Thank you for standing by, and welcome to the Millennium bcp 2021 earnings conference call. At this time, all participants are in listen only mode. There will be a presentation, followed by a question and answer session. At which time, if you wish to ask a question, you'll need to press star one on your telephone. I must advise you that your conference is being recorded today. I would now like to hand over to the speaker, Mr. Miguel Maya, CEO. Please go ahead, sir.
Good morning, Miguel Maya speaking. Welcome to BCP earnings conference call. I will go through the highlights of our performance in 2021, then Miguel de Bragança and Bernardo Collaço will follow to provide you more details about the earnings. In 2021, there was a relevant recovery of the economic activity despite being a year still marked by consecutive waves of the pandemic that have significantly impacted our social life, but also the performance of companies, both dimensions that affected more incisively the business of a bank with a strong retail franchise as BCP. The growth trends observed in 2021 were expected to last for the following years, if not hindered by the current war situation in Eastern Europe that is dominating the world's attention these days, and which carries further uncertainty about the magnitude and consequences of the changes in the monetary policy.
The priorities we immediately assumed since the outset of the pandemic to strongly support companies and households, even at the most acute phase of the pandemic crisis, were decisive to steer the bank to a privileged position in 2021 when the economies where we operate start to climb the upward phase of recovery, trend that in Portugal will be further stimulated until 2026 by incoming European funds that should have a transforming effect on the modernization and competitiveness of our economy. This positioning of the bank allowed us to increase the core income by 4.9%, which combined with a 1.8% reduction in the operating costs, is reflected in a 11% year-on-year growth in the group's core operating profit to EUR 1.3 billion.
The net profit of EUR 138 million was heavily influenced by charges of EUR 533 million, with the substantial reinforcement of provisions for legal risks associated with the FX loans in Poland and with mandatory contributions in Portugal. If we exclude the provisions of Swiss francs legal risks and its associated costs, namely for the conversion agreements that continue to be concluded at a good pace with clients, the net profit would have reached EUR 405 million, increasing 57%, which is a clear indicator of the bank's ability to prosper and generate income on a sustained basis, including in the Polish market, where Bank Millennium showed a very solid growth performance in its core business indicators.
I also highlight the net income of EUR 173 million in Portugal, which represents a year-on-year growth of 28.5% and confirms the quality of the business model and the relevance of BCP in the Portuguese market. In 2021, we swiftly concluded a successful and relevant process of headcount reduction in Portugal, which together with the significant reductions also undergone in Poland in the last couple of years following the integration of Euro Bank, were critical to adjust the workforce and improve the efficiency of the bank. We maintain an adequate capital position with a total capital ratio of 15.8%, CET1 of 11.7%, which is above regulatory requirements, although continuing to demand our full attention and rigor in the capital allocation decisions.
The level of liquidity remains well above regulatory requirements, and we have over EUR 25 billion assets eligible for funding on the ECB. As I mentioned, and despite the restrictions throughout the year still caused by the pandemic, we had a very intense commercial activity in 2021, supported by the proximity and the greater involvement with companies and households, which was reflected in an increase of EUR 3.1 billion in performing loans, an increase of almost 6% year-on-year at the group level, and 5.2% in Portugal, where the loan portfolio increased by EUR 1.9 billion, supported by mortgage and corporate loans.
The performing loans growth was carried out while maintaining strict control over the quality of the portfolio, namely in Portugal, where we implemented risk mitigation solutions for supporting companies in the economic upward phase, granting them loans partially covered by the European Investment Bank and the European Investment Fund. Customer funds acquisition remains very important for our business model as a commercial bank that relies on long-standing relationships with customers for positioning the bank as their main bank for treasury savings and investments.
Therefore, we see the significant increase of 9.5% in customer funds as an important reinforcement of the customer's trust, and also a good indicator of the perception about the quality of our value propositions, with emphasis on our ability to advise and provide saving solutions that supported the 4.1% growth in off-balance customer funds. Despite the unfavorable environment, we pursue our steady trajectory of improvement of the asset quality, having performed a NPE reduction of EUR 543 million. Once again, we confirm that our execution capabilities in the recovery and sale of non-performing credit continues to be efficient regardless of the harsh context. The high priority we gave to proactively manage the moratoriums portfolio was crucial to preempt an increase in the admission of NPEs.
Our initial understanding that for a crisis with these characteristics, the moratoriums would be very effective to preserve the productive capacity of the economy without degrading the risk profile of the bank's loan portfolio has been proving correct. We also maintained the path of decreasing the cost of risk, which reached 60 basis points at the consolidated level and 69 basis points in Portugal, accompanied by the reinforcement of 5 percentage points in the level of NPE coverage by impairment to 68% at the consolidated level. This figures that considering the nature and composition of our business portfolio and the relevance of other collaterals, positions BCP very well compared to our peers.
The customer base continues to grow consistently, having exceeded 6.1 million clients at the group level and 2.5 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, both at the group level and in Portugal as a result of the customer recognition of the quality of our mobile solution. This, customer recognition was very clear, very bold in Portugal. For the first time, BCP achieved the full leadership in terms of customer satisfaction, leadership simultaneously on the physical channels and on the digital channels, both in the retail and corporate segments, as well as leadership in all service, quality indicators, having been selected, by the customers as Consumer's Choice in Portugal, not only in 2021 but also already for 2022.
This result is even more important as it was achieved in a year in which the operational restrictions imposed by the pandemic did not prevent us from continuing the bank's transformation path. Quite the opposite, we have implemented important changes in the model and size of the bank's commercial footprint alongside a significant workforce reduction. This improvement was driven by the incorporation of technology across the entire organization, which is enabling faster operational procedures, advanced journeys in the interactions with customers, and increased data analysis capabilities that further improve our knowledge about the customers' behaviors. Let me emphasize that the BCP's leadership in customer satisfaction and recognition was not restricted to the retail segment.
Companies have also selected us as their bank of choice, the best bank for companies, the one with the most appropriate products, the most innovative bank as a leader in supporting SMEs. In digital, we also continue to be the bank of choice and the bank that customers most recommend in Portugal. The priority we give to investing in mobile solutions with a clear focus on customer-centric innovation means that our app continues to lead the rankings and deserves the best reviews from customers. This recognition is also reflected in the use that the customers make of the app, which has gained increasing relevance as a preferred platform for their interactions with the bank. This preference is shown both in the 20 percentage points increase over the last four years in the percentage of our mobile customers in Portugal.
In the last year alone, customers carried out 53% more transactions through the app with notable growth in the number of transfers and payments. The app is increasingly becoming the preferred digital platform of customers for acquiring financial solutions, accounting for 71% of our digital sales. Mobile sales increased by 43% with emphasis on the 283% increase in the number of cards sold, 160% in the amount of personal credits contracted through the app, and 48% in the number of savings solutions carried out in the app. This relevant evolution is a clear evidence of the bank's ability to stand out with a business model based on the symbiosis between human proximity and digital channels.
We are well aware of the challenge ahead, but as we have shown throughout the current term, the value of the Millennium franchise is very strong in all different geographies, and we are able to identify and implement the necessary measures for the evolution of the business, the strengthening of the balance sheet quality, and the improvement of the bank's efficiency and profitability. Miguel de Bragança, the floor is yours.
Thank you very much. As you see here in page 12, we have had a good evolution in terms of the main recurring items with the NII growing almost 4%, commission income growing 7.6%, so that the core income grows almost 5%. The recurring operating costs, i.e. excluding the provisions for headcount reduction for restructuring, went down by 1.8%, so that this meant that the recurring core operating profit in the period, in spite of COVID, went up by almost 11%. The operating net income, then, based on other income that I will explain later on, grew 5%.
Basically the main factor that then influenced negatively the net income was, as our CEO has already briefed, the provision for the Swiss franc loans in Poland. That in spite of this huge level of provisions, the bank has decreased the net income only by around 25%. Excluding this impact of the Swiss franc loan, the evolution of the net income would be almost 57%, which clearly shows the strength of our franchise. When we divide the evolution between the Portuguese business and the international business, which is basically Poland and Mozambique, we see that there is a balanced evolution. The NII in the international operations grew based on the NIM. This is to a large extent explained by the interest rate environment in Poland.
As you know, the WIBOR increased from around 20 basis points to a level that today stays at around 3.6%. It was a huge increase in WIBOR, which is not yet totally reflected in the last year, neither in the last quarter because this has a dynamic effect. In Portugal, in spite of a very strong discipline in terms of pricing, the liquidity situation of the bank implies some compression of the NIM. However, in spite of this compression of the NIM, because of the volume growth, the NII grew low single digit, as we have been commenting, around 3.2%. Fees and commission are beating both in Portugal and international operations.
The banking fees and commissions in Portugal grew 6.5% with a strong contribution from asset management fees and investment fees, but also in the last part of the year of transactions and credit cards. The banking fees and commissions growing 6.5%. In the international operations, the banking fees and commissions also showed a strong growth, growing 11.5%. All the other income we see a stability with some growth in terms of the normal trading gains in Portugal that increased from EUR 62 million-EUR 75 million. Some decrease, as you may see, I'm sorry, the mandatory contributions actually increased from EUR 70 million-EUR 77 million.
In the international operations, you see the decrease that I was commenting in terms of trading gains. This decrease is mainly explained or solely explained, as you may see in the footnote, by the costs with the renegotiations and repayments of Swiss franc loans that have explained EUR 78 million in terms of out-of-court settlements, this year. This basically explains the difference. Operating costs. The recurring operating costs went down in Portugal 3%. In nominal terms, of course, this will be even higher, to a large extent explained by the strong restructuring effort that the bank implemented. In the international operations, the costs, the recurring costs quite stable. Including the non-recurring costs, there was some reduction. We are seeing some costs and some salary pressure, mainly in Poland.
In Portugal, less so. We have been able to compensate this or to more than compensate this with efficiency gains and headcount reduction. Impairment and provision charges. We see in slide 17 the very positive evolution in terms of cost of risk, which still stands above our peers and which still stands above the steady state cost of risk that we expect for the bank. Nevertheless, we have provided around EUR 350 million for loans.
The main impact here in terms of other provisions, as you see, was the Swiss franc evolution, the Swiss franc provisions that increased from PLN 152 million in 2020 to almost PLN 460 million in 2021, so that we are reaching almost a level of PLN 3 billion of reserves for Swiss franc contingencies in the balance sheet of Bank Millennium. We expect this evolution of the cost of risk, as you know, to continue. In terms of the Swiss franc portfolio, we'll speak certainly later on. The credit quality that you see in page 11 evolving very favorably.
In spite of COVID, the NPEs went down by 500 million, with an increase in coverage. Both the total coverage, i.e., with collateral or only the cash coverage, have increased 5 percentage points. The NPL that are really in default more than 90 days are already very close to 2%, at 2.1%. The NPA ratio, including all the securities and off-balance sheet guarantees, is at 3.2%. If we include only loans, our NPE ratio is 4.7%. Still above the European average, but with a very, very positive dynamic. In terms of business activity, in page 20, you see it is very healthy in terms of customer funds.
We have been growing 9.5% with an important contribution of off-balance sheet funds that are, at this point in time, clearly more profitable than balance sheet funds. This is an area where we have still some leeway to improve, unless right now, over the short term with the situation in Ukraine, the customers turn much more risk averse. If the situation returns to normality, we would expect the off-balance sheet funds to continue to grow at this type of levels, both in the Portuguese operation and in the international operation. In terms of loans, a very solid loan growth with the performing book growing almost 6%, including performing and non-performing, the growth was 4.6%.
Well balanced between Portugal and the international operations, with some larger growth in international operations that goes 6.6%. Nevertheless, in Portugal, with a growth of 3.6%, which for an economy of the level of development of Portugal and of the levels of Portugal is an interesting growth rate. In terms of capital, as you know, we have a capital position that is clearly above the capital requirements. As you see the CET1 ratio is at 11.7%. That compares with a 9.16% mandatory requirement as of today. With a buffer, if we want, of 2.5 percentage point.
In terms of the total capital ratio, because there are some buckets that are not totally filled yet, this difference or this buffer is of 2.1%. This is clearly an area that we know that we have to still work on by generating organic capital. We see that this is part of our plan that we have presented to the market. The ratios have been affected by adverse elements in the Polish subsidiary, in the available for sale reserve that have more than offset the organic capital generation and the sales of subsidiaries. I think page 24 is very highlighting of what we say.
As we have been commenting for some time, the business model of the bank, if we take a look at what is the organic capital generation in the absence of, I would say, extraordinary or legacy issues, is able to generate between 15 and 20 basis points per quarter. That's what we have this year. We have generated, in the absence of legacy or extraordinary issues, 84 basis points. This is once we reach the steady state, this is, I would say, a level of capital generation, which we feel comfortable right now, and that we feel comfortable that it may even increase when we reach the 10% capital, the 10% ROE target.
As you know, we are in the process of creating CHF provisions for the CHF risk. This has taken out of these 84 basis points, 54 basis points. There is another element that we have been commenting in previous quarters. That is the lower, I'm sorry, the lower the capital requirements in Poland, and actually the supervisor has been decreasing the capital requirements in Poland, the less minority interests we can appropriate in Poland. This impact that I would say it's a positive impact in the sense that the local supervisor feels comfortable with lower capital requirements, actually at group level, reduces our minority interest. Once we reach a steady state, I mean, it's normal that this impact will vanish.
We have a special issue in this last quarter that was a clarification by the EBA to a question, where the EBA said that banks that have subsidiaries in countries that have not implemented the CET1 requirement as defined by Basel III could not benefit from minority interest in these countries. I mean, we have some doubts where this I mean is a balanced position, but it is what it is, and we have to comply. This took out around 20 basis points of our capital position.
We know that at least in half of last year, that Mozambique is working on adapting its banking regulation to Basel III, and we would expect that this effect, or at least the joining of Mozambique to the Basel III framework and the implementation of a CET1 as defined in Basel III and not defined in Basel II, will occur in the next quarters. I would say this year, of course, we cannot guarantee. It's not something that we control, but we would expect that it would make sense. We have two divestments of one small insurance company in Mozambique and of a bank in Switzerland, of our private bank in Switzerland, that contributed positively together around 22 basis points. We had an effect that is short-term negative, long-term positive.
That is the increase in interest rates. As I was commenting, for instance, in Poland, the interest rates went up, the WIBOR interest rates went up from 20 basis points to around 3.6%. The longer-term rates also went up, so in spite of a very conservative position, the near hedging of a part of the balance sheet, even with a small duration, we are speaking about durations below five years, had an impact in terms of the capital. A negative short-term, of course, this type of environment in which the interest rates are higher is positive medium- to long-term, I would say even this year for the bank.
As we will see, as we are seeing, I mean the NII of the bank in Poland is having a very positive behavior. This is the other side of the coin. This is basically the dynamics of the bank. I would say as you take a look here, that right now these 15-20 basis points of normal capital generation makes sense. If you ask me going forward what we expect, we would expect in the absence of these extraordinary effects or legacy effects to have this impact, of course. The key issue is how much, because the other effects are less, I would say, are less expected to occur this year. How much of the Swiss franc provisions will we have this year? I think this is the main issue.
This question will certainly be raised. I think right now we have a certain methodology. This methodology is a methodology that implies that as cases are lost in first instance, the sample is changed. By changing the sample, this means that we have to continue to provision more for the portfolio. I would say that until there is either a clarification for the treatment of the Swiss franc mortgages, we will continue with a high level of provisions, until at least we reach the values that the bank mentioned, around PLN 4.5 billion-PLN 5 billion zlotys of the well-known KNF proposal.
I would expect to continue with a high level of provisions in the next quarters in the absence of a clarification for the banks of key issues, leverage ratios.
You see we compare very favorably with our competitors in terms of leverage ratios, and to a large extent, this is explained by the high level of RWA density that we have, in part because probably some of our models are already updated, and they have already the add-ons and the filters that the regulators demand, in part because a part of these models have been influenced also by the period in which Portugal faced some difficulties, and this of course translated also into a time series of PDs and LGDs that were worse in Portugal than in other countries. MREL requirements at group level have been disclosed to the market. You have here the numbers in page 26. I will not read them.
The only thing that I would here like to highlight is that we do not have any subordination requirement at group level, so we do not need to issue subordinated debt or senior non-preferred to meet these requirements, which is positive from a cost perspective. We have complied with the interim target, having a plan to continue to execute. We expect to issue until the end of 2023, so between 2022 and 2023 a total volume of new issues of around EUR 2 billion, which is around EUR 1 billion a year, which is something that is totally reasonable in terms of our market access. This in terms of our resolution group, the center in Portugal. Pension funds.
The pension funds has a projected rate of return and a projected discount rate, as you know, of 1.35%. It has been increased in line with market rates. The funds profitability grew or was above this 1.35%, which means that we had actually a positive deviation in terms of the fund profitability. The fund has a quite conservative position in terms of equities right now, which is good considering what has just happened. A part of the interest rate of the fund, of the pensions covered through the bond portfolio of the fund, and the liabilities are fully covered.
We have here an excess of around EUR 200 million between the portfolio and the liabilities, which effectively is a capital buffer, in the sense that if we have any negative deviation, until this negative deviation reaches EUR 200 million, there is no impact in terms of our capital ratios. Liquidity is very, very comfortable. I would say too comfortable. We are making some effort here to develop more our off-balance sheet business and to accelerate with price discipline, credit concession. From a pure liquidity standpoint, of course, the ratios, as you see on page 28, are very, very comfortable. I'll pass it now to Bernardo.
Okay, thank you, Miguel, and good morning, ladies and gentlemen. On page 30, starting with the Portuguese operation, net income increased 28.5% year-on-year to EUR 172.8 million. Albeit the strong operational trends, net income in 2021 was impacted by the head count adjustment costs of around EUR 90 million. Net operating revenues increased 5.7% and recurring costs went down 2.7%, demonstrating the strong operating trends on a very challenging environment. On page 31, looking to NII in Portugal, at the end of 2021, it stood at EUR 830 million, meaning 3.2% up or almost EUR 25.9 million above the previous year.
Favorable impacts as the expansion of the performing credit portfolio supported on mortgage loans and loans to companies, as well as the positive effect of the wholesale funding, which includes the impact of TLTRO and the repricing of deposits more than compensate the negative effects of EUR 45.6 million arising from lower price on credit influenced by the negative evolution of short-term rates, EUR 10 million from lower yields on securities, EUR 17.6 million from the NPEs reduction, and EUR 6 million from the excess of liquidity. On page 32, regarding spreads on term deposits, back-book spreads stood at -57 basis points and almost aligned with the three-month average Euribor registered over 2021. Customer rates on deposits went down 8 basis points from 10 basis points in 2020 to 2 basis points in 2021.
Spreads on loan book was slightly compressed year on year, and that can be explained by the guaranteed credit lines. Although, it is important to mention that spreads were stable compared with the previous quarter. NIM stood at 1.44%, eleven basis points lower than a year ago, due to the excess of liquidity, lower yields from the ALCO portfolio and reduction of the average credit rates related once again as the credit guarantee lines. Moving to page 33, that represents the evolution of fees and commissions as well as other income. You can see that banking fees increased 6.5%, and the most significant impacts came from cards and transfers that grew 12%.
The increase in transactional activity and from customer account-related fees with an increase of 7.5% explained by pricing optimization and increase of Millennium customer base. Market-related fees registered an increase of 8.4% as a result of the performance on asset management, where there was a significant increase of mutual fund subscriptions. All in all, fees and commissions went up 6.8% to a level close to EUR 550 million. Looking to other sources of income, in 2021, there was a positive evolution of EUR 40 million on net trading income from the last year, arising from positive impacts related with securities and lower negative impacts from loan sales.
On equity accounted earnings, contribution from P&L in 2021 was similar than 2020, and the small reduction from last year was related with the one-offs effect from the insurance company booked in 2020. Regarding other operating income, contribution from this line was better than one year ago due to higher results arising from real estate sales, even taking into consideration that mandatory contributions increased EUR 7 million compared with 2020. Going to page 34, regarding costs, there was a reduction of 2.7% in terms of recurrent and co-recurring costs. Total operating costs increased year-on-year as explained by the one-off impact of around EUR 90 million related with the head count adjustments in place in 2021.
Related with that process, the net evolution of employees in 2021 was a reduction of 724 employees, and as regards branches, there was a reduction of 44 branches in 2021. Moving to page 35, which refers to asset quality. Even under a challenging environment, BCP was able to reduce EUR 485 million of NPEs year-on-year, meaning -20.5%. NPE stood below EUR 1.9 billion compared with EUR 1.9 billion. Cost of risk was 69 basis points, but it's also important to mention that adjusted by the one-offs, it stood at 77 basis points, which is much better than the range that we estimate at the beginning of the pandemic on the first quarter of 2020.
Let's move to page 36, which looks at the NPE coverage breakdown. As you can see, total coverage to that 127%, 100 registered and above, the one registered in 2020. With a reinforcement of the NPE coverage by loan loss reserves to 68% from 63% a year ago. Total coverage for individuals with high levels of real estate collaterals stood above 90%, and for companies at 140% from 127% a year ago. Coverage by real estate collaterals on companies at 41% and loan loss reserve is 7 percentage points up than a year ago. Foreclosed assets and restructuring funds on page 37, it's possible to show the evolution of those two topics.
There was a reduction year on year of 33% in terms of foreclosed assets and by 5% on restructuring funds. In terms of property sales, there was a slowdown compared with 2020 due to the restrictions in place in the first half of 2021 in Portugal, and the number of properties sold were lower than a year ago. It is also worth to mention that the sale value continues to be above the book value. Now moving to page 38, total customers funds grew almost 9% to more than EUR 66 billion.
The growth was more than EUR 5 billion and was supported by the increase of demand deposits, but also from the increase of 4% on off-balance sheet funds, explained by the high level of subscriptions of mutual funds that more than compensate the strong reductions on the insurance products that were already expected in 2021 coming from closed unit links. In terms of gross loans, there was an increase of 3.6%, supported by an increase of 5% in mortgages and 2.6% in companies. It is also important to highlight that performing loans went up 5.2% year-on-year, almost EUR 2 billion, and NPEs were reduced by EUR 485 million or 20.5%. Going to page 39, it is possible to see our strong support to companies and their recognition of BCP as the main bank.
Performing credit portfolio in Portugal up by EUR 1.9 billion or 5.2% from December 2020, supported in growth in mortgage loans and loans to companies. Let me also highlight the reinforcement of European guarantees provided to BCP to support small and medium-sized companies affected by the pandemic. Now going to page 40, it is possible to affirm that expired moratoriums in 2021 didn't have a significant impact on past due loans. Of the total of EUR 8.2 billion of expired moratoriums as of December, 90.2% which corresponds to performing loans, and out of which 9.8% are marked as Stage 3. 61% of these loans were already in Stage 3 when moratoriums were implemented.
As you can see on the bottom left chart, the percentage of loans with days past due that were under moratorium registered a behavior similar to the bank loan portfolio. In terms of stage migration, as you can see on the top inside chart, net flows from Stage 1 and Stage 2 to Stage 3 were below 3%, and net flow from Stage 1 to Stage 2 stood at a level below 12%. Now, moving to page 42 and regarding international operations, you can see that there was a negative contribution from international operations to consolidated net income. The strong decrease is explained by the Polish operation that booked significant costs in 2021 related with the CHF loan portfolio.
Bank Millennium had a loss of almost EUR 292 million that compared with a small profit of EUR 5 million in 2020. Mozambique's contribution was better than the previous year and amount almost to EUR 83 million in 2021. Combining contributions from international operations in 2021, it represent a loss of almost EUR 35 million with a positive that compares with a positive contribution of almost EUR 50 million a year ago. Moving to page 43, net income in Poland was strongly impacted by costs related with Bank Millennium CHF loan portfolio that amount to EUR 532 million after taxes. Total provisions related with Bank Millennium CHF portfolio, and that's excluding the provisions from Euro Bank portfolio of EUR 48 million that were neutralized on P&L in other income line, stood at EUR 457 million.
That means more than 200% than one year ago. Costs associated to conversions of and early repayments of CHF loans had an impact slightly below EUR 80 million. That compares with EUR 80 million in 2020. On the trading line, and that goes to the trading line. Costs with legal advice booked under admin costs, other admin costs were close to EUR 11 million. That compares with EUR 5.6 million a year ago. It's important to highlight that excluding these factors and due to the excellent operational performance, net income from Bank Millennium, which stood at EUR 240 million, 58% higher than last year. Even considering the substantial decrease of the three-month WIBOR during 2021, that started to be reverted in the last quarter of 2021.
Looking to operational trends and excluding the impacts related with the CHF mortgage loans, we can understand how strong is the franchise. It's important to mention the strong performance of new mortgage loan production and consumer loan production that reached levels prior to COVID-19. Operating costs went down 6.5% due to the optimization process that was in place in 2020 and 2021, and CET1 at 14% and total capital ratio above 17% and comfortable above the regulatory requirements. On page 44, some detailed information about Bank Millennium. NII, even not considering the interest rate increase that happened on the fourth quarter of 2021, there was an interest rate hike of 165 basis points, and in 2022, more 100 basis points more.
The NII would be slightly above last year. Although, with the effect of the increase of reference rates in 2021, it stood 5% above last year to an amount of slightly less than EUR 600 million. NIMs stood at 2.7% and improving significantly on the fourth quarter, where it stood at 3%. Fees and commissions increased at double digits to EUR 185 million, 11.3% more than one year ago. Other income decreased significantly, as explained before, by the impacts on the trading line related with out-of-court settlements with CHF borrowers. Operating costs with a decrease of more than 6% after the strong efforts in place in 2020, even with some inflation pressure, as we know.
Moving to page 45, related with asset quality, NPL ratio decreased 50 basis points, and cost of risk stood at 37 basis points, in line with the previous quarter. It is important to remind that in 2020, cost of risk was at 83 basis points due to the COVID provisions. Covered ratio of NPL by loan loss reserves at 135%, meaning an increase of 13 percentage points from last year and higher than the previous quarter. On page 46, you can see how strong is the franchise, where customer funds increased 11% year-over-year. In terms of loans to customers, gross books stood at EUR 17.7 billion, more 6.5%. It is important to highlight the increase of złoty mortgage loan portfolio of 28% and 4% on consumer loans.
Bank Millennium reached, in 2020, a market share of new mortgage loan sales of 12.5% and of 10.2% on new cash loan sales, both above Bank Millennium natural market share. On page 47, regarding FX mortgage portfolio, it now represents less than 11.5% of total loan portfolio. As you can see, the reduction of the CHF portfolio in 2021 stood at 17%. Bank Millennium, due to the increase of court claims and decisions more favorable to customers, made additional provisions of more than EUR 457 million in 2021, increasing the coverage of the outstanding to 25.7%. Cumulative provisions for legal risk on the FX mortgage portfolio of Bank Millennium, and not including Eurobank, stood above EUR 651 million.
It is also important to mention, as you can see on the bottom right chart, that Bank Millennium has accelerated the extrajudicial agreements with CHF borrowers in 2021, and those amicable agreements had a cost of almost EUR 80 million in 2021. On the second, third, and fourth quarter of 2021, the number of out-of-court settlements were above the new lawsuits. Turning to page 48, which regards to Mozambique, net income increased significantly to almost EUR 83 million due to higher NII fees and commissions and lower credit impairments. Net operating revenues increased 10.3% and operating costs 3.9% higher than last year. Capital ratios stood almost at 45%. Moving to page 49, NII went up year-on-year 9.1% to almost EUR 160 million.
NIM was stable year-on-year above 7.5%. Commissions and other income increased 14% and cost to income improved to 43.5%. Moving to page 50, NPL 90 days past due ratio decreased to 10.8%. Cost of risk stood at 72 basis points due to a specific operation, and coverage by loan loss reserves increased 21 percentage points to 77%. Regarding volumes on page 51, you can see that customer funds registered a small decrease and loans to customers went down 5%, reflecting the conservative approach under the challenging environment of the country. Just to finalize, let me thank you for your attention. Before we move to Q&A, I will return to Mr. Miguel de Bragança for some final remarks.
As you see on page 53, we compare exactly how we stand on the dynamics with our commitments to the market and with our strategic plan metrics planned to be attained by 2024. To tell a long story short, we are relatively on track. The cost of risk has had a positive evolution. The cost to income, excluding non-usual costs, is already at 44%, clearly on track to achieving the 40% by 2024. The evolution of the ROE, mainly when we consider that it's influenced by a lot of factors that will not be there by 2024, in principle, is clearly also on track to achieving the 10%.
The Common Equity Tier 1 of 12.5% more than a target is a parameter for the ROE. We will, because this Common Equity Tier 1 ratio will be influenced, of course, between now and 2024 by the dividend decisions, just to name a few decisions. We clearly think that it's possible to achieve these 12.5% based on the evolution of the organic capital generation that I have just presented, and that it is consistent with the 10%.
The NPE ratio evolved very favorably, especially when we take into consideration the COVID environment and the franchise that is a critical element to achieve the other elements of our strategy, namely the customer growth, the mobile customer growth, and how we position ourselves in terms of ESG, have already had the evolution that we were expecting. Thank you very much, ladies and gentlemen, for your commitment and your attention. I will open now the floor to Q&A.
Thank you, sir. As a reminder, ladies and gentlemen, if you do have any questions or comments at this time, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. Once again, if you have any questions or comments, please press star followed by one on your telephone now. We have our first questions coming from the line of Maksym Mishyn from JB Capital Markets. Please ask your question.
Hi, good morning. Thank you for the presentation and opportunity to ask questions. I have two, if I may. The first one is on interest rate sensitivity in Portugal. If you could please remind us what sensitivity you currently have to a 100 basis points hike in the CB rates. And also if you could please tell us how much of loan book is at fixed and floating rates, that would be helpful. The second one is regarding news on disposal of corporate restructuring funds. Could you share more details on what impact we should expect for BCP? And when do you expect the disposal to be finalized? Also, if you could give more color on what moving parts we should consider and the potential impact on capital, that would be very helpful. Thank you.
Starting with the last question, the moving parts on capital are more or less the ones that I was commenting that affected this year. We have the organic capital generation that we expect this year of 2022 to be at least at the level of 2021. Then we will have the issue of the Swiss franc portfolio that I have just commented, that probably the size until we reach around PLN 5 billion of provisions or there is a decision from the Court of Justice of the European Union. The magnitude of the provisions will continue to be at this level.
Based on interest rates, increases in interest rates, even being positive from a, I would say, from a franchise standpoint and from a valuation standpoint, may have a negative short-term impact through the fair value reserves of the ALM portfolio. These are the moving parts that you can model, the two other parts you can model. In terms of the disposal of the restructuring funds, as this is a process that is going on. It is a complex process because it involves, I mean, the banks, the asset management of the restructuring funds, et cetera.
As I have commented here in the past, in spite of being a complex process for the funds of ECS, we are not expecting any additional, I mean, negative impacts in terms of our P&L. We are expecting a positive impact in terms of RWA reduction that we estimate to be between 10 and 15 basis points. In terms of the interest rate sensitivity in Portugal, of course, the NII sensitivity in Portugal, we have been commenting that it evolves over time. Typically, the evolution that we have is for each 100 basis points of increase, we expect an increase of around EUR 100 million of NII over the next 12 months.
If there is an immediate shock of 100 basis points, there would be an immediate increase of EUR 100 million of NII. In terms of the portfolio, speaking about the total trade portfolio, we have a hedging in place for our trade portfolio. Our balance sheet is quite hedged, viewed as a whole, so to say. When we see the ALM portfolio, the hedge, the swaps that we use to hedge the mortgage portfolio and so on, I would say that the interest rate risk that we have in terms of basis points value is quite very small when you compare with the size of our balance sheet. That's what I would like to say here.
It does not make a lot of sense to tell what is the composition of, so to say, of our mortgage portfolio when a part of it is hedged through swaps. Just to give you an idea. By the way, I just would like here, Maksym, also to express our solidarity with your country that is really facing a terrible moment. Okay?
Thank you very much, and thank you for this.
We have the next questions coming from Ignacio Ulargui from BNP Paribas Exane. Please ask your question.
Thanks very much. Thanks for taking my questions, and good morning, all. I just have two questions. One is a bit on NII outlook for 2022. I mean, you said during the call that part of the impact from higher rates has been not yet captured into the-.
I'm sorry, Ignacio. The sound is not very good. If you could speak closer to the mic or something like that because we're having some difficulties.
Yeah. You hear me now better?
Yes.
Okay. I was just referring on the NII in Poland, that you were saying that, still there is part of it not being captured by the, I mean, the higher rates have not been yet visible in the NII. Just wanted to see if you could quantify a bit or give us a bit of outlook of NII for 2022 at a group level. How do you see NII will progress in 2022? The second question is on credit quality. There was a small increase in NPEs in the quarter, but as you have flagged, in the context of the moratoria was relatively small. Just wanted to get a bit of color.
Where do we see or where do you see provisions in 2022, and the cost of risk evolving, given the fact that it looks relatively well-contained, and just wanted to see whether we could be below 50 as early ahead of 2024 or there is something that we need to be aware of? Thanks.
Okay. Thank you for your questions, Ignacio. As you know, I mean, there is the further into the future we look, the riskier it is to make projections. Of course, when we presented the plan with targets for 2024, and when we plot this as what we expect as a cost of risk of 50 basis points by 2024, as we approach 2024, I mean, the value can be lower or can be higher.
In general, as we have more, I would say, more visibility into, in terms of 2024, and if the macro environment turns out to be, I would say, more favorable, and right now with the situation that we are living in Europe, it's difficult to say. It is possible that 2024 will have a lower value of cost of risk than the one that we have here. As we approach 2024, we will probably, I mean, have more information on this. As of today, mainly with the, I would say, with what we are seeing in the world, I think it is too soon to review the target, but maybe closer to 2024, we can give a little bit more visibility into it.
Having said that, in 2021, we had 66 basis points of cost of risk, excluding one-off reversal, that you see in page 53. 60 basis points with one-off reversals. Our base case right now, in the absence of, I would say, an escalation of the conflict that I mean goes beyond our worst case scenarios, is still that by 2022, we would have a decrease of the cost of risk converging to the value of 2024. We have had the 60 basis points in 2021. We expect 2022 to have a lower value than in 2021 converging to the 50 basis points.
Maybe at the end of this year, we'll have more visibility in terms of 2024. In terms of NII, I think we have here two different stories, I would say. We have a story in Portugal, and we have a story in Poland. In Portugal, we have the challenge of the end of the TLTRO this year. But we have a lot of other levers in place to compensate it. We are not expecting a decrease in the NII, but we are expecting a small increase, a low single-digit increase in terms of the NII in Portugal. In Poland, I would say there was a quantum change.
I mean, when the WIBOR goes from 20 basis points to 350 basis points or 1060 basis points, we cannot use normal metrics of interest rate sensitivities of the margin and so on, because this is a whole new world, so to say. We cannot model the margin as if, I mean, all the other factors were constant because this has an impact on volumes, this has an impact on credit appetite, this has an impact on mix, on how much or how much the customers want demand deposits and how much the customers want term deposits.
This becomes very sensitive to the pass-through of these rates to final deposit rates and depends, becomes very sensitive to what competitors say, so to say, and what competitors decide in terms of pricing of deposits, because this will be critical for the pass-through. Having said that, what do we expect? When we take a look at the last quarter, as you might expect because of the evolution of the interest rate, December was better than October and November. Of course, the first quarter of this year will be closer to December than to the average of last quarter.
That's what I'm saying, that probably the first quarter of this year will still be better than the last quarter of last year because it will have, I mean, three months that already reflect all this increase in interest rates. Okay? The immediate impact in terms of NII of what happened positively in Poland is very positive because the credit reprices almost automatically, at least the credit that is indexed to the WIBOR. It's almost automatic, while the deposits have some inertia. The immediate impact is very positive. We are expecting very, very positive, I would say year-on-year evolutions when we compare the Q1 of this year with Q1 of last year in Poland.
However, as time goes by, there will be an impact on volumes, there will be an impact in terms of customer behavior, so to say, in terms of the mix between term deposits and demand deposits, and there will be an impact in terms of the repricing by the competitors and of this dynamic. It is normal that we have, I would say, one quarter or two quarters that are very positive. Then the Q3 and Q4 probably these other, so to say, compensating effects start to kick on. In any case, and of course, I cannot forecast what the competitors will do and so on, but I would be surprised if the margin in Poland grows less than 20% in 2022 than it was in 2021.
Just to give you an idea. Of course, in the first quarter it will be higher. Taking a full year view, I would be very surprised. I cannot forecast totally what competitors will do, but I will be surprised if the margin grows less than 20%. Okay?
Thank you very much.
We have the next questions coming from Carlos Peixoto from CaixaBank BPI. Please ask your question.
Yes. Hello, good morning. Thank you for taking my call. The first question would actually be on other provisions. This quarter, we have again some provisions, some I don't know how to call it, generic provisions or provisions overlay, being run at in Portugal. I remember you also had a bit in previous quarters. I was wondering if you could give us some color on what is the current stock of the total overlay, and when would we have some visibility on the application on the use of these provisions. Looking a bit into the outlook as well, I was wondering on fees, what type of evolution do you expect to see during next year?
2021 was a year with good performance, parts of which are driven by market related fee through. I guess this year is perhaps a challenging one, or at least recent days are showing that that front might be a bit more challenging. I was wondering if you could give us some color on what your expectations there. Finally, if I may, just a final one also on the cost side after the restructuring charges booked during this year, how should we look at cost evolution into 2022? Thank you very much.
Thank you for your questions. The other provisions are provisions that are, as you know, in consolidated terms, they are basically influenced by the Swiss franc provisions and by one specific case that was at the time commented to the market that was, I would say, a so-called mis-selling case. In terms of what we have right now in terms of other provisions, most of these other provisions are provisions for other assets, so to say, for mark to market or revaluations of real estate, for revaluations of sometimes funds, and also for guarantees. So these are basically the normal and for litigation, so to say.
These are basically the bulk of other provisions: guarantees, litigation and impairments, if you want, of other assets, non-credit related assets. I don't have here the stock of these other provisions with me. It is on our balance sheet. We can then send it to you. It is on our accounts, but this is the way it is applied. I would expect here a gradual reduction of these other provisions in line with the credit provisions. In terms of your other question, that is, we don't have, so to say, a lot of success fees in terms of of asset management fees because we actually do not perform asset management itself.
We place funds managed by third parties. We are almost an open architecture, so to say. Of course, our liquidity position enables us to focus on off-balance sheet products because we do not need, I would say, balance sheet products. From our perspective, this is an opportunity also to increase the P&L of the bank and to offer a more diversified solutions to our customers.
In terms of securities, commissions and so on, a lot of it has to do with CMI, I would say, investment banking deals, where the bank also has a small investment banking operation, but even being small, in relative terms to the remaining of the bank, there are some years or some quarters where they generate capital market fees and some of them when they do not generate capital market fees. Going forward, if you asked me one month ago, I would be very optimistic in terms of the evolution of these asset management fees because we were seeing some demand from our customers.
In terms of our expertise, in terms of advising the customers, and in terms of finding the right solution for each customer, we were also evolving. Right now, I think the world and the customers are on a risk-off mode. I would say this is one part of our net income that is more sensitive to the situation that we are now living. Your judgment is at least as good as mine as to whether or when will be the moment in which retail customers will become risk-on versus risk-off.
If this situation, I mean, is solved quite quickly, and if we get to a risk-on mode or at least to a risk neutral mode, I do think that our fees as a whole may continue to grow mid-single digits, 5%-7%. If not, if we go to a risk-off mode, it will become much more difficult to grow, at least in this area, as you may understand. The costs moving forward, as you know, we have had an important effort in terms of the reduction of our cost base this year.
These restructuring efforts is something, at least when you do it in large processes, that you cannot do, I mean, every year because this has an impact on the motivation, morale and on the efficiency and effectiveness of the organization. We are not expecting to do something similar this year. There is some, I would say some normal cost inflation, some salary upgrades and so on, that we expect to compensate through normal efficiency gains. The way we look at it is that we expect a quite neutral, so to say, growth or very close to zero, a little bit above, a little bit below growth in costs in Portugal this year. The total overlays that we have right now, just for you to know in terms of our models, is around EUR 80 million.
Thank you.
We have the next questions coming from Noemi Peruch from Mediobanca. Please ask your question.
Good morning, and thank you for taking my questions. On common equity, with the current level of long-term rates, the buffer within the pension fund is due to increase. You have disregarded the chances of crystallizing it before, but I would like to ask you if there is an ideal level above which you would then consider crystallizing parts of the gain. On cost of risk, I have two questions. One is how much of the European guaranteed loans have you already issued? The second one, if you could please comment on your approach towards the trade-off between cost of risk in 2022 and the Pillar 2R, so calendar provisioning, and if you are willing to increase provision to reduce the requirements.
My last question is on the evolution of NII in Portugal on a quarterly basis, if you could just walk us through the moving parts there. Thank you very much.
Okay. Thank you for your question, Naomi. In terms of the pension fund, as you know, we have an excess of EUR 200 million in terms of the difference between the assets of the pension fund and the liability of the pension fund. Considering the situation of the pension fund right now, we do think that the investors and the markets value more, I would say, taking the pension fund risk a little bit out of the way, but having this buffer so as not to have even more moving parts in terms of the capital evolution than simply to reduce this value that then would expose us to more equity volatility.
I would like to recall that it's EUR 200 million in a pension fund that is around EUR 3.7 billion. It is a buffer, but it is not a tremendous buffer. It is not something that we say if we go now to zero, that we would probably have here a volatility. We have not defined a level above which we would try to reduce this, the difference. We have not defined it yet. In conceptual terms, if we reach a level where we, when we look at between now and 2024, and where we are so comfortable so far, so comfortable that nothing will happen that would consume this level, probably we would give it a thought.
With the volatility and that we have right now and with the uncertainty that we have right now, we think that the market values more the reduction of this risk than simply taking out the excess. Okay. This is what I would like to say at the moment. In terms of the EIB, our lines are give or take around EUR 3.2 billion, and we have already consumed around 60% of these lines. In terms of the calendar provisioning, I believe this was your question whether the calendar provision. We are taking impairments also in part to consider the calendar provisions.
What I can say is that mainly when we do the individual analysis, we consider very seriously the impacts of calendar to estimate the impairments and the provisions. If in doubt, I would say the alternative is to create a backstop provisioning for the customer. If there are arguments to also impair this excess, probably we would impair this excess. Our impairments right now already reflect our sensitiveness to calendar. That's what I would say right now. Okay? The impact that's deducted from capital is very small exactly because we take this into consideration.
I mean, in terms of of NII on a quarter or on a quarter looking forward, it's more difficult for us to project exactly the quarter on quarter than the full year. We are taking here some measures right now. We would expect to have the negative impact that we'll have in the second half of the year, somewhat compensated by the measures that we are taking right now in terms of spread management and in terms of reduction of the excess liquidity that we have. I would not like to, I mean, to go further than that at the moment in terms of committing to quarter by quarter evolutions.
What we think is we can deliver because there may be different lag times of some measures, and there are also some competitive issues here, is that we are expecting a full year evolution in Portugal of a low single digit this year. Okay.
Thank you. If I just may follow up on the NII evolution. What I meant was the delta between Q4 and Q3.
Okay.
Thank you. In Portugal.
I thought you wanted a projection month by month for 2022. No. If commenting exactly this quarter, I would comment there are a couple of effects. In terms of credit, there was a minor positive effect in terms of the margin of credit because the NIM compression has compensated the part of the volume growth, but I would say it's a minor effect in terms of credit. There was a negative contribution for the NII, but a healthy negative contribution of around EUR 14 million because of the NPE reduction.
The NPE reduction, as they were unlikely to pay, we were accumulating a part of the margin. In NII, there was a negative evolution of around EUR 14 million. That was broadly in line with the evolution of the cost of deposits, mainly in foreign currency. That was also around EUR 14 million. The remaining, I would say, was the wholesale world, I would say, with wholesale funding and investment of the ALM portfolio, so the wholesale world being responsible for the remaining effects. Okay.
Thank you.
We have the next questions coming from the Sofie Peterzens from JPMorgan . Please ask your question.
Hi, here is Sophie from JPMorgan . My first question would be around your capital returns. Yesterday evening, there were some Bloomberg headlines from your chairman saying that BCP wants to restart dividend payments. If you could just talk about your kind of thoughts about dividends versus share buybacks, kind of potential payout ratios that you're thinking about. That would be my first question. My second question would be on deposit beta. In your kind of rate sensitivity guidance and also what you're seeing in Poland, if you could just comment on what you're seeing in terms of deposit beta in Poland and what you gotta assume as a deposit beta in Portugal, in your EUR 100 million increase in NII from a 100 basis point increase.
Then my last question would be, could you just give a sensitivity to the discount rate? So if the discount rate was to go up by 25 basis points, what would that mean for your Core Equity Tier 1? Th ank you.
Starting with the last question. Okay. If the discount rate goes up by 25 basis points, the impact on the pension fund liabilities, ceteris paribus, would be a maximum around EUR 128 million. This is a maximum fact because it does not consider the position of the pension fund also in fixed rate. The liabilities would go up, but exactly because we have this buffer of EUR 200 million, this would not have any impact in terms of our capital ratio. If the interest rate goes up 25 basis points. I'm sorry. I'm sorry. I was. The numbers are similar, but just to give them correct numbers.
If the interest rate goes down 25 basis points, the impact on our liabilities would be EUR 135 million. The gross impact before the impact of the assets of the pension fund. If a part of this is hedged through the ALM of the pension fund, the impact effectively will be lower. Okay? However, because we have exactly this excess of EUR 200 million of buffer between the value of the assets and the value of the liabilities, this would not have any impact in terms of our capital ratios. Okay? If the interest rate goes up 25 basis points, the impact would be a reduction of the liabilities at most EUR 128 million. A part of it, once again, would be compensated by the asset side.
Effectively, what this would have as an impact would be to increase the buffer, the safety buffer that they use in the pension fund, so not having any impact in terms of our capital ratios. I would say for variations of the discount rate up or down until 50 basis points almost, the impact would be negligible in terms of our pension fund. The second, the interest of the impact of the capital of the pension fund on our capital. Second question, the sensitivity of interest rates and the sensitivity of the margin of interest rates.
I mean, the models of interest rate sensitivities are models that are made at the margin, so they are marginal models that assume all else remaining constant, as I was commenting to the questions of Ignacio. They are not very relevant when we are trying to model the impact of such a dramatic move as an increase of 20 basis points to 360 basis points. It's so different qualitatively that we have to model other factors together with the evolution of the margin, okay?
What I was commenting to Ignacio is that it is difficult to forecast exactly how the competitors will move and how the customers will change their mix between demand deposits and term deposits and savings accounts, because we have had not such a similar evolution in the past. To say, we do not have properly a benchmark here. Having said that, what we can say is the following, as I commented. First, the year-over-year evolutions in the first months of the year will be very positive and will be better than in the last months of the year, okay?
I think the yearly evolution will be very, very positive because the impacts on the asset side are quicker, are more impactful at a faster pace than the impacts on the liability side that have some elements of inertia. Very, very high positive evolution here. The total impact for year-end, it's difficult to model, but what I commented, and I cannot forecast exactly what the customers will do and whether there will be an excess of competitiveness in terms of deposits, because this is the key issue, whether the market and the competitors transfer all these interest rate increase to higher deposit rates. This is the key issue, and it's difficult, I mean, to anticipate exactly what the competitors will do.
What I can do is that I would be very surprised if the year-on-year growth of the NII is lower than 20%, between 2022 and 2021, considering volumes, considering mix effects, and considering already some pass-through. Dividends and capital. First, we are not where we want to be in terms of capital ratio. The main way of getting where we want to be in terms of capital ratio is through organic capital generation.
We do think that when we take a forecast between now and 2024, we will have to be above, in terms of capital generation, above 12.5, so that we have a sustainable dividend policy that enables us to grow to this level and to this benchmark level, because the way to get there for us is mainly through organic capital generation. In any case, I mean, we are not expecting to distribute any important, so to say, or any high dividend or have a high volume share buyback until we get to a level that's where we want to be, of 12.5. Because that's the way we want to get there is exactly through organic capital generation.
Having said that, we do think that there is a signaling, a positive signaling effect of having even a small dividend, because this effectively is a signal to the market and to investors and to small shareholders that the regulator, I mean, people that are looking at us, I mean, feel comfortable with the dynamics of our capital generation. Because, if the people do not feel comfortable with the dynamics of our capital generation, all the stakeholders, of course, even a small dividend would not be possible. This is more a signaling effect and, I mean, putting a little bit of money where our mouth is, to show effectively the trust of all the stakeholders in our organic capital generation capacity.
In any case, until we get to the levels that we expect, we will be very, very prudent. Third element, in terms of earn-out and share buyback and so on. The way we like to look at it is, in principle, we favor dividend distributions over share buybacks, as long as what we are generating is a normal organic capital. We would consider maybe share buyback in a situation that we are not envisaging, if there is an extraordinary gain.
In the absence of extraordinary gains, conceptually, we typically favor dividend distributions over share buyback and regular dividend distributions. In terms of payout, what we are saying is that by 2024, we will be having, I would say, a steady state CET1 ratio and an ROE of 10%. We do not expect by then to have a regular increase in RWAs above 5% a year.
This means that if we are generating capital of around 10%, and if our RWA growth is lower than I mean at or below 5%, that we could live with a dividend payout ratio of 40%-50% without any major problem after we reach the steady state. That's the way we look at it. But we prefer to define our dividend policy based on the CET1 ratio than on a certain amount.
Okay.
Thank you. That was very clear.
We have the next questions coming from Benjie Creelan-Sandford from Jefferies. Please ask your question.
Yeah, good morning. Thanks for taking the question. Just a couple of quick, sort of follow-ups or clarifications from me, please. The first one was, again, just coming back to capital. Apologies if I missed it, but could you just confirm the level of mark-to-market headwinds, in capital in the fourth quarter? And also just given how, you know, sovereign bond yields have trended year-to-date, you know, have you any sense of what the impact would be for the first quarter? I mean, I know you mentioned, you know, near term headwinds. I'm just wondering whether you expect the CET1 ratio to go down or to go up, in the first quarter as things currently stand. And the second question was just on costs.
I'm clear on the guidance that you expect costs to be flattish for this year in Portugal. I was just wondering within that, if we look at the 4Q run rate, are all of the targeted cost savings from the plan last year now embedded within that figure? Or is there still some pending tailwinds to come through from the cost saving program in 2022? Thank you.
Okay. Starting with your last question. There are still some benefits, I would say, from the restructuring program for Q1. In any case, these benefits for Q1 are, I mean, small, and there are always some salaries applied also in the beginning of the year. I would not expect any very positive evolution in terms of costs for Q1. There are still some people to go, but it's a minor number of people, and this will compensate a little bit of salary increases that we may have. We are speaking about a very rigorous numbers and very prudent, I would say, cost management in any case.
In terms of the fair value reserves. The fair value reserves in Q4 of last year contributed negatively to the capital around 24 basis points. Roughly half of it in Portugal, half of it in Poland, so more relevant in Poland. In terms of Q1, we are not disclosing these value yet because it's a forward looking. You can estimate based on what happened in Q4 last year versus what's happening in Q1. The portfolio has not changed materially, you can see what was evolution of the interest rates in one period in the other and make your own estimation.
It's not a value that we are disclosing now to the market, because else we would have to do a general communication to the market. Okay? What I can say is that the portfolio has not materially changed.
Perfect. Thank you very much.
Okay.
We have the next questions coming from Hugo Cruz from KBW. Please ask your question.
Hi. Thank you for the time. Can you just clarify your comments on the dividend? I understand it's gonna be small. It's about the optics. Will you pay a dividend in 2022 out of 2021 earnings? I had a couple questions on Mozambique. You have this BIM's deal. Do you expect the deal to have any impact in terms of your recurrent profitability in Mozambique, you know, in 2022 and beyond? Second, you know, Mozambique again, I think there was some more penal capital treatment from the EBA that I think you're trying to mitigate. You know, when do you expect to have news on that potential mitigation? Thank you.
Okay. Just the divi first. I mean, dividend is a shareholder decision, and we are very careful about governance, and it is the AGM that will decide on the dividend. I'm here on first hand, so to say, representing the ExCo and dividend goes beyond, I would say, what is the duties and the job of the ExCo. It is a shareholder decision. Okay? What I can say, this is the first point. Second, the decision has not been taken at the ExCo level or at the board level. As of today, there is not a decision on this issue on what to recommend to the AGM. Okay. I think it's important. There's not a formal board decision, so there's not a decision, okay? This is second point.
Third point, what we see is that our capital strategy is based on organic capital generation, and we are still not where we want to be in terms of CET1 ratio. We have to be very prudent and very conservative in terms of distributions from our capital. We are not, I mean, distribute capital when we know that we need it to reach the 12.5. That's not something that we want to do. Okay? Fourth question, we see some positive signaling value. Also, I would like to stress the signaling value in terms of having some small dividend, just to be very firm to the market, to shareholders, to supervisors, to regulators, that there is a sign of confidence in our capital generation strategy. It's a signaling value.
As you know, there are many theories about dividends. I will not get very theoretical on this issue here with you, but you all know them for sure. The very important theory that frames how we should think about dividends is exactly the signaling theory. Okay. Dividends as a symbol and as a sign. Okay. I mean, Mozambique. Mozambique, as you know, we were surprised by the evolution of the minorities in Mozambique firsthand. This is something that we expect to be reversed, at least partially, over time.
In terms of the sale of the subsidiary, the normal net income of the subsidiary was around EUR 7 million before tax. These EUR 7 million, of course, they had some minorities because we lost around one third of it through the minority shareholders in Mozambique. This means that the value for us was closer to EUR 4 million. We expect to compensate, I would say, a part of this value by our remaining participation and by a stronger efficiency from the company.
I would not expect anything relevant, I would say, in terms of the impact on our consolidated net income, because we still retain a stake and because there are synergies also with the new buyer. A small impact, but nothing to write home about, in terms of the negative ongoing impact looking to the future. Okay.
Okay. Thank you very much.
We have the next questions coming from Pamela Zuluaga from Credit Suisse. Please ask your question.
Hello, good morning. Thank you very much. This has been very helpful. I have two questions and a follow-up, if I may. The first one is, you have flagged the provisioning related to the estimated losses arising from the KNF solution that goes through the other provisions line. However, in addition to those, as you say, you're booking the costs related to out-of-court settlements through the trading line. So my question is, how should we think about the overall goal you have in mind regarding total estimated costs on these loans, including both the provision line and out-of-court settlements? The second question is, you have indeed had a very constructive core revenue evolution, yet the offset of the loss brought by these provisions for legal risks in Poland also came from one-offs.
Do you anticipate exploring more divestitures from non-core operations as you cope with these costs linked to the FX-denominated mortgages in Poland? Then finally, the follow-up. On the evolution of NII, and I'm sorry if I missed it, but you have signaled supportive dynamics from loan growth and lower wholesale funding costs, including the TLTRO effects. And you mentioned that before that upon the expiration of the ECB's facility, you still have positive levers. Can you give us more details around what those levers are? Will we continue seeing the same level of pressures from NPL deleveraging and margin compressions in the absence of rate hikes in the Eurozone? Thank you.
Okay. Thank you for your questions, Pamela. In terms of the Swiss franc loans, it's true what you say, that we have here two, so to say, ways that are affecting our income statement. On one hand, we have the provision for litigation risk, i.e., customers that are already in courts and there is already litigation, the projection of what's going on in terms of litigation. On the other hand, the out-of-court settlements that we do with customers, typically, I mean, most of them are still not litigating, at least not litigating aggressively with us, are in the first stages of the process.
Going forward, what we expect is that this level of negotiations with the customer, at least for next two or three quarters, will be maintained, not least because we think it's good for all the parties involved. We reduce our risk, and the customers also save a lot of legal fees and save and get a deal that is not probably as good as their best-case scenario in case they win in court, but at least it's for sure, and it's already stabilized and so on. We would expect the same type of costs in the next two or three quarters, at least for out-of-court settlements. After two or three quarters, let's speak about it.
Of course, by having more out-of-court settlements, sooner or later, this will be reflected in less provisions for legal contingencies because these customers, I mean, so get out of the sample with which we then model the Swiss franc litigation risk. In terms of the margin in Portugal, the main levers for the margin in Portugal are linked to our liquidity strategy, to how to invest the excess liquidity that we have and how to accelerate the off-balance sheet products to our customer base. These are the main levers that we have right now, and also link all this to some volume growth in credit.
These are the main levers that we expect to use to counterbalance the negative effect of the end of the TLTRO this year. We may see some stabilization in terms of the spreads, but at least the margin compression during the full year, this will take some time, but during the full year, we will, we hope, be reversed to the extent that we I mean, we have less liquidity because, as you know, liquidity right now has a huge cost. The non-core assets, I did not understand totally your question, but if the question is whether we are projecting other sales of non-core assets to compensate what's happening in Poland, the issue is that we do not have a lot of non-core assets at the moment.
We have sold basically almost all our non-core assets. What we have is relatively small. As of today, in terms of pure non-core, that's what I would like to say.
Perfect. Yeah, that was it. Thank you very much.
We have another question from Carlos Peixoto from CaixaBank BPI. Please ask a question.
Hi, good morning again. Thank you for taking these follow-up questions. Just on capital still, you mentioned, I just wanted to make sure that I understood correctly. You expect Mozambique to adopt Basel III in this quarter or over the coming quarters? Just to clarify that. If I may, on the capital run through for this year, with a 11.7 fully loaded ratio, this year you basically generated, or the last year, sorry, you basically generated organically 100 basis points, but that ended up being roughly consumed by the Polish FX litigation costs.
Do you see that as being the case again for next year, or should we already expect the flow of the CET1 to come up to trend upwards closer to your medium-term goals? Thank you.
I mean, Carlos, thank you for your questions. Starting with Mozambique, I mean, with Mozambique, we do not have any special insight, so we are basically commenting based on our experience and on common sense. This process of Mozambique adapting its whole banking regulation to Basel III, including CET1, has already started some quarters ago. We would expect it to occur during the year. We do not know, and we don't have any special information in terms of saying whether it will be April, June or December. It's just an expectation based on the normal evolution and based on the normal time these things take in these type of environments.
Our best guess right now is that this will be, say, corrected during the year, but it is an educated guess. It is an expert, if you want, but we do not have any firm commitment on this issue from the regulator. I think this is the point. In terms of what we expect this year of capital evolution in Swiss francs and so on. I think that the organic capital generation this year will be similar or better. The organic capital, I mean, the first part of the waterfall that I've shown in the graphs to you will be better, will be at least as it was last year. That's what we are expecting.
The net income plus DTAs will be at least as it was last year. We expect the Swiss franc contingency cost this year to be on the same order of magnitude than last year. If anything, a little bit lower, but it's too early to say because it is. We have a methodology based on inputs, based on cases in court. The last indications from cases in court are quite positive because there are less customers or less customer demands. We are still in the beginning of the year, so it's very difficult to anticipate what will be during next year. I would say the same order of magnitudes with some bias to be a little bit lower, if anything. That's the numbers that we are seeing right now.
It does not depend a lot on us. It depends a lot on, I mean, the pace at which the customers pose demands to the bank. This is data that we, I mean, it's more difficult to forecast for us than costs or credit volumes or depreciation evolution. To make a long story short, 2022 with a better organic capital generation than we had in 2021, with a level of Swiss franc negative contribution to capital that will be on the same order of magnitude or a little bit better.
Thank you very much.
Okay.
We have another question coming from Noemi Peruch from Mediobanca. Please ask your question.
Thank you for taking my follow-up question. It's just a clarification on unrealized losses on govies. Does your 11.7% common equity consider the new transitional agreements? If not, can you remind us of the common equity sensitivity to a 100 basis points higher yield curve in Portugal? Thank you.
Okay. We at the Polish level, so the numbers that we present for the Polish subsidiary and for the ratio of the Polish subsidiary are using the transitional methodology, so to say. At the Portuguese level, I mean head office, we are not using any type of transitional agreements for the available for sale reserve. In terms of the impact of a 100 basis point increase, or of between. I'm sorry. Okay. A 100 basis points increase in terms of the balance.
I'm sorry, the mark to market of our government debt portfolio reflects an around a pre-tax impact of around EUR 100 million, give or take.
Thank you. Thank you very much. The 11.7 includes 100% of the moves in terms of Portuguese govies, but only 30% of the moves we are seeing on the Polish govie. Is that correct?
No. We at consolidated level, we do not use any transitional agreements.
Okay. Thank you.
Okay.
Thank you.
Okay.
There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect your lines. Thank you, and have a good day.
Okay.