly in Poland, the growth in the international business is 4.5%.
The loan portfolio, stable, but it is a stability that has to be seen together with the reduction of NPEs. If you see only the performing loans, we see that there was some increase in Portugal, some decrease in international operations, but this was or this has occurred to a large extent because of the capital situation that we were living in Poland that forced us to be much more, I would say, contained in terms of RWA growth and credit growth so as to achieve the appropriate capital ratios. In terms of capital, as my colleague Miguel Maya just commented, we present a capital ratio pro forma of 13%, of which 50 basis points is expected to materialize this quarter due to an authorization for the Article 352.2.
That is basically an exemption to consume, to consume capital, associated to FX hedging positions, structural hedging positions. An FX position that is used for a structural hedge should not because it envisages exactly a risk reduction should not consume capital. We think that we will obtain this formally this quarter. Without this, our ratio would be 12.5%. With this exemption, our ratio would already be 13%, which compares favorably with the minimum required ratio of 9.4%. In terms of total capital ratio, we present a comparison between 17.5% of total capital ratio on a pro forma basis with 14%.
Of course, this data do not include our Pillar 2 Guidance, you can assume that our Pillar 2 Guidance is close to the lowest quartile in Europe, because we present a very solid business model with low exposure to stress scenarios or to a relatively low exposure to stress scenarios. In terms of the different moving parts of our capital position. The organic capital position evolved since the beginning of the year around 160 basis points. Before extraordinary situations or that are not directly linked to our business model, we were able to grow around 40 basis points per quarter. As some of you probably recall, typically our guidance has been a growth between 25 and 30 basis points per quarter, at least before.
We have clearly exceeded our guidance in terms of the organic capital generation. Of course, there were some exogenous factors, such as the need to continue with a high level of provision for CHF, which consumed 50 basis points. The credit holidays in Poland that were, as we all know, somewhat of a surprise this year, that consumed around 35 basis points. Of course, with our normal hedging positions, with the increasing interest rates that occurred during the year, this had an impact on our capital ratio of around 40 basis points. These were the, I would say, the negative moving parts. We took action, a part of it in the fourth quarter, where we have decreased our investment in Ageas.
That is a capital deduction through an extraordinary dividend, which contributed with around 17 basis points. We implemented a series of securitizations that were responsible for around 30 basis points. As it was adequately communicated to the market, timely communicated to the market, we sold some of our restructuring funds, which with an impact of around 15 basis points. These were the key elements. These -17 basis points here are negative, because it has to do also with the structural hedges to some extent. This is what explains the growth in the year from 11.7% to 12.5%.
Our leverage ratio still very healthy and our RWA density, comparing relatively conservatively still with the RWA density from the other banks in Europe, as you see here in graph page 23, which is a way of saying that we feel quite comfortable with the additional factors, namely the floors of Basel 3.5, because this means that our models are quite conservative. In terms of MREL requirement, as you know, the MREL requirements are communicated on a revolving basis, so to say. We have a MREL requirement for 2024 of 27.3%. It is a required MREL requirement. We are already above the 27.3% with a ratio of 27.7%, which makes us comfortable.
Of course, in terms of access to the market, we would like to have probably a buffer that is higher than the one that we have right now. Please don't forget that we still have one year to go in terms of capital generation. Of course, in terms of access to the market, we have shown that we have clearly access to the market. In terms of the MREL as a function of the LRE, here we show a much higher buffer with a difference of 10.8% vis-à-vis a requirement of 6.9%. The pension fund coverage also positive signs.
The fund profitability that typically is a partial hedge of the liabilities has evolved slightly negatively in spite of the drastic performance of the capital markets, decreasing by only 5%. The other side of the coin was that the liabilities, the effect of the interest rates on the liabilities was positive in the sense that the liabilities decreased by around 17%. This has allowed us to increase the buffer materially, which means that our pension fund and our capital is protected for up to EUR 593 million of adverse movements in our pension fund. Liquidity ratios, say nothing to write home about. Strong liquidity ratios. This is the general view of our group.
I'll pass the floor now here to my colleague, Bernardo Collaço.
Thank you, Miguel. Good afternoon, ladies and gentlemen. On page 28, starting with Portugal, net income increased significantly from EUR 173 million to EUR 354 million. Recurrent profitability went up more than 50% and was driven by stronger net operating revenues that increased 12%. Lower operating costs with a reduction on recurrent costs of 2.8% and an improvement on cost of risk. That clearly shows some strong positive draws on the Portuguese operation. On page 29, looking to NII in Portugal at the end of 2022, it's true that EUR 951 million, meaning 14.4% above last year or almost 120 million euros.
Impacts from commercial activity contributed to almost half of the improvement, and it's worth mentioning the positive contribution from credit volumes and rate effect. Higher yields from securities portfolio and excess of liquidity more than compensate the negative impacts from wholesale costs. It's also important to mention that the most significant part of the TLTRO was reimbursed in December 2022. Means to that 153 basis points, almost 10 basis points higher than one year ago, and 8 basis points higher than the previous quarter. Moving to page 30, that presents the evolution of fees and commissions and other income. Banking fees and commissions increased 9.4%, and most significant impacts came from cards and transfers that grew 25% and was driven by the increase on transaction ability.
Market-related fees resisted an increase year -on -year of 6.7%, and all in all, fees and commissions went up 9%, a level that compares with EUR 514 million one year ago. Looking to other sources of income, these, as you know, these also accumulate other effects. As you can see, other income stood mostly aligned with the previous year, although with a different mix than last year. When you look at equity accounted earnings, as you can see, there was an increase, and that's mainly explained by a one-off impact.
Net trading activity was decreased from previous year. It was mainly due to some impacts on sovereign debt and other operating income that was more negative than the year before because of the higher contributions to mandatory contributions. Going to page 31, that's regarding costs. Bank continues to apply a strict policy on cost management. Comparing recurrent costs from last year, there was a reduction of 2.8%. Non-recurrent items includes essentially, in 2021, the headcount adjustment. In 2022, the compensation for temporary salary cuts in place in the period 2014- 2017, and other measures to support the levels of high inflation. Staff costs went down 7%.
Admin costs, slightly higher than previous year, especially related with higher energy costs and depreciation aligned with 2021. To what regards to branches, there was a decrease of 26 branches compared with the previous year. Moving to page 32, which refers to asset quality. You can see that there was a significant reduction of NPEs, as already mentioned. NPEs were reduced by 27%, meaning more than EUR 550 million in one year. In the fourth quarter, there was a reduction of more than EUR 175 million. As you can see, also on the top left chart, reduction occurred mostly on 90 days past due loans. That, at the end of the year, represent less than 25% of total NPEs.
It also explains the higher cost of risk compared with our peers as the reduction has been mostly through write-offs. NPEs, as of December 2022, stood at EUR 1.36 billion compared with EUR 1.9 billion a year ago. Cost of risks stood at 54 basis points. That compares with 69 basis points one year ago. Now let's move to page 33, which looks at the NPE coverage breakdown. As you can see, total coverage stood at 126%. NPE coverage by loan loss reserves at 69%. When you look at total coverage for individual with a high level of real estate collateral, stood slightly above 100%, and for companies, 132%. Coverage by real estate collaterals on companies at 51%, and by loan loss reserves by 79%.
On page 34, which shows the evolution of foreclosed assets and restructuring funds, there was a strong reduction year-on-year on both of them. Foreclosed assets stood at EUR 262 million, that compares with EUR 565 million at the end of 2021, meaning a reduction of more than 59% or a decrease of EUR 265 million.
In terms of property sales, there was a slight reduction in terms of transactions compared with 2021, but sales value was 13% higher than one year ago. Regarding restructuring funds, there was a reduction of almost 50% that is explained by the transaction announced to the market, the so-called Project Crow, that was closed on the last days of 2022, and it took a little bit longer than the complexity and the number of parties that were involved. Now moving to page 35, total customers grew 3% to EUR 68 billion, and growth was equivalent to EUR 2 billion and was mainly supported by on-balance sheet customer funds.
Off- balance sheet funds continued with a downward trend that was seen over the last quarters. It's mainly related with market conditions as well as the maturity of some insurance products. In terms of loans, gross loans, there was an increase of less than 1%, supported by an increase of more than 3% in mortgage loans. It is also important to highlight that performing loans went up 2.1% or EUR 800 million. NPEs reduced by EUR 500 million. Going to page 36, it's 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 up EUR 800 million from 2021, supporting in growth in mortgage loans by EUR 700 million.
It's worth mentioning that as of December 2022, guarantees provided by the European Investment Fund and Portuguese entities account for more than 30% of loans to companies. If we zoom it into the SMEs, the percentage of guarantees cover more than 40% of total SME portfolio. Let me also reinforce the recognition of BCP as the best bank for companies, a segment where we have been achieving important milestones. Now, moving to international operations on page 38 regarding, and as it was mentioned before, results were strongly impacted by extraordinary effects from Poland. Bank Millennium net income stood at -EUR 217 million. That compares with -EUR 284 million one year ago.
It is important to remind you that Bank Millennium registered a profit of almost 55 million EUR in the fourth quarter of 2022 after eight quarters with losses. If you remember, Bank Millennium already had profits on the second quarter if there was no IPS contribution, and on the third quarter if it was not booked, the front-loading related with credit holidays. Mozambique contribution increased 6.6% compared with 2021. Contributions from international operations as a whole stood -EUR 43.8 million , which compares with -EUR 35 million in 2021. It's important to highlight that in 2021, there was a positive contribution from discontinued operations of 77 million EUR.
it should also be highlighted that there was a one-off impact related with Bank Millennium goodwill that was booked last year with an amount of more than EUR 100 million. Moving to page 39, which refers to Bank Millennium. Net income in Poland was strongly impacted by costs related with moratoria, booked on the third quarter of 2022, and also costs associated with CHF mortgage loan portfolio, which, as you know, include provisions, out-of-court settlements, and legal costs. Of course, also to highlight the contribution to the IPS scheme. It is important, as I mentioned once again, to reinforce that Bank Millennium on the fourth quarter came to profitability with a net income of EUR 55 million.
Excluding those factors and due to the excellent operational performance, net income would have stood at EUR 478 million, almost 100% more than in 2021 if we look on a comparable basis. Net operating revenues increased 50%, excluding the impact of credit holidays on NII. Operating costs, including mandatory contributions, went up 11% due to the inflation that is having some pressure on salaries and admin costs in Poland. CET1 and total capital were at the end of 2022 again above regulatory requirements and stood at 11.3% and 14.4% respectively. This was another important achievement from Bank Millennium that was possible with a combination of several factors as the improvement of operational profitability and capital optimization initiatives.
It is important to highlight that capital ratios were temporarily below minimum requirements due to the impact relating with credit holidays. On page 40, some detailed information about Bank Millennium. NII increased strongly 71% above. That is without the credit holidays impact to almost EUR 1 billion. That compares with EUR 580 million one year ago. This movement was mainly driven by interest rate hikes since the fourth quarter of 2021. NIM increased significantly year -on -year from 2.7% to 4.43%. Fees and commissions decreased 2.7% to EUR 173 million, and other income decreased significantly, as explained before, by the impacts on trading related with out-of-court settlements. Operating costs, excluding mandatory contributions, increased 11%.
Regulatory contributions increased significantly due to the one-off impact of the contribution to IPS with an amount of EUR 59 million. Moving to page 41, related with asset quality in Poland. Even with a very challenging environment, Bank Millennium cost of risk stood at 44 basis points. This is the same level than the previous quarter. Increase from last year is mainly explained by the increase on consumer loans. Non-performing loans and more than 90 days past due ratio decreased 20 basis points to 2%. Coverage ratio of non-performing loans at 157%, meaning an increase of 22 percentage points from December 2021. On page 42, customer funds grew 4% year-on-year. Off-balance sheet funds decreased significantly due to market conditions and higher interest rates in Poland.
In terms of loans to customers, gross books stood at EUR 16.8 billion, less 2.5%. It is important to highlight here, as you can see, the increase of the Polish złoty mortgage portfolio and of almost 4%, and the significant decrease of mortgages in FX, and this is the amount deducted by provisions for legal risk. On page 43, as usual, looking to the FX mortgage portfolio. FX mortgage as percentage of total gross book, at the end of 2022 stood at 8.1% over total loan book. As you can see, the reduction of the CHF mortgage loans was 17% last year, and 4% quarter-on-quarter.
Bank Millennium, taking into consideration the level of court claims and decisions more favorable to customers, which are the drivers on the provisioning model, continued to make additional provisions in 2022, increasing the coverage level for almost 47% from 25.7% one year ago. Total cumulative provisions for litigation risks stood at more than EUR 1 billion at the end of last year. It is also important to mention, as you can see on the bottom right chart, that Bank Millennium is maintaining the high levels of out-of-court settlements. On the fourth quarter, amicable settlements were again above new court claims. In 2022, amicable agreements had a cost of around EUR 100 million. That compares with EUR 80 million in 2021.
Turning to Mozambique on page 44, which, as I said, it starts a brief overview about Mozambique that even under a challenging environment continues to be an important contributor for BCP Group. Net income increased more than 6%, mainly due to higher NII. Net operating revenues increased almost 10%, operating costs were 7% higher than last year. Capital ratios stood at a level higher than 35%. Moving to page 45, NII went up year-on-year 10% to more than EUR 202 million, that was mainly influenced by higher interest rates in Mozambique. Commissions went up 7%, other income increased 11%. Costs increased at a lower pace than revenues, cost- to- income stood at 43%. That is similar than one year ago.
Moving to page 46, non-performing loans more than 90 days past due at 8%, which compares with 11% in 2021, and almost 10% in September last year. Cost of risk stood at 118 basis points. That compares with 181 basis points at the end of September last year and with 72 basis points in 2021. This cost of risk was, in 2021, influenced by some one-off effects due to some reversals that were registered in 2021. Coverage by loan loss reserves increased 21 percentage points to almost 100%.
Regarding volumes on Mozambique, you can see that customer funds registered an increase of more than 10%, and loans to customers an increase of 2%, mainly supported with loans to individuals, as loans to companies were stable year-on-year. This is my final slide. I will thank you for your attention. Before we move to Q&A, I will return to Mr. Bragança for some final remarks.
As you know, three years ago, we have presented to you our strategic plan with the metrics that will, I now show in page 49. The idea would be to reach a cost-to-income ratio of 40% by 2024, a cost of risk around 50 basis points, an ROE of 10%. A Common E quity Tier 1 ratio in excess of 12.5%, an ROE, an NP ratio around 4%. All of these based on growth of the franchise and more efficient and more adaptive servicing of our clients with a strong client preference and quality as shown in the other indicators. What we can tell you now is that we are, as you see here, somehow ahead of the plan.
Of course, we benefited here from some tailwinds in terms of the interest rate movement, but also from some headwinds, namely in terms of the regulatory risk in Poland mainly, and the war situation that we are living in Europe. However, what we can tell you is that we are ahead of the plan. We are not intending to present a new strategic plan in the next quarters, but we can tell you that we are ahead of the plan and our forecasts vis-à-vis this plan, exactly because we are ahead of the plan, are more biased towards the favorable side than towards the unfavorable side. We thank you very much for your attention to our equity story and to all our commitment with our clients and our shareholders.
Thank you very much. I now open the floor to questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Once again, that's star one and one if you wish to ask a question. We will now take the first question. It comes from the line of Ignacio Ulargui from Exane. Please go ahead. Your line is open.
Thanks. Thanks very much for taking my questions, and congratulations for the results. I just have a couple of questions. Just starting a bit with the NII outlook that you have for Portugal. I mean, what should we expect for 2023 after the good performance that you have delivered in the fourth quarter? Also how the cash flow hedge should impact NII in 2024 and 2025, provided that rates don't move substantially from here. Second question would be coming up to your latest remarks, Miguel, on the ROTE target. I mean, that 10%, in the context of profitability delivered in the fourth quarter looks to me kind of an intermediate level towards a higher level given the context of rates.
Where did you think the ROTE of the bank could land on a bit more normalized levels? Or at least whether you see growth beyond that 10% target? A final one on the Common Equity Tier 1 ratio. I mean, after the strong print of capital in the quarter, what should we expect in terms of payouts of payout ratio for 2023 once you are getting closer to a bit more normalized levels? Whether there could be any opportunity in inorganic growth that could kind of take you to reinforce capital rather than distributing it. Thank you.
Okay. Thank you very much for your questions, Ignacio. When we presented our plan in 2024, the objective of the plan was to become, by 2024, a reference bank with an excellent performance, both in terms of customer franchise, in terms of shareholder value creation, and in terms of financial soundness. Our plan and what and what we are delivering is to become a reference bank in terms of what are the key references in the way. We are ahead of the plan, as I'm just commenting.
We are intending and we are estimating that we will be this reference bank in all the typical indicators that you would expect from an excellent in terms of financial performance and customer franchise performance bank that you would expect in Europe. Having said that, we are not formally reviewing the targets because this has a formal internal process, neither in terms of ROE nor in terms of dividend payout. What we can tell you is that by relatively to 2023 and 2024, you should expect from BCP a benchmark excellent performance also on these indicators. That's what we would expect to deliver. We are not reviewing the plan formally, but that's what we are expecting to deliver because we are on track for it.
If you look at what are the normal dividend payouts for 2023 and 2024, of course, this is a decision that has to be taken by the AGM at the time. I would expect with the performance that we are seeing to have, I would say, a benchmark payout ratio. In terms of return on total equity, what can I tell you on tangible equity? This year, if you look only at Portugal, our return on total equity vis-à-vis Portugal is already close to 10%, as you may know. 10% in Portugal. If you look at Poland, I mean, the numbers before CHF are very high. I will not...
What we can say is that Poland is able to generate before Swiss francs a very substantial net income. The issue that is always difficult to estimate is the timing of the provisions for the Swiss franc. It's very difficult for me to commit to a specific return on tangible equity for 2023. After the, after Swiss franc, what I can tell you is the following: We are on a growth path, and we are on a growth path in Portugal, and we are on a growth path in Poland in terms of everything that we see before Swiss francs. This is where we are. That we are ahead of our plan.
What I cannot tell you exactly is how the timing of the Swiss franc provisions will play out. Our base case, as we have already commented, is that the provisions for this year will be below the provisions that we had last year. Okay? This is what I can tell you at the moment. There is a lot of uncertainty there, but our base case is this is what we are expecting. By the way, in this base case, it is already somewhat reflected the possibility of the changing the methodology to no remuneration. Okay? Being totally clear also, the key factor that may influence the provisions for Swiss franc is the number of new cases that may appear.
Depending on the customer behavior and depending on where there is some increase versus there is no increase versus there is a sharp increase, the changes in the Swiss franc provisions may be different. But in any case, to make a long story short, we are ahead of the plan. We will perform according to reference banks in Europe. We are already with a ratio, an ROE around 10% in Portugal, and everything that depends on us will show a clearly, as far as I can see, a benchmark reference performance when you compare it with other banks.
In terms of the margin, what, I mean, I don't like to separate the different parts of the margin because we view the balance sheet as an integrated part. Of course, we may have more demand deposits. The demand deposits are non-remunerated. We treat them in a way we can have more of a portfolio that is available for sale or more of a portfolio that is hold to collect. Of course, the ways in which one hedges the margin are quite fungible, so we can use one instrument or the other. Using one instrument or the other depends on each point in time what suits best our interests.
What we have shown and what we have said very often is that our margin sensitivity is more or less and has been relatively stable, and based on impact models, is around EUR 100 million of margin per each shock of around 100 basis points. We have been oscillating typically between 80 and 120 basis points, typically around EUR 100 million of margin per each 100 basis points. We think that this is the appropriate exposure of a bank with our risk profile. Okay? We benefit when interest rates are higher, and we suffer somewhat when interest rates are lower. Not as much as we would benefit or as we would suffer if we had absolutely no hedges. The business models in Europe are very different.
As you know, banks in France and in other countries mainly have fixed rate mortgages, they don't use any type of hedges. Banks in other countries that have floating rate mortgages use more hedges, depends on also whether the banks have floating at one-year rate or floating at three- months rate. You cannot compare, I would say, things that are not totally comparable. The key metric is this one. In terms of guidance, what we expect right now is for a beta of around 30% in the term deposits, we would expect a growth of our NII in Portugal on the low teens. Okay? That's what we are seeing for a beta of around 30%, which we think makes sense.
Of course, because we live in a competitive market, we don't know exactly what the beta, what the beta will be. We think that this makes that this makes sense and this is at the moment the guidance that I would like to give. For 2024 and 2025, it depends of course, also on the evolution of the beta and on the evolution of interest rates. We would expect also a substantial growth in margin also for 2024 and 2025, but I would not like to give guidance right now for 2024 and 2025 because, I mean, it will depend a lot on the dynamics of the beta and on dynamics of the pricing of the deposits. In any case, growth.
So, 2023 will not be the year of the top year for our margin in Portugal.
Thank you very much.
Thank you. We will now take the next question. It comes from the line of Maksym Mishyn from JB Capital Markets. Please go ahead. Your line is open.
Hi. Good afternoon. Thanks for the presentation and taking my questions. I have three. The first one is a follow-up on Ignacio's question on guidance for NII. I was wondering what kind of loan book growth do you factor in the low teens guidance, and how do you see demand for different kinds of loans evolving in January and February?
The second one is on fees outlook. I was wondering what's your outlook for fees growth in Portugal for 2023. Now that interest rates are higher, some banks hinted they might be reducing some fees for account maintenance, and I was wondering, what's your view on this? The last one is on other provisions. They've increased quarter on quarter. Could you explain what was the reason? Was it the adjustment of macro models? If so, what kind of assumptions are you using behind the macro model? Thanks.
Okay, starting with the last question. In terms of other provisions, most of these other provisions have been used for other assets, namely real estate in anticipation of a less favorable environment looking forward of what could be the impacts on real estate valuation. Clearly, this last quarter is not, I would say a steady state. Our steady state in Portugal for other provisions is much closer to a level of around EUR 15 million-EUR 20 million than what we had last quarter. In terms of fees outlook, it is correct that there is some trade-off between fees and margin, not least because of investment funds and so on.
Of course, when the deposits are more attractive, savers tend to invest more in deposits and less in funds, just to give you an example. The same applies also for bank insurance products and so on. Our view to, vis-à-vis this, exactly because of this, of this movement, is a low -single digit growth in terms of fees in Portugal. This low -single digit is also what we are expecting for our loan book in Portugal. Right now, the loan book is stable, so to say. What is implicit, if you want, in our estimation of low teens for the NII, is a low -single digit growth in terms of loan book. Okay?
Thanks.
Thank you. We will now take the next question. It comes from the line of Pamela Zuluaga from Credit Suisse. Please go ahead. Your line is open.
Hello. Thank you very much. You've had a very encouraging capital uplift, which is great to see. A large portion of this came from one-off items, as you highlighted, and organic capital generation amounted to actually 24 basis points more or less versus Q3. Out of the 110 basis points, more or less delta quarter-on-quarter, could you give us maybe some more detail around the rest of the capital build path, particularly thinking about could any of these one-off items, potentially reverse and therefore, continue posing risk on capital levels? I understand that you did around 30 basis points of securitization, 15 basis points from the sale of restructuring funds. Was just wondering about, where the rest was coming from and if there was any risk in that reversing moving forward.
The next question I wanted to ask is again around capital. I understand you're saying you're not really targeting any change in your strategy so far and saying that potentially you could expect a benchmark payout moving forward. I'm just wondering, is there anything else that you're seeing that could potentially be a risk for capital that's maybe weighing on your appetite for further shareholder distribution in the future? Thank you.
Just a couple of issues. In terms of reversal of trends, I would not say there is any type of reversal. Of course, the securitizations have a maturity, have a time frame. When they end, they end, so the benefit in terms of capital ends. We can always take the same raw material and do repackage with a new securitization, but there's not really a reversal. The dividend from the insurance company also it's not a reversal. The investment funds have been sold, so it was an upright sale, so there is no reversal on this end. In terms of the P&L, I mean, we have spoken about the ROE, the P&L. Of course, these are different ways of looking at it.
Our guidance has been that we would be in organic terms generating capital between 25 and 30 basis points per quarter organically. We maintain this view of it, I would say more biased to the upside right now than to the other side. We are comfortable for this. In terms of risk for capital, I mean, there is nothing to my knowledge that we have not commented that we feel I'm not envisaging any risk that we have not already commented here. Of course, there is always the issue of Poland, as we have commented, but is we have already commented. However, I have here to stress one point.
That is, we really think that our rating does not reflect appropriately the financial soundness and the business model that we have right now. We think that we have to probably work on a level of capital that may be higher than other banks with the same rating, just to make sure that we get also to the place that we want to be in terms of rating, because at the end of the day, this will benefit the shareholders and the cost of funding also. Okay. There's not properly-
Thank you very much.
There is a... Okay.
Thank you. We will now take the next question. It 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 four. On NII, what is the EURIBOR you're considering in your low teens guidance? Always on NII, we have seen that most of the incumbent players in Portugal are offering an advertising term deposits, with an interest rate up to 2% more or less, which is somewhat diverse, diverge from other markets in Europe. Can you just walk us through the market dynamics here and your strategy? The third one is on capital, and in particular on the 50 basis points regulatory head tailwinds. Shall we still assume the benefit in its entirety here or only a portion of it?
Do you expect regulatory headwinds in 2023 in terms of capital, calendar provisioning, EBA guidelines and large corporate exposure? Lastly, on M&A, could you talk us through your approach to M&A when it comes to strategy and also your financial KPIs that you are considering here? Thank you very much.
Okay. Starting with the last one. In terms of M&A, I mean, at the end of the day, the key criterion is shareholder value creation. What we will see is at the end of the day if in any type of deal, what we expect to be the value of our share for our shareholders is higher after the deal than before the deal, and what is the type of, at the end of the day, the price. This is dependent, of course, on price and synergies. A key factor on this issue is the impact that any M&A deal has on the capital position of the bank and whether it is accretive in terms of EPS and after fixing, so to say, the capital.
In terms of capital tailwinds, I mean, we are not anticipating. I mean, from our contacts with the regulators and so on up until now, there is the normal negotiation that we have in terms of models and so on. Some of them, I mean, have a more positive outcome for us, others less so. We are not anticipating any type of material negative headwinds for our bank in terms of capital impacts. In terms of the EURIBOR, basically in the assumptions that I've given for the low teens, what we are using is the forward rates as of today. We have recently done the calculation based on the market forward rates as of today, and this is what we expect.
In terms of the deposit evolution in Portugal and so on, I mean, when we are in a free market, when there is competition and so on, it's always a little bit difficult to be totally assertive in terms of what will be the end game. It's much easier if we had a monopoly, which we don't. What we can say is the following: the banks have excess liquidity. I think this is an important point. Contrary to what happens in other jurisdictions, the banks have excess liquidity, which makes them be quite, I would say disciplined in terms of pricing of deposits. This is the first point. Second point, I think most of the large banks are not going after market share.
They are, for different reasons, they are going for, I would say, a healthy balance sheet and a healthy income statement. We have here two Spanish banks, as you know, Santander and CaixaBank, that are banks that typically are very much P&L focused. There is a government-owned bank, as you know, that also has, I would say as a feature that it cannot access the market. It's very much dependent on internal capital generation for its growth. I think it's very important and has a lot of funding. We expect, of course, some of the interest rate increase to pass on to clients, and that's why we are expecting here a beta of around 30%.
We think that there are enough structural factors to make us comfortable that the beta will not be much higher than this. Of course, I mean, we do not control, neither we, of course, exchange opinions with our competitors on this matter. I believe I've answered the question.
Thank you very much. The call, at least for me, was breaking, just wanted to make sure I got your answers right. In terms of EURIBOR, in your guidance, you're considering the current forward rate. In terms of capital, you do not expect any capital headwinds, but I have not catch your comment on the 50 basis points regulatory tailwinds.
Yes. Okay.
Yes.
I confirm what you're saying. Relatively to the 50 basis points, I mean, this is a long and complex process with a lot of work because few banks have applied for this exemption. These pro forma exemptions. It was a lot of work, both from the supervisor and from ourselves, much more than what we were expecting, probably what the supervisor were expecting, because the regulation is not very specific on this issue. What we were recently informed by the supervisor is that we are already at the final stages and that we are very close to a final decision for it. That's why our CEO and myself, we have commented that we count on a decision on this subject this quarter.
Of course, our opinion is that the decision would be positive because else we would not accrue this in the pro forma.
Okay. Thank you. Sorry again, to double-check on M&A. I got EPS accretive synergies and the impact on the share price, I've not, I have not caught your comment on capital. Can you please repeat that? Thank you very much.
No, no. The first point that I commented was capital. After capital fixing, without any impact on capital fixing, we have to feel comfortable. The axis test is that whether at the end, this is beneficial for shareholders and for the bank or not? I want to emphasize the following. I mean, we do not need M&A. I think this is very important. I mean, we are the largest privately owned bank in Portugal. We have the largest customer base of all the private banks in Portugal. We are digital. We have the best digital platform in Portugal. We don't need M&A to perform well. Other banks may need scale. We don't need scale in our markets.
This makes us feel comfortable that we would only envisage an M&A if this is clearly beneficial for the bank, because we don't need it. Exactly because we don't need it, we would only, I mean, record to it if it's a clear no-brainer. Okay. I think this is important to comment to you. This is not part of our strategy. I think it's not part. We are not looking for it. Of course, it's part of our job if an opportunity comes to the market to analyze it, but we are not proactively looking for it, and we don't need it. I think it's very important. The best way to have a good deal in terms of shareholder value creation is not needing the deal.
Thank you very much.
Thank you. We will now take the next question. It comes from the line of Sofie Peterzens from JPMorgan. Please go ahead. Your line is open. Sophie, is your telephone muted?
Sorry about that. Hi, here is Sofie from JPMorgan. Thanks very much for taking my questions. My first question would be around the securitization that you did in the fourth quarter. Will it have any material impact on your net interest income, and if so, how much? My second question would be that net interest income in Poland was down slightly quarter-on-quarter. How should we think about the NII quarter-on-quarter trajectory in Poland going forward? Has NII on the quarter in 8 basis points already peaked or should we expect NII to kind of grow from here? My third question would be on the cost outlook. You're very good at managing costs. You're already ahead of your cost income ratio target of 40%.
How should we kind of think about wage inflation in Portugal in 2023 and 2024? Do you have any upcoming wage negotiations that we should be aware of? In general, what kind of cost inflation you're seeing? My final question would be around the discount rate. It was increased to 4.17, I think. From which level was it increased and how much did it help your Common E quity T ier 1 in the quarter? That's all from me. Thank you.
Hold on one second. The securitizations that we have done in Portugal do not have an impact in terms of the NII. They will have an impact in terms of trading income. What we can tell you is that our after cost of equity will be or is on the high -single digits area. We are expecting an impact that can be absorbed in the normal comparison with the past year. I mean, something around between EUR 1 million and EUR 2 million per month or something like that, so not more than that before tax. In terms of the pension funds, in terms of the NII, I'm sorry.
In terms of the NII, as you know, an interesting evolution of the NII in Portugal in Q4. We expect the NII still to grow in Q1 of 2023. We are not expecting it to have peaked in Q4. Going forward, probably some stability in terms of NII. It's to reach a value of around, as I was commenting, in the low teens for the full year. In terms of costs and negotiations, of course, we are in negotiations, as you would expect. The inflation in Portugal, as you know, is on the high -single digits area.
We expect our costs to be contained through efficiency measures and through negotiations around the mid-single digits. What we are expecting in terms of costs is mid-single digits. To summarize, in terms of NII, we are expecting low teens and i n terms of commissions, fees and commissions, we are expecting low- single digits. But NII is much more important than fees and commissions, as you know, in a bank. In terms of costs, we are expecting mid- single digits. Low- to- mid- single digits in Portugal. In terms of the pension fund, we have, I mean, the total impact is explained here in this page, the of our presentation.
The actuarial rate, we were based to a large extent on the Mercer discount rates for the period of the pension fund, for the duration of the pension fund. These Mercer discount rates were in June at 3.3% and were in December at 4.17%. A large part, I would say, a large part of the benefit that you see here from the EUR 202 million of excess to the EUR 600 million of excess is exactly explained by this evolution from 3.3% to 4.17%, o kay? 4.17 %, o kay?
Okay. That's very clear. Sorry, just on the Polish NII. In Poland, has the net interest income peaked on a quarterly basis or how should we think about the Polish net interest income going forward?
I would say, I would not like to comment too much Poland here because it's a listed entity. It's a listed entity with its own disclosure requirements and so on. What I would expect here, without entering into a quarter-by-quarter analysis, is that we would expect some stability in the NII in Poland when you compare the full year, I would say. That's what I would like to say at this point in time. Okay? Which is a high level as we know.
Okay, great. Thank you very much.
Thank you. We will now take the next question. It comes from the line of Benjie Creelan-Sandford from Jefferies. Please go ahead. Your line is open.
Yes. Hi, good afternoon, everyone. Thanks for taking the question. Look, I know you've talked about it a lot already, but I just wanted to come back onto the performance of the domestic net interest income. Clearly you've raised the guidance for 2023 quite meaningfully from mid-single digit to low- teen growth. I was just wondering, you know, is that purely driven by, you know, a higher forward rate curve? Is there any other assumptions that you've changed or are trending better? I guess more specifically, just looking at this quarter, there's been some sharp moves in your hedging derivatives on the balance sheet. There was also a trading loss in the quarter.
I'm just wondering whether you've done anything, in terms of changing your structural, hedging positions and whether that's leading to a stronger NII momentum into 2023. A couple of other just specific questions on the domestic net interest income. Could you tell us what the average yield on the loan book was in Portugal at the end of 2022, and how that compares year-over-year? If it's possible to let us know what the TLTRO contribution net of reinvestment was in the fourth quarter. Thank you.
In terms of the rising, I would say, of the guidance for the NII for 2023, the main factors were the level of EURIBOR rates. Effectively, the EURIBOR rates have increased somewhat, and I was, as I commented, in spite of being partially hedged, we are not totally hedged. Basically, I would say the starting point in terms of betas. As you know, the rates started to rise, mid, in the middle of the year, so to say, at least the EURIBOR and so on. What we have seen is that from the middle of the year until now. The financial system has been very disciplined in terms of rate increases.
The starting point, I would say, for the term deposit remuneration, the one that we have right now, is lower, so to say, than the ones that we were estimating three months ago. Exactly because, I would say, there was much more pricing discipline in this factor than what was envisaged before. This is the main factor. The TLTRO contribution in the fourth quarter was EUR 9.2 million. Basically what we did is, we have repaid the TLTRO and sold, so to say, some short-term securities that we have and avoided, so to say also, some deposits that we had at the central bank.
In terms of the average interest rate on our assets. On last year, on the total of last year was 2.1% in terms of for Portugal, I mean, which compares of course with I mean, a negative interest rate, as you know. I'm speaking here about the interest rate, okay?
Thank you. Sorry, the line was breaking up, so I just didn't catch that last point about the asset yield in Portugal. I guess just one other quick follow-up, if I may.
The average asset yield on the full year of 2022 in Portugal was 2.1% for loans. The average asset yield for loans in Portugal for the full year of 2022, which we have to compare of course with the interest rate level of 2022, was 2.1%. Please keep in mind, I mean, that for a large part of the yield, the EURIBOR rates were negative and most of our assets are floating rate.
Okay. Thank you.
Thank you. We will now take the next question. It comes from the line of Carlos Peixoto from CaixaBank BPI. Please go ahead. Your line is open.
Yes. Hello?
Yes, yes, Carlos, please go ahead.
Okay, perfect. Thank you. Hi, everyone. Carlos Peixoto from CaixaBank here. Basically, a couple of questions here. The first one would be on NII, if you could help us understand the movement in the fourth quarter. There was a EUR 40 million increase in NII in the fourth quarter in Portugal. Within that context, I didn't really catch how much was the TLTRO contribution in the fourth quarter. Sorry, the line was breaking up. If you could repeat that, I would appreciate it. On the trading front, you mentioned that the securitization could have an impact of roughly EUR 1 million-EUR 2 million per month in trading income.
You experienced losses in this line, in this quarter. How should we think of it for next year? Should it continue to be pressured by not only the securitization cost but also NPE disposals or things of that nature? Finally, my third question would be regarding the outlook for provisions and cost of risk into 2023. So far you have been guiding towards cost of risk being somewhere in between where it is today, and the 50 basis points target that you have for 2024. Is that still the case? That would be pretty much it. Thank you very much.
Okay. Thank you, thank you very much, Carlos. In terms of the moving parts of the margin, we I think there is in the presentation for the full year. Effectively, we do not go into detail too much in terms of the impact for the quarter. What we have is in commercial terms, if you want, there is an effect in terms of the growth of the interest rate on the credits of around, and this impact was around EUR 33 million in the quarter. The growth in the cost of deposits was only EUR 7 million. So to say, this commercial margin, so to say, contributed with EUR 25 million.
The remaining parts, the remaining part to the EUR 40 million, so the remaining EUR 15 million, I mean, is explained by more the wholesale part, where the wholesale funding and liquidity more or less cancel themselves out. There is a contribution from the securities portfolio of around EUR 15 million. I would say this explains. EUR 25 million from the EUR 40 million, EUR 25 million comes from this, so to say, positive impact of benefiting more on the loans than the increasing costs of the deposits. Of course, when we look forward, we do not expect to have negative trading gains. But there are sometimes, mainly when we sell portfolios or we sell real estate, some negative trading gains.
What I would project going forward in terms of Portugal for trading gains, I would say is relatively minor but positive trading gains. In this line, I would expect quite immaterial positive gains looking forward. Of course, trading is trading, and we can have a certain point in time capture good market opportunity or on the other hand, I mean, we can get, I mean, surprised by a very negative market evolution. Having said that, in any case, we do not take relevant trading positions within our books, so that's why I would comment this way.
In terms of, I mean, the cost of risk, when you compare our bank with other banks in Portugal, we have had a historically, a much higher cost of risk, as you know. This was, to a large extent, explained by the high level of legacy assets. As we normalize the bank and we become more similar to the other banks, there is a natural trend of convergence of the cost of risk on one hand. On the other hand, we cannot ignore that with a higher interest rate environment, the credit risk increases. Of course, in the situation which we are, the credit risk increases.
Albeit I have to say that up until now, we are not seeing any hard signs of this increase. We are expecting because, I mean, we are forward-looking, but we are not seeing any signs yet. Keeping this in mind, we would maintain our guidance from at around 50, probably slightly biased upwards, but around 50 basis points of cost of risk going forward for 2023. Okay?
Thank you. There are no further questions at this time. I would like to hand back over to the speakers for final remarks.
Thank you very much for your interest. Thank you very much for being here with us, listening to us, analyzing our bank and our equity story. I really would like to reiterate our strong confidence in our plan and in our delivery capabilities. I would like to reiterate the fact that we will, and we are totally committed of being the excellence bank in Portugal in terms of customer franchise, customer preference, but also financial strength and shareholder value creation. Thank you very much.
That does conclude our conference for today. Thank you for participating. You may all disconnect.