Good afternoon, Miguel Maya speaking. Welcome to BCP's earnings conference call. As usual, I will highlight the most relevant issues that marked our performance, and then Miguel de Bragança and Bernardo Collaço will follow, providing additional details. Going straight into the nine months earnings, we have achieved a net profit of EUR 97 million, growing 63% year-on-year, while operating in a highly unstable environment marked by a mounting inflation exacerbated by a war in Ukraine, combined with demand restrictions still from the pandemic context and the process of reconfiguration in supply chains. In Portugal, the path of fiscal consolidation, together with the controlled unemployment level, gives confidence about the preparation of the economy going forward to tackle the volatile economic outlook, as recently evidenced by very important improvements of sovereign ratings.
It should be noted, though, that our consolidated net profit of EUR 97 million was heavily influenced and contained by the extraordinary effects related with Bank Millennium, namely the costs associated with the FX mortgage loans, the upfront provisioning for the credit holidays, the one-off contribution for the institutional protection scheme, and the goodwill impairment, which altogether reached this year more than EUR 850 million. The most relevant impact, and unexpected, to say the least, came from the upfront provisioning of EUR 305 million following the government decision for credit holidays on mortgage loans, which, as we have previously announced, was the reason that led Bank Millennium to activate the recovery plan, considering the substantial loss that ended up being reported in Poland on the third quarter.
However, Bank Millennium kept showing that it has a solid franchise that continues to expand its customer base and generates growing levels of pre-provision profit. If it wasn't for the credit holidays upfront provision, Bank Millennium would have reported a profit this quarter, proving its capability to organically generate capital to absorb the FX mortgage provisioning needs that are being accounted. The uncertainty around this issue will continue until a reasonable legal solution could be envisaged and implemented. On this matter, I must underline the importance of the clarifying statement from the Chairman of KNF about what is really at stake. On the recent earnings presentation of Bank Millennium, the management team expressed that, in a reasonable time horizon, Bank Millennium will recover its capital ratios above requirements exclusively through a combination of further improvements of operational profitability and capital optimization initiatives.
I emphasize, without any kind of capital or liquidity support from BCP. Excluding the extraordinary effects coming from Bank Millennium, the group's adjusted net income could have reached EUR 536 million, growing 125% year-on-year with the international operations adjusted contribution reaching, EUR 240 million. In Portugal, year-to-date net profit has surpassed EUR 295 million, growing almost 67% on a comparable basis, driven by an increase of core income combined with a reduction of operational costs and rigorous management of balance sheet risk profile. We continue to rigorously steer the capital position and optimizing capital allocation with our strong business model organically generating capital, which has been absorbed to compensate the extraordinary impacts recorded by Bank Millennium.
The total capital ratios stood at 15.1%, and the Common Equity Tier 1 at 11.4%, both above capital requirements. The effects of the normalization of the monetary policy and the implementation of the recovery plan in Poland will certainly contribute to translate our capacity to organically generate capital into reinforcement of the capital ratios. We remain with a strong liquidity position and with more than EUR 24 billion in assets eligible for ECB funding. The commercial activity intensities stood at very high levels across all geographies where we operate, exploiting our solid relationship business model that combines a high quality footprint of physical branches enhanced by our digital solutions.
Maintaining a strict risk control of the balance sheet, this intense commercial activity led to an increase of EUR 1.1 billion in the performing loans book, particularly in Portugal, where performing loans grew 3.7%, increasing EUR 1.4 billion year-on-year, driven by mortgage and corporate loans. In the international activity, the growth of the loan book in local currency was hindered at the consolidated level by the zloty depreciation. Customer funds grew 3.5% year-on-year, having increased EUR 3.1 billion at consolidated level and EUR 2.7 billion in Portugal. A remarkable performance given the increasingly importance of customers funds for NII in the current monetary policy framework of upward trend for interest rates.
The fact that, particularly in a challenging macroeconomic context, term deposits were responsible for the major portion of growth in customer funds, having increased EUR 5 billion, of which EUR 3.5 billion in Poland, is also very good indicator of the quality of our franchise and the confidence customers have in the bank. Throughout the challenging economic environment in managing the asset quality, in which the pandemic shock was followed by a global energy crisis unleashed by war in Ukraine, we kept a steady pace of improvement of the asset quality. In Portugal, we have decreased NPEs by more than 20% over the last year, a reduction of almost EUR 400 million, with the NPEs ratio standing for the first time below 4%.
Coverage levels are being kept along this NPA, NPE downward trajectory, with impairment coverage above 66% and total coverage at 114%, while rigorously managing the balance sheet risk, with the cost of risk continuing to decrease trend towards our strategic target of 50 basis points, having achieved 57 in Portugal and 55 at group level. Our customer base continues to grow consistently, having exceeded 6.4 million clients at group level and 2.6 million in Portugal, confirming the bank's ability to meet the customers' expectations and to attract new clients. The priority we gave to mobile has been fueling its adoption by customers across the group, showing their recognition of the quality of our mobile solutions.
Last year, mobile customers grew 20% both at the group level and in Portugal, with mobile customers already accounting for 62% of the group's customer base, close to our strategic goal for 2024. Customers recognition has been notorious. In Portugal, our app leads competition on the ratings of measure platforms. Millennium BCP was considered the best consumer digital bank by reference entities and one most recommended by the customers of the largest banks since 2018. Our permanent focus on innovation is driving its increased relevance as preferred platform for the customers in their interactions with the bank. Users of Millennium app represents 51% of our customer base in Portugal at 6 percentage points year-on-year increase. Customers carried out this year 25% more transactions throughout the app, significantly increasing the number of transfers and payments.
The number of sales increased 47%, notably in the sale of personal loans, cards, and savings solutions. We continue to invest in the digital transformation of the bank to achieve more streamlined operations and improvements in the quality of the interactions with customers, which enable us to continue the trajectory of improvement of the bank's efficiency and profitability. We have been successfully turning customer interactions with the bank easier and more convenient, while promoting new growth engines by enabling access to multiple ecosystems and investing heavily in cybersecurity and data protection to leverage customer trust. Digital interactions increased 30% this year, with the number of digital sales already representing 77% of total number of sales.
We are well aware that the context in which we operate remains highly challenging, but we are confident in the bank's ability to successfully pursue the strengthening of operating efficiency, the improvement of balance sheet quality, and achieving better profitability by deserving the customer's preference. Miguel, the floor is yours.
Thank you very much, ladies and gentlemen. As you may see on page 11 in our income statement, we show a very robust growth in core income driven by the net interest income that in consolidated terms grows around 33%, but also by the commissions that grow 7%. The total core income grows almost by one quarter, 25%, and this has been achieved with very strong discipline in terms of recurring costs that clearly grow below inflation, so that our recurring core operating profit grows around 40%. Non-recurring costs, of course, also contribute to the good performance vis-à-vis 2022, because in 2022, we had the provision of a stronger restructuring charge.
In terms of other income, one may see the impact of the regulatory contributions, including the regulatory contributions to the institutional protection scheme in Poland that charge our income statement around EUR 60 million more than in the previous year, so that the operating net income grows around 50%. The impairment and other provisions also grow around 50% to a large extent, due to regulatory issues that are beyond our control, such as the credit holidays in Poland, the legal risk on CHF mortgages that continues to be a heavy burden in our income statement. As was shown here in the previous quarter, the depreciation of the goodwill in Poland that we have booked this year.
The impact of all these effects is a growth in the net income before tax of around 58% and in the net income around 63%. The evolution has been very positive, namely excluding extraordinary impacts. However, with extraordinary impacts, we want to show the ROE is still very much below our target and what we want to achieve as a management team vis-a-vis our shareholders. The net interest margin has here a different evolution between Portugal and the other international operations, namely Poland. In Poland, due to the interest rate increase as to, I would say, a strong discipline in terms of deposits, the NIM grows from around 3% - 4.7%.
In Portugal, the major driver of the NII is the volume growth because the NIM is kept constant. Basically, in the first nine months of the year, we have not been seeing yet the flowing through the NIM, the important impact of the interest rate increases due to the normal repricing inertia of the balance sheet. In terms of fees and commissions, all of them, mainly the banking fees and commissions grow very substantially, as you see. The market-related fees and commissions don't grow as much, mainly due to the effect that we all know in terms of the markets and their impact in asset management fees.
However, in terms of banking fees and commission, there is a very positive evolution, mainly of transaction fees, card fees, current account fees, etc. In terms of the other income, the net trading income is relatively constant at consolidated level, but this is a tale of two parts where the net trading income grows very well in Portugal, around EUR 20 million. Has a negative evolution in Poland, but I would say it's a healthy negative evolution because as you may see in the footnote, the net trading income includes around EUR 48 million of out-of-pocket costs with out-of-court settlements with clients.
The other operating income is relatively stable, but there is here a very important effect of the institutional protection scheme that has cost us around EUR 60 million in Poland. Operating costs very disciplined, as you see in page 15, in Portugal, the recurring costs decreasing from EUR 454 million- EUR 438 million in spite of the inflation. Of course, there is the base effect of the restructuring charges last year. The other costs in the other geographies, mainly Poland, suffer from the inflationary environment that in Poland is even higher than in most of Europe. Impairment and provision charges.
Comparing the nine months of 2022 with the nine months of 2021, one sees the goodwill or the impairment of goodwill of Bank Millennium, around EUR 100 million. The credit moratoria that we have announced to the market, and we have provided around 80% or with a parameter of around 80% of clients engaging in this credit moratoria. The CHF legal risk, I would say relatively stable vis-à-vis last year, but still showing some sign of decrease. As expected in our plans, a regular convergence to normality of the impairment charges.
This is what explains also this convergence to normality, where we are still above the cost of risk of some of our competitors, as you know, explains why the cost of risk in Portugal has decreased from 68 basis points to around 57 basis points. And absent, I would say a major crisis in Europe, we expect this decreasing trend to continue, albeit at a soft pace. Credit quality, a lot of ratios here, but this is so to say also to make the analysis easier. The total coverage, i.e., the coverage with collaterals is still above 100%, which is the key point, that the cash coverage plus the collateral value currently evaluated is around 14%. The other coverages are very much at reasonable level.
The NPE ratio, considering loans, is 4.1%. Without including the unlikely to pay and only the defaulters, the 90-day defaulters ratio, we are already at consolidated level at a ratio of 1.5%, which is, I would say, a very interesting ratio. We were able to reduce year-on-year EUR 400 million. As time goes by, the recovery of the loans becomes more and more from two sources. Either the unlikely to pay loans that get cured once the loan, the clients pay all the installments that allow us to reevaluate their position, or the cases that are already so old that either we sell them or we write them off.
Because of this situation, it's normal that the coverage shows some decrease because typically a write-off has a very strong provision. You see that in Portugal, the NPE ratio, including securities and off-balance sheet, is already at 2.5%, and in our international activity at 3.2%. In terms of group activity, very healthy growth in terms of total customer funds that grow 3.5% in consolidated terms, of which 4.2% in Portugal and 1.5% in the international operations. Without the FX effect that these international operations would have grown 4.8%. I would say growth levels above 4%, both in Portugal and in our international operations. Sorry.
In terms of credit, in spite of the strong reduction of NPEs in terms of book value, our loans continue to grow, and they grow 1.1% in consolidated terms. This is explained by the consumption of a reduction of NPE of around 14% and an increase in performing assets in performing credit of around 2%. As you see in Portugal, this is more evident where one may see that we have grown EUR 1.4 million of performing assets in Portugal. In terms of capital, I would like to highlight here the evolution vis-à-vis last quarter.
As you know, we have had all these extraordinary movements this quarter, of which I would like to highlight the impairments for CHF and the moratoria. As we have communicated to the market, the moratoria would have an impact of slightly above 40 basis points. The CHF impairments had an impact, as we are seeing almost every quarter of around 10 basis points. The fact that we have increased our CET1 ratio in spite of these very strong adverse movements means that in terms of organic capital generation, we have been able to generate more than 50 basis points of organic capital in the quarter, which I think is very interesting.
Leverage ratio still, I would say very a very strong ratio at 5.5%, comparing very favorably with the average ratios in other countries. An RWA density that reflects the conservativeness of our models. Liquidity ratios, I would say, still very very strong, very well prepared for anything that may come. Now I will pass the floor here to Bernard.
Good afternoon, ladies and gentlemen. On page 26, starting with the Portuguese operation, net income increased year-on-year significantly from EUR 150 million to almost EUR 200 million. Recurrent profitability went up more than 66%, showing how robust is our business model. Recurrent net income excludes mainly costs related with actuarial adjustment on the first half of 2021, and in 2022, costs that were related with the compensation for temporary salary cuts within the period of 2014-2017. Net operating revenues increased 13% and recurring operating costs went down 3.4%. On page 27, looking to NII in Portugal.
At the end of the first nine months of 2022, it stood at EUR 671 million, meaning an increase of EUR 8.3 or EUR 51 million above the previous year. The positive impacts from growth of performing loan book, higher yields from securities portfolio, and the excess of liquidity more than compensate the smaller negative impacts from pricing on loan portfolio, the reduction of the NPEs and the effect of the wholesale that also includes the TLTRO. NIMs stood at 145 basis points, equal to September 2021, but with a positive evolution quarter-on-quarter. Moving to page 28, that presents the evolution of fees and commissions as well as other income.
You can see that banking income fees and commissions increased more than 11%, and the most significant impacts came from cards and transfers that grew 30%, driven by the increase of transactional activity. Market-related fees registered an increase year-on-year of 8%. All in all, fees and commissions went up by 11% to a level higher than EUR 417 million. That compares with a level of EUR 376 million in the first nine months of 2021. Looking to other sources of income, in the first nine months of 2022, other operating income was quite stable year-on-year, although it is important to mention that mandatory contributions increased almost 15%.
This line also accommodates other effects, as you know, as real estate sales that were higher than the first nine months of 2021. Trading went up almost EUR 35 million regarding, and regarding equity-accounted earnings. Contribution for P&L was higher than last year due to some one-off impacts. All in all, other income, including equity-accounted earnings, trading, and other operating income went up year-on-year almost EUR 40 million - EUR 82 million. On page 29, regarding costs, bank continues to apply strict policy in terms of cost management. Comparing recurrent costs from last year, there was a reduction, as mentioned, of 3.4%. Non-recurrent items include, as I said, on the nine months of 2020 and 2021, the headcount adjustment of EUR 87.6 million.
In the 9 months of 2022, the compensation of EUR 6.1 million that is related with the temporary salary cuts in place within the period of 2014-2017. Staff costs went down 7%, admin costs slightly higher than the previous year, and depreciation aligned with the nine months of 2021. As a result of the process in place in 2021, the net evolution of employees from September 2021 to September 2022 was a reduction of 254 employees. As regards branches, there was a reduction of 39 branches in the 9 months, 2022, and there was a reduction of seven branches from the previous quarter.
Moving to page 30, which refers to asset quality, and even under a challenging environment, BCP was able to reduce almost EUR 400 million of NPEs, meaning -20%. In the first nine months of this year, there was a reduction of EUR 342 million, out of which EUR 98 million were on the third quarter. As you can see on the top left chart, reduction occurred mainly on the NPL, more than 90 days past due, that at the end of September represents less than 30% of total NPEs. NPEs as of September 2022 stood at EUR 1.5 billion. That compares with EUR 1.9 billion a year ago. Cost of risk stood at 57 basis points. That compares with 68 basis points, showing the normalization path of the cost of risk.
Let's now move to page 31, which looks at the NPE coverage breakdown. As you can see, total coverage of NPEs stood at 123%. NPE coverage by loan loss reserves at 66%. Total coverage for individuals with high levels of real estate collaterals stood at 100%, and for companies at 131%. Coverage by real estate collaterals on companies at a level of 52%, and loan loss reserves at 77%. On page 32, which shows the evolution of foreclosed assets and restructuring funds, there was a strong reduction year-on-year on foreclosed assets. Foreclosed assets stood up to EUR 335 million.
That compares with EUR 641 million at the end of September 2021, meaning a reduction of more than 47% or a decrease of more than EUR 240 million. In terms of property sales, there was a reduction in terms of the number of transactions compared with last year, but the sale value was 17% higher than a year ago. Also important to highlight is that the sale value continues to be above the book value. On the first nine months of 2022, sale value exceeds the book value by EUR 29 million. That compares with EUR 16 million one year ago. Regarding restructuring funds, exposure was stable. As mentioned on the previous quarter, it is expected a reduction with the closing of the transaction that is in place.
Now moving to page 33, total customer funds grew 4.2% to EUR 67 billion, and growth was equivalent to EUR 2.7 billion and was mainly supported by the increase of demand deposits. Off-balance-sheet funds continued to show a decrease due to market conditions and maturity of some insurance products. In terms of gross loans, there was an increase of 2.6%, supported by an increase of more than 4% in mortgage loans. It is also important to highlight that performing loans went up 3.7% year-on-year, or more than EUR 1.4 billion, as well at the same time, the NPEs were reduced by almost EUR 400 million.
Going to page 34, it is possible to see the strong performance on new loans origination, and the recognition of BCP as the main bank for Portuguese companies. Performing credit portfolio in Portugal went up EUR 1.4 billion or 3.7% from September last year, supported in growth in mortgage loans by EUR 800 million and in loans to companies of almost EUR 450 million. Let me also reinforce once again the recognition of BCP as the best bank for companies, a segment where we have been achieving important milestones. Now moving to page 36 regarding international operation, and as already mentioned, results were strongly impacted by, from extraordinary effects from Poland. Bank Millennium net incomes stood at -EUR 270 million. That compares with -EUR 176 million one year ago.
It is important to remind you that on the previous quarter, Bank Millennium, without the contribution to IPS, would have had a profit. Also on the third quarter of this year, that if there was not the moratorium cost that was booked up front, Bank Millennium would have had a profit as well. Meaning that Bank Millennium was able to accumulate the CHF negative impacts from the improvement of the operating results on the last two quarters of this year. Mozambique contribution increased almost 6% compared with nine months 2021. Contributions from international operations stood at EUR -96 million, which compared EUR -55 million one year ago.
Net income on a comparable basis, and that means excluding impacts from Bank Millennium's CHF mortgage portfolio and the contribution after taxes and non-controlling interest, and the goodwill as well increased almost 100%, and this really shows the capabilities from our international operations. Moving to page 37, which refers to Bank Millennium in Poland. Net income in Poland was again strongly impacted by costs related with the moratorium booked on the first quarter 2022, and with costs associated with the CHF mortgage loan portfolio, which includes provisions, out-of-court settlements and legal costs, and also the contribution to the IPS scheme. Excluding these factors and due to the excellent operational performance, net income, which stood at EUR 392 million, more than 127% more than last year on a comparable basis.
Net operating revenues increased EUR 271 million or almost 50%, and operating costs, excluding mandatory contributions, went up 11% due to inflation that is putting some pressure on salaries and the admin costs in Poland. Common equity ratio runs to that 9.5% and total capital ratios to that 12.4% at the end of the third quarter. Capital ratios to be temporarily below minimum requirements due to the impact of the upfront booking of credit holidays, and the recovery is expected in the relatively short term through a combination of further improvement of operational profitability and capital optimization initiatives. On page 38, some detailed information about Bank Millennium. NII increased strongly, more than 75% to more than EUR 730 million. That compares to slightly more than EUR 400 million one year ago.
This movement is due to interest rate hikes in place since the fourth quarter of 2021. NIM increased significantly year on year from 2.6%- 4.36%, improving from a level below 3% at the end of 2021. Fees and commissions decreased 1.5% to EUR 130 million, and other income decreased significantly, as explained before, by the impacts related with the out-of-court settlements. Operating costs, excluding mandatory contributions, increased less than 10%. Regulatory contributions increased almost 71%, and it is mainly due to the one-off effect of the contribution to the IPS. Moving to page 39, related with asset quality in Poland. Even with a very challenging environment, Bank Millennium cost of risk stood at 44 basis points.
That means slightly higher than the previous quarter, and this was mainly influenced by consumer loans. NPL, non-performing loans, 90 days past due ratio, decreased 30 basis points. Coverage ratio of non-performing loans by loan loss reserves at 144%, meaning an increase of 16 percentage points from the previous quarter. On page 40, 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 almost EUR 17 billion, up 2.2%. It is important to highlight the increase of the zloty mortgage loan portfolio of almost 10% and the significant decrease of mortgages in foreign currencies. On page 41, regarding FX mortgage portfolio.
FX mortgage as percentage of total gross book at the end of September this year stood at 9.4% over total loan portfolio. As you can see, the reduction of the CHF mortgage loan book was 18% year-on-year and 5% quarter-on-quarter. Bank Millennium, due to the level of court claims and decisions more favorable to customers, continued to make additional provisions of almost EUR 300 million in the nine months of this year, that is excluding Eurobank provisions, increasing also coverage at the same time to 41% from almost 26% at the end of 2021. Total cumulative provisions for litigation risks are now above EUR 1 billion.
It is also important to mention, as you can see on the bottom right chart, that Bank Millennium is maintaining a high level of extrajudicial agreements, and in the third quarter of this year, agreements were again above 2,000, and the new claims were below amicable settlements for the sixth consecutive quarter. In the third quarter of this year, amicable agreements had a cost of almost EUR 35 million. Turning to page 42 with regard to Mozambique, we can say that Mozambique, even with a challenging environment, continues to be a stable contributor for the group P&L. Net income increased almost 6%, mainly due to higher NII. Net operating revenues increased almost 7% and operating costs were 6.5% higher than last year. Capital ratio stood almost at 37%.
Moving to page 43, NII went up year-on-year 7.8% to more than EUR 140 million. NIM is increasing and stood at almost 8% at the end of September. Commissions have been stable year-on-year and other income increased 10%. Costs increased at a lower pace than revenues and cost to income stood at 44% similar to one year ago. Moving to page 44, NPL 90 days past due below 10%. Cost of risk stood at 180 basis points. That compares with more than 200 basis points at the end of June 2022, and 140 basis points in September 2021. Coverage by loan loss reserves increased 27 percentage points to 103%.
Regarding volumes, on page 45, you can see that customer funds registered an increase of almost 4% and loans to customers with a small increase of 1.4%. Regarding loans, increase was mainly in loans to individuals. Let me thank you for your attention. Before we move to Q&A, I will return to Mr. Miguel Bragança for some final remarks.
As you may see in page 47, we are progressing towards our vision implicit in our Excelling 2024 plan. In terms of NPEs, we are clearly ahead of schedule. In terms of cost of risk, I would say that in spite of a much more challenging environment, we are also ahead of schedule. In terms of cost to income, we are ahead of schedule. I would say that in terms of all the key metrics that are beyond or that are directly reflected in our business model, we are clearly ahead of schedule. Unfortunately, the legacy assets, mainly in Poland, are weighing more than what we were expecting at the moment in which we did the plan. In terms of ROE, we are still suffering.
We continue to strive for our target for 2024 so as to generate the value for all our stakeholders that they deserve. Thank you very much.
Thank you. As a reminder, to ask a question, you will need to slowly press star one and then one on your telephone and wait for your name to be announced. Once again, it's star one and then one on your telephone and wait for your name to be announced. We are now going to proceed with the first question. The first questions come from the line of Ignacio Ulargui from Exane BNP Paribas. Please ask your question. Your line is open.
Thanks very much. Good afternoon, gentlemen. I have just a couple of questions. Starting with NII. I just wanted to get a bit of your thoughts of how do you see NII progressing in 4 Q 2022, and what should we expect in 2023? I'm particularly interested a bit on how do you see deposit betas evolving given that the liquidity conditions in the Portuguese market have improved materially. A second question is on cost of risk. Well, I'm very glad to see that cost of risk has been below 50 basis points. How you see this evolving from here? It's been a good quarter. Do you think that the progression that we have seen this quarter could be maintained?
I think it will be very interesting to see where the cost of risk of the bank evolves now that NPE ratio in Portugal is trending closer to 3%. As you said, Miguel, you are getting very, very close to your targets. A final question on capital. I mean, what should we expect for capital? We have seen a bit of a, I think, a turnaround in the capital in the quarters. What kind of tailwinds should we expect in the coming quarters to get you back to around 12%? Thank you very much.
Okay. Thank you very much for your question, Ignacio. Trying to address them all. Starting with the NII. Effectively, as you know, the banking system in Portugal has excess cash. It is in a very strong liquidity position. Contrary to what happened in 2011, 2012, where the banking system was very much dependent on external wholesale funding, we do not expect that this increase in interest rates will generate, so to say, a very strong margin compression on the side of the deposits. Our base case is that there will be a rational behavior from the several competitors, so as to allow, say, some progression in terms of NII.
Comparing this year with next year, before the decision of the ECB, we were expecting, as you know, a high single digit growth in terms of NII. Right now we are closer, I would say, after this decision, to expecting a mid-single digit growth in terms of NII for next year. In terms of the final quarter of this year, we expect some stability vis-a-vis this year, so I would not expect any type of strong surprises in this area. In terms of cost of risk, yes, as you rightly point out, we have a strong difference vis-a-vis some of our competitors. That was the legacy credit portfolio in Portugal.
This legacy portfolio some years ago was more than twice the equity of the bank, as some of you may remember. Today, it is really much smaller. We expect this, our cost of risk to gradually converge to the cost of risk of the system. This is what we are, the premise on which we are working. Of course, in the meantime, there is also some uncertainty in Europe, no? The war in Ukraine, the price of energy and so on. These are also some headwinds. When we presented this plan to the market of 2024, being around 50 basis points, we were not anticipating the situation in which we are now. We are also accustomed to try to overachieve in terms of our targets.
Probably if it were not for the war in Ukraine, and if it were not for this geopolitical uncertainty, we would have arrived at 2024 at a better place than what we had presented in our strategic plan. Right now, we are pointing towards getting to this level in, say, a gradual pattern between 2023 and 2024. That's what we are working on, and we see no signs to the contrary. Let's see what type of macroeconomic developments there will be in Europe, but we are quite optimistic. In terms of capital, we are not expecting a new credit holiday type decision in any of our countries.
This was something very, very special that occurred this quarter in Poland. Poland, that is being a drag on our capital, as you know, we'll start presenting, so would at least be break even in the next quarter. That's what we are expecting to occur. Our, as we have been commenting, on a normal quarter, we would expect a capital accumulation before Swiss francs of around 30-35 basis points. The Swiss franc provision typically is taking out around 10 basis points. This is the type of capital accumulation on which we are working, of course, with all the uncertainty that that is in equity in the market.
We generally believe that the steps that we are taking in terms of business model and in terms of generating recurrent profit, and what you see here is real recurrent profit, will continue to drive our capital ratio upwards.
We are now going to proceed with the next question. The next question comes from the line of Noemi Peruch from Mediobanca. Please ask your question. Your line is open.
Good afternoon, and thank you for taking my question. I have a few. Just one clarification on NII. You mentioned stability in Q4. Do you mean a similar level to Q3? And there, could you please share with us the total contribution in Q3 and Q2? On asset quality, we know that the government in Portugal is working on a restructuring scheme. I was wondering if these clients applying for this type of restructuring would then be classified as Stage 2. If the government can waive such reclassification or is it only in the hands of the EPA? Finally, on capital. We see that through OCI, financial assets declined further in the quarter. Can you please update us on your Common Equity Tier 1 ratio sensitivity to government bonds?
Thank you very much.
In terms of NII, I don't want, of course, to give guidance in terms of, I would say, next quarter's profit to a level of assurance of EUR 1 million more or EUR 1 million less, as you may imagine, because there is an uncertainty around it, and it would not be a best practice. When I speak about stability, it's about no surprises that we are expecting in this regard. Probably somewhere in between, I would say, the pro rata of the full year and Q3. But let's see. We cannot forget also that there is a small, albeit in the quarter, maybe relevant impact of the end or the change of the conditions of the TLTRO.
So this, of course has a small impact in a quarter. That's why I speak about stability. I'm speaking about a Q4 that probably will be somewhere between, I would say the year-to-date number, pro rata of the year- to- date number, and the Q3. Or I would say a Q3 number with the level of growth that we were seeing before, but with some adjustment on these new TLTRO conditions. In terms of the margin in Portugal, as you know, I would say there are two large worlds in terms of the NII, as was presented here.
When you compare with last year, at least, the main impact was the growth of the performing credit volume on one hand, and on the other hand, what we have, roughly the same size, is the wholesale world, so to say. The effect of the growth of the securities portfolio together with the excess liquidity and deducted, so to say, by the higher costs that the TLTRO had this year when compared with last year. In terms of sensitivity, as I have commented here before, the sensitivity of our capital to the general level of interest rates is immaterial, so to say, because we have the interest rate of our OCI portfolio basically hedged.
There is a small impact in terms of the sensitivity to the spread of Portuguese government debt, that I would say for a 25 basis points growth, it would be around EUR 20 million impact in terms of Common Equity Tier 1. Okay.
In terms-
In terms of the, we know. I mean, we don't have any objective news in terms of what would be the program of the government for the restructuring of loans. We will advise, of course, to what are the accounting rules. If this restructuring clearly is a signal of deterioration of the credit portfolio, we will have to mark them as Stage 2. If not, we will not mark them automatically as Stage 2. Here, as in many other things, the devil is in the detail. We don't have enough information to take the decision. What I can tell you is that it will depend very much on the program that will be approved by the government.
Thank you. We will now take the next question. The next question comes from the line of Carlos Peixoto, from CaixaBank. Please ask your question. Your line is open.
Yes. Hi, good afternoon. Carlos Peixoto from CaixaBank here. A couple of questions from my side as well. Starting with, I guess, a follow-up on one of the previous questions on the government plan on the mortgage restructuring. I was wondering whether you think that the classification, whether the fact that the restructured loans have or not to be classified or moved to Stage 3 will that have a direct impact on cost of risk or that will be just a-
I'm sorry. Carlos, we are having a lot of troubles with the communication. If you could speak up or closer to the mic. I'm sorry.
Give me one second here. Are you hearing me better now?
Unfortunately not, Carlos.
Now?
Now perfect. Perfect.
Sorry. As I was saying, on the government plan, following up on the government plan on debt restructuring, I was wondering whether the move into Stage 3, whether the decision to have these loans or being obliged to classify them as Stage 3 or not, whether it will translate into higher level of provisions or it wouldn't be having an impact on cost of risk. That would be my first question.
Secondly, on the mortgage book overall quality, I was wondering if you could provide some data on affordability ratios and also how much of your loan book is composed of loans that were granted, I don't know, maybe over the last five years. Within that, what was the percentage of variable versus fixed rate loans. Finally, just another follow-up on the capital side. Did I understood correctly, your expectation is to generate 25 basis points of capital per quarter before considering the impact from FX mortgages in bond? Thank you.
Starting with the last question. What I commented, of course, this depends on quarter by quarter, was that, I would say in a normal quarter, we should be generating around 35 before Poland before the FX mortgage of Poland. After the 10 basis points of Poland, we will be closer to the 25 basis points. In terms of strength of our mortgage portfolio, what I can tell you is that we have an average LTV of 60%, and we have 83% of our loans with an LTV below 80%. Which gives us a lot of comfort.
In terms of fixed rate, most recently in the last years, I mean, the LTVs are typically slightly worse because the mortgage has not repaid a lot in the beginning. We have had fixed rates around slightly below 30%, what we have in terms of the new production in the last years. In terms of the stock, we are between 14% and 15%. I would also like to highlight that the unemployment in Portugal is very, very low. In the last crisis, the unemployment reached levels that were above 15%.
Still, if you take the average cost of risk in the last crisis, for several reasons that we can elaborate, the cost of risk of mortgages was on the average of the cycle around, in our case, it was around 50 basis points. Typically, you have two income earners in Portugal. Typically, the prices of the houses vis-a-vis the earnings of the average customer are not too high, are very balanced when you compare them. Although, of the old stock of houses, when you compare them with other countries. You also tend to have, I would say, some cultural family links.
That you have an intergenerational support, so to say, from parents to sons and vice versa. What you have seen in Portugal is not a problem in terms of mortgages. Even when the unemployment rate was above 15%, and now it is much, much lower, as you know. We are not concerned with our mortgage portfolio. Okay. In terms of Stage 3, I mean, the restructuring does not automatically trigger a Stage 3, as you know. The restructuring may trigger a Stage 2 if it is an indication of the deterioration of the portfolio.
Once a restructuring triggers a Stage 2, what happens is that, as you know from an accounting standpoint, you go from a yearly provision to a lifetime provisioning, and this has an impact on the cost of risk. Yes. Not the fact that they are Stage 3, but the fact that you go from a provision for one year to a provision for the lifetime of the credit. Mainly in longer term credits, this has an impact in the cost of risk. We are not particularly concerned with the issues of mortgages in Portugal right now. What we lived was a situation that was totally abnormal with negative interest rates, where some of the people even saved money in these periods.
Now we are getting back to normality. Most of the stress tests, most of the credits that were awarded in the last years were already stressed for these type of scenarios that we are living right now. Because we are still, as we all know, we are still below the long-term interest rate levels. Okay.
We are now going to proceed with the next question. The next question comes from the line of Benjie Creelan-Sandford from Jefferies. Please ask your question. Your line is open.
Hi, good afternoon, everyone. Thanks for taking the questions. A couple from me, please. The first one, I mean, just looking at the balance sheet, I mean, obviously CET1 ratio was up quarter-on-quarter, so that's good news. Looking at the balance sheet, I mean, tangible book value was actually down 7% Q-on-Q. I'm assuming that was to do with, you know, further negative impacts on the cash flow hedges. Perhaps you could just confirm whether that was the case. And also if you could just maybe walk us through a bit more detail on the nature of those hedge positions and how we should think about the unwind of those through the P&L going forward. The second question was on MREL.
I was wondering if you could tell us what your current MREL ratio was and what your issuance plans or targets are to meet the 2024 requirements. One final follow-up was just going back to the NII guidance that you provided. I just wanted to check, is that guidance in relation to the group, or is that purely on domestic Portugal NII? Thank you.
Okay. Starting with the last question. The NII guidance is for Portugal. Of course, for the group, the dynamics in Poland is different. The NIM in Poland is much higher. As you may know, I don't know whether you have assisted the conference of Poland, the dynamics is different, but it's for Portugal. In terms of the MREL ratio, we're not disclosing it now. What I can tell you is that we are both above the regulatory ratios and the recommended ratios, and attaining the ratio by the 1st of January of 2024 is perfectly consistent with our funding plan.
Our funding plan, I would say foresees a benchmark issue during next year. A benchmark senior preferred issue during next year. That's what I can say. With that, we will be clearly above the MREL ratio at the time. The cash flow hedges. As you know, when you originate, so to say, a fixed rate loan, you don't account for the mark-to-market value of the fixed rate loan. We have, so to say, fixed rate demand deposits, which mark to market you do not recognize in our P&L. We have, so to say, loans that can be fixed rate or floating rate.
If we were to have a fully hedged portfolio, what we should have is basically all the demand deposits or all the fixed rate liabilities that we have on one side of the balance sheet should be covered by fixed rate assets on the other side of the balance sheet. Fortunately or unfortunately, the large part of our mortgage book and the large part of our business is floating rate. What can we do exactly to hedge partially the interest rate risk? What we do is that we resort to cash flow hedges. Unfortunately, what happens is that these cash flow hedges that are used to convert a floating rate loan to a fixed rate loan, I would say, they have an impact in terms of our balance sheet.
The other side of the balance sheet, that is the fixed rate liability, so to say, the demand deposits, they are not marked to market. Okay? In spite of the fact that we benefit much more from an increase in terms of value, from an increasing interest rate, the negative part is accounted for in the balance sheet, in the P&L, and the positive part not. The supervisor realizes this, and basically he treats, so to say, the cash flow hedges from a regulatory standpoint in the same way as the supervisor would treat, I'm simplifying it a little bit, a fixed rate loan. Basically the supervisor excludes, so to say, these fluctuations that are done for interest rate hedging purposes from the capital ratio.
It makes sense to do so because it treats the same economic reality, a loan that is at the end of the day a fixed rate loan in the same way as a variable rate loan that is swapped to fixed rate. This, as you correctly pointed out, this impact on the balance sheet is a product of cash flow hedges. For a very good reason, these cash flow hedges do not affect our capital ratio. The way these cash flow hedges, so to say, flow through the P&L is exactly the way that I was commenting, that I comment very frequently, that is, through the margin sensitivity. If we have absolutely no hedges, probably if the interest rates would go up or down, we would have a very, very strong exposure to the fluctuation of interest rates.
Right now, what we have is that for normal betas, we typically have shown a sensitivity to the interest rate movement of around. I mean, for small interest rate movements and for strong interest rate movements, it's a little bit more complex. For small interest rate movements of around EUR 10 million for each 10 basis points of movement. This is what allows us to have, I would say, to behave as a commercial bank and not necessarily as a trading house, more as a positioning house. It flows through the NII. The way you should look at it is that it is already reflected in the interest rate sensitivity that we communicate to the market.
If we had not discussed cash flow hedges, if the interest rates would behave worse than what is reflected in the market, we would have suffered much more. If the interest rate go up much stronger than what is reflected in the market, it would have gone much more. Okay? Right now, for the current environment of interest rates which has strong movement that also then have impact in terms of volumes. It's important because when you speak about small movements, I mean, you can have an analysis, that's what the economists call ceteris paribus, all else constant. Once you go to sharper movements, you have also to project the impact that this may have on volumes, you know, because of course, the volumes that you produce in a different interest rate environment may be different.
Right now, when I commented that we are expecting a mid-single-digit growth for the NII next year, this is already reflected there.
Okay, that's very clear. Thank you. We are now going to take the next question. The next question is from the line of Maksym Mishyn from JB Capital. Please ask your question.
Hi, good afternoon. Thanks for the presentation and taking my questions. I have three, if I may. The first one is on the repricing of loan book in Portugal. You mentioned that NII does not reflect higher rates yet. If you could just explain the mechanics and when we should expect to see the impact of higher rates, that'd be great. The second question is on trading income in Portugal. Could you please add a little bit more color? I saw that this was some revaluation of corporate restructuring funds, if you could specify how much that would be great. The last one is on capital. Could you please update us on the disposal process for corporate restructuring funds and how much of an impact you expect on your capital? The other one is on the regulatory tailwind.
How much of an impact do you expect? Because I think that the pro forma ratio is now at 11.8%, while the fully loaded increased by 10 basis points. Thanks.
Okay. The corporate restructuring fund, there is one large transaction that has been closed in terms of the SPA, but now it's in the execution phase. We expect the settlements to occur until the year end. There's always some risk on these issues, but if it's not the year end, it's Q1 of last year, but we expect it for the year end. Okay? In terms of all of the NII, as you know, I mean, if you have a mortgage that is indexed to the six-month Euribor, on average, it takes three months for a client then to reprice the mortgage. The latest Euribor only has an impact on the six-month Euribor loan on average, after six months, after three months.
On some of them, it will be the day after, but on some of them will be six months after. We expect this impact to be much more visible next year, because next year, this very high level of interest rates is reflected, so to say, in the full portfolio. Of course, if the interest rates continue to go up very sharply, you will still have an impact by the end of next year and the year after. There is always some inertia in this issue. This impact is exactly what explains the growth of around mid-single digits that we are commenting for Portugal for next year. This is basically the impact of this issue.
In terms of the trading income in Portugal when you compare it with last year. You know, we are not a trading house, so we do a lot of trades. We typically have some customer facilitation, and so on. For a bank of our size, when you compare one quarter with the other quarter, when you see what happened, most of it had to do with interest rate instruments, swaps and bonds and arbitrage between swaps and bonds. Where this explains the growth of around EUR 20 million quarter-on-quarter. That's, it's perfectly reasonable for a bank of our size.
The restructuring funds, the impact of the restructuring funds in the capital, as we have already explained several times, will be around 10-15 basis points, I think. Positive, of course.
We are now going to proceed with the next question. The next question comes from the line of Sofie Peterzens from JP Morgan. Please ask your question.
Hi, here is Sofie Peterzens from JP Morgan. Just going back to the TLTRO, can you just maybe elaborate a little bit what your plans are? Are you planning to repay it early or keep it to the end? How does kind of TLTRO impact your liquidity and LCR ratio? I recognize your LCR is very strong at 264%, but if you could just kind of discuss a little bit your plans on TLTRO and how you see that, and also if you have any hedges in place. Then my second question would be on the discount rate on the pension fund.
I can't see it in the presentation, maybe I missed it, but if you could just remind us what the discount rate that you currently use is. My final question will be on Poland. It sounds like things are slowly but steadily getting better. In terms of the kind of out of court settlements, additional CHF mortgage provisions, what kind of levels should we expect still to come? Like, how should we think about the additional regulatory and Swiss franc mortgage provisions that you might take next year? Thank you.
In terms of the TLTRO, effectively, the ECB changed the conditions. The funding cost was related to an average ECB rate, right, so to say, and instead of using the average ECB rate that is positively influenced by the whole history, so to say, of the TLTRO, it has changed the interest rate to, I would say, a point in time ECB rate after the second of November. This basically makes the profitability of the TLTRO less interesting than what it was before.
That's why if you had listened in June, we had commented that we were expecting for 2023 a high single-digit margin growth, and now we are commenting a mid-single-digit margin growth. This is an explanation for this. The market is very volatile and the relative prices of assets are moving very fast. For us, we will take a look at in marginal terms on what assets can we invest the TLTRO, so to say, and compare it with the cost of the TLTRO. Of course, the eligible assets for us would be assets that do not have an RWA charge.
We will take our decision based on, to a large extent, based on the difference between the cost of the TLTRO and the remuneration of these assets. Let's see as time goes by and after the, so to say, the market incorporates all these movements, what type of, so to say, profitability will there be in terms of the TLTRO versus all these assets. The TLTRO, in any case, for most of the liquidity indicators already have, I would say, a short time frame for, it was already within the twelve-month period of next year. It would not have a material impact even if we pay them in advance. I mean, our liquidity ratios are totally comfortable. We will see.
The answer is we have not taken a decision. We will see, depending on the profitability of our investments. We don't need a TLTRO. It just helps to the income statement and a merited reward for the growth in credit. Please don't forget that the subsidized rate of the TLTRO came with strings attached. We have grown our credit portfolio to some extent also to get the TLTRO. We did it expecting, so to say, a certain rate for the TLTRO. In terms of the pension funds rate, as you may know, we only update the pension funds parameters twice a year in June and December. Okay?
In the other months, September and March, we do not update them. In any case, what I can tell you is the following. If we take a look, for instance, at the discount rates that Mercer publishes for between 15 and 20 years, the rates are between 4.11% and 4.16%, and our discount rate is at 3.3%. Okay? In this quarter, there was a slight decrease in our valuation of the pension fund. This slight decrease would be much more than compensated by the updating of these discount rates, because the movement would be if we had updated probably from around 3.3% to around 4.11%, 4.12%. Okay?
In terms of Swiss francs and other movements of this sort, a reasonable I mean the situation in Poland is not very clear in terms of what will be the final outcome in terms of Swiss francs. When we do not control all the variables in question, we have to do what is in our hands to mitigate the risks and to manage what we can manage. I would say that until there is more clarity on the final outcome, the most reasonable scenario is to assume a continuation of the size of Swiss franc costs, both in terms of trading gains and in terms of provisions that we have seen until now. Probably some soft decline because the low-hanging fruit comes first.
Until there is more clarity, which for the time being, I would not expect until end of next year, because the European Court of Justice will only take the decision by. I mean, they have not committed to any date, but our expectation is that it is by the summer of next year, then probably there will be a decision by the Polish Supreme Court. We will not have a visibility on any type of final solution, probably before Q4 of next year. I would expect the movement that we are seeing right now to continue at somewhat lower pace than it has been this year. The order of magnitude should be around this.
In any case, I would like to highlight something that Bernardo stressed very thoroughly, that even after Swiss franc provisioning, the bank in Poland is already contributing positively to the net income of the group. I think this is a very important change.
Thank you.
We have no further questions at this time. I hand back the conference to you for closing remarks.
Thank you very much. Thank you very much for investing your time and effort. I'm sorry. Is there a question still or closing remarks?
We just have a question being registered now. One moment, please.
Okay. Pamela, please feel free to pose your question.
The question comes from, Pamela Zuluaga from Credit Suisse. Please ask your question.
Hello, can you hear me?
Yes, yes.
Hi, I'm very sorry. I don't know what happened. I did register my question in advance. Sorry for that. I have one follow-up question and then two, if I may. The follow-up is regarding the discussion on the wholesale funding. You have recently issued wholesale funding at somewhat higher yields, if I remember correctly, close to 8% yielding debt. Thinking about your issuance plans, of course, you couldn't give us any details so far, but are you anticipating the higher wholesale funding costs within the guidance that you've given us on NII growth? Two further questions. My understanding is you've been selling sovereign bonds accounted for at amortized cost and reinvesting in bonds that are now accounted at fair value. Sorry, the other way around. You've been
Yeah.
-selling the bonds accounted for at fair value and now are investing into bonds that are now accounted for at amortized cost with the goal of shielding the capital from volatility in the sovereign spreads. As you do this, of course, you lock in the interest rate in these bonds for their maturity. Did I understand correctly that you could still aim to invest current liquidity into more of these assets? And therefore, could we expect some more upside from the strengthening of the sovereign yields, or should we expect the contribution from the securities portfolio on NII to remain now relatively stable? And then the last one is, you have been progressing significantly in cost efficiency in Portugal. However, we have been seeing some inflationary pressures on wages in other countries as unions start asking, the beginning of negotiations, for example, in Spain.
Do you see any such pressure potentially decelerating your progress on cost reductions in Portugal? Thank you.
Okay. Starting with the last question. Of course, when you have high single digit or even double-digit inflation, of course there are salary pressures and we will have to manage them. We have to compensate them partly with efficiency gains. What we have been seeing also is that our workforce has been understanding the situation in which the bank is and the importance of generating capital. A lot of it will depend on what is the forward-looking inflation rate and how successful will the ECB be in taming the inflation rate? Because if the inflation rate is tamed and starts converging to more normal levels within the mandate of ECB, we will expect, so to say, the salary pressure to be low.
If we expect this to be the new normal in terms of inflation, at least for some years, of course there will be some pass-through of the inflation to salaries. I think it's still early days to have a view on this. What I can comment you is that we will probably outperform our competitors in this area because we are very much focused on what needs to be done. We are very much cost disciplined, but everything is relative. What we commit is to be particularly disciplined and particularly focused in this area. In terms of the wholesale, we do not need funding. We do not need wholesale funding, as you know. There are some MREL requirements.
These MREL requirements are an order of magnitude lower than our balance sheet. Even if we have to issue for MREL and the issue that you commented, I would like to highlight, it's an issue that is subordinated to deposits. It's very, very important because in Portugal there is a structural subordination to deposits. It is as if it is comparable to a subordinated issue in another country. We will have some issues of this sort. These issues will be in the hundreds of millions, but not in the billions, so to say. It will be a small part of our balance sheet. Yes, they are already reflected in our projection of mid-single digits NII growth for next year.
In terms of contribution from the sovereign portfolio, there may be some positive contribution, but I think it's still early days, so I would expect this to be not very material. We will have to see. We will have to see exactly where the market stabilizes once these new conditions for the TLTRO stabilize. I would not expect anything in the order of magnitude of the tens of millions. If anything, something in the order of magnitude of the millions over the year, but not in the tens of millions.
Thank you very much.
Okay.
We are going to take the next question. It comes from the line of Noemi Peruch from Mediobanca. Please ask your question.
Good afternoon again, and thank you for taking my follow-up question. It is on NII. Can you share with us the notional value of the hedges currently in place, and what is the average duration, please? Thank you very much.
Noemi, I don't have them here with me, and I don't know whether this is public information, but what I can tell you is the following. Our report on the June accounts is very thorough, and this has not changed materially since June. What I can comment is either it is there with the information that you, probably it is there, the information that you need. In any case, I cannot give you much more information than the information that is in the June accounts. Okay? I would suggest we can then send you exactly what is the note in the June accounts where this is described. I don't have it here with me. Okay?
We have no further questions at this time. Please continue.
Okay. Thank you very much for following up on our equity story. This quarter was clearly an inversion quarter in terms of the story of the bank. An inversion quarter because we have been able to more than compensate some very negative legacy effects that came from our activity in Poland, but also an inversion point for the size of the capital that was generated and for the very strong movement in all the core variables such as the NII, the commissions, the recurrent costs, and the cost of risk. We want to really show our commitment in continuing to deliver this so as to satisfy, I mean, everybody that trusts on us and that trusts on us their investments.