Good day, thank you for standing by. Welcome to Millennium bcp First Half 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question- and- answer session. To ask a question during the session, you will need to press star one one on your telephone keypad. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, Miguel Maya, CEO. Please go ahead.
Good afternoon, Miguel Maya speaking. Welcome to BCP earnings conference call. I will go through the highlights of our performance in the first half of 2022, then Miguel de Bragança and Bernardo Collaço will follow to provide you more details. Before going into our earnings, I would like to briefly comment on the current situation in which we are operating, and particularly the most recent developments in Poland. The macroeconomic instability and volatility stemming from the pandemic was seriously exacerbated by the war in Ukraine, creating a backdrop that made the last quarter one of the most challenging and unpredictable quarters for many years.
The supply chains were already struggling to deal with the surge in post-pandemic demand, and the war with all its negative, direct and indirect consequences, worsened markedly the global macro picture by exacerbating the commodity inflation problem, driven by an energy crisis and shortage of cereals and fertilizers. The economic outlook worsened, significantly together with inflation exacerbation, which prompted central banks to tighten monetary policy meaningfully. Although we remain confident that the ECB will be successful in steering the interest rate upward trajectory while simultaneously avoiding the fragmentation risks within the Eurozone. However, adding to this adverse global macroeconomic scenario, a package of legal measures was recently approved in Poland, aiming to mitigate the impact from the surge in interest rates on the borrowers applicable to everyone and not directed only to those really in need, which place an unprecedented, disproportionate and unjustified burden on banks.
It is expected that the government take targeted measures to protect the most vulnerable citizens from sudden changes in the economic environment. It's harder to understand the provision of general measures imposed also to non-public sectors of the economy, like the concession of a broad moratoria on mortgage loans. Bank Millennium will front load the estimated impact from this legal package on the third quarter, which will have implications on the bank's profitability and capital levels, as already disclosed to the market. In facing this possibility of breaching the capital ratios, the subsidiary in Poland launched its recovery plan.
We are confident that Bank Millennium will be able to raise the capital ratios above the minimum required levels through a combination of operational profitability improvements and the capital optimization initiatives within a reasonable time horizon and without any liquidity or capital support from BCP. In fact, besides the impact of of the FX loans legacy, our Polish subsidiary has a strong business model, has been quarterly showing with the growing operational results. It should be noted that, in the last quarter, despite the significant provisions constituted from FX mortgage, the bank would have avoided to report negative results had it not been, for the extraordinary contribution to the Institutional Protection Scheme. We consider that Poland is an attractive market with high growth potential, in which we are very well positioned and, have strong competitive advantage.
We remain confident that eventually we will have a business environment more in line with that of the European Union. Moving now to the earnings, I start highlighting the net profit of EUR 74.5 million, which is a six-fold year-on-year increase, despite the costs of EUR 258 million associated with the litigation related to FX loan portfolio in Poland and the cost of EUR 54 million related to Bank Millennium's contribution to the Institutional Protection Scheme. The last quarter result was also negatively affected in the amount of EUR 102 million due to the full impairment of the goodwill of our participation in Bank Millennium.
The consolidated net profit level of the semester was achieved by a positive combination of a 22% increase in core income and a very strict management of the operational costs, which grew only 1.5% under inflationary backdrop. The domestic activity confirmed once again the growing relevance of BCP in the Portuguese economy, having contributed with more than EUR 174 million for the group's net profit. The contribution of the Portuguese activity for the consolidated profit increased 63% year-on-year on a comparable basis.
Excluding the costs related with the Swiss francs portfolio, the adjusted net profit of the group stood at EUR 201 million, increasing 59% year-on-year, with the international operations reaching an adjusted net profit of EUR 129 million, which confirms that our operations in Poland and Mozambique have strong business models. We have a capital position with a total capital of 15.9%, and the Common Equity Tier 1 of 11.8% on a pro forma basis, pending the approval by the supervisors of the request submitted by the bank to exclude the currency positions taken to hedge against the impact on Common Equity Tier 1 of fluctuations of the exchange rates. Our capital position stands above regulatory requirements, although requiring a strict management in the capital allocation between different business lines as we have been doing
The level of liquidity remains well above regulatory requirements. Our strategic position of a relationship bank enhanced by the symbiotic relation between an excellent commercial network and superior digital solutions provide us with a competitive edge to increase our engagement with clients. This intense commercial activity is reflected in a growth of 3% year-on-year of the performing loans portfolio, which increased EUR 1.6 billion while keeping a strict control over the quality of the portfolio. In Portugal, the performing loans grew 4.1%, increasing EUR 1.5 billion, supported by mortgage and corporate loans. Even throughout the long periods of negative interest rates, we never downplayed the acquisition of retail customer funds, which we always consider as very important for our commercial banking business model that relies on long-standing relationships with the customers.
With the shifting of the monetary policy and following the path of normalization of interest rates, the significant increase in customer funds of 3.6% since June 2021 assumed a renewed relevance as source of income going forward. BCP's ability and developed competencies for managing the NPE legacy have been crucial for our steady pattern of improvement at the asset quality level. We have been successful in decreasing NPEs quarter after quarter, reaching NPE ratio of 4.3%-4.4% in Portugal after having reduced EUR 501 million in NPEs over the last year, of which EUR 460 million in Portugal. This semester, the NPE reduction in Portugal was EUR 243 million.
The cost of risk also continues its downward trajectory towards our strategic target for 2024, reaching 61 basis points at the consolidated level and 69 basis points in Portugal. This was done while maintaining a well-positioned level of 65% in coverage by impairments and total coverage of 113%, which is adequate for our risk portfolio and compares well with our European peers. The customer base, it continues to grow consistently, having exceeded 6.3 million clients at the group level and 2.6 million in Portugal, confirming the bank's ability to meet the customers' expectations and to attract new clients with emphasis on the growth of 20% in mobile customers at group level and 22% in Portugal, confirming the customer's recognition of the quality of our mobile solutions.
The strategic priority we gave to our mobile app, which is considered Product of the Year, provides customers with an outstanding user experience and seamless access to end-to-end solutions that we are constantly improving to fulfill their daily needs. Consequently, customers nominate us best digital bank and the leader in terms of Net Promoter Score, which has been consistently increasing since 2018, with the Millennium App leading the competition on the ratings of major platforms. The constant investment in innovation for improving and release of new features focusing on customers' needs is fundamental to the growing percentage of customers' usage which stood at 49% this semester and for the year-on-year increase of 15% in the number of digital interactions.
The app is increasingly the customer's preferred digital platform to interact with the bank in their daily transactions, being already responsible for 75% of the digital transactions and 74% of digital sales. This intense use reflected this semester on the increase of 46% in the number of sales done through this channel, with emphasis to the 161% increase in personal loans granted, 124% increase in cards sold, and the 35% increase in savings solutions carried out in the app.
To conclude, in short, the macroeconomic challenges are very relevant. The mortgage FX issue in Poland continues to weigh on the performance of the BCP Group, although we have been demonstrating quarter after quarter that the quality of the bank's franchise and professional, the management obsession with efficiency, the significant improvement and consequent normalization of the balance sheet quality, the ability to innovate and use technology at the service of customers and operational efficiency will altogether allow us to face the challenges with the necessary confidence benefiting also now, which is not irrelevant for a larger retail bank from the normalization of the monetary policy. In terms of capital, despite being above regulatory requirements, we will continue with an extremely rigorous management and within the same parameters that have guided our actions, which means optimization in the allocation and organic generation. Miguel, the floor is yours.
Thank you very much. Thank you very much, ladies and gentlemen. Going on to page 11, we can see the simplified consolidated income statement. What you see is a very healthy net income, core income growth, with NII growing almost 30%, 28.6%, with commissions growing almost 10%, 9.8%, which makes the core income grow 22.7%. This was achieved together with operating costs, recurring operating cost growth of 1.5%, which makes the recurring core operating profit grow 40%.
On top of this, we have another positive evolution when you compare it with last year, because as you may recall, we had a special non-recurring restructuring charge in the first half of last year, so that this represents a further positive evolution. In terms of regulatory semi-regulatory costs, we have an unfavorable movement, mainly explained by the Institutional Protection Scheme that was implemented in Poland with slightly over EUR 50 million of cost. This makes the operating net income, the pre-provision profit grow 46%. This is the part that is, I would say, the best news in terms of our income statement.
In terms of the impairment and other provisions, the evolution was not as positive as we see to a large extent explained by the impairment of Bank Millennium's goodwill that has increased around EUR 100 million, that had a cost of EUR 102 million, and also by the evolution of the cost for the CHF mortgage litigation that still is very high. All in all, what we can say here is that we have had a net income excluding costs related to the CHF loan portfolio, which is a closed book, as you know, or growing around 60%. Having said that, the net income also grew almost five-fold, but the ROE still presents important growth potential because it's still below 3%.
The NII, as you may see on page 12, evolved healthily both in Portugal and abroad, mainly in Poland. In Poland, there was a very high growth in the NIM that grew from 2.96%, almost 3% to 4.4%. In Portugal, the NIM was quite stable, but nevertheless, the volume increases allowed the margin to increase around 5%. In terms of fees and commissions, we see a growth of almost 10%, to a large extent explained by the bank's fees and commissions linked to transactionality, cards, payments, just the economy picking up again after COVID. In terms of other income, we have had a not so positive evolution with the semi-regulatory costs of the institutional protection scheme in Poland.
That explains EUR 54 million of costs. At the same time, an important decrease in the net trading income because the markets were not as favorable on one hand, and on the other hand, this line is a line that has a strong negative contribution from the negotiations that we are performing in Poland to reduce the Swiss franc risk. Operating costs, very stable, very controlled in spite of inflation. To some extent, the positive evolution in Portugal is also, of course, explained by the strong headcount reduction effort that we did last year. In Poland, you see here a high salary inflation that is more than compensated by the very positive jaws that you can see in the margin growth.
Impairment and provision charges decreasing from 68 basis points to 61 basis points. For this moment in the cycle, I would say quite healthy and quite controlled with the international operations with the cost of risks of 44 basis points, and in Portugal, going down from 81 basis points to 69 basis points, clearly on course to achieve the 50 basis points. That is our target for the run rate in 2024. Credit quality, once again, a decrease in NPEs. This decrease was a decrease on a year-on-year of EUR 500 million. This allows us to present an NPE ratio including only loans according to EBA of 4.3%.
If we include the full ratio of EBA, i.e., including securities and off-balance sheet items, we are already at 2.8%. A very positive evolution in this regard. In terms of business activity, customer funds growing in a healthy way with 4.6% growth in Portugal in spite of some decrease of balances, funds, explained mainly by the mark to market of some funds and by the lesser interest, so to say, of some clients in market and in investment products. Stability in international operations, mainly due to the more costly deposits that we are letting go to preserve the margin.
The loans to customers grow 2% overall with a 3% performing growth, mainly explained by the growth in Portugal that was responsible for EUR 1.5 billion of growth. In terms of capital and liquidity. Here there were some adverse movements. I think as we have been commenting, our intrinsic capital generation, so before market movements and before regulatory issues, has been around 25-35 basis points per quarter, and this is not an exception here.
To this impact, we have to deduct the impact of the Swiss franc provision that typically has been around 10 basis points, and also the mark to market of the OCI portfolio that, in spite of our low risk, due to the size of the portfolio, it has been also responsible for around 40 basis points decrease. I think the good news going forward is that this 25-35 basis points of intrinsic capital generation, so before, I would say the market and regulatory movements is quite solid, I would say. We feel very strongly about it being resilient going forward.
I would say these degrees that we have had in this quarter maybe somewhat allows us also to see the next quarters with some optimism. Of course, there is an impact that's not reflected here yet. As our CEO has just commented, there was this credit holiday law in Poland that may have an impact of around 25-30 basis points also going forward. What we see is that our capital generation, organic capital generation is strong enough to cope with it. Leverage ratio, very, very healthy. We see here clearly a potential of improvement of our capital ratio, based on our still very high risk-weighted asset density. Another area where we have a positive evolution was in the pension fund.
As we have an ALM of the pension fund, so that when the interest rates go up, the liabilities go down, which is positive. A part of it is compensated with the asset side and the other way around. Not everything, but a part of it. We have here some asset and liability match and some asset liability hedging within limits. What we see right now is that the excess of the pension fund assets over pension fund liabilities is almost EUR 700 million. This allows us, basically, this reduces significantly the risk of our capital ratio going forward because adverse movements up to this amount will not affect the capital ratio.
Liquidity, liquidity ratio is very healthy, as you see here, with an LCR above 260% and with a Net Stable Funding Ratio above 150%, and eligible assets in excess of EUR 25 billion. Nothing to highlight, especially here. I will pass it now to Bernardo Collaço.
Okay, thank you, Miguel. Good afternoon, ladies and gentlemen. On page 27, starting with the Portuguese operation, net income increased sharply from EUR 45 million to EUR 175 million. Recurrent profitability went up more than 63%, showing how robust our business model is. Recurrent net income excludes mainly costs related with headcount adjustments on the first half of 2021. On the first half of 2022, the costs related with the compensation for temporary salary cuts. Net operating revenues increased 8.4% and recurring operating costs went down 4.6%.
On page 28, looking to NII in Portugal at the end of the first half 2022, it's true that more than EUR 430 million, meaning 5.2 percentage, 5.2% up or EUR 21 million above the previous year. The positive impact from growth of performing loan book, higher yield from securities, lower wholesale funding costs, and the continued decline in the remuneration of term deposits have more than compensated the negative impacts of pricing on the loan portfolio, the reduction of NPEs, and the excess liquidity. NIMs stood at the end of the first half 2022 at 141 basis points. That compares with 146 basis points in June 2021.
On page 29, regarding spreads on term deposits, as you can see, back book spreads stood at -47 basis points and pretty aligned with the three months average year-over-year. Spreads on the loan book were slightly compressed year-on-year. That can be explained, as we have been doing, over the last earnings presentations, by the deployment of loans with guarantees. NIMs stood at 141 basis points, 5 basis points lower than last year, but stable with the previous quarter. Moving to page 30, that presents the evolution of fees and commissions and other income.
You can see that banking fees and commissions increased almost 12%, and the most significant impacts came from cards and transfers that grew 32%, driven by the increase in transaction activity, as in the previous year was strongly affected by the pandemic. Market-related fees registered an increase year-on-year of 14%, supported by securities transactions, mainly coming from brokerage fees and asset management fees. All in all, fees and commissions went up by 12% to a level higher than EUR 277 million. That compares to a level slightly below EUR 250 million one year ago.
Looking to other sources of income, in the first half of 2022, other operating income was stable year-on-year, although it is important to mention that mandatory contributions increased almost 15%, but the impact was compensated by other effects as real estate sales. Even with considerable contribution to P&L, trading went down 12%. Regarding equity-accounted earnings, contribution for P&L was higher than last year due to a one-off related with some dividends that were received. All in all, other income, including equity-accounted earnings, trading, and other operating income, went up from EUR 28 million to EUR 34 million year-on-year. Going to page 31, regarding costs, bank continues to apply a strict policy, and from last year, in terms of recurrent costs, there was a reduction of almost 5%.
As mentioned before, non-recurrent items include on the first half 2021, the headcount adjustments of EUR 87.2 million, and on the first half 2022, it includes mainly the compensation of EUR 5.7 million for the temporary salary cuts on the period of 2014, 2017. Staff costs went down 9.5%. Admin costs slightly higher than previous year, and depreciation aligned with first half of 2021. As a result, the process in place in 2021, the net evolution of employees was a reduction of 683 employees compared with June 2021. As regards branches, there was a reduction of 43 branches from the first half of 2021 and six branches from the previous quarter.
Moving to page 32, which refers to asset quality, even under a challenging environment, BCP was able to reduce EUR 460 million of NPEs year-on-year, meaning -22%. In the first half of 2022, there was a reduction of EUR 243 million, out of which EUR 153 million on the second quarter. As you can see on the top left chart, reduction occurred on NPL more, on NPL 90 days past due to that and at the end of March, it represents 30% of total NPEs. NPEs as of June 2022 stood at EUR 1.6 billion. That compares with EUR 2.1 billion a year ago. Cost of risk stood at 69 basis points.
That compares with the adjusted cost of risk of 81 basis points one year ago and on the downward trend to the 50 basis points. Let's move to page 33, which looks at the NPE coverage breakdown. As you can see, total coverage of NPEs stood at 120%, which is similar as of the end of 2021. The NPE coverage by loan loss reserves stood at 64%, and total coverage for individuals with high levels of real estate collaterals stood at 100%, and for companies at 128%. Coverage by real estate collaterals on companies at 51%, and loan loss reserve is at 74%.
On page 34, which shows the evolution of foreclosed assets and restructuring funds, there was a strong reduction on foreclosed assets, more than 48%. That represents a decrease of EUR 265 million. Foreclosed assets stood at EUR 356 million. That compares with EUR 687 million at the end of June 2021, and EUR 470 million in the first quarter of 2022. In terms of property sales, there was some stability in terms of the number of transactions compared with the first half of 2021, but value of sales were 41% higher than one year ago and, as usual, sale value continues to be above the book value. On the first half of 2022, sale value exceeds the book value by EUR 25 million. That compares with EUR 11 million one year ago.
Regarding the restructuring funds, exposures were stable and it is expected some reduction under the process that it's ongoing. Now moving to page 35, total customers grew 4.6% to EUR 67 billion. The growth was equivalent to EUR 3 billion and was mainly supported by increase of demand deposits. Off-balance sheet funds continued to show some a decrease due to the market conditions and maturity of some insurance products. In terms of gross loans, there was an increase of 2.7% supported by an increase of 5% in mortgage loans and 10% in personal loans. It is also important to highlight that performing loans went up 4.1% year-on-year or more than EUR 1.5 billion, and that NPEs, as mentioned before, were reduced by EUR 460 million or 22%.
Going to page 36, 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 to EUR 1.5 billion, supporting growth in mortgage loans by EUR 1 billion and in loans to companies by EUR 400 million. Let me also reinforce again the recognition of BCP as the best bank for companies, a segment where we have been achieving important milestones. Now, moving to page 38 regarding international operations, you can see that there was a slightly positive contribution from international operations if we do not consider the impairment of Bank Millennium goodwill of EUR 102 million.
Bank Millennium reduced losses by half compared with the first half of 2021, even with high costs related with CHF mortgage loans and the extraordinary contribution of EUR 54 million to the institutional scheme. Mozambique contribution increased 14% to EUR 24 million compared with first half 2021. Combining all contributions from international operations, there was a residual positive contribution in the first half of 2022. Although, due to the registration of the impairment of Bank Millennium, as mentioned, therefore, without impact on capital, international operations registered a loss of EUR 103 million.
Considering the goodwill impairment, and if we adjust net income by the CHF impacts on a comparable basis, contributions from international operations increased almost 60% year-on-year, and this really shows our operational capabilities. Moving to page 39, which refers to Bank Millennium in Poland. Net income in Poland was again strongly impacted by costs related with CHF loan portfolio. That amount to EUR 252 million after taxes, and in the second quarter 2022, also by the contribution to the Institutional Protection Scheme.
Total provisions related with Bank Millennium CHF portfolio, meaning excluding the provisions related with Eurobank, stood slightly lower to a lower level than in first half 2021 to slightly below EUR 200 million. Costs associated to conversions or early repayments of CHF loans have an impact of around EUR 33 million on the trading line, and costs with legal advice booked under admin costs line were close to EUR 5.5 million. Excluding these factors and due to the excellent operational performance, net income would stood at on the positives and not without the IPS contribution, meaning that the operation were able to accumulate the CHF related costs.
Net operating revenues increased EUR 152 million or almost 40%, and operating costs went up 9% due to inflation that is having some pressure, especially on salaries and services in Poland. CT1 stood at 12.1% and total capital ratio at 12%, at 15.2% at the end of the first half 2022 and above the regulatory requirements. On page 40, some details, some detailed information about Bank Millennium. As you can see, NII increased strongly, almost 68% to more than EUR 461 million. That compares with EUR 275 million one year ago. This movement is due to the interest rate hikes in place since the fourth quarter of 2021.
NIM increased significantly year-over-year from 2.58% to 4.414%, improving from a level below 3% at the end of the year. Fees and commissions increased 3.1% to EUR 77 million, and other income decreased significantly, as explained before, by the impacts related with the out-of-court settlements with CHF borrowers. Operating costs, excluding mandatory contributions, increased less than 10%. Regulatory contributions, even without considering the one-off of the IPS, increased almost 23% compared with the first half of 2021. Moving to page 41, related with asset quality in Poland, even with a very challenging environment, Bank Millennium hasn't seen signs of credit deterioration.
NPL 90 days past due ratio decreased 50 basis points, and cost of risk stood below 40 basis points, which was exactly the level observed in the full year of 2021, where it also stood at 37 basis points. Coverage ratio of NPL by loan loss reserves at 147%, meaning an increase of 10 percentage points from previous year. On page 42, customer funds grew 3.4% year-on-year. Off-balance sheet funds decreased due to market conditions and instability. In terms of loans to customers, gross books to about EUR 17.4 billion, more 4.5%. It is important to highlight the increase of the zloty mortgage loan portfolio of almost 19% and the decrease of mortgages in foreign currencies. On page 43, unusual slide regarding the FX mortgage portfolio.
FX mortgage as a percentage of total gross book, and this is gross after legal risk provisions. At the end of the first half 2022, represent 9.6% of total loan portfolio, and as you can see, the reduction of the CHF mortgage loan book year-on-year was 20% and 5% quarter-on-quarter. Bank Millennium, due to the level of court claims and decisions more favorable to borrowers and according to the provision model established, made additional provisions of almost EUR 200 million in the first half 2022. Once again, this is excluding Eurobank-related provisions. It was able to increase the coverage to 36.3% from 31% at the end of the first quarter 2022.
Cumulative provisions for legal risk on the FX mortgage portfolio of Bank Millennium stood at EUR 831 million. It is also important to mention, as you can see on the bottom right chart, that Bank Millennium is maintaining high levels of amicable agreements, and on the second quarter of 2022, agreements were again above 2,000 cases, and new claims were below amicable settlements for the fifth consecutive quarter. In the second quarter, 2022, those amicable agreements had a cost of EUR 23.6 million, as I said, booked on the trading line, and slightly lower than the first quarter of 2022. Moving to page 44, the legislation that was recently published in Poland announced the ability for borrowers to suspend eight months of installments.
As you know, two installments in the third quarter of 2022 and two installments on the fourth quarter of 2022. One installment on each quarter of 2023. As recently reported on the current report, the maximum cost expected by Bank Millennium from this measure is around EUR 1.8 billion, if 100% of the eligible borrowers would use such option. Bank Millennium estimated participation that was also published on the current report, within a range of 75%-90%, and the impact will be booked on the third quarter 2022. It is important to highlight that application of moratoria does not trigger the reclassification of the loan to Stage 2.
Considering this impact from credit holidays, Bank Millennium announced on the current report that expects a loss in the third quarter 2022, and as a result, capital ratios will drop by 300 basis points, and Group Tier 1 ratio might fall. It depends on the range of participation between 118 and 174 basis points below the current minimum requirements. The risk of breach of capital ratios triggers the decision to launch the recovery plan. As you know, and as it has been stated, each bank is required to have a recovery plan and, at least once a year, update recovery plan through the regulator. Bank Millennium has a current recovery plan that was approved by the regulator in February this year.
The management board of Bank Millennium, as mentioned on their earnings presentation and also yesterday on our press release, intends to increase capital ratio comfortably above the minimum required levels through a combination of further improvement of operational profitability and capital optimization, with initiatives such as management of risk-weighted assets, including securitizations. Turning to page 45, with regard to Mozambique, net income increased slightly more than 14%, and that was due to higher NII and fees and commissions. Net operating revenues increased 11%, and operating costs were 6.7% higher than last year. We can say that Mozambique, even under a challenging environment, has been a stable contributor for the group's P&L. Capital ratios stood above 40%. Moving to page 46, NII went up year-on-year almost 8% to more than EUR 92 million.
NIM has been stable around almost 8%. Commissions increased 9% and other income increased somehow about 46%. Costs increased at a lower pace than revenues, at 6.7%, and cost to income stood at 43%. That compares with almost 45% in June 2021. Moving to page 47, 90 days NPL 90 days past due below 10%, whereas at the end of March was at almost 11%. Cost of risk stood at a level around 200 basis points and not far from the first quarter of 2022, and coverage by loan loss reserves increased 28 percentage points to 99% from 83%.
Regarding volumes on page 48, you can see that customer funds registered an increase of 8%, and loans to customers went down around 10% with a decrease on loans to companies, albeit the increase on the individual segment. This reduction reflects the conservative approach under the challenging environment of the country. Let me thank you for your attention. Before we move to Q&A, I will return to Mr. Miguel Bragança for some final remarks.
Yeah. Thank you very much for attending this call. As you see, in terms of the main operational metrics, we are clearly on track. We have already achieved the cost to income ratio of 40%, albeit with some support from trading margin. We think the trajectory is very healthy. The cost of which we are clearly on track to achieve it. The NPE, we are clearly also of course on track to achieve the 4% even to overachieve it. More important than this, in terms of our main franchise metrics, we are evolving very positively, which gives us comfort that we will be able to achieve our P&L and our valuation going forward.
In these roads to the steady state scenario, of course, there is some volatility in the capital ratio, mainly linked to issues that are external to the bank's management, such as certain regulatory changes and market movements. Nevertheless, we confirm our target for 2024 of 2.5%. Thank you very much. Now let's open the floor to Q&A.
Thank you, dear participants. We will now begin the question- and- answer session. As a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for a name to be announced. Please stand by. We will compile the Q&A roster. This will take a few moments. Thank you. Now we are going to take our first question. The first question comes to line of Ignacio Ulargui from Exane BNP Paribas. Your line is open. Please ask your question.
Yeah. Hi, good afternoon. Thanks for the presentation and for taking my questions. I have to, Miguel, one starting on the impact of the moratoria that's gonna have in capital in the next quarters, what are the levers that the bank has to improve capital ratios beyond the organic capital generation? Then are you considering at a given point the overfunding that you have in the pension fund, EUR 684 million, could that be incorporated into the bank's capital at a given point? Or could you also update us on how and when we could expect the approval of the application of Article 352.2 on the FX hedging? The second question is regarding Poland.
I mean, just wanted to understand a bit better how much CHF provisions should we expect in coming quarters. I mean, the bank has already reached 36% coverage of the exposure. I had in mind around 40%, 45%, like the level. Could we expect that this will have to finish in 2022? Linked to that, why you have taken such a high level of acceptance rate in the moratoria? I think that the 75%-90% is probably one of the highest of all the banks that have disclosed the acceptance rates. Thank you. Thank you.
Okay. Let's start with the last questions that have to do with Poland. First, in terms of CHF provisions, as you know, the main issue here or one of the main issues that is going to be decided or clarified over the next quarter is whether in the context of the annulment of the contracts, whether the customers have the right to remuneration or not, or don't have the right to remuneration. This has not been clarified yet. We think it's tremendously unbalanced if we convert, so to say, the loans from CHF to zlotys, and then there is no remuneration. This has not been clarified by the courts yet.
What we are assuming in our methodology, because there have been no decisions yet, is that there is, so to say, a 10% probability of remuneration and a 90% probability of a non-remuneration, which is a very conservative input, but that is what is basically feeding into our model until there is a decision on this subject. Until there is a decision on this subject, we would expect this same level, so to say, of provision that we have been seeing in the last quarters, maybe with some decrease. I would say the same order of magnitudes because this assumption that is conservative feeds very much into the impairment or the Swiss franc provision contingency issue.
To make a long story short, until there is a decision on this issue, which we expect may occur first quarter, first half of next year, we will be having probably more or less this order of magnitude of provisions that we are having right now. In terms of the acceptance of what they call the credit holidays or the moratoria without holidays, we will know by year-end what is the right number, because the customers will have to say what they want. The reality is what it is, so to say. This is a very new situation. I think nobody knows exactly how many customers would like to have a moratoria that is interest-free.
We think that the interval between 75% and 90% makes sense based on other similar situations, but by year-end we will know. If we are being too cautious, in terms of this assumption, I mean, what we will see by year-end is that the provision will not be as high. If we are being less cautious, we will correct it. This is, I would say, to be honest and to be humble, this is a very new situation. Nobody knows exactly, and this is based on similar situations, so to say, and we will know by year-end what is the final number. In terms of the capital levers, so to say, the first and foremost capital lever, and I want to stress this, is the organic capital generation.
As I was commenting, if you do the numbers as most of you do on the bank. Before, I would say regulatory headwinds last year or in the year-on-year, we have generated 130 basis points of capital, and this was in the previous interest rate scenario. In this quarter, we are generating, before Swiss francs and FX reserves, around 30 basis points of capital. Looking forward, of course, as we are seeing, the core income, the NII and the commissions and so on will be more favorable than what they have been in the past.
Absent a major recession in Europe, which is possible, but is clearly not our base case, clearly the most important source of capital will be the organic capital generation. On top of this, we have requested, as we have commented here, the Article 352.2 application for the consumption of risk-weighted assets for the structural FX position. The regulator, as you know, never commits to a date to the regulators, but we would be very surprised if we would not have this during this year. We would be very surprised because this would be really below our, I mean, outside of our expectations. But it's just an expectation.
We don't have, so to say, levers to force timings of the regulator. If you want to ask me, will we have this in September or in October? It's very hard to say. Whether this will affect September or whether this will only affect Q4, it's very hard to say. In terms of other sources of capital, you commented on the issue of the pension funds. We feel very comfortable with our organic capital generation. In the past, what we have seen is that the market, because this is very particular to some markets, like the Portuguese market, but not to all European markets, felt somewhat uncomfortable with the capital ratio volatility caused by pension funds valuation and pension funds, so to say, risk.
We do see as something very positive to have a buffer in the pension funds that allows us that if we go into a recession and if interest rates goes down again, that we do not have any type of hit in terms of capital. We see it something as very positive to have this buffer there. As we think that through organic capital generation, we can get to where we want. We are at this point in time, what we think is that it's more important, so to say, to eliminate or almost eliminate the volatility on capital ratio caused by pension fund risk than to, so to say, take out the funds out of the pension fund. As time goes by, and also depending on the level of our capital ratio, this may change.
This is clearly a management judgment on what is better for the share price, whether a higher CET1 or whether eliminating the pension fund risk. As of now, we think there is more value in the elimination of the pension fund risk on the capital ratio. If things evolve, of course, this is a decision that we may always take, keeping in mind, of course, that we have the rights to take this out, but it's always subject to the pension fund regulator authorization. Okay. Other areas of capital generation that we are mainly exploring in Poland is our securitizations.
Poland has a very strong agenda in terms of securitizations, and it's through securitization, together with organic capital generation that they intend to reach the required capital levels very quickly.
Thank you very much.
Thank you. Now we're going to take our next question. Please stand by. The next question comes to line of Noemi Peruch from Mediobanca. Your line is open. Please ask your question.
Good afternoon. I have a few questions, mainly on capital. On the pension fund, again, I just have a follow-up on the process to eventually crystallize even in part that surplus. Can you do it just in case you choose to, or are there any regulatory constraints that would not allow you to? Can you update us on the most recent Common Equity Tier 1 ratio sensitivity to sovereign yields? Can you please share with us the status of the sale of the restructuring funds? Shall we expect the consolidation by year-end? Thank you very much.
Okay. Starting with the last question. In terms of the sale of the restructuring fund that we would expect to have a contribution to the capital ratio around 10 basis points, give or take. We are in the final steps of the negotiation. We are very optimistic about the outcome of the negotiation. Our expectation is to close it over the next couple of weeks and to have it implemented until year-end. Of course, until the negotiation is closed, it is not closed. As in any negotiation. We do expect, our base case right now is to have it until year-end.
In terms of sovereign yields, we in terms of the exposure in Portugal, so to say, that is the most relevant one, for each 25 basis points of increase in Portuguese spreads, we have around EUR 20 million of impact in terms of capital, so it's quite low. Of course, the portfolio is large because we have a lot of excess cash. Nevertheless, it's a very contained risk. In terms of pension funds, there are some conditions that you have to fulfill to take the funds out of the pension fund. The main one is the one that we fulfill, is to have a consistent excess between the assets and liabilities.
Consistent with what is in the law is that you have to have a positive difference between assets and liabilities for the last five years, which we do have. Okay, not as large as today, but if you see in our last five years, the numbers between assets and liabilities, that's what we have. This is the objective condition that if we don't meet this condition, we would not be able to take the money out of the pension fund. However, as it very often happens, the regulator may always assess at its judgment that taking the funds out of the pension fund risks too much the guarantees of the pension holder and may defer it or may limit it and so on. It is always an authorization.
It's not just a rubber stamping, so it is an authorization. The main condition that has to be fulfilled, which we do fill, is to have these access on a sustained basis during the last five years. Okay?
Thank you very much. If I may follow- up also on the pension fund, who will decide whether to ask the regulator to reduce that surplus? Do you have kind of autonomy to ask for that? Or is it also the company that manage the pension fund that needs to agree-
No, no.
they are the one making the decision?
Okay. Good question. It's the bank. We as board, we can send a letter to the pension fund authority and ask for it. Okay. The company is not a key part in this process.
Thank you very much.
Okay.
Thank you. Now we're going to take our next question. Please stand by. The next question comes from line of Maksym Mishyn from JB Capital Markets. Your line is open. Please ask your question.
Hi, good afternoon. Thank you for the presentation and taking our question. I have two. The first one is related to interest rates. After the unexpected hike by the ECB, I was wondering if you see upside risk to your NII growth guidance for the second half of the year in 2022. Do you think that the rates will have an impact on new production in Portugal? The other question is related to provisions. I was wondering if you could explain what happened with other provisions in Portugal and why you had booked some reversals. Thank you very much.
I mean, the other provisions in Portugal, as you know, they are very much aligned with last year. To do the analysis on a quarter by quarter basis is always difficult because it sometimes depends on the valuation of a piece of real estate or on a guarantee. I would say that over the year, what we should expect is some normal decrease on a year by year basis comparing with last year. There will always be some volatility that depends on valuations of assets. From a valuation perspective, I think this will cancel itself out.
As you see, I mean, when you compare the other provisions this year with last year, they are very much aligned with a slight downward decrease as it happens with the normal credit provisions. In terms of NII. Of course, our NII is sensitive to the general level of interest rates. When we started speaking about this around six, seven months ago, our first guess or our first estimation was that we could raise our estimation of NII in Portugal from low single digits to mid- single digits. Okay? If we had asked us one month ago, probably where we would be in terms of NII growth this year, next, probably we would give a guidance more towards the high single digit.
I would say that depending on the evolution of Euribor and based on the estimations that the several macroeconomists have and with some interval around the present forwards, I would say that if they stay more or less where they are right now, or if the Euribor evolve aligned with the present forward curves, we would expect still high single digits growth for this year and for next year, okay, of NII. If they decrease vis-à-vis what is implicitly the forward rates, we would go back to the mid-single digit. That's more or less where the numbers are.
For us to give you an idea, as we have told you several times, typically, the sensitiveness of our margin in Portugal to a 100 basis points shock oscillates depending on the position of our balance sheet between EUR 60 million- EUR 100 million. Of course, this evolves through time. This is not an immediate shock, but it should give you a guidance on where we are. In the absence of a major recession in Europe, what we see are good tailwinds, both in margin and both in fees and commissions, with growing, I would say, at this type of levels, high single digits, both for 2022 vis-à-vis 2021 and 2023 vis-à-vis 2022. Okay.
Thank you.
Thank you. Now we're going to take our next question. Please stand by. The next question comes to line of Pamela Zuluaga from Credit Suisse. Your line is open. Please ask your question.
Hello, good afternoon. Thank you for taking my questions. I was thinking about capital. As of Q1, you had around 65% of your sovereign portfolio accounted for at fair value, which
I'm sorry, could you speak up or closer to the mic because the connection is poor? I'm sorry.
Can you hear me now?
A little bit better.
Sorry. I was thinking about the risks to capital. As of Q1, you had around 65% of your sovereign portfolio accounted for at fair value, which according to what you were saying, has resulted in capital consumption. How have you addressed this risk or plan to address it moving forward? How should we think about further capital vulnerability? The second one is around the sensitivity to rate hikes. How should we think about the sensitivity given that many of your peers are talking about refraining from passing through increasing positive rates to deposit costs, at least until the ECB's deposit rate reaches 50 basis points plus. How are you thinking about your deposit funding costs in this new interest rate scenario? Thank you.
Okay. I mean, if you allow me, I will not comment in terms of our future commercial strategy, in this environment, in this group. What I can tell you is that we are disciplined. We will make what you would expect from a sound management. We have to measure the present value of our decisions. They have to make sense. What we can tell you is that we have excess cash, so we don't need the deposits, but we do need value creation. The way we think about it is in terms of franchise and value creation and not in terms of need.
We won't overpay in deposits because we do not need the cash, but we will be careful to protect well our franchise, mainly with clients that have good value, that has a good present value. We don't want to lose present value of clients. Exactly when and how and at which levels we will start paying for deposits or not, this is something that we will be managing, I mean, among ourselves, and we will not pre-announce to the market and to competitors. This is the first thing. Trust us, we will make the right decisions in terms of protecting the shareholder value. In terms of OCI and hold to collect portfolio mainly in Portugal.
Right now, what we have is a portfolio that is broadly 20% in OCI and 80% in hold to collect. We don't have any type of material capital ratio exposure to the general level of interest rates right now. As I was commenting in Portugal, we do have, because it's difficult to cover without selling the position, we do have some exposure to the spread risk of Portuguese government debt, albeit a small exposure, as I was commenting, for each 25 basis points, around EUR 20 million of capital, which is not very material. Okay. I hope I've answered your questions.
Yes, thank you very much.
You're welcome.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please slowly press star one one on your telephone keypad and wait for the automated message advising that your hand is raised. Now we're going to take our next question. The question comes from line of Carlos Peixoto from CaixaBank. Your line is open, please ask your question.
Yes. Hi. Good afternoon. A couple of questions on capital as well. Typically, I was wondering in terms of the Polish moratorium impact, this was just a follow-up. I was just trying to get, I think I heard that it would have an impact of roughly 25-30 basis points on BCP's capital group. Did I heard it correctly? Because, I was getting to numbers a bit higher in my math. Just trying to make sure, and then if you could help us understand a bit what how the impacts work, I would appreciate it. Secondly, on the Mozambique Basel III adoption, what's the latest there?
What type of development can we expect? Then finally, on the capital levels, I was trying to understand a bit what are the, let's say, minimum levels which you feel comfortable in operating with? Is that the regulatory minimum or what type of management buffer do you seek to have? Just trying to understand here as the last quarters have been a bit challenging on this front. How comfortable are you with the current capital situation? Thank you very much.
Carlos, I'm sorry, but I did not get your second question because the connection is not so good. If you could speak closer to the mic.
Sorry.
I've understood the first and the last one, but the second one not so good.
Yeah. The second one was regarding Basel III adoption in Mozambique, the timeline for it.
Okay. Okay.
If you have
Okay.
Thank you. Thank you.
Okay. Carlos, starting with the second one, we are engaging with the authorities in Mozambique in terms of what they are working. It's a lot of work because if you see the CRD and the CRR and what it takes to adjust the regulations in a country to Basel, it's a lot of work. We know they are working on this. They tell us they are working on this, but we don't have a commitment in terms of when they will deliver it. Once again, the pressure works from the regulator to the regulator and not the other way around, but we know they are working on it.
In terms of the moratoria, I mean, if effectively you understood well, our expectation is for the type of levels that we've seen, of course it depends on the FX rate. You have to model well the moratoria, that this moratoria on consolidated terms will have an impact between 25- 30 basis points as we commented. Okay? In terms of the capital level and how we look at it, the way we look at it is that you have to consider the flow and not only the photo. Okay?
The way we look at it is that in this context in which we feel very comfortable that the bank is generating capital and that we have a sound business model, and that our pre-provision profit brings capital and so on, we feel comfortable about the future because we don't feel that we need other types of sources of capital. Okay. If we were in other types of model with a very high cost to income or with a very low interest rate, or a situation in which we would not be generating capital, of course, we would think that we would need at least a capital level of around 12%. That's how we approach it.
We think that because we can generate capital and because we will generate capital so as to get to these 12.5% that we are seeing here, and because organically, the type of capital that we are generating before these other movements that are not attributable to the bank's management. We think we can be between these 25- 35 basis points of capital generation. As we've seen this quarter, around 30 basis points of capital generation before pricing movements and before Swiss franc. We think that with this type of capital generation, we feel very comfortable with the way we are. That's the way we look at it. There is not a trigger, I would say.
It's a situation which we analyze the bank, analyze how we are, and we see whether we do have the capabilities or not to outgrow ourselves out of the ratio that we have. If we think that we are able to get to a more normalized level of capital as we see with other banks by ourselves, that's what we'll do. We have answered the questions.
Yes. Yes, you have. Thank you.
Thank you. Now we're going to take our next question. Please stand by. The next question comes to line of Benjie Creelan-Sandford from Jefferies. Your line is open. Please ask your question.
Yeah. Hi, good afternoon, and thanks for taking the questions. First one was just around loan growth in Portugal. We obviously saw continued decent growth trends this quarter. I was just wondering if you could talk a little bit about what you're seeing in terms of corporate and retail demand and whether you're seeing any changes in behavior. Obviously, we had the ECB bank lending survey out a couple of weeks ago, sort of indicated a falling demand for fixed investment loans, but increase for working capital. On the corporate side, I just wondered if you were seeing similar trends in your business. Equally on the retail side, you know, you've got good employment trends, but cost of living pressures.
Just whether you were seeing any changes of behavior on the consumer side as well. The second question, just a brief one. Could you just remind us of where the Stage 2 balances are quarter-on-quarter, and also what the level of macro overlay provisions that you're currently sitting on, if any. Sorry, if I can sneak in a quick follow-up. I just wanted to come back to the expected moratoria impact, the 25-30 basis points guidance that you just gave. Can I just double check on what basis that's being calculated? Is that on the sort of 75%-90% assumed take-up? Are you assuming any tax shield on that?
Because I assume that, you know, to the extent there's DTA creation that would get deducted from capital. I just wanted to verify whether there is much of a tax shield. Also just around the treatment of the minorities, you know, given that part of Millennium's minorities count towards BCP's capital position, and given that Millennium will be falling below its minimum standards, should that mean that the impact on BCP Group is something larger than simply taking the 50% stake of ownership, if you like, of the losses you have at level? If you could just yeah clarify the sort of some of the moving parts around that 25-30 basis point guidance, that would be really helpful. Thank you.
Okay. In terms of this last question, I mean, the way we do it, of course, I have to be careful because Bank Millennium is listed. Bank Millennium has communicated to the market what is the total impact and what is the interval of expectation. The 75%-90%. This interval that I've given is still smaller, I would say, interval than what would depend on this. Of course, it also depends on the other weight that you have at this point in time, in Q3 and on the CT1 that is on the Q3, because what is fixed is the amount, but then the impact that it has on the ratio depends on the other factors of the ratio.
These are second order impact, but when you are going to see exactly the details, these are important. If you want to go to the numbers at the very precise level, you have to see with the precise numbers, what are the impacts. We consider everything. Of course, we consider the minorities, we consider the excess minorities. We consider the fact that when there is a tax shield, but when this tax shield is a tax loss carry forward, of course it does not count on capital or towards capital. As you know, if there is a cost that generates a tax loss carry forward, as it will happen in Poland, this does not or this gets also deducted from capital. It is everything considered in this calculation.
I don't think that this is, I mean, the moment to tick all the boxes in terms of the calculation. Afterwards, if you want, I mean, you can speak with our investor relations team to make it a little bit easier to see exactly how the calculation is being done. In terms of Stage 2, what we see right now is that in Portugal, our Stage 2 was around 17%. It has been reduced to around 16% of the total loan portfolio in. I'm sorry. It was 16%, and it went to around 15% in terms of our stock of loans in Portugal.
It went from around EUR 6.5 billion to around EUR 6 billion. In consolidated terms, it went from around 13% of our loan portfolio to around 12% of our loan portfolio. In terms of our overlays, I don't think that this is an information that's public yet. I will check whether it is public or not. What I can tell you is that they have not materially decreased, so they are more or less at the same level that they have been in the last quarters. I have to check whether this is public or not before giving you an answer. If it is, we can then share with more people. Okay?
Okay, thank you. Sorry, just about the loan demand in terms of what you're seeing on customer behavior.
Our loan demand. Up to the moment, we are not seeing any material loan demand. What we are seeing is that comparing with our expectations, we were considering that the loan would pick up faster because of all these recovery fund program in Europe, and the funds are not coming yet. These funds are very important because they will, so to say, multiply in terms of credit. We are not seeing these funds coming in magnitude yet. We would expect that once these funds come, that we will also see more corporate loan demand. Let's see at the exact moment at which they will arrive.
We were expecting these funds to already have arrived, but also because of everything that had to do with this logistical crisis that we are living, they have not arrived. For the moment, to make a long story short, what we see is a loan demand in the second quarter aligned with the first quarter, aligned with last year. Of course, there's always some volatility, but in terms of level, general level, we're not seeing a lot. What we are also seeing is that mainly focused on the short term, because for the longer term, people are expecting for the resilience fund of Europe to approve the projects and to start investing.
That's very helpful. Thank you.
Thank you. Now we're going to take our next question. Please stand by. The question comes from the line of Sofie Peterzens from JP Morgan. Your line is open. Please ask your question.
Yeah. Hi, here is Sofie from JP Morgan. My question would be around the pension fund again. I can see that the pension fund discount rate is around 3.3%, compared to 1.35% at December. If it would go back to 1.35%, what would that actually mean for your Core Equity Tier 1 ratio? And then my second question is on your bond portfolio. Considering the moves we have seen in bond yields, do you have any intentions of increasing the bond portfolio in size to support your NII? And then, lastly, could you just comment on the TLTRO and how you think about the TLTRO contribution going forward? Thank you.
Okay. The last one. The TLTRO, I mean, we don't need the funding of the TLTRO. What we have implicit in our models is to the extent that the TLTRO has an interesting margin. We maintain it, and at the moment it has an increasing margin, and we think it makes sense to maintain it. If there are any type of, so to say, adverse regulatory movements that make it have less interest, we will reevaluate. But we don't need it for our business model. When it contributes, we maintain it. In terms of the bond portfolio, we view ourselves very much as a retail bank, and we use the bond portfolio. We have used it in the past to a large extent to manage the interest rate risk.
We have demand deposits that are zero rate on demand deposits. Our term deposits have a very low, I would say, volatility or sensitivity to interest rate movements. If we want to manage our NII so that it does not get too volatile, so that it has some exposure to interest rates, but not too high of an exposure to interest rates, we have to have a bond portfolio. This is the largest. Or swaps, either one or the other. We view it as instrumental to managing our interest rate risk, and we will continue to view it this way. We are not. I mean, we don't see it as a portfolio to grow, to generate margin by itself, because these investors can do it on their own.
We don't add value necessarily to investors by just creating a public debt bond portfolio and substituting ourselves in terms of investors. In terms of the sensitivity of the pension fund, it is a little bit complex, your question, because I mean, you cannot only look at the liability side, because if interest rates go down, we would also have a positive impact on the asset side. I think this is important. Of course, what we have commented is that our sensitivity, as you see, for each 25 basis points of increase in the discount rate is slightly above EUR 100 million. Let me just check here. The last sensitivity that we have.
Actually right now it went to below EUR 100 million. Our sensitivity to each 25 basis points variation of discount rate is around EUR 90 million, give or take. Slightly below EUR 100 million. If this is not totally linear, but if based on this, you can do your own simulation. If interest rates go down by 100 basis points, you have to multiply this EUR 100 million by four, give or take. We also have a movement of reverse nature on the asset side. That's what we have seen in this context, that typically compensates a part of it.
I would say that, to a large extent, the fact that we have this buffer allows us to feel comfortable that even if the interest rates go down, except in very extreme scenarios, we would not have any hit on capital because we have exactly these more than EUR 600 million capital buffer, so to say, related to pension fund that allows us to cope with it. In terms of guidance, by the way, a very important guidance that we follow is a public guidance that are the Mercer discount rates that you can follow on the internet at mercerdiscountrates.com, where you see exactly how these interest rates have changed.
Based on this, you can extrapolate what type of discount rates we may have.
Thank you. That's very clear.
Thank you.
Okay, I understand there are not any more questions, so thank you.
There are no further questions.
Okay. Thank you very much for following our investment case and for following the performance of the bank. We are very strongly committed in delivering a very excellent performance in operational terms. Hopefully we will see here also the share price translating this into value for our shareholders. Thank you very much.