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

Good day, and thank you for standing by. Welcome to the Millennium BCP 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Miguel Maya. Please go ahead.

Good afternoon, Miguel Maya speaking. Welcome to BCP earnings conference call. As usually, I will mention the highlights of our performance and then Miguel Braganca and Bernardo Collaço will follow providing additional detail. It is well known that 2022 was a complex year. On top of the pandemic effect on global economies, the turmoil caused by Ukraine's invasion by Russia, the high inflation and the swift correction in monetary policy, some unexpected adversities with significant economic impact emerged in Poland, namely the enforceability of credit holidays on mortgage, which by itself made the Bank Millennium to bridge capital requirements on the third quarter. We have immediately activated the recovery plan in Poland that has been swiftly and successfully implemented. The capital measures of the plan, combined with the quality of our franchise, enabled our Polish subsidiary to reset capital ratios above minimum requirements within 2022, confirming Bank Millennium's potential and discussion skills, and its ability to weather adversities, while expanding current business. Operating in a challenging global context, our consolidated net income increased 50% over coming EUR 207 million, although this figure was heavily influenced by several factors. On one hand, there was a very positive evolution of the operational activity that confirm the quality of our franchise in our core markets. This performance reflected on the increase of 26% in core income, driven by [Technical Difficulty] net income and 6% in commissions, combined with a very [Technical Difficulty] of recurring operational cost, which has a controlled increase of just 3% in a markedly inflationary context. On the other hand, some negative items have a relevant impact on net income, namely the extraordinary effects coming from Bank Millennium, EUR 525 million of FX loans, EUR 283 million in provision related with credit holidays, contribution of EUR 59 million for the Institutional Protection Scheme, and consequently, an impairment of EUR 102 million of the Bank Millennium's goodwill. The intrinsic and steady capacity of our business model to organically generate capital was once again demonstrated, having -- generating around 50 basis points on the fourth quarter which, combined with some capital optimization measures we have put in place, including securitizations, foster the significant improvement of the capital position in 2022. Last quarter, Common Equity Tier 1 increases 114 basis points, reaching 12.5 by year-end, 13% on a pro forma basis, subject to the ECB approval of the waiver under Article 352, which I envisage, could be approved this quarter. Our rigorous capital management enabled us to have a capital position clearly above regulatory requirements and already aligned with the threshold set for 2024 in our strategic plan. The core competencies we developed to manage and enhance the quality of the balance sheet were crucial to maintain our consistent trajectory of reduction of nonproductive assets, and give us confidence to tackle uncertainties ahead. In 2022, we managed to decrease more than EUR 1.1 billion in non-productive assets having reduced EUR 535 million in NPEs, EUR 265 million in foreclosed assets, and EUR 376 million in restructuring funds. Our track record in this matter speaks for itself. Let me recall that we have NPE ratio that peaked at 27% in Portugal back in 2013, having achieved last year a level of 3.4% with 90 days past due, NPL of only 1.3% and NPE coverage by credit impairment above 68%. The additional reinforcement of our strong liquidity position assumed greater relevance following the shift in the monetary policy framework. Although we've gone through a long period of more than 7 years of negative interest rates, we always consider that situation to be sustainable. And being a retail bank with a very close relationship with clients, we have maintained the strategic view on the importance of balance sheet resources for the development of trusting relationships with clients. Customer deposits grew 9% in 2022, mainly driven by an increase of 5 billion in Portugal, revealing our capability to build up customers' confidence. Overall, despite last year headwinds, we ended 2022 with a fortified business model and with a stronger capital position. Our customer base kept expanding, and that is a very good indicator of the bank's vitality and growth potential. We have a profitable and very efficient business model. In fact, BCP is a benchmark in terms of efficiency, having achieved a cost-to-income of 37%, but equally important is our business model's capability of corresponding to customer expectations. Individual and corporate clients continue to choose Millennium as their preferred bank. In recent years, we undergone a transformational journey in our approach to companies in Portuguese market. We became the main bank for our companies, particularly in the SME segment, while protecting capital by maintaining a very rigorous risk management policy. Across the geographies where we are present, there was an expansion of 5% on the customers' base in 2022, which was an important driver of our good operational performance last year. Not only we are attracting new customers, but existing clients are also increasingly adopting our mobile solutions, representing already 63% of total customers at group level and 52% in Portugal. We continue to be the bank customer's most recommended in Portugal. The investment and priority we give to mobile solutions with a clear focus on customer-centric innovation, means that our app continues to lead the rankings and deserves the best reviews from customers. We are succeeding in our strategy of standing out in the market with a business model based on the symbiosis between human physical proximity, through a high-quality network of branches, and digital channels that provide seamless user experiences and convenience to customers. Clients' recognition is also reflecting in use of the make of the app, which has gained increased relevance as their preferred platform to interact with the Bank. Last year, customers carried out 37% more transactions through the app with a remarkable growth in the number of transfers and payments. The number of sales through our mobile app also increased 46%, namely in personal loans which increased 97%, in cards which increased 74%, and in savings solutions which increased 41%. Summing up, allow me to briefly emphasize some of the most relevant aspects that marked BCP's activity in 2022. Operational activity with a very positive evolution, reflecting the quality of the bank franchise with card income growing 26.1%. Successful implementation of a business model centered around the symbiotic relationship between human and technology as a driver of BCP's value proposal. The notable improvement in the Bank's efficiency reflecting and capturing the implementation of transformation in business model and operational procedures. Currently, we have a cost-to-income below 40% in all operations, exceeding the ambition of the strategic plan. A very significant reduction of non-positive assets, more than EUR 1.1 billion of reduction demonstrates the execution capacity of the Bank's professionals. For lack of a better description, I would say that in security, in the legal and economic environment in Poland, is the main constraint to the bank's profitability. A loss of EUR 217 million in Poland [Technical Difficulty] -- and increase on total charges of [ EUR 207 million ] related to FX loans, credit [Technical Difficulty] at Institutional Protection Scheme contribution and consequent goodwill impairment. Nevertheless, it should be noted that the fourth quarter, Poland's already posted positive net income of EUR 53.8 million, and the minimum capital ratios have already been organically reset. I conclude by highlighting the significant organic reinforcement of the Bank's capital, reflecting the quality of the business model and the discipline in capital management, having surpassed in 2022, the target established in the strategic plan for 2024. BCP is today a bank well prepared for the future. Miguel, the floor is yours.

Thank you very much. Going on to Page 9, which highlights a brief summary of our consolidated accounts. As you see, the NII grew 35% with a strong contribution from all geographies. Commissions grew 2%, which made core income grow 26%. This, together with a very stringent control of high inflation environment, where the recurring costs only grew 3%, made the recurring quarter [Technical Difficulty] grow 44.4%. Considering also the nonrecurring items, we present the growth of the operating net income of [indiscernible].-- This was, as you know, by important adjustments, regulatory factors [Technical Difficulty] that had an impact of -- together with other factors had an income of EUR 309.9 million. And of course, the issue of the risk provisions in Poland in [Technical Difficulty] which has an impact of around EUR 394 million. However, in spite of all these headwinds, we were able to grow our net income before tax around 71%, which is a very strong contribution, that after minority interest and income taxes allows the net income to grow 50%. Albeit an ROE clearly below our targets and clearly below what we envisage for the bank on a recurrent basis. Our ROE is still at 4%, which is higher than what we would expect at this point in our business plan [Technical Difficulty]. We have all the business plan, but still shows a lot of growth potential. In terms of the main items of -- the growth of the NII was both explained by volumes and by the NIM grew from 1.9% to 2.4% with a very strong contribution from the international operations, mainly Poland, where the NIM grew from 3.1% to 4.8%. But also in Portugal, of course, with the contribution of the general rise in interest rates in the Eurozone. Fees and commissions. In spite of the more adverse environment due to the market [ results ] and due to the higher interest rates which typically translate in less interest in off-balance sheet investments, shows a growth of 6%, where [Technical Difficulty ] shows the growth of 9%, to a large extent, explained by credit cards, transactional fees and the current fees. In the international operations, namely Poland, the fees and commissions were stable due to an even higher, I would say, impact from the interest rate movements from the NII. Other income, as you see, were affected by the Institutional Protection Scheme. You can see here, the other income in 2022 had an impact of EUR 59 million, which translates, of course, in the growth of the mandatory contributions. In Portugal, it's quite stable in spite of growth in mandatory contributions from EUR 77 million to EUR 88 million. This income was quite stable at around EUR 70 million. Of course, in our international operations, exactly due to the Institutional Protection Scheme, that we commented at the time, there is here a decrease of around EUR 70 million. Operating costs. Disciplined. Cost-to-income debt were below 40%, both in Portugal and in international operations. So in Portugal, our cost-to-income is already below 40% at a level of 38%. And in the international operations, the cost-to-income was 37%. A very important discipline here, albeit the strong pressures due to the inflationary environment that we live in the world. Impairments. The cost of risk content -- in spite of the war and the risks associated to the growth in interest rates, the cost of risk at 52% in consolidated terms. Quite similar, both in Portugal and RAS, with levels of around 50 basis points, with some decrease in the total cost in Portugal of 3.4% and a very minor increase mainly in Poland of the cost of risk of 1.6%. Credit quality. Improvements, all in all. So we were able to decrease the NPEs as was already commented by our CEO, around EUR 500 million, which is, I would say, important in the scenario that we are living. Our 90 days past due loans are already below EUR 1 billion, which is remarkable for a balance sheet of our size. So our 90 days past due are already at EUR 730 million, as you see here in our balance sheet. And our NPE coverage by loan loss reserves still continues high at 68%. If you add to the cash coverage, the collateral, which makes a lot of sense, given that the part of this 90 days past due is mortgages, we are clearly covered with a total coverage of 115%. Our 90 days past due ratio, below 1.5% at 1.3%, as you see here. In terms of business activity, quite healthy in spite of the war in Europe with a 3% growth in total customer funds, both in consolidated terms and in Portugal. Excluding the FX impact, mainly in Poland, the growth in the international business is 4.5%. The loan portfolio, stable. But it is a stability that has to be seen together with the reduction of NPEs. So if you see only the performing loans, we see that there was some increase in Portugal. Some decrease in international operations, but it was -- this has occurred to a large extent because of the capital situation that we were living in Poland, that forced us to be much more, I would say, [ content ] in terms of RWA growth and credit growth so as to achieve the appropriate capital ratios. In terms of capital, as my colleague, Miguel Maya just commented, we present a capital ratio pro forma of 13%, of which 50 basis points is expected to materialize this quarter due to an authorization for the [ 352.2 ] article that is basically an exemption to consume capital associated to FX hedging positions -- structural hedging positions. So an FX position that is used for a structural hedge should not -- because it envisages exactly a risk reduction, should not consume capital. We think that we will update this formally this quarter. And without this, our ratio would be 12.5%. With this exemption, our ratio was already -- be 13%, which compares favorably with the minimum required ratio of 9.4%. In terms of total capital ratio. We present a comparison between 17.5% of total capital ratio on a pro forma basis with 14%, okay. Of course, these data do not include our P2G, [Technical Difficulty] in Europe because we present a very solid business model with low exposure to stress scenarios, although relatively low exposure to stress scenarios. In terms of the different moving parts of our capital position. So the organic capital position evolved since the beginning of the year, around 160 basis points. So before extraordinary situations or that are not directly linked to our business model, we were able to grow around 40 basis points per quarter. As some of you probably recall, typically, our guidance has been a growth between 25 and 30 basis points per quarter, at least before. So we have clearly exceeded our guidance in terms of the organic capital generation. Of course, there were some exogenous factors such as the need to continue with a high level of provision for CHF, which consumed 50 basis points. The credit holidays in Poland that were, as we all know, somewhat of a surprise this year, that consumed around 35 basis points. And of course, with our normal hedging positions with the increase in interest rates that occurred during the year, this has an impact on our capital ratio of around 40 basis points. So these were the -- I would say, the negative moving parts. We took action, a part of it, in the fourth quarter, where we have decreased our investment in Ageas, that is a capital reduction through an extra [ EBIT ] contributed [ to ] -- is around 17 basis points. We implemented a series of securitizations that were responsible for around 30 basis points. And as it was adequately communicated to the market, timely communicated to the market, we sold some of our restructuring funds, with an impact of around 15 basis points. So these were the key elements, the 17 basis points here, negative also with the structural hedges to some extent. So this is what explains the growth in the year from 11.7% to 12.5%. Our leverage ratio, still very healthy. And our RWA density comparing relatively conservatively still with the other entity from the other banks in Europe. As you see here, in graph 23, which is the way of saying that we feel quite comfortable with the additional factors, namely the floors of [ Basel 3.5 ], this means -- because this means that our models are quite conservative. In terms of MREL requirement. As you know, the MREL requirements are communicated on a revolving basis, so to say. So we have a MREL requirement for 2024 of 27.3%, is a requirement. We are already above the 27.3% with a ratio of 27.7%, which makes us comfortable. Of course, in terms of access to the market, we would like to have probably a buffer that is higher than the one that we have right now. But please don't forget that we still have 1 year to go in terms of capital generation. And of course, in terms of access to the market, we have shown that we have clearly access to the market. And in terms of the MREL as a function of the LRE, here, we show a much higher buffer with a difference of 10.8% vis-a-vis a requirement of 6.9%. The pension fund coverage, also positive signs. So the fund profitability that typically is a partial hedge of the liabilities has evolved slightly negatively, in spite of the drastic performance of the capital markets, decreasing by only 5%. But the other side of the coin was that the liabilities -- the effect of the interest rate on the liabilities was positive in the sense that the liabilities decreased by around 17%. So this has allowed us to increase the buffer materially, which means that our pension fund and our capital is protected for -- up to EUR 593 million of adverse movements in our pension fund. Liquidity ratios. I would say, nothing to write home about, so very, very strong liquidity ratios. And this is the general view of our Group. I'll pass the floor now here to my colleague, Bernardo Collaço.

Thank you, Miguel, and good afternoon, ladies and gentlemen. On Page 28, starting with Portugal. Net income increased significantly from EUR 173 million to EUR 354 million. Recurring profitability went up more than 50% and was driven by stronger net operating revenues that increased 12% -- that decreased 12%, lower operating costs with a reduction of recurring costs of 2.5%, 2.8% and an improvement on cost of risk. That clearly shows some strong positive jaws on the Portuguese operation. On Page 29, looking to NII in Portugal, at the end of 2022, it stood at EUR 951 million, meaning 14.4% above last year or almost EUR 120 million. Impacts from commercial activity contributed to almost half of the improvement, and it's worth mentioning the positive contribution from credit volumes and rate effect. Higher yields from securities portfolio and excess of liquidity more than compensates the negative impacts from wholesale costs. And it's also important to mention that the most significant part of the TLTRO was reimbursed in December 2022. NIM stood at 153 basis points, almost 10 basis points higher than 1 year ago and 8 basis points higher than the previous quarter. Moving to Page 30, that presents the evolution of fees and commissions and other income. Banking fees and commissions increased 9.4% and most significant impact came from cards and transfers that grew 25% and was driven by the increase on transaction ability. Market-related fees registered an increase year-on-year of 6.7%. And all in all, fees and commissions went up 9%, a level that compares with EUR 514 million 1 year ago. Looking to other sources of income. These, as you know, this also accumulate other effects. And as you can see, other income stood mostly aligned with the previous year, although with a different mix than last year. When you look at equity accounted earnings, as you can see, there was an increase, and that's mainly explained by a one-off impact. Net trading activity was decreased from previous year, and it was mainly due to some impact on solvent debt. And other operating income, there was more negative than the year before because of the higher contributions to mandatory contributions. Going to Page 31, that's regarding costs. Bank continues to apply a strict policy on cost management and comparing recurring costs from last year. There was a reduction of 2.8%. Nonrecurring items include essentially in 2021, the headcount adjustment. And in 2022, the compensation for temporary salary cuts in place in the period 2014, 2017 and other measures to support the levels of high inflation. Staff costs went down 7%, admin costs slightly higher than previous year, especially related with higher energy costs and depreciation aligns with 2021. Towards regards to branches, there was a decrease of 26 branches compared with the previous year. Moving to Page 32, which refers to asset quality. You can see that there was a significant reduction of NPEs, as I already mentioned. NPEs were reduced by 27%, meaning more than [ EUR 515 million ] in 1 year. In the fourth quarter, there was a reduction of more than EUR 175 million. As you can see, also on the top left chart, reduction occurred mostly on 90 days past due loans, that at the end of the year represents less than 25% of total NPEs. And it also explains the higher cost of risk compared with our peers as the reduction has been mostly through write-offs. NPEs as of December 2022 stood at EUR 1.36 billion compared with EUR 1.9 billion a year ago. Cost of risk stood at 54 basis points that compares with 69 basis points 1 year ago. Now let's move to Page 33, which looks at the NPE coverage breakdown. And as you can see, total coverage stood at 126%, NPE coverage by loan loss reserves at 69%. And when you look at total coverage for individuals with a high level of real estate collaterals stood slightly above 100% and for companies, 132%. Coverage by real estate collaterals on companies at 51% and by loan loss reserves by 79%. On Page 34, which shows the evolution of foreclosed assets and restructuring funds. There was a strong reduction year-on-year on both of them. Foreclosed assets stood at EUR 262 million, that compares with EUR 565 million at the end of 2021, meaning a reduction of more than 59% or a decrease of EUR 265 million. In terms of property sales, there was a slight reduction in terms of transactions compared with 2021, but sales value was 13% higher than 1 year ago. Regarding restructuring funds, there was a reduction of almost 50%. That is explained by the transaction announced to the market, the so-called Project Crow that was closed on the last days of 2022, and it took a little bit longer than the complexity and the number of parties that were involved. Now moving to Page 35. Total customers grew 33% to EUR 68 billion, and growth was equivalent to EUR 2 billion and was mainly supported by on-balance sheet customer funds. Off balance sheet funds continued with a downward trend that was seen over the last quarters, and it's mainly related with market conditions as well as the maturity of some insurance products. In terms of loans, gross loans, there was an increase of less than 1%, supported by an increase of more than 3% in mortgage loans. And it is also important to highlight that performing loans went up 2.1% or EUR 800 million and NPEs reduced by EUR 500 million. Going to Page 36, it's possible to see new loans origination by segments and the recognition of BCP as a main bank for Portuguese companies. Performing loans in Portugal went up EUR 800 million from 2021, supporting in growth in mortgage loans by EUR 700 million. It's worth mentioning that as of December 2022, guarantees provided by the European investment funds and Portuguese entities account for more than 30% of loans to companies. And if we zoom it into the SMEs, the percentage of guarantees cover more than 40% of total SME portfolio. Let me also reinforce the recognition of BCP as the best bank for companies, a segment where we have been achieving important milestones. Now moving to international operations on Page 38. Regarding -- and as it was mentioned before, results were strongly impacted by extraordinary effects from Poland. Bank Millennium net income stood at minus EUR 217 million, that compares with minus EUR 284 million 1 year ago. It is important to remind you that Bank Millennium registered a profit of almost EUR 55 million in the fourth quarter of 2022 after 8 quarters with losses. Although if you remember, Bank Millennium already have had profits on the second quarter if there was no IPS contribution. And on the third quarter, if there was not -- if it was not booked with the front-loading related with credit holidays. Mozambique contribution increased 6.6% compared with 2021. Contributions from international operations as a whole stood minus EUR 43.8 million, which compares with minus EUR 35 million in 2021. But it's important to highlight that in 2021, there was a positive contribution from discontinued operations of EUR 77 million. It should also be highlighted that there was a one-off impact related with Bank Millennium goodwill that was booked last year with an amount of more than EUR 100 million. Moving to Page 39, which refers to Bank Millennium. Net income in Poland was strongly impacted by costs related with moratoria books on the third quarter of 2022. And also cost associated with CHF mortgage loan portfolio, which, as you know, include provisions, out of court settlements, and legal costs. And of course, also to highlight the contributions of IPS. it is important to mention once again, to reinforce that Bank Millennium on the fourth quarter came to profitability with a net income of [Technical Difficulty] Excluding those factors and due to the exceptional performance, net income have now stood at EUR 478 million, almost 100% more than 2021 if we look on a comparable basis. Net operating revenues increased 50%, excluding the impact of credit holidays on NII. And operating costs, including mandatory contributions, went up 11% due to the inflation that is having some pressure on salaries and admin costs in Poland. CET1 and total capital were at the end of 2022, again, above requirements and stood at 11.3% and 14.4%, respectively. This was another important achievement from Bank Millennium that was possible with the combination of several factors as the improvement of operational profitability and capital optimization initiatives. It is important to highlight that capital ratios were temporarily below minimum requirements due to the impact of credit holidays. On Page 40, some detailed information about Bank Millennium. NII increased strongly, 71% above, that is without the credit of investing to almost EUR 1 billion compares with EUR 580 million 1 year ago. This movement was mainly driven by interest rate hikes since the fourth quarter of 2021. NIM increased to significantly year-on-year from 2.7% to 4.43%. Fees and commissions decreased 2.7% to EUR 173 million. And other income decreased significantly as explained before by the impacts on trading related with out-of-court settlement. Operating costs, excluding mandatory contributions, increased 11%. The Regulatory contributions increased significantly due to the one-off impact of the contribution to IPS with an amount of EUR 59 million. Moving to Page 41, related with asset quality in Poland. Even with a very challenging environment, Bank Millennium cost of risk stood at 44 basis points, this is the same level than the previous quarter, and increase from last year is mainly [Technical Difficulty] by the increase on consumer loans. Non-performing loans are more than 20% [Technical Difficulty] -- 90 days past due ratio decreased 20 basis points to 2%, coverage ratio of nonperforming loans at 157%, meaning an increase of 22 percentage points from December 21. On Page 42, customer funds grew 4% year-on-year. Off-balance sheet funds decreased significantly due to market conditions and higher interest rates in Poland. And in terms of loans to customers, gross book stood at EUR 16.8 billion, less 2.5%. And it is important to highlight here, as you can see, the increase of the mortgages loan portfolio and of almost 4%, and the significant decrease of mortgages in foreign currencies and this is the amount deducted by provisions for legal risks. On Page 43, as usual, looking to the FX mortgage portfolio. FX mortgage as a percentage of total gross book at the end of 2022 stood at 8.1% over total loan book. And as you can see, the reduction of the CHF mortgage loans was 17% last year and 4% quarter-on-quarter. Bank Millennium, taking in consideration the level of court claims, and decisions more favorable to customers, which are the drivers on the provisioning model, continue to make additional provisions in 2022, increasing the coverage level for almost 47% from 25.7% 1 year ago. Total cumulative provisions for litigation risk stood at more than EUR 1 billion at the end of last year. It is also important to mention, as you can see on the bottom right chart that Bank Millennium is maintaining the high levels of out-of-court settlements. And on the fourth quarter, amicable settlements were again above new court plays. In 2022, amicable agreements had a cost of around EUR 100 million, that compares with EUR 80 million in 2021. Now turning to Mozambique on Page 44, which, as I said, it starts a brief overview about Mozambique, that even under a challenging environment continues to be an important contributor for BCP Group. Net income increased more than 6%, mainly due to higher NII. Net operating revenues increased almost 10% and operating costs were 7% higher than last year. Capital ratios stood at a level higher than 35%. Moving to Page 45. NII went up year-on-year, 10% to more than EUR 202 million, and that was mainly influenced by higher interest rates in Mozambique. Commissions went up 7% and other income increased 11%. Costs increased at a lower pace than revenues and cost to income stood at 43%, that is similar than 1 year ago. Moving to Page 46, non-performing loans. More than 90 days past due at 8%, which compares with 11% in 2021, and almost 10% in September last year. Cost of risk stood at 118 basis points, that compares with 181 basis points at the end of September last year and with 72 basis points in 2021. And this cost of risk was in 2021 influenced by some one-off effects due to some reversals that were registered in 2021. Coverage by loan loss reserves increased 21 percentage points to almost 100%. Now -- and regarding volumes, on Mozambique, you can see that customer funds registered an increase of more than 10%, and loans to customers an increase of 2%, mainly supportive with loans to individuals as loan to companies were stable year-on-year. And this is my final slide. So I will thank you for your attention. And before we move to Q&A, I will return to Mr. Braganca for some final remarks.

As you know, 3 years ago, we have presented to you our strategic plan with the metrics that I now show in Page 49. The idea would be to reach a cost-to-income ratio of 40% by 2024, and cost of risk around 50 basis points, an ROE of 10%, the common equity 1 ratio in excess of 12.5%, and ROE -- and NPE ratio around 4%. And all of these based on growth of the franchise and more efficient and more adaptive servicing of our clients with a strong client preference and quality, as shown in the other indicators. What we can tell now is that as we are -- as you see here, somehow ahead of the plan. Of course, we benefited here from some tailwinds in terms of the interest rate movement, but also from some headwinds, namely in terms of the regulatory risk, and in Poland, mainly, and the war situation that we are living in Europe. However, what we can tell you is that we are ahead of the plan. We are not intending to present a new strategic plan in the next quarters. But we can tell you that we are ahead of the plan -- our forecast of -- this plan exactly because we are ahead of the plan are more biased towards the favorable side than towards the unfavorable side. We thank you very much for your attention to our equity story and to all our commitments with our clients and our shareholders. Thank you very much. I now open the floor to questions.

[Operator Instructions] We will now take the first question. It comes from the line of Ignacio Ulargui from Exane.

I have a couple of questions. Just starting a bit with the NII outlook that you have for Portugal. I mean, what should we expect for 2023 after the good performance that you have delivered in the fourth quarter? And also, how the cash flow hedge should impact NII in '24 and '25, provided updates move substantially from here? Second question would be coming to your latest remarks, Miguel, on the ROTE target? I mean, that 10% in the context of profitability delivered in the fourth quarter looks to be kind of an intermediate level that was a higher level given the context of rates. Where do you think the ROTE of the bank could land on a bit more normalized levels? Or at least whether you see growth beyond that 10% target? And a final one on the equity Tier 1 ratio. I mean, after the strong blend of capital in the quarter, what should we expect in terms of payouts ratio for 2023 once you are getting closer to a bit more normalized levels? And whether there could be any opportunity in inorganic growth that could kind of take you to reinforce capital rather than on distributing it?

So when we presented our plan in 2024, the objective of the plan was to become by 2024, a reference bank with an excellent performance, both in terms of customer franchise, in terms of shareholder value creation, and in terms of financial soundness. So our plan and what we are delivering is to become a reference bank in terms of what are the key references in the way. We are ahead of the plan, as I'm just commenting. So we are intending and we are estimating that we will be this reference bank in all the typical indicators that would expect from an excellence in terms of financial performance and customer franchise performance bank that you would expect in Europe. So having said that, we are not formally reviewing the targets because this has a formal internal process either in terms of ROE nor in terms of dividend payout. But what we can tell you is that relatively to 2023 and 2024, you should expect from BCP a benchmark, excellent performance also on these indicators. So that's what we would expect to deliver. We are not reviewing the plan formally, but that's what we are expecting to deliver because we are on track for it. So if you look at what are the normal dividend payout for 2023 and '24, of course, this is a decision that has been taken by the AGM at time. But I would expect, with the performance that we are seeing to have, I would say, a benchmark payout ratio. In terms of return on total equity, what can I tell you on tangible equity. This year, if you look only at Portugal, our return on total equity vis-a-vis Portugal is already close to 10%, as you may know -- 10% in Portugal. If you look at Poland, I mean, the numbers before Swiss franc, are very high. So I will not -- but what we can say is that Poland is able to generate before Swiss franc, a very substantial net income. The issue that is always difficult to estimate is the timing of the provisions for the Swiss franc. So it's very difficult for me to commit to a specific return on tangible equity for 2023 after Swiss franc. What I can tell you is the following. We are on a growth path, and we are on a growth path in Portugal, and we are on a growth path in Poland in terms of everything that we see before Swiss franc. And this is where we are and that we are ahead of our plan. And what I cannot tell you exactly is how the timing of the Swiss franc provisions will play out. But our base case, as we have already commented, is that the provisions for this year will be below the provisions that we have last year, okay? This is what I can tell you at the moment. There is a lot of uncertainty there. But our base case is what we are expecting. By the way, in this base case, it is already somewhat reflected the possibility of the -- changing the methodology to no remuneration., okay. Being totally clear also, the key factor that may influence the provisions for Swiss franc is the number of new cases that may appear. So depending on the customer behavior, and depending on where there is some increase versus there is no increase versus there is a sharp increase, so the changes in the Swiss franc provisions may be different. But in any case, to make a long story short, we are ahead of the plan. We will perform according to reference banks in Europe. We are already with a ratio and ROE around 10% in Portugal. And everything that depends on us will show clearly, as far as I can see, a benchmark reference performance when you compare it to other banks. In terms of the margin, what -- I mean, I don't like to separate the different parts of the margin because we view the balance sheet as an integrated part. And of course, we may have more demand deposits. The demand deposits are non-remunerated. We treat them in a way we can have more of a portfolio that is available for sale, or more of a portfolio that is a whole to collect. And of course, the ways in which one hedges, the margins are quite fungible. So we can use one instrument or the other and using one instrument or the other, depends on each point in time what shoots best our interest. What we have shown and what we have said very often is that our margin sensitivity is more or less and has been relatively stable. And based on impact models is around EUR 100 million of margin per each [ shock ] of around 100 basis points. So we have been oscillating typically between [ 80 and 120 ], typically around EUR 100 million of margin, [ 100 ] basis points. We think that this is the appropriate exposure of a bank with our risk profile, okay? So we benefit when interest rates are higher, and we suffered somewhat when interest rate are lower. Not as much as we would benefit or as we would suffer if we have absolutely no hedges. And the business models in Europe are very different. As you know, banks in France and in other countries, mainly have fixed rate mortgages, so they don't use any type of hedges. Banks in other countries that have floating great mortgages, use more hedges, then it depends on also whether the banks have floating at 1-year rate or floating at 3 months, rate. So you cannot compare, I would say, things that are not totally comparable, so the key metric in this one. In terms of guidance, what we expect right now is for EBITDA of around 30% in the term deposits, we would expect a growth of our NII in Portugal on the low teens, okay? That's what we are seeing for a bit of around 30%, which we think makes sense. Of course, because we live in a competitive market. We don't know exactly what the EBITDA will be. But we think that this makes sense. And this is at the moment, the guidance that I would like to give. For '24 and '25, it depends, of course, also on the evolution of the EBITDA and on the evolution of interest rates. But we would expect also a substantial growth in margin also for '24 and '25, but I would not like to give guidance right now for '24 and '25. Because, I mean, it depends a lot on the dynamics of the beta and on dynamics of the pricing of the deposits. But in any case, growth, so '23 will not be the year of -- the top year for our margin in Portugal.

We will now take the next question. It comes from the line of Maksym Mishyn from JB Capital Markets.

I have 3. The first one is a follow-up on Ignacio's question on guidance for NII. I was wondering what kind of loan book growth do you factor in, in the low teens guidance? And how do you see demands for different kinds of loans evolving in January and February? The second one is on fees outlook. I was wondering what's your outlook for fees growth in Portugal for 2023? Now that interest rates are higher, some banks think that they might be reducing some fees for account maintenance, and I was wondering what's your view on this? And then the last one is on other provisions. They've increased quarter-on-quarter. And could you explain what was the reason? Was it the adjustment of macro models? And if so, what kind of assumptions are you using behind the macro model?

Starting with the last question. In terms of other provisions, most of these other provisions have been used for other assets, mainly real estate in anticipation of a less favorable environment looking forward of what could be the impact on real estate valuation. But clearly, this last quarter is not, I would say, a steady state. So our steady state in Portugal for other provisions is much closer to a level of around EUR 15 million to EUR 20 million than what we have last quarter. In terms of fees outlook, it is correct that there is some trade-off between fees and margin, not least because of investment funds and so on. So of course, when the deposits are more attractive, savers tend to invest more in deposits and less in funds, just to give you an example, and they are the same applies also for bank insurance products and so on. Our view to vis-a-vis this exactly because of this movement, and is a low single-digit growth in terms of fees in Portugal. This low single digit is also what we are expecting for our loan book in Portugal. Right now, the loan book is stable, so to say. But we expect this loan -- what is implicit, if you want, in our estimation of low teens for the NII is a low single-digit growth in terms of loan book, okay?

We will now take the next question. It comes from the line of Pamela Zuluaga from Credit Suisse.

You've had a very encouraging capital uplift, which is great to see. A large portion of this came from one of items, as you highlighted. And organic capital generation amounted to actually 24 basis points more or less versus Q3, so out of the 110 bps more or less delta quarter-on-quarter. Could you give us maybe some more detail around the rest of the capital build path? Particularly thinking about -- could any of these one-off items potentially reverse and therefore, continue posing risk on capital levels? I understand that you did around 30 basis points of securitization, 15 basis points from the sale of restructuring funds, but I was just wondering about where the rest was coming from and if there was any risk in that reversing moving forward? And then the next question I wanted to ask is, again, around capital. I understand you're saying you're not really targeting any change in your strategy so far. And saying that potentially, you could expect a benchmark payout moving forward. But I'm just wondering, is there anything else that you're seeing that could potentially be a risk for capital that's maybe weighing on your appetite for further shareholder distribution in the future?

Just a couple of issues. So in terms of reversal of trends, I would not say there is any type of reversal. Of course, the securitizations have a maturity, have a time frame when they end the benefit in terms of capital. We always say the same raw material and to repackage with a new securitization, but there's not really a reversal. The dividend from the insurance company also, it's not a reverse and the [Technical Difficulty] funds here. So it was in the right sale. So there is no reversal on this hand. In terms of the P&L, I mean, we have spoken about the ROE, the P&L. Of course, these are different ways of looking at it. Our guidance has been -- would be in organic terms, general cap between 25 and 30 basis points per quarter, organically. We maintain this view of it, I would say, more biased to the upside right now than to the other side. So we are comfortable for this. In terms of risk for capital, I mean, there is nothing to my knowledge that we have not commented and we feel nothing is in risk that we have not already commented here. Of course, there is [Technical Difficulty] as we have commented -- we have already commented. However, I am saying one point that is we think that our rating is not at respect the financial soundness in the business model we have right now. And we think that we have to probably -- we have to kind of look at it very high as a bank with writing, just to make sure that we get also to the place that we want to be in terms of writing because at the end of the day, this will benefit the shareholders and the cost of funding also. Okay? But there's probably the risk there…

We will now take the next question. It comes from the line of Noemi Peruch from Mediobanca.

I have 4. On NII, what is the arrival you are considering in your low teens guidance? And always on NII, we have seen that most of the incumbent players in Portugal are offering and advertising term deposits are with an interest rate up to 2%, more or less, which somewhat diverged from other markets in Europe. Can you just walk us through the market dynamics here and your strategy? And the third one is on capital. Any particular on the 50 bps regulatory tailwinds? Shall we still assume the benefit in this entirety here or only a portion of it? And do you expect regulatory headwinds in 2023 in terms of calendar provisioning, EBA guidelines and large corporate exposure? And lastly, on M&A. Could you talk us through your approach to M&A when it comes to strategy and also your financial KPIs they are considering here?

Starting with the first one. In terms of at [Technical Difficulty] -- [ the value ] or share for our shareholders is higher after the deal than before the deal, and what is the type of -- at the end of the price -- on price and energies. A key factor on this if they impacted any M&A on the position of the bank and whether it is accretive in terms of EPS and are having, so to say, the capital. In terms of the capital, we're not anticipating any type of the tech regulators and so on. Up until now, there is a normal initiative that we have in terms of models and so on. [Technical Difficulty] -- Some of them, I mean have [Technical Difficulty] -- but we are not in any type of material negative for our bank increase of capital impact. In terms of your [Technical Difficulty] -- what we are using forward rates as of today, we have recent position based on the market for savings as of today and this is what we expect. In terms of solution in Portugal -- when we are in the free market competition and so on, it's always a little bit an assertive in terms of what will be the end game. It's much easier if we have a monopoly, which we don't. What we can say -- the banks have effective liquidity cash, this is an important point. So contrarily to what happens in banks have excess liquidity, which makes them be quite, I would say, disciplined in terms of pricing of deposits. Second point, I think the large banks are not in after market share. So there are different [Technical Difficulty] -- they are a healthy balance sheet and a healthy income statement. We have here 2 Spanish banks, as you know, Santander, Ageas bank. The [Technical Difficulty] bank that typically are very much P&L focused. There is a government-owned bank, as you know, that also have, I would say, as a feature that it cannot access the market. So it's very much dependent on internal capital generation for its growth. So I think it's very important and it has a lot of funding. So we expect, of course, some of the interest rate increase to pass on to clients, and that's why we are expecting here EBITDA overall 30%. But we think that there are enough structural factors to make us comfortable that the EBITDA will not be much higher than this. Of course, I mean we do not control vis-a-vis, of course, exchange opinions with our competitors on this method. I believe I've answered the question.

The call at least for me was breaking. So I just wanted to make sure I got your answers right. So in terms of writable in your guidance, you're considering the current forward rate? And in terms of capital, you do not expect any capital headwinds, but I have not catch your comment on the 50 bps regulatory tailwinds?

Yes. Okay. Yes, I confirm -- 50 bps. I mean this is a long and complex process with a lot of work because a few banks haven't planned yet for the [Technical Difficulty]-- exemptions -- for tax exemptions. So it was a lot of work both from the supervisor and from ourselves, much more than what we were expecting and probably what the supervisors were expecting, because the regulation is not very specific on this issue. What we were recently we found to provide is that we are already at the final stages and that we are very close to a final decision for it and that's why our sales, we have commented that we count on a decision objects. And of course, our opinion is that the decision [Technical Difficulty] will be not at least be in the pro forma.

Okay. And sorry, again, to double track on M&A. I got EPS accretive synergies and the impact on the share price. But I have not caught your comment on capital. Can you please repeat that?

No. The first point I commented was capital. Our Capital fixing, so without any impact on capital fixing, we have to be [Technical Difficulty] the test is that whether at the end, this is beneficial for shareholders and for the bank or not. But I want to emphasize the following. We do not need M&A. So I think this is very important. I mean we are the largest privately owned bank in Portugal. We have the largest customer advice of all the private banks in Portugal. We have the best digital platform, we don't need M&A to perform well. And the Banks may need [Technical Difficulty] in our markets. So this makes us feel comfortable that we would only envisage an M&A. If this is beneficial for the bank because we don't need it. So exactly because we don't need it. We would only, I mean, recur to it if it's a clear no-brainer. I think this is important -- it's not part -- we are not looking for it. Of course, it's part of our job, if an opportunity comes to the market to analyze it. But we are not looking for it, and we don't I think -- and the best way to have a view in terms of shareholder realization is not needing the deal.

We will now take the next question. It comes from the line of Sofie Peterzens from JPMorgan.

Yes. Sorry about that. So my first question would be around the securitization that you did in the fourth quarter. Will it have any material impact on your net interest income? And if so, how much? And then my second question would be that net interest income improved and was down slightly quarter-on-quarter. How should we think about the NII quarter-on-quarter trajectory improve? And going forward has NII on a quarterly basis already peaked? Or should we expect NII to go of grow from here? And then my third question would be on the cost outlook. You're very good at managing across -- you're already ahead of your gross income ratio target of 40%. But how should we kind of think about wage inflation in Portugal in 2023 and '24? Do you have any upcoming wage negotiations that we should be aware of and kind of finger on what kind of cost inflation you're seeing? And then my final question would be around the discount rate. It was increased to 4.17% I think, from which level was it increased? And how much did it help your core equity Tier 1 in the quarter? So that's all for me.

One second. The securitization that we have done do not have an impact in terms of the NII. They will have an impact in terms of operating income. What we can tell you is that our after cost of equity will be or even single-digit digits area. And we are expecting an impact we can absorb in the normal comparison with -- I mean, something around between EUR 1 million and EUR 2 million per month or something like that's not more than that before tax. In terms of the pension funds -- I'm sorry -- In terms of the NII, as you know, an interesting evolution of the NII in Portugal in Q4 [Technical Difficulty] -- to grow in Q1 of 2023. So we are not expecting it to have peaked in Q4. And going forward, all sub securities in NII to the value of around [Technical Difficulty] our comment is in the low teens for the full year. In terms of costs and negotiations. Of course, we are in negotiation as we expect. The negotiation in Portugal, as you know, is on the high [Technical Difficulty] area -- costs maintained through efficiency measures and negotiations around the middle digit. So what we are expecting in terms of cost is mid-teens [Technical Difficulty] so in terms of NII, we are expecting low-teens, in terms of NII we are low-teens. In terms of commissions, fees and commissions, we are expecting low single digits. In terms [Technical Difficulty] And in terms of cost, we are expecting single digit to mid-single digits in Portugal. In terms of the funds, we have [Technical Difficulty] I mean its explained here in this page of our presentation, the actuarial rate, we were based, to a large extent, on [Technical Difficulty] the pension fund. This -- discounts for in June at 3.3% and were in December at 4.7%. And I would say a large part of the benefit that you see here from the access to the EUR 600 million of excess is explained by this evolution from 3.3% to 4.17, okay. 4.17, one-7. Okay.

And sorry, just on the Polish NII. So in Poland has the net interest income peaked on a quarterly basis? Or how should we think about the Polish net interest income going forward?

I would say -- I would not like to comment on to Poland here because it's a listed entity. It's a listed entity. We [Technical Difficulty] and so on. What I would expect here without entering into a quarter-by-quarter analysis is, you expect some stability in NII compare the full year, I would say, that's what I'd like to say at this point in time which high level.

We will now take the next question. It comes from the line of Benjie Creelan-Sandford from Jefferies.

Look, I know you talked about it a lot already, but I just wanted to come back on to the performance of the domestic net interest income. Clearly, you've raised the guidance for 2023 quite meaningfully from mid-single digit to low teen growth. I was just wondering, is that purely driven by higher forward rate curve? Or is there any other assumptions that you've changed or trending better? And I guess more specifically, just looking at this quarter, there's been some sharp moves in your hedging derivatives on the balance sheet. There was also a trading loss in the quarter. So I'm just wondering whether you've done anything in terms of changing your structural hedging positions and whether that's leading to a stronger NII momentum into 2023? A couple of other specific questions on the domestic net interest income. Could you tell us what the average yield on the loan book was in Portugal at the end of 2022 and how that compares year-on-year? And also if it's possible to let us know what the TLTRO contribution net of reinvestment was in the fourth quarter?

The rising I would say of the guidance for the NII for 2023 factors were -- the level of Europe. So effectively, [Technical Difficulty] increased somewhat in spite of being partially hedged. We are not totally hedged, basically, I would say, the starting point in terms of betas. So regard to rise in the mid-teens, so to say at least the drivers and so on. But what we have seen is that, from the middle of the year until now, that the financial system has been very pleasing in terms of ratings. So the starting point, the term deposit remuneration. The one that we have right now is lower today than the ones that we were estimating 3 months ago, exactly, because I would say there was much more pricing discipline in this factor than what we -- for. So the main factor -- the total contribution in the fourth quarter [Technical Difficulty] by what we did is basically, we have repaid the TLTRO and so some sort [Technical Difficulty] some deposits that we have in the loan bank. In terms of the average rate on our -- interest rates on our assets [Technical Difficulty ] on a total of last year was 2.1% in terms of -- for Portugal, which is -- I mean, which we, of course, it's -- I mean, -- so speaking about the interest rate. Okay.

Sorry, the line was breaking up, so I just didn't catch that last point about the asset yield in Portugal. And I guess just one other quick follow-up, if I may.

The average asset yield on the full year, the average asset yield on the full year of 2022 in Portugal was 2.1% for loans, the average asset yield for loans in Portugal for the full year of 2022, which we have to compare, of course, the interest rate level of 2022 was 2.1%. Please keep in mind, I mean that for a large part of the year, the [indiscernible] 01:22:42 was negative, and most of our assets are [Technical Difficulty].

We will now take the next question. It comes from the line of Carlos Peixoto from BPI.

So basically, a couple of questions here. The first one would be on NII, if you could help us understand the movement in the fourth quarter. So there was a EUR 4 million increase in NII in the fourth quarter in Portugal, whether you could break it down, of imports that contributed to that? And within that context, I didn't really catch how much was the TLTRO contribution in the fourth quarter. Sorry, the line was breaking up. So if you could repeat that, I would appreciate it. Then on the trading front, you mentioned that the securitization could have an impact of roughly EUR 1 million to EUR 2 million per month in trading income. You experienced losses in this line in this quarter. How should we think of it for next year, should continue to be pressured by now with securitization costs, but also NPEs disposals or things of that nature? And then finally, my third question would be regarding the outlook for provisions and cost of risk into 2023. So, so far, you have been guiding towards what's the risk being somewhere in between where it is today in the 50 basis points target that you have for 2024? Is that still the case? So that would be pretty much it.

Now in terms of the moving parts of the margin there is in the [Technical Difficulty] But effectively, we do not go into detail too much in terms of the impact for the quarter. So what we have is in commercial terms, if you want -- there is an effect in terms of the growth of the interest rate of around -- and this impact was around EUR 33 million in the quarter. And the growth in the cost of deposit was only EUR 7 million. So to say, this commercial margin, so to say, contributed with EUR 26 million the remaining parts, the remaining part to the EUR 40 million. So the remaining EUR 15 million, I mean, is explained by more the wholesale part where the wholesale funding and liquidity more or less cancel themselves out. And there is a contribution from the securities portfolio of around EUR 15 million. So I would say this explains -- from the EUR 40 million, EUR 25 million comes from this, so to say, positive impact of benefiting more on the loans than the increase in costs of the deposits. Of course, when we look forward, we do not expect to have negative trading gains. So -- but there are sometimes mainly when we sell portfolios or we sell real estate, some negative trading gain. So what I would project going forward in terms of Portugal for trading gains. I would say is minor, [Technical Difficulty] So in this line, I would expect quite -- positive gains looking forward. But of course, trading is trading, we can be -- we can have a market opportunity and I mean, we can get, I mean, surprised by availability market position. Having said that, in any case, we do not take a relevant trading position in our [Technical Difficulty] that's why will this way. In terms of the cost of risk, I mean, when you compare our banks in Portugal, we have had historically a much higher cost of risk, as you know. This allows us -- to a large extent, explains high level of legacy assets. As we normalize the bank and we become more similar to the other banks, there is a natural trend of convergence of the cost of risk on one hand. On the other hand, we cannot ignore debt with the higher interest rate environment, the rate increases or the situation clear as interest rate decreases. Albeit, I have to say that up until now, we are not seeing any hard signs of this increase, but we are expecting because looking, but we are not seeing any time yet. So with this in mind, we would maintain our guidance from -- at around 50 probably slightly upwards, but around 50 basis points of cost of risk going forward for 2023.

Thank you. There are no further questions at this time. I would like to hand back over to the speakers for final remarks.

Thank you for your interest and for [being here with us] and analyzing our equity story. And I really would like to reiterate our strong confidence in our plan and in our delivery capability. And I would like to reiterate the fact that we are [Technical Difficulty] of being the excellent bank in Portugal in terms of customer franchise, customers -- but also financial strength and shareholder. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may all disconnect.