Old Dominion Freight Line Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 27, 2023

There are 18 speakers on the call.

Operator

Good morning, and welcome, everyone, to BBVA's Conference Call to discuss the First Quarter 2023 Results. I'm joined today by Onur Ghent, our CEO and Rafael Salinas, BBVA's CFO. They will discuss quarterly figures, and then we will open the line to receive your questions. Thank you very much for your participation. Now I hand it over to Onur.

Speaker 1

Thank you. Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining our Q1 2023 results audio webcast. I'm going to run you through as I always do through the presentation by indicating the page numbers.

Speaker 1

So let me start with slide number 3. On the left hand side of the slide, you see our net attributable profit reaching €1,846,000,000 One more quarter. In our view, we are posting very strong results, 39% above the results of the same quarter of last year. I should remind you that these numbers already include the €225,000,000 of extraordinary tax in Spain. If the extraordinary tax was not there, obviously, we would have passed the €2,000,000,000 mark.

Speaker 1

These results bring our earnings per share at the bottom of the page on the left hand side again. Earnings per share up to €0.29 53 percent year over year growth, A higher growth rate than the net attributable profit due to the share buyback program that as you all know we have been executing. The graph on the right hand side of the slide shows our capital ratio 13.13 above our target range and well above our regulatory requirements, 52 basis points higher than our December 2022 reported capital ratio. Moving to slide number 4, our tangible book value per share plus dividends continued outstanding evolution of previous quarters, 22% increase year over year and 7.1% in the quarter. This number obviously is a number that we treasure a lot that we pay a lot of attention to It's one of the most impressive figures in my view in this presentation.

Speaker 1

Regarding profitability, on the right hand side, we continue to improve our excellent profitability metrics, Reaching this quarter 16.3 percent in return on tangible equity and 15.5% in ROE being the highest figures of the last 10 years these numbers. We remain clearly one of the most profitable European banks. In fact, we were the 1st bank among the 15 largest European peers at the end of Q4 and we keep advancing on this. Not all the banks have announced their results yet, but our expectation is we will maintain Our leading position here among the peer group of 15. Moving to slide number 5, what stands out in terms of the key messages for the Q1.

Speaker 1

First, outstanding. Outstanding core revenues evolution, 36.7% growth year over year, supported by both the strong loan growth, 9.8% at the group level and obviously by the clear improvement of customer spreads in our core geographies. 2nd, our leading efficiency ratio improving 43.3% in the Q1 of the year with positive jaws. 3rd, asset quality metrics remain stable and within guidance with cost of risk at 105 basis points year to date. 4th, our capital position is comfortably above our targets as I mentioned.

Speaker 1

And last, the continued great progress in key areas of our strategy. With 2,600,000 new customers acquired in the Q1 and 14,000,000,000 sustainable business channeled in the Q1 also. Slide number 6, focusing on the Q1 results. This is the simplified P and L and the year over year comparisons. The year over year comparisons, The second column from the left, what stands out is the impressive 38.6% year on year increase in operating income, Driven by the strong core revenues growth and positive jaws, which explain the net attributable profit growth of 40.5% in constant euros.

Speaker 1

In terms of quarterly evolution, on the rightmost columns of the table, net attributable profit increased both in constant and current terms 4.6% 18.1 percent respectively versus the 4th quarter despite being negatively affected again by the 2 €5,000,000 of extraordinary banking tax in Spain. Some light into the revenues breakdown and the evolution on slide number 7. First, our net interest income, this is left at the top. It increased strongly 43% versus last year, Driven by the solid activity growth and customer spreads improvements, as I mentioned, the quarter over quarter evolution is negatively affected by Turkey. Excluding Turkey, The group's net interest income grows 3% versus the last quarter with very strong readings, especially in Spain and Mexico, which I will delve upon a bit in a second.

Speaker 1

2nd, the positive evolution of net fees and commissions right at the top, Increasing 16% year over year and consolidating the high figures over the last quarters basically, mainly because of payments and the transactional businesses. 3rd, the performance of net trading income left bottom, it's driven by global markets and hedges. All in all, Excellent growth in gross income. At the right, at the bottom, 33% year over year, thanks to the outstanding growth in core revenues, While the quarterly comparison is negatively affected, especially by the extraordinary banking tax in Spain that we registered Under other income and expenses, the €225,000,000 we registered it under other income and expenses. As such, it affects the gross income figures.

Speaker 1

On slide number 8, a deep dive on the net interest income evolution of Spain and Mexico, Which shows impressive growth in our view in the Q1 of the year. The same page also talks to our underlying optimism regarding the following quarters to come Because the spreads especially they keep going up. These are quarterly averages. The monthly figures obviously show even a better number in terms of customer spread. So very positive outlook also going forward.

Speaker 1

But on the left hand side of the slide, you see the strong loan growth for the group, reaching 9.8%, nearly 10%. In the center of the slide, you see the improvement in the customer spreads for Spain and Mexico. In the case of Spain, it has strongly increased during the Q1 to 275, Obviously, in the context of higher interest rates, but in Mexico, the interest rates have been higher for more quarters. Lending yields and Spreads, they continue to increase in a very consistent manner, reaching 11.72% in the quarter. As a result of all of this, on the right hand side of the slide, you can see the Strong NII growth both quarter over quarter and year over year in both countries.

Speaker 1

Year over year 38% growth in Spain and 29% growth in Mexico. Slide number 9, we want to give you in this page a sense of our highly diversified and transactional deposit base, Very important phenomenon in these times as well as our we want to show you our ample liquidity metrics with a deep dive especially in our Two core geographies of Spain and Mexico. First, in the upper part of the page, regarding the evolution of our deposits in the Q1 of the year, The slight decrease quarter over quarter is explained by seasonality and also by a higher preference for off balance sheet products, mutual funds in a context of higher interest rates. Having said this, the graphs show an increasing trend both in Spain and Mexico in the last two years And we have gained market share deposit market share in both countries in the last year. Also in the middle of the page, you can see that we have a very stable funding structure.

Speaker 1

Our deposit base, it consists mostly of retail and SME deposits, 69% in Spain, 77% in Mexico And over 50% in both cases of our deposits are insured in both countries. Finally, we are very comfortable in terms of our liquidity coverage ratios and levels, LCR is 161% in Spain and 188% in Mexico. Moving to slide number 10. We continue showing positive jaws at the group level, thanks to the good performance of gross income growing 32.7% in the 1st quarter And the costs are growing 25.7 percent mainly due to the impact of high inflation, hyperinflation countries. On the right side of the page, you see our efficiency ratio, the best compared with our European beers.

Speaker 1

It is further improving 43.3 percent from the point of 45.8% last year. Excluding the extraordinary banking tax, by the way, we highlighted in the page that if you exclude the Under the banking tax, the ratio would have improved to 42%. Slide number 11. In this page, you see the asset quality metrics. They remain stable and within guidance in an environment of high market volatility And in the context of sound activity growth, 1st on the left hand side of the page at the top, we see impairments decreased in the quarter and remained in line with the pre pandemic levels.

Speaker 1

This results in a cost of risk of 105 basis points at the bottom of the page, again in line with our expectations of cost of risk around 100 basis points as we have I did you in the past in 2023. On the right hand side at the bottom, NPL ratio, it continues to decline fueled by recoveries and repayments, Especially in Turkey and some write offs in Spain. The coverage ratio on the same chart remains high above 80%. Going to slide number 12 on capital, our CET1 as of March stands at At an extraordinary level in our view of 13.13 well above our SREP requirement. This figure represents an excess of capital versus the upper range of our As you know, our target is 11.5% to 12%.

Speaker 1

If you take the upper end of 12%, this number implies that we have an excess capital of around €4,000,000,000 First on the left of the page, you can see the December 2022 CET1 pro form a at 12.80 As we have anticipated to you when announcing 2022 results, there is a positive one off in January 2023 Due to a release generated by the reversal of the NPL backstop reduction and that was 19 basis points. Now turning to the waterfall, our results generation that contributes 54 basis points to the ratio. 2nd, the dividend accrual and AT1 coupon payments, which we do at 50% of dividend accrual, all in detracting 29 basis points 3rd, 23 basis points from the RWAs bucket. And 4th, the market impacts, they add 12 basis points to the ratio. And last, there's a bucket of others, 19 basis points mainly due to the credit indices that offsets the debit in the P and L bucket due to the net monetary position For hyperinflationary accounting countries, higher minority interests, all in all, more than offsetting 20 basis points negative impact Due to the various and all of the regulatory impacts that we were expecting for 2023.

Speaker 1

So all of the regulatory impacts That we're expecting 20 basis points is already factored into these numbers. Then page number 13, new customer acquisition. We remain focused on profitable growth. And as I I keep telling you the most healthy way of growing the balance sheet is through growing our franchise of clients. In the first Quarter of 2023, we have acquired 2,600,000 customers, doubling the client acquisition that we had 5 years ago.

Speaker 1

Although you can see some flattening here, this is an impressive figure. Taking into account, this effort has been quite negatively impacted In Turkey, due to earthquakes, which we basically paused our marketing efforts for 1.5 months and due To Peru and some of the problems social problems that we were having there in the country. Even more impressive in my view in Page is the share of those acquired through digital channels, which increased to 64% versus the 11% in 2017. Turning to slide number 13 14, our commitment to sustainability. Basically, we are accompanying our clients and supporting their sustainable transition.

Speaker 1

We have already channeled €150,000,000,000 since 2018 and in this Q1 almost €14,000,000,000 Continuing the strong trend over the recent quarters. Therefore, we remain aligned with our increased target of channeling cumulative €300,000,000,000 to sustainability by 2020 5. During the Q1 of 2023, we have continued to extend the business of sustainability to all the customer segments. On the right side of the page, You see some new functionalities in our retail banking app in Spain, such as the financing of the acquisition of hybrid or electrical vehicles And also financing energy efficiency measures for buildings, which has grown by 26% 50% respectively compared To the same quarter of the previous year. All in, we are trendsetters in sustainability.

Speaker 1

We maintain the top ranked European bank position in the Dow Jones Sustainability Index. We see this as a business opportunity. And as you see in the numbers, we are delivering on that. Page number 15, I also would like to highlight our positive impact on society on this page. With our primary activity of lending, we continue to help our clients.

Speaker 1

We helped them achieve their life and financial goals. As I mentioned before in the Q1, we have increased the total lending almost 10%, 9.8% compared to the same period last year. This implied so it sounds like a very high level one figure, But this implied that we have helped more than 34,000 families buy their homes. We have financed the growth of more than 100 30,000 SMEs and self employed individuals and more than 70,000 larger corporates, thus we are promoting employment, investment and welfare In the society with our core function. This quarter, we have also mobilized €3,300,000,000 to finance inclusive growth initiatives including social infrastructures or social mortgages.

Speaker 1

And finally, slide number 16 on our long term targets announced in the Investor Day. I will again choose to not go into each one of them for time purposes, but I can say that we are on the right path to achieve them all as you can see on the slide. Also very important, I would highlight on this page that given the excellent performance that we have been having, we are in the process of improving, Grading some of our long term goals. These goals were for a 3 year planning period of 2021 to 2024. We will be in the middle of the planning period in June, June this year.

Speaker 1

So in the coming quarter, quarters, we will be announcing some improved targets for this planning period. And now for the business areas update, I turn it to Rafa. Rafa?

Speaker 2

Thank you, Onur, and good morning, everyone. As Unur anticipated, we are pleased to share with you a very good start of the year with very solid operating trends across the board in activity, spreads, Efficiency results and capital. Therefore, in an especially volatile quarter, we can say that the strength of our franchises and the challenges of Our business model has been confirmed once again. Going to Page 18, let's start with Spain, We're presenting an outstanding quarterly set of results. In loans, the total portfolio remains flat, affected by the leverage for the mortgage book due to early repayments.

Speaker 2

However, positive growth trend continue in Consumer and Commercial segments despite quarter seasonality. As already mentioned in Payonur, we have not seen any unusual trend in deposit behavior in the Q1 of the year. Quarterly evolution is driven by seasonality, the already mentioned debt repayments and higher demand for off balance sheet products. No meaningful transfer from site to time deposit has taken place in the quarter. In terms of P and L, Very solid dynamics in core revenues lead to an outstanding recurrent pre provision profit figure close to €1,200,000,000 after excluding the new tax banking banking tax in Spain.

Speaker 2

NII growth accelerated in the quarter, leverage on a continued repricing of the loan portfolios. On the deposit side, Pressure on deposit remuneration remains contained and there is still an excess of liquid in the market and loan growth is limited. In fact, In the Retail segment, deposit EBITDA remains very low. Given this performance, we feel confident and rise our NII growth forecast Guidance for 2023 to around 30%. In fee income, also sound trends back up on positive growth across products and segments in the quarter.

Speaker 2

All in, efficiency ratio improved to 43.6%, driven by revenue growth. On the asset side on the asset quality side, underlying trend remain within our expectation. The cost of risk stands at 27 basis points in the quarter, which I would say reflects properly the underlying credit performance of our portfolios. Overall, a very strong quarter for Spain, slightly overshadowed by the reduction of the new banking tax. Slide 19, Mexico.

Speaker 2

Activity dynamics remain very solid, Leading to sound loan growth, buyers towards segment in which we see more value, further improving our asset mix. Going forward, we expect the loan portfolio to continue growing nicely, driven by a sound labor market and a resilient manufacturing sector. Neassuring is a phenomenon that we are following closely and in fact, we believe it will continue being an additional source of for demand for credit in the future. Moving to the P and L, fantastic quarter in Mexico with net income close to €1,300,000,000 And core revenue being the main driver of the P and L. Very solid trends on NII are maintained, driven by loan growth and successful customer spread management.

Speaker 2

In the coming quarters, in the context in which Banseco tightening cycle is about to come to an end, we should NII evolution to be increasingly driven by activity and effective pricing policies. Given that view, We have decided to review our NII guidance to grow at high teens. Regarding expenses, Performance is driven by activity dynamism, inflationary pressures and our commitment to continue investing in the country to take advantage of growth In any case, here the key indicator for us is the operating jaws. We remain firmly committed to showing positive jaws as has been the case so far. Finally, on risk metrics, a very solid evolution.

Speaker 2

NPL ratio improved to an all time low of 2 point 3%, thanks to loan growth and strong recoveries. Coverage level increased to 137%, While the cost of risk stand at 288 basis points, in line with the figures of the Q1 of 2022 and within guidance, All in all, fantastic result from our leading franchise operating in a market with high growth potential, where we will continue investing to further strengthen our leadership. Regarding Turkey, in Page 20, in the current macro environment and given regulation, we are pursuing a prudent approach. The balance sheet management is our main priority. We expected to better position for a shift in the monetary and financial condition, preserving ample liquidity and capital buffers.

Speaker 2

In this regard, we have been decreasing the duration of our loan portfolio in Turkey's lira and have already sustainably reduced our exposure to Foreign currency loans and our wholesale funding, being this foreign currency portfolio very well provisioned. Moving to the P and L. NII evolution is affected by the above mentioned strategy and regulation in place, while contribution from fees and Net trading income remains solid. In terms of asset quality, risk metrics continued improving, Significant decline in the NPL ratio, thanks to strong wholesale recoveries are low entries and the cost of risk remain well contained while we continue to increasing our Going forward, as you know, the macro outlook in Turkey remain highly uncertain ahead of the elections in May. And finally, moving to South America in Page 21.

Speaker 2

The region maintains a solid Performance in terms of revenue driven by the NII as the main driver of the P and L in the Q1 of 'twenty three, supported by positive activity trends, a better loan mix and a higher customer spread in all geographies except Colombia. Sound feeds mainly related to credit cards and payment services and efficiency continues improving to 45.4%. While rates metrics remain solid, broadly stable NPL ratio year on year at 4.3% and some coverage levels close to 100%. All in, net profit in the region exceeds €180,000,000 in the quarter. And now back to Onur that is going to highlight the main takeaways

Speaker 1

Maybe just to save time on for the Q and A, which is the most interesting part of this and rather than me reading you through these messages, Basically, we do think that we had a wonderful quarter. What is even more critical for us is looking forward, We do have a clear optimism and we do have some positive perspectives going forward despite the fact that we are in a Market environment of high volatility and we have to see how the markets evolve in the coming quarters months, But we have very positive prospects. That's why, as Rafael has mentioned, we are upgrading our NII Guidance in Spain, in Mexico and as a result in the group. So we are looking forward and as I mentioned hopefully in the second quarter call, We are in the process of revising upgrading our long term goals and we would hopefully be sharing better numbers in most of our KPIs there. So we are looking ahead with optimism, and we are now ready to take your questions.

Speaker 1

At least I give back to you.

Operator

Yeah. Thank you very At Sonor, we are ready now to start with the Q and A session. So the first question please.

Speaker 3

And our first question today comes from Max Machin from JV Capital. Max, your line is open. Please go ahead.

Speaker 4

Hi, good morning. Thanks for the presentation and taking our questions. I have 2, if I may. The first one is on customer spreads. In Spain, they have been expanding significantly and seem to continue expanding in the coming quarters.

Speaker 4

However, I was wondering what kind of customer spread Should we think of when repricing is done? And also, does the increase in spread in Mexico relate to higher growth in consumer and corporate loans than mortgages? And the other question is on capital. Onur, you mentioned that you now have €4,000,000,000 of excess. How should we think of its deployment?

Speaker 4

And what would Trigger you to give us more color on how you plan to deploy it? Thanks.

Speaker 1

On the customer spread, Max, thanks for both questions. On the customer spread, as you see the Spain number is 275 now, but this is the quarterly average as you can imagine and The trend of going up still continues. The month only March figure is actually 284. Same for Mexico. You asked about Mexico.

Speaker 1

You see here a clear trend of increase 11.72 is the quarterly average, But the month only March number in Mexico is 11.87. So the trend is there. The trend continues because we are still repricing some of those loans. As you also know, Our mortgage portfolio in Spain, 2 thirds of that we reprice every 6 months and 1 third we price every year. So some of the rate increases that has happened in the past year has still not flown through To the bottom line.

Speaker 1

As such, NII trend is there to stay for a while depending on the rate position of this European Central Bank and other central banks, but very positive reading. In Mexico, I didn't get the full question. If you had did miss anything, please, Rafael, jump in. On capital, maybe I answer that one very quickly and very clearly. On Capital Max, We have been very clear on this.

Speaker 1

In every single call, what we have been saying is that we don't want to operate with excess capital. Our target capital range is 11.5 to 12. We took the upper end in the presentation today also. We took the upper end as the reference and we do have €4,000,000,000 As of today, €4,000,000,000 excess capital. What do we do with this?

Speaker 1

We invest in our business. Our focus is clearly on organic growth. And then as the capital is excess, we are very committed to distribute it back to our shareholders. And on this one, our track record in my view is quite clean. In the last 18 months, only in a period of 18 months, We have given back €8,200,000,000 back to our shareholders, €2,000,000,000 from the 2021 results, €3,000,000,000 from the 2022 results and as you know €3,200,000,000 from the extraordinary share buyback program that we did After the sale of our U.

Speaker 1

S. Business, dollars 8,200,000,000 actually the last share buyback we finished last week, no Rafa? Yes. So we are doing it in a constant and diligent manner. We are very committed to this.

Speaker 1

I would only reiterate The fact that we are committed to giving it back, we are very committed to attractive and sustainable shareholder remuneration. Max, we have today we are announcing a return on tangible equity of 16.3%, more than 16%. And we are still trading below the book. So some of you are also asking us whether we would be stopping the share buybacks when we reach the tangible book value, if we reach the tangible book value. First of all, the 16% return on tangible equity and below book valuation at least to us doesn't make sense.

Speaker 1

When we look into the cash flows of our bank To our shareholders, some projection on this, we still think clearly that we are undervalued. But beyond that, The tangible book value reference is not a reference for us in terms of because our intrinsic fair valuation, we believe, It's much higher than tangible book value. In that manner, what I can tell you is that we will continue to Renumerate our shareholders in a positive, in a sustainable and attractive way, as I mentioned. And it seems like share buybacks will also be A clear part of that payout policy. And I pause here, but you can see our clear commitment based on our track record.

Speaker 1

And when are we going to do the next rounds and so on? Again, we just finished it The last one, but this year, next year, we will continue on the process.

Operator

Thank you, Maxence. Question, please.

Speaker 3

The next question comes from Francisco Racquel from Elantra. Francisco, your line is open. Please go

Speaker 5

ahead. Yes. Thank you. Two questions on Mexico. The NII guidance that you have I'm upgraded to high teens.

Speaker 5

If I were to extrapolate the run rate in the Q1, I get to 17 Same growth already, even if you are increasing the Alco bond portfolio there in Mexico. So the guidance, One could assume that NII could stabilize in coming quarters from here. So I wonder if you can Comment on the tailwinds and headwinds for NII in the coming quarters. Just to assess whether you are being Certainly for noting this guidance in Mexico and what are the main drivers. And then also in Mexico, the loan to the depot has Already reached 100% in Mexico.

Speaker 5

Your deposit EBITDA is just half of what Santander Mexico and Banorte have reported To date, so at what level are you sensitive and will you start paying up to retain deposits? And when where do you see the EBITDA heading To win Mexico by the end of 'twenty three. Thank you.

Speaker 1

Perfect. Thank you, Francisco. On the NII stabilizing, Francisco, I think you have been following us very closely for many quarters years. I do think that you know we are typically the profile of we say something and we deliver. In that sense, there is some conservatism in the number as you have highlighted.

Speaker 1

We wanted to upgrade the figure for sure, because we are not seeing actually any headwinds at the moment on the fundamentals, But we wanted to be a bit conservative so that we can clearly deliver on our promise. Then loan to deposit ratio, the second question that you asked, we are at 96%. So I'm not sure that it's printed in the material of the presentation, but it's 96%. We still have our LCR is 188%. So we do we don't have any liquidity challenge whatsoever.

Speaker 1

So in terms of the betas, at the moment, as you can see in the page, 229 is the Quarterly cost of deposits figure for Mexico, the month only figure is not that different from that. So independent Of the rate situation, as you know, the Central Bank is $11.25 in Mexico. We are able to maintain that number. Why? Because we are in transactional deposits, I keep mentioning it to you every quarter.

Speaker 1

But in my view, it's a unique number. We have 40% market share in payrolls, nominas, the payroll payments of the country. These are transactional deposits that flows. And as a result, we are able to maintain such Cost in deposits because they are small ticket and they are small ticket and they are widespread to many customers. People ask us, yes, but the gap is In 2018, it's not it wasn't that far away.

Speaker 1

2018, the rate in Mexico was 8.5% And we were still at 2% in terms of cost of deposits. So we are able to maintain this because of the structure of our business and because of the We are serving many customers, atomized many customers in our business and as such the beta is not that material. We wouldn't expect by the end of the year, you're asking, we wouldn't expect that big of an increase, some increase, but not that big of an increase In the cost of deposits in Mexico going forward.

Operator

Thank you, Paco. Next question please.

Speaker 3

Next question comes from Benjamin Thomas from RBC. Ben, your line is open. Please go ahead.

Speaker 6

Good morning, both and thank you for taking my questions. First on costs, your operating expenses were up 26% in constant currency terms as running ahead of weighted average inflation at 20 Can you just clarify that there's some lumpiness to costs here based on some investments? And by the end of the year, you'll be back in line with the weighted average Inflation number. And then secondly, in the appendix, you show your commercial real estate exposure. It's €9,000,000,000 or 2% of exposure default, Which is quite low relative to peers.

Speaker 6

Can you just provide some more color on this number, please, maybe by geography or by how much is office space Or maybe the average LTV of this lending? Thank you.

Speaker 1

Let me start very quickly with the second one. The average LTV is around 50% of that exposure. So it's Very nicely and highly collateralized. And it's basically spread between Spain and Mexico mainly. So We don't see any risk at all in that portfolio for us.

Speaker 1

On the cost topic, the 20% growth this 20% Growth in inflation versus the 26% growth in costs. It is a bit specific, Benjamin, to the Q1, Because in the coming quarters what we see that growth or the gap to be softening up a bit. And when you look into Core of why that number is as such, first of all, the hyperinflationary countries, especially Argentina and Turkey, the Announced inflation figure and what our people live through, there is some gap. So we have gone EBITDA above inflation in terms of the salary increases and so on in the hyperinflationary countries. That's one.

Speaker 1

But more importantly, when you look into our 2 core geographies, in Spain, we are below inflation. In Mexico, we are above inflation. And on that one, we are a bit purposeful. Let me say it that way. We do think that this is the time Mexico It's in our view booming on multiple dimensions.

Speaker 1

And we do have a competitive discontinuity in the market. As you know, one of our competitors It's being sold. So we do think that this is the right time to invest in Mexico to grab market share and you see that in the growth figures. We are gaining market share across the board In Mexico, and as such, we have purposefully decided that we might go because we do have this mantra that we don't go above inflation in our geographies. But in the case of Mexico this year, we do think that it would be very much justified to go for the revenues and for the business than purely optimized forecast.

Speaker 1

So we are over investing EBIT in the figures. Overall though in the coming quarters and at the end of the year, You would see that 20 six-twenty percent gap to be narrowing. Anything you want to add on this one, Rafa?

Speaker 2

No problem. I mean, On the commercial real estate, as Ouro mentioning, I mean, it is a €9,000,000,000 portfolio. It's 50% Mexico, 50% Spain. And the only portfolio that has been growing in the last 2 years has been in Mexico. I would say mainly related to the near shorting effects And the construction of our logistic warehouses in the north part of the country.

Operator

Okay. Thank you very much, Benjamin. Next question please.

Speaker 3

The next question comes from Ignacio Ulargui from BNP Paribas Exane. Yes. Sure, your line is open. Please go ahead.

Speaker 7

So thanks. Good morning for taking my questions. I have just Two questions. 1 on the competitive landscape in Spain in terms of deposit and how do you see deposit pitas evolving so far? There hasn't been a material increase in deposit costs.

Speaker 7

I just wanted to get a bit of a sense how do you see Competition in terms of cost of deposits in the domestic business. 2nd question is linked to the SME lending growth. If you could give us some color on the initiatives that you have in Mexico for just to leverage On the near side effect, focusing on the SME and the commercial side mainly. Just one follow-up on The capital on excess capital, Onur, you mentioned last call that the bank could explore Moving or migrating to a standardized models, has been any progress on that? There could be any kind of Use of the capital to reduce the future volatility of the ratio?

Speaker 7

Thank you.

Speaker 1

Rafael, if you want to take The second on the semi lending and the new shoring in Mexico. On the first one on the Spain competitive landscape and in relation with deposit betas and deposit costs, You can see it in the numbers as well, Ignacio. If you look into the Spain cost of deposits increase, so far, if you take the last 12 months and then if you take the reference as the ECB, depo rate, Basically, our beta so far is 12%. And this does vary, very much From segment to segment, in the case of CIB, the big large corporates, we are around 70% beta. In the case of companies, including all sizes of companies, excluding the large ones, the company segment, it's around 20%.

Speaker 1

And in the case of retail, which is the core as you know of our deposit base, 89% actually as you know is demand deposits and it's mainly driven by retail. The beta for that segment for the Retail segment is less than 5%. Now, what is our expectation going forward? We are expecting still That's why we are upgrading actually our NII guidance today. We are expecting the betas still to be 20%, 25% as we have guided you average At the end of the year, but we are expecting that to evolve in such a way that it will not be happening soon.

Speaker 1

It will be later than originally planned. That's why the NII guidance is going up. And why is that the case? Ignacio, there is so much liquidity in Spain. As you can see in the figures, our LCR is also 161, our deposit versus our LTD in Spain is 92%.

Speaker 1

We have €45,000,000,000 in Central Bank in the European Central Bank as excess cash. And on top of this, As you have seen, quarter over quarter, Spain lending growth is negative for the market. For the market, we are doing better than the market, but for the market, It's coming down. So the liquidity excess is not seeing any pressure from the growth of the lending. As such, As much as the liquidity excess situation is as such, I don't see any competitive market driven push On any player to go after deposits in a big way, which implies once again that The original plans that we had in terms of the betas and so on, the overall number still stays, but there will be delay In our view, for those numbers to be realized.

Speaker 1

The second one on SME, Rafa?

Speaker 2

On SMEs, in Mexico, Ignacio, On the first of all, in terms of the growth in the quarter that you have seen, we have been growing in line with the growth of the balance sheet around this 40%. But I think the relevant fact at the end of the day that we have been growing market share in SMEs in the last year, close to 100 basis points in the last 12 months. And we believe this is linked to, I will say 2 factors. The first one is just clearly on the demand side. I mean, the near shoreline effects, we are seeing quite a demand, especially on machinery and equipment sectors that are the main drivers of the demand there.

Speaker 2

And second, I would say also probably just the payoff of some of the investment that we have been doing in the segment in Mexico in the last few years, especially in the digital connectivity with the clients. So at the end of the day, it's a combination of our investment, the creation of the franchise that we have and also clearly with a significant growing demand from the SMEs given the natural connection with the U. S.

Speaker 1

And then regarding your final question, Ignacio, the Moving to standard models and so on, it's a process and there is no positive figure whatsoever from that work In the numbers that you are seeing today in capital. On the contrary, because of our advanced models, once again, we registered minus 20 basis points of regulatory impact, which was the impact that we were guiding you for the full year. We have taken that in the Q1. But in terms of the moving to standard and the potential positive impact of this in our numbers, there is nothing in our numbers yet because it's a process. It takes time as you know.

Speaker 1

It requires also a clear dialogue with our supervisors and so on, but there is no positivity coming from it yet.

Operator

Thank you, Neto. Next question, please.

Speaker 3

The next question comes from Alvaro Serrano from Morgan Stanley. Alvaro, your line is open. Please go ahead.

Speaker 8

Good morning. Two questions, kind of both follow ups. In Spain, in particular, You've explained why the deposit balances were down mainly seasonality. I'm just And so curious on your thoughts, how do you think deposit balances are going to evolve for the rest of the year? Is there sort of For the transfer to off balance sheet products or can we expect it to be flat or up?

Speaker 8

What are your thoughts there? And also where the term deposit mix might end up at the end of the year. And the second question is on Capital distribution, and I apologize if you touched on this already because I've been on and off, sorry, in advance. But On that capital, it sounds like you're very committed to distributing. Given the level of the capital, Could we expect some extraordinary distributions to be announced already interim?

Speaker 8

Or is this something that the Board will consider at the end of the year? Thank you.

Speaker 1

Very good. On the deposit outflows, first of all, let me give you the breakdown of that, Alvaro. So the $7,000,000,000 decline that we have seen in the deposit base in Spain, dollars 7,000,000,000 2 of that was big companies enterprises, let's say, BEC, as we call it Banco de Empresas, the commercial banking and also CIB, the 2. 5 is retail, okay? The 2 of the CIB and Empresas, the companies, That is pure seasonality as far as we can see it.

Speaker 1

The 5 in retail, it's basically 3 components, 5 outflow. 40% of that is more or less 40% of that is basically the payments of loans. There is some early payments and there were In the month of January, there were double payments. It's because of the workdays and the fact that the end of the year Was on a weekend and so on. 40% is early payments and double payments of the credit.

Speaker 1

So credit implied reduction. Then the another 40% basically around €2,000,000,000 is moving to off balance sheet products, especially funds, Mutual funds. And then the rest, the €1,000,000,000 is basically the seasonality of retail. In this context, the key two changes is Early payments and additional quota installment payments of loans and moving to non off balance sheet products, mutual funds and so on. The second one, the mutual fund movement will continue in that manner more or less.

Speaker 1

The first one, the early payments and so on, we are seeing some clear stability there. It will not be increasing too much or it will be not happening in that manner. So the deposit outflows might be happening, but in a marginal manner. As you know, our deposit number is €212,000,000,000 €213,000,000,000 So it's very, very, very soon. But given this, you are asking, I guess, also the implication on the cost and so on.

Speaker 1

And on that one, as I just mentioned, the deposit beta that we have guided you, 20 to 25, the combined beta, That's still our expectation for the end of the year, but we are expecting that beta evolution to be much slower. And in the coming months, we don't expect a major change in the deposit beta. Then the capital distribution, can we expect an interim Payout and so on. You can expect an interim payout. It's a process.

Speaker 1

You can expect it might happen this year or next year, A piece of that excess capital will definitely be in our view flowing through to our shareholders.

Operator

Thank you, Alvaro. Next question please.

Speaker 3

The next question comes from Carlos Peixoto from Deutsche Bank. Carlos, your line is open. Please go ahead.

Speaker 9

Yes. Hi, good morning. Thank you for taking my call my questions. So first, what actually is Cobia On capital, we noticed well, basically, this other lines that you have, so basically, they include 20 basis Negative impact from regulatory items. So this means that basically you have about negative 40 basis What's positive impact from the rest?

Speaker 9

I was wondering if you could break it down a bit on how much was the minority interest impact and how much were the What's the effect from hyperinflation? And then still on capital, on

Speaker 7

the market impacts, I was just wondering if

Speaker 9

you could give us some additional color on what was behind the mark to market as well how to collect portfolios. I believe this wasn't the usual Process, just to just have a bit of visibility there. And then finally, looking at NII, we're looking at a different area. On the Corporate Center, we noticed there a significant improvement in NII as well. This relates to Higher emigration on non excess liquidity, well, basically what is behind this?

Speaker 9

Thank you.

Speaker 1

The last one if I didn't capture it very well because the line was not so good Carlos. But on the first one, I guess you're asking the breakdown of the other bucket. The breakdown of the other bucket is very simple and clear. So 8 basis points comes from minority interests, 27 basis points come from hyperinflation, Minus 20 basis points from the regulation impact as I mentioned, regulatory updates and so on and then the rest is basically marginal. Then mark to market or help to collect.

Speaker 1

Rafael, do you want to comment on the mark to market or help to collect, the famous topic over the last few months?

Speaker 2

On the mark to market, I think what we have is a positive effect from FX, I think around 2 basis points. And then we have A positive mark to market of the portfolio of 12 basis 10 basis points, sorry.

Speaker 1

But the I think he's asking for the mark to market Position today of the bank in terms of help to collect. Carlos helped to collect today. The end of March actually today is positive. It was minus €100,000,000 All the euro balance sheet helped to collect book the face value of the mark to market of that book, which is not obviously in the capital It's around €100,000,000 at the end of March. And as of yesterday, actually, it was a positive figure.

Speaker 1

So some of the Big numbers that you have seen in the U. S. On the Help to Collect book and so on, obviously, it doesn't exist For BBVA. Then the NAI or Corporate Center, the big item in the Corporate Center is not NAI, but the NAI is mainly the funding cost For the equity participations that we have in different geographies and so on. So that's not the Ki Bin, the number for the Corporate Center is relatively bad this quarter for 2 very simple reasons.

Speaker 1

Number 1, We do hedges as you know especially for currency and Mexican peso has appreciated so well in the Q1 That we are seeing the positivity of that in the quarter and in the coming quarters actually when you convert the Mexican peso earnings to current euros. So in the new even in the coming quarters, we will see a positive correlation that the fact Mexican peso is appreciated. But we do have hedges and we do have the Mexican peso hedges and appreciation of currency immediately hits you in the hedge figure. And we have like around €180,000,000 in that. And if Mexican peso depreciates a little bit That 180 will disappear and the Corporate Center number will also improve.

Speaker 1

In any case though, we have the insurance for the Mexican peso currency changes already bought and locked into our balance sheet. So the Mexican whatever happens to the Mexican peso in the coming 9 months, A good part of it is already hedged. The second piece in the corporate center is the tax effect. The Turkish profit Has been positively affected from some tax changes in Turkey. And as you know, we do smooth out Any tax impact into the overall P and L, which means there's a positive impact.

Speaker 1

For example, in the case of Turkey as we have lived through, We do a negative in the holding in the Q1 so that we can smooth it out for the whole year. So in the coming quarters, Some of that negative will be released back to the P and L. That's the reason why the Corporate Center number is that negative. In the coming quarters, our expectation is that the bottom line of the corporate center obviously will clearly improve.

Operator

So thank you very much, Carlos. Next question, please.

Speaker 3

The next question comes from Carlos Cobo from Societe Generale. Carlos, your line is open. Please go ahead.

Speaker 10

Hi, good morning. Thank you for the presentation. Just a couple of questions for me. One is if you could please confirm or clarify what was the NII upgrade in Spain. Sorry, in advance, I missed that.

Speaker 10

And the question would be the cost of risk in Mexico that has increased a little bit from last year. Could you explain a little bit the drivers underlying that? It is consistent with your full year guidance, but Does it mean that the current run rate is going to be recurrent? Or you still expect a little bit of increases in the provisioning charges? And if you could comment on the same line for 2024, that would be great.

Speaker 10

Thank you.

Speaker 1

You want to take the NII guidance in Spain, Rafal?

Speaker 2

Yes. Carlos, I think you remember, I mean, the NII guidance that we provide for Spain in January Well, just to grow to low 20s. Now we are upgrading, rising that guidance. We are expecting the NII in Spain to grow around 30%. Regarding the Mexico cost

Speaker 1

of risk, Carlos, It's completely driven by the change of mix in terms of growth. If you look into the Mexican page in the presentation, you would see that we are growing Very nicely actually in very high return products, but they are also high cost of risk products. Credit cards is growing 21.9%, SME is 21.2 percent, consumer 16.5 percent, whereas the average is 13.9 percent. So the mix is changing towards high margin, High return, high cost of risk products. That's the key change key reason for the increase of cost of risk.

Speaker 1

We guided All of you, as you know, below 300 basis points, and we clearly stick with that guidance.

Operator

Thank you, Carlos. Next question please.

Speaker 3

The next question comes from Andrea Filtri from Mediobanca. Andrea, your line is open. Please go ahead.

Speaker 11

Thank you. First question is on ALCO. It's up €6,000,000,000 Q on Q. Where is your aspirational And what contribution to NII do you expect for this year from ALCO? And the second question is on IFRS 17 that you've adopted This quarter, if you could indicate to us what the main drivers will be going forward Of interpretation of impact for IFRS 17.

Speaker 11

And just two clarifications. One is the guidance Chicken NII, is it unreported or constant euros? And the deposit beta you have given for Spain, Is it the average for the year or the year end beta you expect? Thank you.

Speaker 1

Very quickly on the last one, it's year end. Very quickly on the third one, it's constant euros. We always provide guidance in constant euros. IFRS 17, I will defer it to you, Rafa.

Speaker 2

On IFRS 17, I think you have seen the implementation of the new accounting rule Represent a reduction of around €98,000,000 on net patrimony of the bank. But at the same time, we have to restate The numbers of the last year that define all the restatement is going to be around 65 €1,000,000 So at the end of the day, this negative impact of IFRS 17 is mainly coming from last year. Going forward, the dynamics are not going to change. As you see, I mean, the impact is very limited. At the end of the day, what we are going to see is just evolution in line with the quarter.

Speaker 1

Regarding the ALCO size, the first question, Rafa, please jump in on that one as well. But very quickly on my side, we don't have a target at all. We see ALCO as a mechanism, Obviously, to create value, but as a clear mechanism to manage our structural risk, especially interest rate risk management. It's an important piece for us. In that sense, we have to also see that we are adding value by as we do this.

Speaker 1

You have mentioned the €6,000,000,000 increase And there are very different reasons for that €6,000,000,000 increase because €2,000,000,000 of that has come from Mexico. And in the case of Mexico, we do think that The long end of the curve, it does offer opportunities and it helps us against structural risk management. As such, we increased it On a clear purpose to lock in some of those rates. In the case of Turkey, another EUR 2,000,000,000 increase out of the of EUR 1,700,000,000 to be precise. Of the 6, it is mainly because of the regulatory requirements.

Speaker 1

In the case the rest is in Europe balance sheet 2.6 percent €1,000,000,000 increase in the Europe balance sheet And that is more tactical and more short term. And we still will not increase the ALCO book, although we have a lot of liquidity yet Unless we see better returns in the long term of the curve basically. Anything you want to add, Dara Fondis?

Speaker 2

No, no. You already mentioned. I mean, we don't have a goal in terms of size. I think what we try to follow is the sensitivity to interest rates of the balance sheet and the combined balance sheet of the customer balance sheet Plus the ALCO portfolio and the variation in the quarter, you just as Onu mentioned, regulatory and also an increase in the Mexican portfolio mainly.

Operator

Thank you, Andrea. Next question, please.

Speaker 12

Thank you very much. The first question is on Mexico. What is the loan to deposit ratio and the cost to income ratio at which you want to run Your business there. The second question is on South America. The market doesn't seem to care too much about The region, but it's 10% of your earnings and 10% of your tangible equity.

Speaker 12

So it seems a bit of a waste of energy And resources,

Speaker 5

so what strategic

Speaker 12

options are you considering there? Is a reshuffling potential disposals Under consideration. And just quickly on Turkey, how are you preparing the balance sheet for the upcoming volatility? How much of your €7,800,000,000 of equity is currently hedged? Thank you.

Speaker 1

Very good. On Mexico, the loan to deposit ratio 96%, do we have a goal? No, it's overall liquidity management liquidity and other risk management that we have to look into. But Marta, Do we have a notional goal to grow? No.

Speaker 1

We have a notional goal to grow our business and we can grow the business on both sides of the balance sheet. If we can grow healthily On the lending side, we will grow our deposits as well. I see no problems whatsoever in growing our franchise. I mean, if you look into our market share, we lost only market share in time deposits Because we didn't want to pay. If we need deposits, we can get it, if we pay for it, no, in the time deposit space.

Speaker 1

To cut the long story short, the core priority of us in Mexico is to grow the business and we will manage the loan to deposit ratio As a result of that. Cost to income, we have guided you also in the Investor Day that we would like to operate around 30. We are already below 30. And hopefully, we will maintain that below 30 reference going forward. South America, this is the first time that I'm hearing it from you.

Speaker 1

We don't see it clearly as a waste of energy at all. It's not only the markets that we have internally, domestically, locally in those countries. A big chunk of our clients has businesses there. So we follow our clients. We follow our clients in Spain.

Speaker 1

And where are the Spanish companies? They are in Latin America. So it's very strategic to us. The whole region is very, very strategic to us. And you can say maybe you can only do CIB not all.

Speaker 1

No, no, I mean when we are there we would like to do the full business. And in that sense, we are following our clients and it's Very, very strategic to us. So I would not at all categorize it as waste of energy. And then Turkey, what are we doing? And are we basically hedging a piece of the equity?

Speaker 1

The answer is yes. Dapo, do you want to comment on this? It's your expertise.

Speaker 2

No, Marta. You know, we our hedging strategy on FX This is mainly on the assessed capital that we have and clearly, we have been very active in Turkey always. But currently, clearly, we are hedging. We are hedging above average Given the uncertainties that we are going to have in the coming months. So at the end of the day, we are hedging, I think, more than 80% of our SEKs capital in Turkey.

Speaker 1

And it's already in the

Speaker 2

But managing at the same time the carry cost. I think we did early so that we took advantage of the pricing what was in the market at the beginning of the year, but also combining with some volatility strategies just to optimize Of course.

Speaker 1

Marta, you have it also in the appendix of the presentation that we have shared with all of you. 10% depreciation in Turkish lira is only 1 basis points impact On capital, why? Because as Rafael said, we hedged a big part of the excess capital. That's why the sensitivity is so low. And regarding other measures in Turkey, we are trying to reduce the duration gap as much as possible, being ready for the rate rises if it happens.

Speaker 1

So the capital and the interest rate sensitivity, we are putting a lot of effort into it and I do think that we are in a very good position at the moment.

Operator

Thank you, Marta. Next question please.

Speaker 3

The next question comes from Benjie Creel in Sanford from Jefferies. Benjie, your line is open. Please go ahead.

Speaker 13

Yes. Hi, good morning. Thanks for taking the questions. First question was just on costs In Spain, I noticed that since the end of the restructuring program, the headcount in Spain has been ticking higher. So just wondering if you could talk a little bit about your hiring plans in the domestic business and whether that is contributing to higher cost growth Or not really, if it's a change of mix of headcount.

Speaker 13

The second question was, I guess, Some of your peers, we've seen being quite active in terms of partnerships on the payments side. I just wondered whether you had any plans On that side for your payments business. And then the final, just a follow-up on net interest income in Spain. You've obviously given a lot of detail so far, but I was just wondering whether I could push you to say when you expect the peak in NII to come through on the basis of the current Some forward curve, is that into the NII peak in 2023? Or do you think we can continue momentum into 2024?

Speaker 13

Thank you.

Speaker 1

Hiring plan, very quickly again, Benjie, thank you for all the questions. Hiring plan, you would see in the FTE, the full Full time employee evolution of BBVA that there is some increase in the Spanish perimeter. It's mainly because of the internalizations that we do In the areas of data engineering IT basically. So there is some hiring, but it's mainly internalizing Some of the external resources that we are using from different companies and as such You would see an increase in the FTE. But in the network, in the service and so on, we have increased a little bit, but we don't see A major recruiting effort or so on in the Spanish millimeters.

Speaker 1

Partnerships on the in the payments business, We see payments as core to our business. In that sense, as long as We don't deteriorate that core notion. We might look into different things, but that's not in the plan at all. We don't have anything Cooked in the process at all because we see it as core and it's something that we have to be on top of clearly. NII, when is it going to peak?

Speaker 1

Depends on deposit beta. As it stands, it's going to continue to go up in the coming months quarters, but depends on the deposit beta.

Operator

Thank you, Benjie. Next question please.

Speaker 3

The next question comes from Ignacio Cerezo from UBS. Ignacio, your line is open. Please go ahead.

Speaker 14

Hi, good morning and thank you for taking my questions. I've got 2. 1 in Mexico going back to the loan loss number, You have mentioned mix changes as the reason for the pickup of loan losses, but I mean is it 20%, 30% increase basically versus the average over the last 2, 3 quarters? You've been growing consumer for some time already. So is this just the beginning of vintages getting a little bit worse?

Speaker 14

Some of that growth translate into lower losses? Or there anything more specific in the quarter? And the second one is, if you can give us a little bit of color basically on the scenarios you can see out of the Turkey selections, Best case, worst case, base case, if you have one basically a little bit of information on that. Thank you.

Speaker 1

Let me start very quickly on the second one, it's a political assessment we won't get into it. We are prepared for any scenario. Let me see it very clearly. Mexico, the loss numbers Ignacio, if you look into the past 10 years of Mexico, The average cost of risk was 3.40 basis points. We guided all of you, it's going to be less than 300 And we are sticking with it.

Speaker 1

You are mentioning I go back to the same explanation that I gave to one of the previous questions. It's all about the mix. If you look into the cost of risk by product, we are clearly there. So if you are looking for A sense of is there some deterioration and so on? My answer is clearly no.

Speaker 1

And we are also obviously following very clearly what we call the vintages. So the new things that we produce, the new consumer loans, the new credit cards, what's happening with them, we see 0 Surprises or negative surprises in those numbers as well. So we are we guided you less than 300, which was clearly lower than the typical Average over the last decade, and we are sticking with that guidance. And there's nothing to be negatively surprised about in that number. Anything you want to add, Rafa?

Speaker 1

Okay.

Operator

Thank you, Natna. Next question, please.

Speaker 3

The next question comes from Sophie Petterzans from JPMorgan. Sofia, your line is open. Please go ahead.

Speaker 15

Yes, sorry about that. Hi. Here is Sophie from JPMorgan. So just going back to your capital position. First of all, given that there were kind of 28 basis points coming from Turkey in the core equity Tier 1, Is this all kind of fair to stay?

Speaker 15

Or could some of these capital improvements this quarter kind of refers in coming quarters? And could you also confirm that the full 20 basis points of regulatory capital headwinds have been taken and we shouldn't expect any further Capital headwinds ahead. And then just finally, you have €4,000,000,000 of excess capital. Things are going well in Spain and Mexico. How should we think about or how do you think about M and A

Speaker 1

So on the first one, if I didn't if we couldn't get it properly, please alert us. But you're asking about the capital headwinds And also the number in for the Turkey, will it be reversing if I understood it correctly? It wouldn't be reversing at all, Sophie. It's The reversal is not going to come from that item. It can come from FX.

Speaker 1

In these type of thing hyperinflationary economies, You do have this capital add back as we say it in the capital figure, but then you typically have the depreciation in the FX. The FX depreciation has not happened in our view in the way that it should have because there is a big inflation, but not too much depreciation devaluation in the currency. So you would be not reversal in that number at all because that's the number, but you might see higher FX related impact in the coming quarters. But if you were following to the first part of this call, as we just said, on the FX, We did some hedging, which implies that 10% devaluation of the currency would only create 1 basis points impact in capital. So the negativity, the reversal as you said it Might come from FX, but that sensitivity is being managed very, very clearly.

Speaker 1

Any capital headwinds going forward? On the contrary, I do think that if you look into our organic capital generation capacity, if you look into our improved guidance today in NII in Spain and Mexico, I would see a very positive organic capital generation going forward. And we did guide you that Beyond regulatory impacts, beyond any non organic, inorganic transaction and so on, We should create €1,500,000,000 organic capital every year after the payouts. And we are clearly going to be as I see it, clearly going to be above that Organic capital generation formation kind of goal or reference. So we don't see any headwinds.

Speaker 1

We on the contrary, we see Positive organic capital generation capacity. The €4,000,000,000 in the indexes capital and M and A opportunities, We are focused on organic growth. I mean, you have asked me also twice in this call now when is the timing of giving back that extra capital. Not going to answer the timing question. The only thing I'm telling you is that this year next year, we are committed, we have delivered, We have a proven track record of giving back the excess capital to our shareholders.

Speaker 1

We are committed to do that also this year or next year. And M and A, We are focused on organic growth is the answer.

Operator

Thank you, Safi. Next question, please.

Speaker 3

The next question comes from Britta Schmidt from Autonomous Research. Britta, your line is open. Please go ahead.

Speaker 16

Yeah. Hi, there. Thanks for taking my questions. My first one would be, could you add a little bit of color on the loan growth outlook in Spain by segment, given what we've seen with prepayments and mortgages And also view on corporate demand. The second one will be on asset quality as 12 month arrival is approaching 4%, at what sort of level of rates Would you become a little bit more nervous around the asset quality?

Speaker 16

And then lastly, on Turkey, it looks like excluding the tax impacts, Profits were down quite significantly. I mean, what is the barring any volatility around elections, what is the outlook here? Do you still expect the Turkish lira customer spread to decline further? And is there a possibility that the P and L could you turn negative in any of the coming quarters? Thank you.

Speaker 1

Very quickly on the last one, the Turkish one, you're right. A big part of the profit came from tax, But you should also realize that in the month in the Q1 of 2023, we booked €60,000,000 of additional And the PMA's provisions for the earthquake and we booked €35,000,000 of additional costs due to earthquake. There was a big earthquake And around more than €100,000,000 extraordinary hit to the P and L we have realized in the Q1. Going forward, we have to see how the situation evolves and whether the Central Bank policies and so on, how they change, do they Change after the elections independent of the election outcome. We do expect some orthodoxy coming into those policies, but we'll see.

Speaker 1

So We will discuss more in the Q2 on this. The Euribor, when do we expect the high Euribor levels affecting the Quality in Spain, we did mention this to you to all the investor community also before, Britta. Basically, It depends. It's mostly mortgages. The key as you know the asset category that we should look into, Eurobord related is mortgages, the households and the mortgages.

Speaker 1

But as you might remember, basically 75% of All the variable rate loans mortgages that we have in the balance sheet today 75% they were originated before 2012. What does that imply? The increase in the installments due to the Euribor increase is relatively capped Because the principal amount in the installment has come down to a level where the increase in the rate, it's Spread across many customers, many customers, but the increase at a customer level is not that high because a big chunk of these variable rate loans Have been originated many years ago. In that sense, in our view, the asset quality implication would not be that big. This is what we are seeing even today.

Speaker 1

I mean, it has gone up. You rebore a lot. But in that sense, when you look into the NPLs, when you look into the cost of risk for the mortgage Portfolio specifically, we don't see a major issue. We don't see an issue actually because of that fact, because of the installment increase is relatively capped Due to the age of those loans. On the lending growth by product, Rafa, in Spain, do you want to talk about it?

Speaker 2

I will say, I mean, probably the most relevant to comment there, Britta, is just the prepayment that we already mentioned affecting mainly mortgages, but also consumer lending. We have seen some growth on commercial. I think a quarter on quarter 0.7 percent growth in commercial. And also we have seen after Few years in which we have been downsizing the size of the public sector loan portfolio, we are growing and then we are growing now 3.5 1% on the quarter and 1.1 percent year on year. So at the end of the day, growth in commercial, growth in public sector and clearly some deleverage because of the prepayments on the retail side.

Operator

Thank you, Britta. Next question please.

Speaker 3

Last question comes from Fernando Guldesantivanez from Vistenberg. Fernando, your line is open. Please go ahead.

Speaker 17

Hi. Thank you very much for taking my questions. Two quick ones, please follow ups. NII in Spain, what is the deposit mix that you expect term site year end this 2023? What is the I will reference that you're using for this NII guidance that you have provided?

Speaker 17

And what is the difference between the previous one And this one? And finally, on the sensitivity in Turkey, so you're declaring now one basis point for every 10% move. Before it was 5 basis points, I mean, how much is the cost of this hedging? And how long can you keep it during the year? Thank you very much.

Speaker 1

Rafal Kosto, hedging in Turkey, maybe you take on the first one. The Euribor what is the Euribor assumption that we have in all these NII guidance that we are giving to you? It's basically around 4%. As we I think it was in the last call that we guided you, we were forecasting a band of 3.5% to 4%. We do expect that maybe in the coming this quarter in the second quarter, we might see slightly above 4s, but it's going to be around 4 in both 202320 24, the average Euribor that we would be seeing.

Speaker 1

That's the assumption that we have in the numbers. But the band is the 3.5 to 4 still. Throughout the different quarters, it's going to be in that band. The second question was deposit mix on the deposit. It's all in the beta.

Speaker 1

It's all in the beta, Fernando, as we are guiding you 20%, 25% at the end of the year. The Turkish cost of hedging, Rafa?

Speaker 2

Fernando, there, I mean, we don't provide, I mean, the exact number, but we have been executing hedging, especially in February on March. So at the end of the day, our hedging cost is well below the current levels of the market that we have seen a Significant increase on the cost of hedging in Turkey, especially in April. But clearly, in our case, it's well below, Although it's a relevant number given the inflation differential.

Operator

So thank you very much, Fernando. This was the last question. Thank you very much for your question, for participating in this call. And let me remind you that the entire IR team We'll be available to answer any questions you may have. Thank you very much.

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Old Dominion Freight Line Q1 2023
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