Banco Comercial Português, S.A. (BCP) Earnings Call Transcript & Summary

Good afternoon, Miguel Maya speaking. Welcome to BCP Earnings Conference call. I will go through the highlights of our performance in the first quarter. Then Miguel Braganca and Bernardo Collaço will follow to provide you more details about our earnings. Looking back to the beginning of 2022, a marked global economic recovery was already evident following the 2 years. Following the 2 years of pandemic crisis, recovery that in Portugal has been based on the increase in the investment aimed at the energy and digital transitions and modernization of the productive sector as well as by the resume of tourism and private consumption, which was recently reflected in GDP growth of 2.6% on the first quarter. This positive perspective was at the time only conditioned by a certainty about the adverse effects that could result from the inflationary expectations that were already felt at the end of last year. Looking ahead, I emphasize the increase of risks as a consequence of the invasion of Ukraine and the persistence of the impacts from the pandemic on the logistics change mainly due to new lockdowns in Asia. The main consequences of the conflict for the Portuguese economy steam almost exclusively from its indirect effects as Portugal's trade relations with the countries involved at a very small rate in the initial trade balance. The second and third are effects of the conflict, namely on commodity prices and on agricultural production are driving the rise of inflation, increasing spreads and accelerating the normalization of the monetary policy, which requires that we remain prepared to deal with the highly volatile and demanding environment. It should be noted, however, that the Portuguese economy is currently much more robust than in the past. Recovery from the pandemic crisis proved to be swift and allowed the unemployment rates to fall close to historic close. And for families and companies to present a more solid financial condition, crucial to mitigating the adverse effects of the current economic environment. Additionally, Portugal benefits from an unprecedented stimulus from European funds within the next-generation program, which will allow for the continuation of a favorable dynamic of investment. And I would like to add that in current circumstances, Portugal's location of the Western edge of European Europe gives country a competitive advantage in the tourism sector, which is an important element for support for economic activity. The earnings of the first quarter confirmed our robust business model, having achieved a net profit of almost EUR 130 million, a 95% year-on-year increase despite the cost of EUR 123 million associated with the litigation related to the Swiss franc loan portfolio in Poland. The domestic activity confirmed, once again, the growing relevance of BCP in the Portuguese economy, having contributed with more than EUR 107 million for the group's net profit, an increase of 29% year-on-year. Excluding the costs related to -- with the FX portfolio, the adjusted net profit of the group stood at almost EUR 175 million, increasing more than 52% year-on-year, with the international operation reaching an adjusted net profit of EUR 67 million with an increase of 116% year-on-year, which confirms that our operations in Poland and Mozambique also have strong business models that can generate relevant contributions for the group core income. We have an adequate capital position with total capital of 16.1%, and the common equity run of 12% on a pro forma pro forma basis, subject to approval by the supervisors of the requests submitted by the bank according to Article 352 of the CRR. However, and despite our capability to organically generate capital, we continue with a very strict capital management as we are well aware of the high the level of uncertainty over the Swiss francs issue in Poland. The level of liquidity remains well above regulatory requirements, and we have almost EUR 24 billion assets eligible for funding on the ECB. We kept a very intense commercial activity this quarter, supported by proximity and greater involvement with companies and also enhanced by the potential of the symbiotic relations between our commercial network and cutting-edge digital solutions. This commercial activity reflected in a growth of 5.8% year-on-year of the performing loans portfolio, which increased EUR 3.1 billion, while keeping a strict control of the quality of the portfolio. In Portugal, the performing loans also grew 5.7%, increasing EUR 2.1 billion, supported by mortgage and corporate loans. As a commercial bank that relies on long-time relationships with the clients, the customer funds acquisition remain very important for our business model going forward. The significant increase of 7.7% since March 2021 is an important reinforcement of the customers' trust and of their perception about the quality of our value propositions. With the change of the monetary policy, this business front assumes further relevance as a significant source of income. BCP's ability and competencies for managing the NPE legacy has been crucial for our steady part of improvement at the assets' quality level. Still dealing with an unfavorable environment, we have been well succeeded in decreasing NPEs quarter after quarter, reaching an NPE ratio of 4.6% after having reduced EUR 421 million over the last year, of which EUR 405 million in Portugal. This quarter, the NPE reduction in Portugal was EUR 91 million. The cost of risk also continued its downward trajectory, reaching 62 basis points at the consolidated level and 68 basis points in Portugal. This was done while reinforcing 3 percentage points in the coverage by impairments over the last year to a well-positioned level of 68%, which compares very well with our European peers. The expansion and the renovation of our customer base is a clear sign of the recognition of our service quality by the clients. We have more than 6.2 million active customers, of which 2.6 million in Portugal, having increased the number of mobile customers by 20% across our operations over the last year. I also highlight that our digital capabilities are widely recognized by the customers. Mobile has been a strategic priority in which we have strongly invested as an essential part of the modernization and the adaptation process of the bank. We are permanently improving and operating our app, having been continuously nominated by customers as Best Digital Bank and obtaining top ratings on the most relevant platforms. These investments and the constant innovation in the mobile solutions also; reflect in the intense use they made of our app, which is highly integrated in their daily transactions and is clearly their preferred platform to interact with the bank. 48% of our customers in Portugal use our mobile platform. And this quarter, they realized 30% more transactions than on the first quarter of 2021, particularly in transfers and payments. The intense use is also reflected this quarter on the increase of 46% in the number of sales done through the channel, with the emphasize to 250% increase in personal loans granted, to 160% increase in cards sold, and the 32% increase in savings solutions. Now I give the floor to Miguel Braganca.

Thank you very much. Going to Page 12. What we see is a very robust top line growth with net interest income growing 24.1% and commissions growing 12.7%, which means that the recurring net income grows more than 13%, comparing with the growth in operating costs of around 1.1%, which means that due to the operational average effect, we have -- we are showing a core operating profit growing almost 40%, 37.2%. The other income also performed well, mainly through the trading gains in the sovereign portfolio so that the operating net income growth is also around 37%. Then the impairment and other provisions relatively aligned with last year, and -- so that the net income before tax growth was 130% and after tax, 95%. Adjusting for the costs related with the CHF portfolio, which were higher than last year than this year, the total costs, our net income grows 37 -- sorry, 52.6%. And looking a little bit more in detail, the net interest margin, we have here a story of 2 perspectives. What is happening in Portugal vis-a-vis what is happening in Poland. In Poland, and so influencing the number for international operations. The general level of interest rates went significantly up, as you know, due to the increasing of the central bank rates, so that the net interest margin grows from 2.9% to around 4.1%. On the other hand, in Portugal due to -- so in a large part, due to the excess liquidity and the excess liquidity costs, that the negative interest rate for the time being, as you know, with the Central Bank. We have a contraction of the net interest margin. However, this contraction of the net interest margin is more than compensated by volumes, so that the NII, even in Portugal, in spite of the low interest rate environment and the excess liquidity grows low single digits, as I've been saying, 3.6%. The fees and commission line very robust, growing in Portugal, 14% with strong contribution both from the banking fees and commissions from market-related fees and in the international operations growing 9.4%. This is a critical element of our strategy going forward. Other income, we see in Portugal still in spite of the market -- or connected with the market volatility. The net trading income still at a reasonable level, almost EUR 50 million in Portugal comparing with EUR 33 million more or less last year. And in the international operations, some influence, as you know about the -- or from the negotiations with Swiss franc borrowers in terms of their negotiations of conversions of Swiss loans in zloty loans. Operating costs with a lot of discipline as we've commented last year. We had a payback or we're expecting a payback of around 3 years in the cost [indiscernible] that we have last year. A part of the benefit were already reaped last year, as you know, mainly in the third and fourth quarter. The administrative cost also with a very strong discipline in Portugal, which means that we were able to show a nominal contraction of the cost in spite of the inflation, so that our costs in Portugal were contracted 5%. On the other hand, in Poland, as you know, there is a high inflation and in general, there is a high salary inflation also so that the costs grew 10%, but nevertheless, with very, very positive jobs because as you see the revenues in Poland, grow at a much higher rate. Impairment. We are in the progressive process of normalizing our cost of risk so that in the general group level, we were able to decrease the cost of risk from around 80 basis points to 62 basis points. This was particularly evident in Portugal, where we were able to come to a risk of already below 70 basis points on a recurrent basis. And in the international operations, the cost of risk is stable, and this is our perspective for the time being. In spite of the very complex context, we are continuing to reduce NPEs. As we've told you in the past, some of the NPE files are complex and take some time to solve. The other side of the issue is that as time goes by, some of these more complex files get eventually solved and that's what's happening. In Portugal, we were able to reduce EUR 400 million, that's what the problem is with an NPE ratio according to the EBA i.e., including all the exposures, already below 3%. In terms of the general activity level. We see a very, very healthy acquisition of new business in terms of customer funds, growing 7.2% in Portugal and 9% outside of Portugal. Unfortunately, we have a stronger contribution from on-balance sheet funds than from off-balance sheet funds. However, as time goes by and in, I would say, a more favorable interest rate environment, these -- today is not a very strong contribution to our opinion as the interest rate normalizes, will eventually become an important contribution. The loan portfolio grew materially, mainly in Portugal, with the performing loan portfolio growing almost EUR 2 billion in a portfolio of EUR 38 billion, which is more than 5% for the performing part. In the international operations, we see also an interesting growth of around EUR 1 billion in a portfolio of EUR 17 billion. In terms of capital, then the capital ratio decreased somewhat because, as you know, in a favorable interest rate environment there is a general positive effect in terms of the value of the bank, in terms of the economic value of the bank. Because for a retail bank, a general level of interest rates that is higher is more favorable than one that is lower. However, there tends to be an immediate negative effect in terms of the capital ratio because of the fair value reserves of the AFS portfolio that is used to hedge the deposits and the term deposits and the current accounts. As you know, there is not a mark-to-market of the term deposits and of the current accounts. However, for capital purposes, there is a sort of mark-to-market of the portfolio that is hedging. So in spite of a very positive, I would say, evolution of the net income, there was more than a compensation of this in terms of the evolution of the favorable results. However, as you may know, the EBA has approved guidelines around -- about the Article 352(2) of the CRR that come into effect after the first of January this year. The impact of the Article 352(2) basically is the exclusion from capital requirements of the structural FX hedge positions, the positions that we hold to hedge our capital ratios in the context of the international operations. We have filed the application for using these already last year. It was only possible for the Central Bank to give us the authorization this year. We are expecting -- we see no reason why we should not have it. So the impact of this would be around 50 basis points, so positioning ourselves 50 basis points higher than what we are right now. In leverage terms, that was a very healthy ratio with a high density that also gives us some comfort in terms of the review of the model that we are doing. We are, in normal terms, reviewing the add-ons and our models. And we -- that we expect to have some news during the current year or at least until the first half of next year. And these are the way that it gives you comfort that we may get even some slight positive news on this matter. Liquidity ratios, I would say, very, very comfortable as I was commenting on, almost too comfortable in this low interest rate environment. However, in a scenario of increasing interest rates, this is clearly a good place to be. I'll pass now the floor here to Bernardo.

Okay. Good afternoon, ladies and gentlemen. As usually, we start with the Portuguese operation on Page 27, where you can see that net income increased 29% year-on-year to EUR 107.6 million and was positively impacted by core revenues, decrease on operational costs and lower credit impairments. Net operating revenues increased 13.6%, and operating costs went down 5%, demonstrating the robustness of the Portuguese operation and the resilience of the business model. On Page 28, looking to NII in Portugal. At the end of the first quarter of 2022, it stood at EUR 211.8 million, meaning 3.6 percentage points or, if you want, EUR 7.3 million above the previous year. There was some favorable impact as the expansion of the performing credit portfolio supportive on mortgage loans as loans to companies as well as the other positive effects of the wholesale funding, the repricing of deposits and higher yields on securities that more than compensate the negative effects arising from lower price on credit from the NPEs reduction and the excess of liquidity. NII stood at 141 basis points, that compares with 150 basis points on the first quarter 2021. On Page 29, regarding spreads on term deposits, back book spreads stood at minus 55 basis points and are pretty aligned with the 3-month average Euribor. Customer rates -- customer rate on deposits went down 2 basis points. Spreads on loan book were slightly compressed year-on-year. And that can be explained, as I mentioned on the previous earnings release is that it's related with basically the credit lines with guarantees associated. NIM stood at 144 basis points, 9 basis points lower than last year and 3 basis points lower than the previous quarter, mainly to the excess of liquidity and the reduction the average credit rate related with the guaranteed lines provided. Moving to Page 30, that presents the evolution of fees and commissions and other income. You can see that banking income fees and banking fees and commissions increased 13.1% and the most significant impact comes from cards and transfers that grew 31%, showing the increase on transaction ability compared with the same period of the previous year that was affected by consignments. Market-related fees registered an increase year-on-year of 19.1%, supported from securities operations and asset management fees. Looking to other sources of income in the first quarter of 2022, there was a positive contribution from trading related with sales of debt securities, both sovereign and corporate and from loan sales. On the equity accounting earnings contribution for P&L was EUR 1.2 million higher than the first quarter of 2021. And regarding other operating income contribution from this line was much better than 1 year ago due to the higher results coming from real estate sales. Going to Page 31, regarding costs. There was a reduction of 5% year-on-year. Total operating costs decreased was mainly related with the headcount adjustment in place in 2021. And as a result of that process, the net evolution of employees year-on-year was a reduction of 740 employees. To what regards to branches, there was a reduction of 55 branches from the first quarter of 2021. Moving to Page 32, which refers to asset quality. Even under a challenging environment, BCP was able to reduce more than EUR 400 million of NPEs year-on-year, meaning 18.5%. In the first quarter, there was also a significant reduction of EUR 90 million. NPE stood below EUR 1.8 billion at the end of the quarter that compares with EUR 2.2 billion a year ago and cost of risk stood at 68 basis points, that compares with 94 basis points on the first quarter of 2021. Let's move to Page 33, which looks at the NPE coverage breakdown. And as you can see, total coverage stood at 132% and above the level registered at the end of 2021. With the reinforcement of the NPE coverage by loan-loss reserves to 69% from 66% a year ago. Total coverage for individuals with high levels of real estate collaterals stood at 99% and for companies at 143% from 133% a year ago. Coverage by real estate collaterals on companies at 43% and loan-loss reserves higher 5 percentage points, from 76% to 81%. On Page 34, which shows the evolution of foreclosed assets and restructuring funds, there was a reduction year-on-year of almost 42% and 4%, respectively. In terms of property sales, there was a significant increase compared with the first quarter of 2021 due to the restrictions in place in the first half of 2021 in Portugal. The number of properties sold were much higher than a year ago. And as usually, sale value continues to be above the book value. On the first quarter 2022, sale value exceeds book value by EUR 15 million, that compares with EUR 5 million, 1 year ago. Now moving to Page 35. Total customer funds grew 7.2% to EUR 66.6 billion. The growth was more than EUR 4.5 billion and was mainly supported by the increase of demand deposits. Off-balance sheet funds with a slight decrease due to market impacts and the expiry of insurance products that were not fully compensated by new subscriptions of mutual funds and the other financial insurance products. In terms of gross loans, there was an increase of 4.3%, supported by an increase of almost 6% in mortgage loans and 3.2% in loans to companies. It is also important to highlight that performing loans went up 5.7% or EUR 2.1 billion more and NPEs were reduced by EUR 405 million or 18.5%. Going to Page 36, it is possible to see the strong performance on new loans origination and the recognition of BCP as the main bank from Portuguese companies. Performing credit portfolio in Portugal went up EUR 2 billion or almost 6% from March 2021, and it was supported in growth in mortgage loans and loans to companies. Let me also highlight the reinforcement of the European guarantees to support small- and medium-sized companies affected by the pandemic with more than EUR 3.3 billion. Now moving to international operations on Slide 38, regarding, as I said, international operations. You can see that there was a positive contribution from those international operations to consolidated net income that compares with a loss of EUR 25 million, 1 year ago. Bank Millennium in Poland had a loss of more than EUR 26 million, that compares with a loss of EUR 67 million in March 2021. Mozambique contribution was significantly better than the previous year and amounts to EUR 24.3 million in the first quarter of 2022. Combining all contributions from international operations, there was a positive contribution in the first quarter of EUR 5 million, as I said. Although if we adjust it by the CHF impacts on a comparable basis, contributions from international operations more than doubled, compared with the previous year. Moving to Page 39, which refers to Bank Millennium in Poland. Net income in Poland was again, on the first quarter 2022, strongly impacted by costs related with CHF loan portfolio that amount to more than EUR 123 million after taxes, with -- which compares with EUR 130 million, 1 year ago. Total provisions related with Bank Millennium CHF portfolio, and that excludes the provisions for Euro Bank portfolio that amounts to EUR 10.4 million that were, as you know, neutralized at the P&L level at the other income line stood at EUR 97.4 million. Costs associated to conversions to other repayments of CHF loans have had an impact of around EUR 26 million. And as you can see, excluding these factors due to the evolution was strongly -- we can see the strong performance of the Polish operation where NII improved more than 50% year-on-year. Net operating revenues increased EUR 63 million or almost 34% and operating costs went up 13.8% due to inflation that is having some pressures on salaries and services in Poland and higher mandatory contributions. CET1 ratio stood at 12.9% and total capital ratio at 16% and comfortably above the requirements. On Page 40, some detailed information about Bank Millennium. NII had a strong increase of 54.5% and to more than EUR 205 million, that compares with EUR 134 million , 1 year ago, and that's due to the interest rate hikes in place since the fourth quarter of 2021. NIM increased significantly from 256 to 377 at the end of the first quarter 2022, improving from a level below 3% at the end of 2021. Fees and commissions increased 7.8% to EUR 47.7 million and other income decreased significantly, as explained before, by the impact of the trading line related with the out-of-court settlements related with CHF loans. Operating costs increased more than 13.5% influenced by higher staff costs and higher mandatory contributions, as I mentioned before. Moving to Page 41 related with asset quality at Bank Millennium. NPL 90 days past due ratio decreased 40 basis points and cost of risk was stable at a level around 40 basis points, which was slightly higher than the level observed in the full year of 2021 that stood at 37 basis points. Coverage ratio of NPLs by loan-loss reserves at 137%, meaning an increase of 15 percentage points from last year. On Page 42, you can see how strong is the franchise where customer funds increased 8% year-on-year. In terms of loans to customers, gross books stood at EUR 17.5 billion, more 5.4%, and it is important to highlight the increase of zloty mortgage loan portfolio of almost 24% and the decrease of the mortgages in foreign currency. On Page 43, regarding the FX mortgage portfolio. It now represents 10.7% of total loan portfolio at Bank Millennium. And as you can see, the reduction of the CHF year-on-year was 19%. Bank Millennium due to the increase of out-of-court claims and decisions from more favorable -- decisions more favorable to customers made additional provisions of more than EUR 97 million in the first quarter of 2022, increasing coverage to more than 30% from 25.7% at the end of 2021. Cumulative provisions for legal risk on the FX mortgage portfolio of Bank Millennium and once again, not including Euro Bank, stood at EUR 741 million. And it is also important to mention, as you can see on the bottom right chart that Bank Millennium is maintaining high levels of extrajudicial agreements with CHF borrowers that on the first quarter 2022 were above 2,280 cases. In first quarter 2022, those amicable agreements have a cost of EUR 26.8 million that were booked on the trading line. Turning to Page 44, which regards to Mozambique, net income increased to EUR 24.3 million due to the higher NII, fees and commissions and lower credit impairments. Net operating revenues increased almost 20%, and operating costs were 6.7% higher than the last year. Capital ratio stood at 38.5%. Moving to Page 45. NII went up year-on-year 12.3% to more than EUR 45 million. NIM increased from 7.4%, 1 year ago, to 7.9% in March 2022. Commissions and other income increased 41% and costs increased at a much lower pace than revenues and only 6.7%. Cost to income stood at 42%, that compares with almost 47% in March 2021. Moving to Page 46. NPL 90 days past due decreased 10.9%. Cost of risk at 203 basis points from 306 basis points 1 year ago, and coverage by loan-loss reserves increased 16 percentage points to 83%, that compares with 77% at the end of 2021. Regarding volumes on Page 47, you can see that customer funds registered an increase of 6.3% and loans to customers went down 3%, reflecting, once again, the conservative approach under the challenging environment of the country. And so let me thank you for your attention. And before we move to Q&A, I'll return to Mr. Miguel Braganca for some final remarks.

So you clearly see in Page 49 that we are clearly on track to achieving our objectives. We are growing customer engagement and the share of mobile customers. We are improving the quality of the balance sheet. And this is allowing us to have an adjusted ROE that is also on a positive path. We are very comfortable in terms of the recurring cost of cycle, cost of risk and this has been shown in the numbers that we are presenting. And as you know -- as you see, the cost of income also evolves well, albeit that we have to consider that 1 quarter for measures such as cost of income that includes trading gains is not probably the most appropriate measures. But in any case, we are clearly on track to achieving our objectives, and we really appreciate your interest and your commitment with our equity stories. Thank you very much.

[Operator Instructions] The first question comes from the line of Noemi Peruch from Mediobanca.

I have 3. So the first one is on capital. So can you walk us through the process of applying for Article 352(2). And when do you expect the approval by. Always on capital, can you shed more color on the internal model update that you expect this year in terms of timing and size. And my last question is on Poland. The discussion around the deposit rate is very much ongoing with some banks already offering 5% deposit rate. Without loan-to-deposit below 100%, this level of remuneration could considerably reduce the benefit on higher rates. Can you please share your thoughts around this discussion?

As you may know, the EBA has issued guidelines in how to apply the Article 352(2) some time ago. But the implementation of these guidelines was deferred to the 1st of January of this year. So what we have done -- and these guidelines are very sensible because they basically say that the position or the structural position that is held to hedge the capital ratio, I'm simplifying it a little bit, should not generate otherwise because it's motivations ahead of motivation. And we have applied for it in November last year. We think our situation is quite simple one because we effectively we try to hedge the capital ratio from structural hedge positions. So we are expecting the answer from the supervisors. We have not the answer yet, but we are expecting this any time. Having said that, of course, we cannot commit for the supervisors, and they are always serving in their decisions and in their timing. In terms of the model updates, it's a regular model update that we do. We are expecting this model update, as I was commenting, to occur or the approval of the model to occur until the end of this year/first half of next year. And what we expect is, by the information and by our application, is a slight positive impact. So nonnegative impact or a slight positive impact. Of course, I will not enter into more details because this is also something to be discussed with the regulators, but I don't want to -- I mean to create a difficult situation in the procedure with the regulators. In terms of the deposit side, so it is normal, then when interest rates go up, so to say. There is some inertia in terms of the deposit rate. And of course, the type of growth of NII that we had in the first half of this year when compared with the first half or with the first quarter of this year with the first quarter of next year, will not occur every quarter going forward because this would be excessive. As you know, in retail banking, what happened particularly is that we have different speeds of repricing in terms of the assets and the liabilities. The first impact is in the indexation of the assets that has, to a large extent, already occurs in Poland, not totally, but to a large extent, already occurred in Poland. As time goes by, a part of this interest rate movement gets transferred, so to say, via pass-through to the deposits, right? There is also a change in the mix of the deposits typically so that customers that did not mind having a current account at 0 when the deposit becomes higher, some of these customers also then prefer also to have term deposit accounts as it happened in the past when it was the other way around. And in any case, we are expecting, I would say that the full year NII in Poland, even with this -- how can I say, the more intense competition that you are seeing for deposits or this pass-through of deposits to be sort of aligned with the NII that we had in this quarter, but let's see. I mean, we are not -- we don't know exactly what is -- what the competition will do. So part of it will depend on the completion. We were already expecting part of the deposits -- part of the fight for deposits to become more intense as the deposit rate goes up. And you are right. I mean this is occurring, but this is normal business. I believe I've answered your questions.

The next question comes from the line of Carlos Peixoto from CaixaBank.

So the first question was actually then on capital as well. I was thinking a bit here on capital allocation going forward. So I believe that there are some items to consider. I was...

Carlos, I'm sorry, can you please speak up because the connection is not so good. So I am having some...

Are you hearing me better now?

Much better, much better. Thank you.

Okay. Sorry. So I was saying on the capital evolution. So basically, besides the point you already mentioned. I was wondering in terms of measures that could be adopted by BCP to reduce the volatility that the capital ratios have been having to the evolution of the bond deals in the market of portfolio, whether this is something we can see this volatility reducing going forward. And at the same time, what type of capital -- organic capital generation we expect to see throughout the rest of the year. particularly considering the efforts on FX mortgages in Poland, which should probably remain at levels around these ones. Then on the second question, in terms of costs, the first Q will be a reference for the full year. I think I was seeing here, particularly in Portugal, where costs have practically evolution, should surely think about first Q and annualized for the balance of the year? Or is there something else we should take into consideration?

Okay. Let's separate here the -- I mean in terms of capital evolution, there are 3 questions. So one is the volatility of the ratio, so to say. The second is, what is the organic capital evolution and the third one more linked to measures, so to say. In terms of the volatility, we have not -- we have a balance sheet that is what it is with the size that it has. And effectively, when we -- there is a trade-off between managing the economic value of the bank, basically by hedging, so to say, the economic value by investing in fixed income, fixed rate portfolio and managing the risk, so to say, of the capital ratio. And typically, we try to -- and these trade-off mixes, I mean , have choices and these choices are dependent on where we are exactly at each point in time. Right now, we are changing somehow our decisions so that we are waiting more the hedging of the capital ratio than the hedging of the economic value of the bank. But of course, as time goes by -- as time goes by, the negative impact of the mark-to-market of the AFS portfolio that is used to hedge the deposits. Of course, it tends to be -- it tends to become lower. There is a pool to par if we want in all these bonds. And so there's a natural evolution, both in terms of dimension and in terms of the situation as time goes by because the bank -- because the economic value was also considered in the situation, effectively benefits in terms of organic capital generation from the higher interest rate environment. So as time goes by, then the interest rate environment becomes higher. And the contribution of the interest rates to the capital ratio becomes higher. What -- in terms of organic capital generation, I would separate here the Swiss franc portfolio from the remaining part of the business. In terms of the remaining part of the business, what we are expecting here is a quarterly generation of organic capital in terms of the core business that is around 15 to 20 basis points per quarter and increasing in this higher interest rate environment, okay, ex Swiss franc portfolio. In terms of the Swiss franc portfolio, it depends a lot on the decisions. And on the final decision by the courts, which I mean my guess is as good as yours as to where it will be. What I can tell you is that until there is a final decision of the court because of our methodology and because of our model that is dependent on the cost that come into on the processes that come into costs and so on, I would expect the same -- roughly, I mean, in terms of order of magnitude, the same type of cost that we are having right now in the next quarters, except if there is a decision -- a final decision by the courts in which we will have to wait to what would this final decision would be. In terms of costs in Portugal, effectively up until now, we are overperforming in terms of costs in Portugal. But we are seeing some signals of inflation as you all are seeing now. So I would say that our target right now is to come to an end of year number that is in nominal terms, aligned or slightly below what we had last year so to say, compensating the inflation with the efficiency gains. And that's where we are a target -- that's what we are targeting, maybe a little better. But until we have more visibility on what the inflation will be, that's what we are targeting. In terms of capital measures, I mean, the capital measures that we are implementing is basically organic capital generation is net income, it's the pressure that we are feeling to perform better and better, so as to generate more capital, of course, being careful or being even more careful in terms of some decisions so that they do not increase the capital ratio volatility. But I would say the main capital generation, both in Poland and in Portugal, is through pre-provisioning profit, is through core income, is through this type of -- is through management effort and delivering.

The next question comes from the line of Ignacio Ulargui from Exane.

I have just 2 questions. And I know that you are not a fan of guiding in the quarter. But given the relevance of the sort of like proximity of Poland as of Ukraine, are you seeing any slowdown in anything that you can share with us in terms of activity levels, simple and then how you think this might impact in the coming quarters? And linked to Carlos' question on the Swiss mortgage portfolio. And then do we have any kind of deadline for court -- for the final decision of the court? Because last year, we were sort of like waiting and waiting. And do we have any visibility on that? Could it be beyond 2023? Because if I understood correctly, Bank Millennium management, the expectations for related -- CHF related provisions will be there in 2022, but it won't be extended beyond, into 2023. So you just wanted to get a bit of clarity on up until when we should be expecting this kind of provisions from the CHF mortgage portfolio?

I'm not -- as you say, I'm not a big fan of trying to anticipate exactly the calendars and decisions of judges. But based on other cases, there is a very important case at the European Court of Justice that concerns our case and concerns on how remuneration should be calculated in case of invalidity. This case is in the European Court of Justice. And if you want, without the commitment from my side because I cannot commit, but my best guess is Q4 this year or Q1 of next year, let's see whether the -- one of the problems that sometimes happens is that the decisions are not clear enough. So -- but it could happen that this decision is clear enough. So I would expect to have a decision by the European Court of Justice by Q4 or Q1 of this year -- or Q1 of next year and expecting it to be clear enough. But of course, we have to see what the decision will be and what is the degree of clarity. In terms of activity, I would say in terms of the macro situation in Poland, in general, I would say. The situation of an increase in interest rate, of course, is beneficial -- in the short term it is beneficial for banks, for commercial banks. Having said that, the speed at which it occurred was probably not the optimal speed for retail bank. So we would have preferred if we could design it exactly as we wished it, which is a theoretical case to have a smaller pace of the interest rate increase in terms of our objectives, not necessarily objectives of the country. Having said that, we are having, as you are seeing a very, very positive top line growth, and we expect this top line level to be maintained across the year. Having said that, because there are still some, as I was commenting to Noemi, there are still some assets to be repriced, but there will also be some I mean, rivalry, some pricing rivalry on the liability side. Having said that, in this scenario of higher interest rates, we will have less volumes and there is more uncertainty. So the mortgages in Q1, the new mortgages in Q1 came significantly down, came down roughly 40%. The new consumer loans, the new cash loans also came down and speaking about market levels, not necessarily bank level. So in general, of course, with a war next door, people are more cautious when they think about buying houses when they think about new consumer loans, et cetera. If the situation stabilizes, this could provide even a new a new energy subset to the market because we are speaking about a couple of million people that moved and some of them with qualification -- with high qualifications. They've moved to Poland and some of them may stay there for some time because of the destruction that happened in Ukraine. So -- over the short term, there are some reductions in terms of production. These reductions do not -- we are not expecting them to have a very high impact in terms of the P&L of this year because, as we all know, the P&L is much more explained by the back book than by the front book. And a lot of the final impact will depend on how long the war takes. And here, I think we are on the same level of information in terms of how it will happen. In general, I would say that at least in organic terms and before Swiss francs, we are optimistic relatively to Poland. There's also another dimension, by the way, I want you to know, that is the cost of credit that I mentioned. I think it's also an important dimension. We were targeting a 50 basis points cost of credit. We think right now that it may be somewhat higher, but very, very controlled, so to say, if anything, of course, with a war next door, if anything, if there is a deviation, there will be a negative deviation rather than a positive deviation. But in any case, we are expecting a very robust set of earnings this year for Poland before Swiss franc costs.

[Operator Instructions] The next question comes from the line of Sofie Peterzens from JPMorgan.

Sofie from JPMorgan. I had a quick question on your rates and so DBD. So could you just walk us through kind of how we should think about higher interest rates how kind of that feeds to on your asset side but also on the liability side and kind of if rates kind of normalize to 1.5%, 2% by end of 2024, how should we think about the potential NII benefit for BCP. And then my second question would kind of go back to one of the previous questions. In terms of the AFA -- or AFS portfolio, we saw some hits to capital from the bond portfolio this quarter. In general, I should rethink about the sensitivity to capital from kind of a rising bond yields. And then finally, how should we think about kind of trading income outlook, especially given that the out-of-court settlements are booked in trading -- in the trading line in Poland should we expect trading income to continue to be kind of negative? Or how should we think about that?

Starting with our next with your last question. we have been making around 2,000 negotiations per quarter as we are commenting with roughly the same cost of a per quarter in the last quarters. And I was -- of course, it's always difficult to project how customers will react and so on. But our base case is to maintain these trends between around 2,000 per quarter, which is around -- which has a cost between EUR 26 million and EUR 30 million in Poland per quarter. So that's how we are seeing it. In terms of the theoretical impact of the interest rate parallel movement in our NII. If we have a parallel movement of 1% in all the rate -- interest rates at once in our NII, both in Poland and in Portugal. The impact that we would be expecting is around a 10% impact in Portugal, around EUR 80 million, give or take and 6% impact in Poland. So this is a theoretical impact that is a one-off impact in terms of NII. However, looking in a more sophisticated way of the second other impact, the impact that they may have in volumes, the impact that the interest rates do not occur through a shock, but rather occur or as time goes by. What I can tell you is, for instance, for Portugal, if the net interest -- if the interest rates evolve as per projected by the forward rates today. So if instead of having constant interest rates, the [indiscernible] evolves as per the forward interest rates we would -- and in spite of the headwinds, as you know, the TLTRO will end by the mid of this year, which is a clear headwind, we would instead of having a growth of low single digits in Portugal have a growth of mid-single digits in Portugal. And this year probably a growth of around high single digit, low double digit next year. So the impact of the interest rates evolving as per the current forwards rate is clearly positive in Portugal, even with the side effects. But most of the impact because of the repricing mechanism and so on, will occur next year. But in any case, as I'm commenting, in spite of the TLTRO headwinds, we would be expecting a positive NII this year. In terms of Poland, the situation is more complex because the interest rate movement was so sharp, as we were commenting, that it may have a stronger impact even in terms of credit demand because when the interest rate goes, I mean it goes up 5 percentage points as we were commenting, it may have an impact also in terms of credit demand. However, having said that, as I was commenting, we would be expecting levels of NII aligned with the run rate of this quarter, which is a very high run rate this year. and for next year, a clear double-digit number, but it's still to be seen. So because the models when the situation is so strong, when the change is so strong, the models are obviously less perfect. But we would expect clearly double digit -- so the run rate of this year for this year and double-digit for -- low double digit for next year, okay? The capital sensitivity. We have, as I was commenting, a fixed a fixed-rate portfolio, but this fixed-rate portfolio typically, a part of it or the longer part of it, is hedged through the interest rate swaps. So we typically -- so our -- the duration of our hedges is lower than the duration of the fixed-rate portfolio. And that's why, in spite of the size of our portfolio, the impact on our capital has been relatively mitigated when you take a look at the size of our portfolio. It changes over time, but typically, the impact on capital of a 1% change oscillates depending on the positioning of the ALM portfolio between EUR 50 million and EUR 100 million for each 1% of interest rate changes when you take a look at the interest rate, okay, the general interest rate movement.

[Operator Instructions] The next question comes from the line of Hugo Cruz from KBW.

A couple of questions. So first on the capital measures, I know you said it was mostly -- capital should grow mostly organically, but there's a couple of moving parts there. I wonder if you could give guidance. First is on the Mozambican minorities, is there room to find some regulatory adjustments there to offset the negative impact you had in Q4? Second, I understand from reading the press that there could be some restructuring fund sales in Q2, could you give guidance on the potential impact on capital? And third, you typically update the pension fund with 6 months as well. Could there be any potential impact on capital from debt as well at least based on the current rates? And then my second question is on NII, deposit details in Portugal, my assumption is once rates go up, probably as long as rates continue to be around 0, there is not going to be any repricing of deposit rates by the banks. My question is at what point do the banks start to pass the rates to the deposit holders. Is it going to be when the deposit rates to be positive, is it going to be around 50 basis points of the ECB rate, is it around 1%. So obviously, that will depend on competition. But if you could give guidance that would be great.

Okay. I'm seeing some of my competitors here listening to my call. And so I don't think it will be a good practice to tell in anticipation how I will behave in terms of my customer and deposit pricing to market movements. So I'm sorry, but you'll allow me -- I will not comment on how I will react in the future in terms of deposit pricing. In any case, we will be sensitive. We will take trustors, we will take sensitive economic decisions in this situation. And you are right, we are not in a hurry to gain market share in deposits. So we will be quite prudent and conservative in the management of this. But at this point in time, I don't think it's in the interest of our shareholders to comment this. In terms of the pension fund, effectively, you're right, we typically only update the pension fund discount rate every half year. And right now, what we are seeing is that if we were to update that you can consult for instance, the master discount rates, which are always interesting guidelines for this issue. And we have communicated to the market in December, what is our sensitiveness to our -- to the master discount rates. What you would see is probably -- roughly applying a simple calculation, an impact of a decrease, in terms of liabilities, of around EUR 400 million if you do a very simple calculation, applying the master discount rate, which is not -- I mean, which if it were really today, we don't really know exactly how it will be by the end of June. However, for you to consider this in your capital ratio, you have to have a special authorization from the pension authority to distribute this excess -- these excess assets or liabilities to BCP, which we could. But what happens is that for the time being, this buffer that is already there. So we already have a buffer around EUR 200 million absorbs negative shocks on the pension fund. And for the time being, our decision has been that it's more in the interest of the shareholders to have a buffer that absorbs the pension fund risk and the patient fund volatility, taking out volatility out of the capital ratio than to distribute this. So It may change. But for the time being, this has been our decision. Of course, if needed, we may always review this decision, but we think there is a lot of value in taking this risk out of the conversation by having such a high capital buffer. In any case, the numbers are the ones that I commented. We have right now a buffer of around EUR 200 million. This buffer applying only the discount rate, there may be the other movements on the other sides it will go from EUR 200 million to EUR 600 million. . In terms of the restructuring funds, you're absolutely right. We are not necessarily looking at it as a capital -- I was going to say, as a capital initiative, but more as a balance sheet initiative in terms of derisking the balance sheet. If we were to sell the funds or the fund return, we are now being analyzed. The impact that we would be expecting would then be something between 10 and 15 basis points positive, of course, in terms of the capital ratio give or take. Of course, it depends on the other ways at the time and so and so on. But that's the area in which we are. In terms of Mozambique, you're absolutely right also. I mean, this is also not really a capital initiative because it's a decision from the Mozambican authorities to implement the CRD concepts in Mozambique and to implement the concept of common equity Tier 1 as it is defined in Basel III, to be more precise. This is worth around 20 basis points for us. We are -- I mean there's not a lot of things that we can do, but we think it will be a good practice for them, of course, to implement the Basel concept as most of the countries in the world, not all. But as most of the countries in the world have already done. There's not -- there are not a lot of initiatives that you can take there, except hoping that they aligned by the world best practices in terms of the provision. But the value is around 20 basis points there.

We have the next question comes from the line of Carlos Peixoto from CaixaBank.

So on a follow -- on a separate question -- or on a follow-up. I was wondering on the guidance you have been providing on -- or you have provided on NII in Poland. Are you considering any potential impact from the measures announced by the support package to borrowers that the government has discussed mainly the LIBOR, the potential changes to the LIBOR and also the theme of more volumes that has been discussed whether that could be somewhat incorporated in the guidance or separately, whether you have some sort of view or the insights to what might be in store on this front.

Okay. I've provided a guidance that includes some of the more intense pass-through of the interest rates to the deposits, which was some of the assertion that the government has issued. So we think that, I mean, except for -- if there are some extraordinary circumstances, and of course, I have to say that we cannot anticipate in such a volatile environment, what our competitors will do. So if we could, how we would be having the type of problems. So we cannot anticipate this, but it already includes this. In terms of the LIBOR. I'm speaking about basically this year. And we do not expect any type of viable impact to occur this year. I mean the substitution of the LIBOR by another interest rate. So the numbers that I have commented do not include, of course, this year, but we are not expecting this to occur this year, we expect to occur next year. And of course, we do not know exactly how it will be substituted. So it is not prudent from our side to say what the impact will be because basically, what we said is that as it occurred with some LIBOR rates, the LIBOR rate in Poland will be substituted. In terms of the monetary, the values that I was commenting do not include the impact of the monetary, but it's also difficult to know, as of the moment, what the impact of the monetary will be on the NII because it may be rather an impact in terms of the modification of the loan. So we have to see exactly what the impact will be. It's still very early days. As you know, there is not even a proposal yet sent to the parliament. So a lot of it will depend on what is done. And we have to see which line of the income statement it affects. It is not obvious that it will affect NII. It depends a lot on what -- how it is done. So deposits, yes, LIBOR in principle in '23, the monetary, it's not included because we do not know the size and what line of the income statement it would effect.

[Operator Instructions] The next question comes from the line of Noemi Peruch from Mediobanca.

I have just a follow-up on cost of risk. If you could share with us your outlook for 2022 in this macro context in Portugal? And when do you plan to update your macro assumption?

Okay. And contrary to what happened in Poland, where the interest rate movement was very, very sharp. The interest rate movements in Portugal have not been so sharp yet. And the economy is performing, for the time being, quite well. And as our CEO, Mr. Miguel Maya was commenting, we may even profit in terms of tourism and so on from the fact that we have a lot of people that are already vaccinated. We were one of the frontrunners in this field. And being on the western part of Europe, we have, I would say, a competitive advantage when you compare with other countries such as Turkey and so on. So we are expecting a good year in tourism, which is one of the key levers for the Portuguese economy. And the sectors that are being affected by these crises are very different sectors from the sectors that have been affected from the previous crisis. So we don't want to sound complacent, but for the time being, we think that this type of cost of risk of around 60 basis points, which is still very much above the cost of risk of our competitors is, I would say, an unbiased estimation of what the year will be, may be higher, it may be lower. But I would say it's quite unbiased for the time being, taking into consideration, please keep this in mind, that half of our book is mortgages and that our competitors in Portugal have much lower cost of risk. So it is a conservative number in terms of cost of risk. In terms of the macro assumptions, our last update was done in December of '21 and we are now revaluing whether it's needed to update it or not exactly because of the situation that I'm commenting that the Portuguese economy is performing relatively well in this scenario. So we have not taken a decision on even whether to update the macro assumptions for model purposes or not, we are still analyzing this.

There are no further questions. I would now like to hand the conference over to your speaker, Miguel Braganca, for closing remarks.

So thank you very much, ladies and gentlemen, for staying so close to us and following on our equity story. We -- as you know, we do think that the situation of Millennium BCP in Portugal is a situation of a very solid turnaround. As you see, we have been able to show a very strong top line increases with contained costs and with a progressive normalization of the cost of risk. And this is the path that we are following. In parallel in Poland, what we also see is a very, very strong pre-provisioning profit that is allowing us to cope with the Swiss franc risk. So that in spite of all the these uncertainties that we are leaving and that all the banking industry is leaving, we remain very confident on the strength of our business model. Thank you very much. And we are, of course, aware then to take on a one-to-one, other questions, if you wish so. Thank you very much.

That does conclude the conference for today. Thank you for participating. You may All disconnect. Have a nice day.