Banco de Sabadell, S.A. (SAB) Earnings Call Transcript & Summary

Good morning, and thank you for joining us on today's Investor Day. Today, it's a very important day for us, and we are very excited to present to share with you our strategic plan for the 2021-2023 period. The presentation will be carried out by our CEO, Cesar Gonzalez-Bueno, who will be presenting the strategic view; and by our CFO, Leopoldo Alvear, who will be sharing with you the financial implications of it. We expect the presentation to take up around 70 to 75 minutes. The presentation will be followed up by a Q&A session, for which we have a schedule around 45 minutes. With that, let me hand it over to Cesar.

Good morning, everyone. We are very excited to present the plan for Sabadell next 2.5 years. Nevertheless, the very deep transformation we are undertaking should yield positive results far beyond 2023. It is all about execution, following a straightforward diagnosis. We believe the plan is realistic. It has the unconditional support of the Board and the full endorsement of management. Beyond 2023, there will be room for more ambition. But now it is the time to deliver. I will start by sharing the pillars of our strategic road map for the upcoming years. Afterwards, we will go through the specific details per business line, in which we will elaborate our approach before ending with a final recap. Let's move please to the banking environment in Slide 6. This is all well known. The impact of COVID-19 on society has accelerated existing trends in customer behavior and preferences. This presents significant opportunities to reduce costs and start doing things differently, in particular by accelerating the pace of digitalization. Along with the opportunities for transformations, other well-known challenges remain and cost efficiency is an imperative. ESG is gaining momentum. Action is needed here. As a matter of fact, we are working on an ambitious ESG plan which we intend to present before the end of the year. And last but not least, we are starting to see some promising signs of recovery in our macroeconomic environment. This is good news. However, I would like to emphasize that our plan is based on conservative macro assumptions, as Leo will explain later, especially for the evolution of the interest rate curves. Any faster-than-expected improvements in the macro conditions could produce tailwinds for our plan. Let's now move to Slide 7. We found no major surprises following our assessment of the bank. Our starting position is a good platform from which to deliver. Sabadell is a competitive franchise in Spain with unique strengths. Without any doubt, our SME business is attractive and has strong barriers to entry for other competitors. We have also identified areas with room for improvement, and we know what needs to be done and how. We have a straightforward plan. It is now time for execution and delivery. And for that, there are 3 key enablers for the successful execution of this plan that I would like to highlight. The first one is the new organization already fully in play. The bank's new structure is aligned with the new strategy while fostering focus and accountability. The second enabler is a culture move. Sabadell's culture has lots of positive elements, lots of them, which we want to preserve, but some changes are also needed. We need a greater sense of urgency in the organization and a more results-oriented culture. The third enabler is a shift in management focus. In this regard, greater emphasis has already been placed on return on equity. I can assure you that this shift is clearly observable in the behavior and in the new way already now of making customer decisions. Building on these premises and based on the different starting point for each business, we have defined the strategic road map that you can see in Slide 8. Let's just start with retail banking. As you can see, it represents approximately 1/4 of our capital today. Its profitability is low, mainly due to its high cost base. We need a deep transformation here. In fact, this is where our transformation will be the most radical. Retail needs to undertake both a decisive cost reduction and a full review of the way we serve customers, which will be achieved through digitalization and very importantly, significant process redesign. Business banking is our most recognized franchise. It is profitable and highly efficient, and we have around 1/3 of the group's capital allocated to it. This is where Sabadell holds a leading position in the Spanish market, based on long-lasting relationships with our customers. We plan to do more of the same here and do it better through what we describe as an evolutionary transformation. This will consist of, on the one hand, continuing to grow in SME developing further from our excellent and differentiated starting point in this segment; on the other hand, reducing cost in the self-employed and business segments, which is very much in line with our strategy in retail banking given similar or analogous consumer behaviors. Our corporate and investment banking franchise is small in terms of capital, but highly profitable. This is something we want to maintain. As you can see in the chart, TSB accounts for a high proportion of the group's capital. It has not performed well in the past terms in terms of efficiency, and it currently has delivered a low profitability. However, the signs of a successful turnaround are starting to materialize. And last quarter, TSB already made a modest but positive contribution to the group. We are optimistic about the future of TSB. We will increase focus on its core products, mortgages, lending and savings. Finally, we have our other international businesses, Mexico, Miami and the international branches. These businesses are overall delivering modest returns. Our strategic approach here will be to deleverage and optimize the use of capital. Moving on to Slide 9. You can see a snapshot of the evolution of income through the plan. In terms of net interest income, we expect an increase at the compound annual growth rate in the low single digits. This will be mainly driven by higher loan volumes and stable NIM over the plan horizon. Moving on to fees. We expect an increase in the period at a compounded annual growth rate in the mid-single digits on the back of a proven track record. This growth will be driven by higher activity and other commercial activities. Leo will provide further details to it in his presentation. Moving on to Slide 10. Let's talk about cost reductions. In March 2021, we completed a cost reduction program in Spain with an annualized impact of around EUR 140 million in gross cost savings. Additionally, by the end of 2021, TSB will complete the delivery of its cost reduction program, enabling a reduction of its cost base close to EUR 7 million over the period. Looking ahead, we will launch an efficiency program in Spain that we expect to complete by the first quarter of 2022. This program will bring gross cost savings of approximately EUR 100 million per year and will be funded by the sale of bonds in the ALCO portfolio. Moving on to Slide 11. Let me share with you our guidance for 2023, which will be, again, further developed in Leo's presentation, but I wanted to give you a snapshot. The strategic map I just described will improve the financial performance of the group as follows: we are targeting a return on tangible equity above 6%; our pre-provision profit or risk-weighted assets ratio will grow from approximately 210 basis points to above 250 basis points; in terms of asset quality, after the COVID 19 impacts, our credit cost of risk will significantly decrease and remain below 50 basis points; and finally, we will maintain a solid capital position with a fully loaded core equity Tier 1 ratio above 12% after potential Basel IV impacts. This is our path towards 2023. But as I mentioned at the beginning, the transformation we are undertaking will keep positively impacting the group's performance beyond that. We are confident that by then, many attractive options will open for us. In the following chapters, we will take a closer look at the specific priorities for each business. I am well aware that what comes next might seem rather abstract to this audience. Nevertheless, it is the path we are going to execute, and it will prove transformative. Let's just start with Spain in Slide 13. The cost reduction efforts will specifically target retail banking. Moreover, we will use digital means to attract further demand from our products through a smarter allocation of our marketing budget. And we will adapt the way we serve customers, focusing on their needs, which we understand well. I will give more color on this point in a bit. As a result of our transformation strategy, we will significantly improve the efficiency of the retail business. We will attract more demand for key products, and we will increase conversion rates. Let's move on now to Slide 14. The chart illustrates the evolution of our in-branch capacity, both for commercial and noncommercial interactions for -- with customers. As you can see in the slide, we are observing a significant reduction of demand for transaction servicing in branches such as cash deposits with rows or bank book updates. In this context, during the first quarter of 2021, we reduced our retail workforce in branches by 20%, mainly in the servicing-related activities. This is already a very significant reduction, and we plan to further reduce capacity. The bulk of this additional reduction will continue to be customer servicing, as demand for those services in branches has decreased. There will also be some reduction of commercial workforce, although to a lesser extent. But however, we will not lose momentum due to a natural redistribution of our in-branch commercial activity. In that sense, the commercial activity in branches will be mainly concentrated on complex products where customers require handholding for different reasons. And these products are mortgages, savings and investments and insurance. For other products, we will manage demand through remote channels. Let me explain this in more detail in Slide 15. For example, we know that mortgages are complex. They take a long time to process, and the experience is usually stressful, especially for first-time buyers. Today, our customer journey is 100% branch-based, where demand is managed by our generalist relationship managers. What we are doing here is to move that handholding activity into specialized relationship managers supported by significantly improved processes that will ease the customer journey throughout the end. Something similar will happen with savings and investments, which are products that retail customers often find difficult to understand. And finally, we are taking the same specialization approach for insurance, as it is a complex product and one where customers require a trusted adviser. As for the other products, the ones in the bottom part of the slide, we will manage demand through remote channels. Consumer loans should be very straightforward, pre-approval, one click, and the money should immediately be transferred to the customer account. In cards and payments, no face-to-face support is needed. So remote is also the most convenient channel. And finally, let me share our views on account opening. Currently, our account onboarding process is 100% branch based. With some exceptions, this affects the kind of customers we acquire and their tendency to be less digitally savvy. We will radically transform our value proposition to attract digital demand as well as deploy fully digital onboarding journeys to increase conversion. In summary, we will move from a branch-centric commercial model to a more convenient model based on customer channel preferences. Let's now move to Slide 16. We have identified for sure an ambitious transformation road map, and we have the means to fund the required digitalization. The cost effort is feasible. As a matter of fact, the revamp from front-end applications required for retail digitalization can be absorbed in normal business costs. Many of the elements required to deliver on that road map are already in place, enabling faster delivery. The new digital sales journeys for all products will be rolled out gradually over the next 12 months. And finally, we have clear accountability to execute with the new reorganization of retail products so that execution can take place in a focused way. Let me now move to business banking in Page 18. This is an outstanding franchise, outstanding franchise. Serving companies has been in our DNA since the foundation of the bank 140 years ago, and our current market positioning in these segments illustrates our strength. We have a broad customer reach with an overall 40% market penetration among Spanish companies. We have also long-lasting relationships. On average, they last for 11 years, which we believe is quite unique to Banco Sabadell. We also have deep relationships with these customers and know them well. On average, each one has 7 products with us. This feeds into strong market share across key products. For example, our market share in turnover at point-of-sale stands at around 17%. Our lending market share is at around 10%, and our international market share is approximately 30%. All in all, we believe that our business banking franchise has a strong foundation to drive further growth. Let's share a bit more on Slide 19. Within business banking, we serve 2 customer segments clearly differentiated: on one side, self-employed and businesses; and on the other side, SMEs. On the one hand, self-employed present and businesses present cost efficiency opportunities. Our main focus will be to improve efficiency through cost to serve reduction using a similar approach as for retail customers as their consumption behavior is, to some extent, analogous. On the other hand, SMEs are a profitable and highly efficient segment. SMEs are our strongest franchise, and we aim to strengthen the advantage that we have with them. Our main priority will be to achieve sound business growth while maintaining credit risk properly. I will now give you further detail in Slide 20. You can see the 4 levers that we expect to drive SME growth throughout the plan. The first one is growing the penetration of specialized solution among mid-market customers, following increased demand for more sophisticated products such as debt capital markets, structured finance, treasury or brokerage. These are highly profitable and mostly capital-light products. We are already working this path, and we are confident that we can accelerate it, given our proven expertise also in corporate and investment banking. The second lever is to expand alongside the export growth of Spanish SMEs. We currently have a very good positioning here and opportunities are arising for further growth. The third lever is vertical specialization by sector. This is something we already have in place for a number of sectors, both in terms of offering and in terms of specialized relationship managers, and that is working pretty well. We will continue to develop sector customized propositions to meet our customer-specific needs. Just as an example, we serve close to 6,000 pharmacies with a 25% market share. This means that we have the critical mass to address their specific needs and drive their satisfaction. And finally, there's a big opportunity arising linked to the next-generation EU funds, the Europe Union recovery package to support member states hit by the COVID-19. Although the details of how the funds will be managed by the government and are yet to be defined, holding a leadership position in the SME segments will allow us to grasp undoubtedly this opportunity sooner and effectively. All these levers are underpinned by an improved risk framework, which I will describe in a bit. But finally, an important shift that we are pushing in this business unit is an increased focus on portfolio profitability, with return on equity becoming more central in our customer decisions concerning, for example, growth ambition for a specific client or pricing. Moving on to Slide 20. I would like to share with you what is so special about risk management with SMEs for Sabadell. And this is an essential element of all our strategy. Our risk and commercial teams, who know our customers well, work in a coordinated manner to provide extensive ground-level know-how on each of our customers. This has always been there. But on top of that, in the last 1.5 years, we have deployed data analytics tool that provide further insight on an individual basis. This is quite simple, ground-level expertise plus advanced analytics. None of these 2 elements is now valuable enough on a stand-alone basis, but it is the combination of both together with the decisiveness of our implementation that makes our risk model unique and difficult to replicate. This granular understanding of each of our customers allows us to grow without eroding risk quality, proactively selecting where we want to grow. With this, I would like to finalize business banking. Let's move on to corporate and investment banking in Slide 23. Our corporate banking franchise in Spain is small and profitable. Our main priority here will be to enhance profitability without increasing the total capital allocated to this business unit. The chart in the slide illustrates our top 100 customers by capital allocation, which account for around 2/3 of the capital allocated to this business unit. As you can see, returns among these customers are widely dispersed. On the left side of the chart, we have a small portion of customers underperforming in terms of RaROC. These can be new customers where we may be just starting to position ourselves or others who have worsened their probabilities of default as a result of a deterioration. We will continue to be disciplined in the transitioning these customers who are on the left side of the chart to the right-hand side of the chart, and if it is not possible, we will be decisive in exiting their relationships. Let's now move to TSB, TSB on Slide 25. TSB is back on the path to profitability after the execution, the verifying execution of its restructuring plan, which will be completed by the end of 2021. Looking ahead, we are targeting a cost base of around GBP 730 million by 2023, which represents an 80% reduction versus 2020. We also envisage greater income generation, underpinned by the core lending activity of the franchise mortgages. Here, we expect to strongly outperform the market. We will be less ambitions in other products like unsecured lending or business banking following a lower-risk-appetite approach. As an important element worth noting is that TSB will fund its lending growth from its own capital and will make a positive contribution to the group's organic capital generation. We are forecasting a comfortable capital position for TSB with its core equity Tier 1 ratio standing above 14% throughout the period. If we move now to Slide 26. Let me share with you some of the milestones of TSB's restructuring plan. TSB has reduced its branch footprint by around 50%. This will leave a network of 290 branches by the end of this year. This is something that we were able to accelerate following the COVID-19 outbreak as changes in consumer behavior accelerated. It has also reduced its workforce to become a leaner organization with a headcount reduction of approximately 20%. Overall, TSB is on track to reduce its cost base to around EUR 730 million following the plan by the end of 2023. Looking ahead, we will maintain cost discipline while protecting commercial performance. If we now move to Slide 27. We believe that focusing on mortgages growth is the right move for TSB. The market in the U.K. is expanding. We have operational capacity to meet additional demand, and we have a low 2% market share, meaning that we have significant headroom to grow without affecting market dynamics. We also have strong intermediary relationships to build on, with most of our mortgages sales made through brokers who are satisfied with the service we provide. And last but not least, this aligns with our conservative risk approach. TSB has a good risk profile given its predominantly low-risk mortgage lending. We are targeting a cost of risk of 20 basis points in 2023, down from 51 basis points last year, mainly due to the change in business mix. As a result of all the measures we have just explained, we expect TSB to deliver improved profitability with return on tangible equity standing above 6% in 2023. Finally, moving on to Slide 29. I will quickly go through our other international franchises, which include Mexico, Miami and our international branches in Paris, London, Lisbon and Casablanca. We have set 2 priorities to maximize value generation for the group. First, we will increase the required profitability thresholds for our businesses here. This will naturally result in a reduction of our loan book in these geographies, which we have estimated to be around 20% by 2023. Our second priority will be a greater cost reduction focus. Along these priorities, we would like to mention that we will continue to develop our private banking franchise in Miami, which is stable and profitable, and that we will redistribute the customer mix of our international branches to focus more on serving our customer -- Spanish customers abroad. To end my part of the presentation before giving it to Leo, and then after, to Q&A, let me make a final recap. Sabadell is at a sound starting point to deliver on the transformation we see, with no major issues to be addressed and solid strengths to build on. Banco Sabadell will be, over time, a more domestic focused entity with an outstanding business banking franchise, an efficient and transformed retail unit and a profit despite relatively small corporate and investment banking franchise. TSB will be profitable on the back of a straightforward and efficient business model. For the time being, let me emphasize our position. We support clearly TSB's management. We believe in the transformation it has undertaken and we will not initiate any corporate action in the near term. Our other international businesses will be more capital efficient, thus increasing value for the group. Finally, I would like to highlight that the organization, corporate culture and management focus will be aligned with this strategy and focused on delivery. These are a path towards 2023, and we anticipate further and greater results beyond that. To close my presentation and moving on to Slide 32. I would like to share 3 intangible elements with you on our transformation. They are intangible, but they are very relevant. First, the team has the skills and is motivated. This might seem qualitative, but it makes a difference, I tell you, in an execution plan. Second, we know what needs to be done and how to do it. And third, we have committed to delivery -- to deliver with a sense of urgency and determination. I am very optimistic about the future of Sabadell and enthusiastic about the project that we have ahead of us. 2023 will be a significant step in the journey. By then, our well-established new capabilities will lead on to higher ambitions. And on that note, I will end my presentation. Thank you very much for your attention. I will now hand over to Leo, please, to elaborate on the financial elements of the plan.

Thank you, Cesar. Leo better than Leo, as you call maybe.

Yes. I'm so sorry. This is...

For the maybe some Spanish people in the audience.

I think I'll call you Leo from now on.

I see where you're going. Well, good morning, everyone. On the next section, I'm going to set out how the strategy that Cesar -- no, Cesar has just explained develops into a financial plan for the coming 2.5 years. I will first cover the macro scenario included in our strategic plan, along with the forecasted evolution for the sector in both Spain and the U.K. Secondly, I will go through the expected performance of our crop products in terms of volume growth. And then we will move on to the reflection of these assumptions in terms of the P&L, the capital and the funding before ending with a recap of our guidance for 2023. Moving on to the economic backdrop for our strategic plan. Our economic assumptions do not include the recent positive developments in market expectations, and therefore, are more conservative than our current consensus for both Spain and the U.K., as you can see on the slide. Interest rates for the period are also well below current market implied levels. Therefore, our plan is not dependent on an improvement of these base or shop rates. Finally, we expect exchange rates for our currencies that affect our businesses, which are mainly the sterling and the U.S. dollars, to remain broadly at similar levels as they are today. Moving on to the next slide. We show loan growth expectations for the private sector in Spain, which we believe shall benefit from the current supportive economic environment and the expected labor market recovery. In this regard, private sector lending is expected to grow across all segments, underpinned by both consumer loans and lending to corporates and SMEs, which we expect to grow at circa 3% compound annual growth rate, which will also benefit from the next-generation European Union recovery fund, which, as you know, will extend from 2021 to 2026. Regarding customer funds, we expect corporate and household deposits to grow considerably, circa 5% CAGR, driven by the improved economic scenario. This shall translate into a higher disposable income. For off-balance sheet products, we expect to see material growth in the sector, as deposits will continue to flow into off-balance sheet funds as a result of the low savings remuneration rate environment derived from the current negative interest rate scenario. Turning now to the U.K. market. As you may be aware, the current macroeconomic expectations are improving as we speak. The vaccination rollout has been positive so far, driving hopes for a speedy recovery. The mortgage market is expected to continue with its growth trend, circa 2% CAGR, driven by a solid economic growth, improving real estate prices and a resilient labor market in the U.K. In terms of consumer lending, we expect to see a rebound once the economy is fully open again, recovering from the low levels reached at the height of the health crisis. Moving forward now to the business outlook section, in Slide 41, we focus on our retail business plan in Spain. We expect our mortgage book to outperform the market throughout the plan, and therefore, to have a positive growth. We lay this forecast based on 2 pillars. The first one is that we have already outperformed the market in the recent past, leading to a market share in new lending of circa 9%, which is clearly above our stock market share in the 6% range. And we believe that the new strategic approach to this product will translate into a higher number of prospects and therefore, a higher rate of completions. Regarding consumer lending, we expect the book also to grow above the market, which is where we are already today. Gaining market share and leverage also on the new digital initiatives contributed positively to the growth of the loan book. Moving on to Slide 42. As Cesar explained, in SME and corporates in Spain, our focus is to increase our capital allocation as it is a very profitable market, which is the core of our expertise and relations. We expect our domestic business to grow above 3% CAGR in line with the sector, supported also by the European recovery fund and the banking credit associated to it, which may be as large as EUR 125 billion for the period of the fund. Business strong growth will be funded with a deleveraging on our foreign exposures, where we expect to shrink our book by around 20%, driven by the optimization process of our capital allocation. In Slide 43, we show the outlook for TSB in both mortgages and consumer lending. TSB will focus on the core lending activity of the franchise, encouraging more mortgage origination to the detriment of unsecured loans. Regarding mortgages, TSB has already proved it has a good starting point, having recorded a strong mortgage growth of circa 6% in 2020 and having set a new record for quarterly mortgage originations in Q1 this year. We expect to continue this strength and to sharply outperform the U.K. market by leveraging on digital capabilities and struck intermediary relationships. In fact, TSB's market share of new mortgage lending is already 50% higher than the stock's market share. Considering the size of the U.K. mortgage market, this provides a clear strong growth opportunity. Regarding consumer lending, our strategic approach has changed, as Cesar has already explained. And we currently have a lower appetite for this product as its risk-adjusted return is below that of the mortgage business. Therefore, we are assuming to grow below market expectations for this product in the U.K. In Slide 44, we summarized our lending mix evolution from 2020 to 2023. We are expecting Spain to grow, especially in the SME and corporate space, funded by deleveraging on international exposures, while TSB shows also growth driven by their mortgage book evolution, which is expected to be self-funded as TSB's profit increase. This growth path shall bring along a healthy front book blended yield and a high return on a risk-adjusted basis, leveraging on what our franchise does best and increasing our conversion rates through specialization and digitalization. Overall, we expect the total lending to increase over 2% annually throughout the plan. Let's now go through the different items of the P&L in more detail. Moving on to Slide 46. You can see the different drivers that we expect to steer the evolution of NII through the plan. The 3 main positive drivers will be: first, a higher loan volumes, as we've just seen. We expect to have a positive loan growth through the plan; second, savings on expensive wholesale funding maturities, both in U.K. and Spain. As we will see, despite having a net positive issuance plan in the coming years, the current prices for the back book issues to be rolled over are higher than the current cost of renewing them; and third, TSB, which will significantly contribute to our group NII growth on the back of its strong commercial activity in mortgages, which is already well above the market share current evaluation, as I just mentioned. As for the main headwinds, which we also have, those will be the loss of the extraordinary contribution of TLTRO III to the group NII, assuming TLTRO III ends in June 2022, which will be equivalent to roughly EUR 90 million in total as well as a lower contribution to the ALCO book, taking into account not only the bond disposal that we did in Q4 last year, but also the additional forward sale executed for the second half of this year in order to fund the new efficiency plan in Spain. We expect all this reduction of NII in 2023 compared to 2020 to be in the region of EUR 50 million in total. This figure takes into account also the potential reinvestment of the portfolio to be disposed in the second half of 2021. Looking ahead, tailwinds will more than offset headwinds, and our group NII will therefore increase at a CAGR of low single digits over the next 3 years. It is, in any case, in my opinion, very worth mentioning that we expect to achieve this positive evolution of NII already in 2021. This is -- it's not a back-loaded plan. We are aiming to reach these figures already this year. Also, it's important to note that in Spain, we are at the higher end of the scale when it comes to customer spread and NIM, which we are expecting to remain stable over the planning horizon. Additionally, as I pointed out earlier, all have focused our best on conservative macro and interest rate assumption. If we were to apply the current forward interest rates to our loan book growth assumptions, for example, the minus 0.03% on Euribor for 2023 instead of the minus 0.34% which we are planning in our bank, this would boost our NII -- group NII by more than EUR 50 million in 2023. Leaving the NII line to one side and moving now into fees, let me -- allow me to take one step back. It's worth remembering that Sabadell has managed to implement a successful fee strategy in the past. For instance, between 2012 and 2019, its fees increased at a CAGR rate of over 8% on a like-for-like basis. This is excluding any potential impact derived from acquisitions. It has only been in 2020 that our fees have decreased, and this has been due to the impact of COVID-19. Looking forward, we are already raising our guidance for 2021 to a mid-single-digit growth as we are seeing higher activity levels and better performance of fees than we initially expected. We are confident that we will achieve this growth. As an example, only by annualizing the Q1 fees we would reach an increase of over 2.7% year-on-year. And as I said, we expect to increase the pace of the fees over the coming quarters. On the basis of this structure record and especially taking into account the current evolution of 2021, we expect fees to increase by a mid-single-digit CAGR in the period. Some of the levers for this growth will be the following: stronger and more begin -- benign economic and commercial activity, which we are already seeing in 2021; higher contribution of our insurance businesses, supported by our business developments and on the back of the momentum of new issuance premiums relative to mortgage lending in Spain; growth in specialized solution fees in our middle-market franchise, as I explained before; or also improving our non-loyal customers' profitability. In this regard, we can implement further strategies to our current customer base in order to increase their loyalty and our share of wallet. Additionally, let me also share with you the strategy that we are implementing in relation with the corporate and SMEs' deposits and current accounts. We're already charging a variable maintenance fees of circa 40 basis points on average on balances above a certain amount, set on a client-by-client basis. Moving on, looking at the cost line. At the top of the slide, we can see the expected evolution for the group space -- cost base for the next 3 years. In the first place, in Q2, we are already benefiting from the gross cost savings of around EUR 140 million as a result of the recently executed restructuring plan in Q1 in Spain. Additionally, we will launch a new efficiency plan in Spain in Q3 this year, which we will use to accelerate our transformation to a more digital business. This plan will be executed by the first quarter of 2022, and it will bring gross cost savings of approximately EUR 100 million per year. This plan will be funded by the forward sale of the bonds in the ALCO, which I just mentioned, which will also take place in Q3 to cover the restructuring plan. We will start seeing the benefit of this efficiency plan from second Q 2022 onwards. Meanwhile, in TSB, as a result of our restructuring plan, which is nearing completion 1 year ahead of schedule, the reduction of its cost base will be close to EUR 70 million in the period of 2020 to 2023. And finally, we are being somehow conservative, and we are assuming an underlying cost inflation rate for all costs of around 2% annually. Therefore, all these elements shall bring the total cost base to around EUR 2.9 billion by 2023. This positive cost evolution, along with the expected improvement in revenues, shall bring along an improvement in the cost-to-income ratio for the group. It is worth mentioning that the downward trend in expenses will decrease the percentage of total costs in relation to business volumes by 25 basis points in -- or by 2023, setting this ratio at 0.8%. As a summary, we're expecting positive [ euros ] evolution and therefore, PPP growth as a consequence of both positive evolution, this is growth of both NII and fees, plus the decrease on all expansions that I just explained. In this context, we also expect positive evolution of PPP, pre-provision profit, which will increase from the circa 210 basis points on risk-weighted assets that we had in 2020 to north of 250 basis points by 2023. Prior to analyzing our forecast for nonperforming assets, let us first share with you our reading of the economic backdrop. If we look at asset quality on a sectorial level, we can see, on the one hand, that the aggregate indebtedness has mainly increased in 2020 due to the decline of GDP, minus 12%, rather than to a sharp increase in terms of outstanding debt. This can be appreciated, looking at the leverage ratio as a percentage of GDP. If we calculate the current leverage ratio over 2019 GDP levels, a pre-COVID level, this is -- what we will see is that the increase is very slightly, only 4 percentage points. On the other hand, the levels of indebtedness in Spain remain well below those at the Eurozone after the massive deleveraging done in the last decade by the private economy. Indeed, we expect indebtedness levels to fall over the next few years, while remaining below the Eurozone level as the GDP growth kicks in, as you can see on the slide. Also, it's important to note that most companies have used their higher indebtedness levels for precautionary reasons, strengthening their liquidity buffers, meaning that the actual increase in net debt has been minimal, as you can see on the right-hand side of the slide, where the net debt levels are similar to those back in 2007. As you know, the health crisis caused by COVID-19 has led to an unprecedented stock shock in the economy. And as a result of this, a number of government measures have been put in place in order to cushion the impact from this crisis. On this slide, you can see the recent developments of these measures, which are already and will continue helping to further ease the impact on the economy and pave the way for a smooth transition to a recovery of activity levels. In this regard, expanding the application of maturities and great spirits to sectors that will recover later will definitely limit their default rates. In addition, the extension of the [ forward-look ] schemes may prevent individuals from defaulting from payment holidays -- when payment holidays come to an end. Additionally, we must also take into account the positive impact that the new generation fund, which amounts to close to 14% of the overall GDP in Spain, will have through the Spanish economy. Overall, as a result of these economic and fiscal policies, where financing facilities have been extended, default predictions for the sector have been revised downwards by analysts. The peak is now expected to be lower at 5.9% NPL ratio instead of 6.4%, and is expected to take place 1 year later, this is in 2022. Similarly, the expected increase in NPLs is not comparable to the surges seen in previous crisis, as any increase will be limited by the [ afforced ] public support measures, the very different nature of this crisis, which in some sectors such as the real estate sector have not been overly affected, and a much lower level of private debt after all the deleveraging exercise that the private economy did through the period 2018 to 2020. Moving on to the next slide. The graph at the top shows the expected evolution of our NPAs over the coming 3 years. As we've just seen for the overall of the sector, we also expect to see the peak of NPAs in 2022. In any case, we believe that this slight increase in both NPLs and foreclosed assets, it's manageable. In other words, we expect our gross NPA ratio, without the need for material inorganic disposals, to remain below 5% in 2023, while our net NPA ratio will stand at below 2.5% by 2023, whereas we expect our coverage ratio to remain stable in the last 3 years. In terms of cost of risk, this will follow a downward trend coming from 2020 in both TSB and the rest of the group. This will be supported by an improved economic outlook and a reasonably stable asset quality that I just mentioned. We expect an improvement in the cost of credit risk at the ex-TSB level from 84 basis points in Q1 2021 to 55 basis points in 2023, while in TSB, it will remain reasonably stable at Q1 figures. This is around 20 basis points. This shall bring the total cost of risk for the group to 45 basis points by 2023. It's worth noting that this will be a higher level still than the 32 basis points that we observed in 2023. When we look at the total overall expense in cost of risk, this is including foreclosed assets provisioning, NPA expenses, et cetera. We see this level at 60 basis points, very much aligned with the current consensus estimates. Let's continue now with the capital and funding section. In Slide 54, sorry, we showed the repayment plan for the outstanding EUR 32 billion of TLTRO III. As you see, we are expecting to comfortably replace this facility with the current excess of liquidity and the wholesale funding that we are planning for the coming 3 years. At the same time, our liquidity position will remain very strong with loan to depo where it is today, liquidity coverage ratio and net stable funding ratio above 150% and 125%, respectively. Moving on to Slide 55. In terms of MREL requirements, we are already complying with the 2022 interim milestone requirements. We expect our funding plan to push MREL levels towards circa 26% of risk-weighted assets by the end of 2023, well above our 2024 requirement. As you may also know, we have to comply with MREL requirements based on leverage exposure as well as subordinated MREL targets. In all these cases, we are already currently compliant with the 2024 requirements. As you can see, the funding plan for the next 3 years is reasonable for it implies new net issuances of around EUR 1 billion of covered bonds and less than EUR 1 billion on MREL-eligible senior or senior number per year. Let me point out, however, that we expect to prioritize sustainable bonds when issuing these eligible senior bonds. At the same time, Tier 2 and AT1 buckets will be maintained full in order to optimize our capital structure. Let's move to capital in Slide 56. When setting capital targets, we have a clear target. We will -- and we want to maintain our CET1 fully-loaded ratio above 12% as we will keep the management buffer above 350 basis points, all throughout the forecasted period. His is in 2021, 2022 and 2023. We have tailwinds where in order to reach these levels and will be driven by the accumulated net profit for the period, where we have assumed an accrual of cash dividend of 30% throughout the plan. When setting this theoretical payout level, let me be clear that this is not a strategic target, but the regulatory requirements, in our specific case, the average payout level over the last 3 years, the one that we used in order to disclose with you the Q1 CET1 ratio. When we have further clarity on the regulatory approach to dividend policies, our Board should set a dividend payout policy. Also, capital will be supported by the deleveraging in the international corporate lending that we've reviewed before. In terms of headwinds, we expect and have incorporated into our figures an increase in risk-weighted assets driven by the higher volumes, both in Spain and the U.K., and also the negative impact coming from the EBA guidelines that will come at the beginning of 2022, and the current expectations on regard Basel IV impact currently expected by the end of 2023. In any case, we've been assuming conservative assumptions on these regulatory headwinds. Our CET1 fully-loaded post Basel IV will remain above 12% throughout the plan, which implies an MDA buffer, as I mentioned before, north of 350 basis points. Finally, let me summarize the guidance that we have been sharing. Our aim is to create sustainable shareholder value, preserving our balance sheet quality whilst also delivering sustainable income growth and a controlled risk appetite. We will improve our profitability. But at the same time, as Cesar has explained, we also will work on evolving our business model by focusing on those segments that are most profitable and deleveraging in those that are not profitable enough, entail a higher risk or require a higher capital consumption. In terms of core revenues, we expect NII and fees to grow gradually throughout the plan, achieving a compound annual growth rate in the low and mid-single digits, respectively, during the period 2020 to 2023. Let me focus again that it's important to mention that this will not be backloaded in the plan, for we shall start seeing it already in 2021. In addition, thanks to the increase in revenues as well as the cost reduction initiatives that we have in our road map, we expect our pre-provision profit to improve and to be north of 250 basis points on risk-weighted assets by 2023. At the same time, I would like to highlight that our strategy is firmly geared towards preserving our balance sheet quality, while deleveraging sustainable income growth with a controlled risk appetite. In this regard, we expect credit cost of risk to be at 45 basis points -- 55 basis points ex TSB, while maintaining a controlled NPA ratio below 5%. In terms of capital, as we just reviewed, we expect to maintain a CET1 fully-loaded post Basel IV above 12% throughout the plan. And finally, as for profitability, in this short time frame, 2.5 years, we are targeting a return on tangible equity north of 6% based on the growth of our income and the improvement of our efficiency. This should only be a first step, for we expect, as Cesar mentioned before, our return on tangible equity to keep on growing from 2023 onwards. And with this, I hand over to Gerardo to kick off our Q&A session.

Thank you very much, Leo. We shall now begin the Q&A session. We're running slightly ahead of agenda. [Operator Instructions] Operator, could you please open the line for the first question?

The first question comes from Alvaro Serrano from Morgan Stanley.

I have one on NII and another on costs in the U.K. On NII, maybe this is more for Leo, but can you help us understand that the takes between -- the offsets between the slightly higher curve you're assuming versus the rundown, presumably the TLTRO because I think you've got EUR 32 billion, the 50 basis point bonus is EUR 160 million headwind that you'll have to offset to grow the NII. So I'm wondering how that compares to the benefit of the rates. You've given that EUR 50 million sort of benefit if rates go to minus 0.0 -- to minus 3 basis points, but that doesn't seem to be nowhere near enough to offset TLTRO. So some color on that. And maybe you can comment as well on the on the yield of the international business that you're losing versus Spain? Is that part of it as well? And the second question, on costs. More broadly, on the U.K., the EUR 730 million target, at least on my numbers, it looks like it's still a cost-income ratio, possibly around 75%, even 80%, which is clearly still suboptimal and worse than peers. I mean is the IT system fit for purpose in the sense that, I mean, we're now 3 years since the first implementation. I realize there was trouble at the beginning, but that should have been ironed out, and you've got another 2.5 years or 3 years. Is there -- what's the issue there? Is it the cost base? Is the IT systems? Or is it purely the need for critical mass?

Shall I start by NII, Cesar?

Yes, Mr. Alvear.

Okay. Let me try to address your question. First and foremost, please, the EUR 50 million sensitivity on NII due to the difference between the Euribor curve that is included in our model by 2023, minus 32 basis points versus the current forward curve, minus 0.03, it's not included in our numbers, okay? Not included. So that's not considered in our NII path. That would be a positive sensitivity should we meet the current cover -- sorry, forward curve in 2023. So that's not included. And [ regaining ] the question regarding TLTRO III. You're very right on the numbers you made, but there is one thing to take into account. We currently have over EUR 23 billion of excess liquidity, which costs us 50 basis points also. So the net number that we will have to address or to offset basically between 2020 and 2023, again, assuming the TLTRO runs in June 22, which is the current assumption, will be EUR 90 million, 9-0, okay? Not EUR 160 million because you have to deduct the access on this liquidity that we have to pay right now to the ECB that we will not have once we have given back the TLTRO, okay?

So, Alvaro, on TSB, I think the cost reduction efforts that we have done at TSB have been very significant. The number of branches has been reduced by more than 30% and the number of employees by more than 20% in the last 2 years. And we have decided now to stabilize the franchise. We see really a big potential for growth. And in the priority because the resources are scarce, you decide, and it's a strategic decision. We decide, do I continue to reduce costs or do I focus in creating really an equity story and a franchise that is really special. And we have opted together with the management team and the Board of the U.K. for the latter. We believe that our market share is below par and that our systems are above par. And therefore, we are setting ourselves for growth. We've done it already with the growth of the stock of mortgages of more than 10% in just a year. And we are seeing that we still have traction there, and that's our focus. You're right. The cost-to-income ratio of the U.K. is not even, at the end of the period, all that great. But in the end, it's more about return on tangible equity, and we are confident we will reach that 6%, and that's why we've chosen for this strategic path for the U.K.

The next question comes from Francisco Riquel from Alantra.

We'll start with -- you can comment on the cost-cutting plan in Spain. The plan you have just implemented is to have a limited impact on the business as it is mainly related to central services. If you can comment on the new one, where are the savings come from? Will you close down branches as well? And also if you can comment on the cost of the plan, the previous one was 2.3x synergies, if I remember well, if this one could be higher or not? And also, if you can share with us the targeted cost-to-income ratio, that would be useful. And second question about capital. If you can please quantify the impact from the regulatory headwinds of the EBA and the Basel IV that you have incorporated in the plans? And also the targeted growth in risk-weighted assets versus the above 2% growth in loans since to me, when I add up the total payout, including the dividends and the 81 coupons, that is going to be difficult to fund organic generation unless you resort to asset disposals. So if you can comment if you are including any asset disposals embedded in this plan, I mean, beyond the renting unit that you have mentioned, for example, the sale of Andorra, Mexico, any other asset.

So if you agree, Leo, I will take the first one on cost and you take capital, and then I come back to sales of Andorra Mexico or whatever. Okay, let's do that. So on the cost-cutting plan, we are giving a very general guidance at this point in time, and we are doing that on purpose for the number of sensitivities and also because the plan is in the process of deployment. So what we would like to share at this point in time is that we have a purpose of cost reduction of EUR 100 million, and that will happen before the end of Q1 2022. The exact nature, how many branches, if there are people involved, what are the other natures of the cost reduction activities that are going to be entailed in this plan, we reserve for a next moment in time. And what we'd like to give is the guidance at this point in time of the amount. In terms of the cost efficiency, I think it shouldn't be too different from things that we have seen in the past. But as we are still defining the plan, let me leave it at that very general level. Leo, would you like to take the capital one?

Sure. Just to add on that, if you wish, that in any case, this restructuring is funded by the sale of the ALCO portfolio. That's going to be whatever is going to be needed, and that is included in our numbers. The lower contribution coming from these ALCO book due to the disposal of bonds in order to fund this restructuring. Now as per the CET1 ratio, we are very confident on these figures, to be honest with you. We are taking into account all the potential impacts coming from the regulatory headwinds. We gave you the guidance for EBA -- sorry, for the impact of EBA guidelines, which was around 15, 1-5 basis points, and this will happen in 2022. We're not giving out the number on Basel IV because it's not closed. As you are aware, the problem or the potential impact in Spain as per Basel IV, it's basically focused on operational risk. I don't think, nor for the system, nor for Sabadell, we will have a big impact coming from the credit exposures because we've already had the -- all of us have already had [ premes ] and have the EBA guidelines before getting into Basel IV. CVA risk, I don't think it's going to be an issue either for the system. And basically, all the potential impact comes from the operational risk. Unfortunately, this is not yet closed as per the final decisions, nor that it will happen in 2023. We are counting it will happen in 2023, which is the current calendar, which, as we all know, has already been delayed a few times. But we can't incorporating those numbers here, and we have been conservative on that regard. So we are putting the full impact that it's now on the table. Even taking that into account, our capital ratio is well above 12% and it's well above 12% accruing 30% of cash payout, as I mentioned before, okay? Now the basis for these are what I said, the income that we're going to generate in the coming 3 years, basically, plus the deleveraging that we're going to do in the international front, although, as you mentioned, RWAs are going to grow. Our book -- lending book, we're expecting to grow this lending book by over 2% in the coming 3 years, although probably the risk weighting of the overall book should come down slightly because right now, the capital consumption of these international loans is obviously higher than, for example, the mortgages in the U.K. or in the mortgages in Spain or even SMEs and corporates in Spain. So although loan book is going up, RWAs are going to go up, but not as much as the loan book, if you wish. And also, it is considered in our numbers. Some of the -- well, basically, disposals that we have already published, no other. So basically, what we have included here on these numbers are the transaction on the renting that we did and we disclosed just before Q1 results. And also the numbers that we believe that we can achieve in terms of capital out of the sale of the bank in Andorra. No other material -- no other issues have been included as per disposals. But again, as I mentioned, we're fairly confident on this capital number to be well above 12%, well north of 12%.

Yes, that's exactly what it is. And I think it is important to stress that one of the reasons, and there are many others, for which we are not considering the disposal of any of the main assets in our portfolio right now is that we have confidence that we can sustain this 12% Core Tier 1 fully loaded during the course of the period without requiring any further sale. And the one of Sabadell Andorra, its a small transaction. I mean it's a book value of around EUR 100 million with a contribution to the group of around EUR 5 million and risk-weighted assets of around EUR 500 million. So it's a small transaction. It is done for strategic reasons. We don't think it fits perfectly our portfolio. We thought that the execution risk was low. The partner or the acquirer is trustable. We are confident and that's what -- why we are doing it. But we are not doing it for capital reasons, first, because it doesn't have the size to fit that purpose. And second, because we are confident that we don't need it. And that is why we are not considering at this point in time, in the short term, the disposal of any of our relevant businesses outside of Spain. together with many other reasons, their improving performance, et cetera.

Sorry, let me just add that as well as I mentioned that we expect to deliver already in 2021 on the income lines. This is on the low single-digit growth on NII and mid-single-digit growth on fees and commissions. We are also expecting to deliver in terms of capital. So already in 2021, we're going to see this north of 12% CET1 fully loaded by the end of the year.

The next question comes from Carlos Cobo from Societe Generale.

Congratulation on a fairly reasonable business plan. A couple of questions also, trying to touch on NII and your growth expectations. Quickly on NII, if I'm doing this math correctly, your -- you disclosed a net impact on NII by 2023 from ALCO and TLTRO of around 4% combined negative impact. And we are targeting like to mid-single-digit loan growth. So those 2 things should be broadly balancing each other. So how do you expect to deliver on the low single-digit growth in NII? Is it purely a mix effect on the new production? I mean I think that sounds like the demand in what would be the ALCO policy going forward this year, you're expecting to top up the portfolio and that's something you are not including in the disclosure. That's one. And the other one is on growth. Obviously, you are not an exception. A lot of banks are now being more constructive on loan growth. But I wonder what's different in Spain from the pre-pandemic levels, where the economy was growing up real times 2%, 3%, and we still saw the corporate sector deleveraging. Could you split your growth targets between what's the underlying trend? And what do you expect will imply the new European funds in terms of loan growth? Is that something happy to discuss? I want to understand how leveraged your growth and revenue targets are on this new European program?

So I'll leave you the easy part level, Leo, which is on the quantitative part of this element, which generates so much curiosity and which I understand why it does. And then I would like to close with some very qualitative statements about the levers that we have identified when reviewing the bank.

Okay. So starting with the NII parts and bits and parts. So basically, yes, roughly the numbers that you said are more or less what we are taking into account on the impact of both the lower ARPU contribution on the TLTRO that I mentioned. We have other levers. I mean for example, just because of reducing our wholesale funding costs, both in Spain and the U.K., important, we should free up around EUR 40 million to EUR 50 million in the same period. Another lever is obviously the volumes that I mentioned before because we want to grow our book, and we want to grow our book more or less at the same spreads as we have right now, perhaps a little bit smaller is what we've included -- I mean slightly smaller spreads is what we have included in our plan, but fairly stable. And another big lever is going to be TSB. I mean the evolution of TSB for the coming 3 years, it's -- we believe it's going to be material. And this will have a big impact or a material impact on NII and also on fees and commissions, but especially in NII because we're going to be focused on mortgages. I mean the production of mortgages that we're doing right now, both in Spain and the U.K., are very healthy. I mean U.K., we're doing spreads above 220 basis points, which is on an adjusted risk basis, a very healthy product to have. And we are producing already 50% more on our origination market share than what we have on the back book. We are growing much faster than on the sector. And this is possible probably only because we are a very small player. So basically, we can grow pretty fast. We can outrun the market, and we don't have to touch prices because we're very small. So we do -- we are very -- we have quite big grounds on the evolution of TSB for the coming 3 years. So I would say TSB plus volumes plus reduction in the wholesale funding cost space will more than offset -- will more than tackle that negative impact coming from TLTRO and the ALCO -- on the ALCO book.

Indeed, this has carried a lot of discussions and assessments and backs and forths between Leo, myself, the team, all the elements of the team in all the business lines. And it is true that we are counting on higher volumes on good U.K. contribution to overcompensate the headwinds of the TLTRO and the ALCO loss of income. And this is going to sound again, a little bit qualitative, but I'm sorry, I think it is well grounded. This franchise is very strong, and at the same time, has elements in which with clear acupuncture it can perform better. And this is across SMEs. And there, we expect the good performance will happen earlier. And then it will kick in more progressively in all the lines of retail. And that transformation requires a little bit more of time. And that's why this plan is not backloaded. It is evenly loaded because we see that there are some quick wins that can be executed immediately, some transformation elements that will kick in later. And we have identified all those elements, and the whole team is aligned, confident and behind this plan. We see that there are so many elements that we can improve in mortgages. We are already growing more than our market share. And we still see that there are so many levers that we can touch on and that have been untapped and where we are putting already the foundation, consumer lending, exactly the same, off-balance sheet you mentioned. And as Leo said, the path is also significantly improved because of the trend that we have capped and we have lowered versus the trend that we are observing now for TSB. So overall, we think that we can -- we've discussed it at length. And of course, we knew that this question will be coming. And the debate has been long and intense, and we are confident. We are confident that we can deliver.

Now we have to deliver and we will. And then I think you made another question, Carlos, regarding what are our expectations or how -- why are we confident that the lending space in Spain is going to grow, and therefore, we are going to grow. Well, I think there are a number of levers. I think the first one is basically, well, we expect GDP to go up very sharply in the next few years, as I think all of us. Second, I think the leverage of the private economy, as I tried to show in a few slides before, it's well below the Eurozone today. So I think there's a space for growing. This is the completely opposite situation that we had at the beginning of the previous crisis. This is back in 2010, where the big problem of the Spanish economy was basically the high leverage of the private sector. Well, that's not longer the case, nor are mortgages nor on SMEs and corporates, where we're both below the European average, especially in SMEs and corporates. And third, we expect to have a big impact coming out of the funds coming from Europe, the new generation funds. Our numbers are that this could entail as much as EUR 125 billion of leverage coming from the private sector, obviously, in the space between 2021 and 2026. But just to remind, the overall loan book of the Spanish private SMEs and corporates is in the region of EUR 550 billion. So EUR 125 million is a big piece of the cake of that. So we are fairly confident that we're going to see growth on these segments. And based on that, well, I believe we're not being extremely aggressive on our growth targets because what we are expecting is basically to outrun on the mortgage book, but that's something that we've already been doing in the last 2 years. So we believe we have the grounds to keep on doing that in the coming years, especially with all the initiatives that we're going to put in place. So it's -- we have a good starting point, and then we're going to put initiatives in place in order to foster that difference with the market. So we are confident that we're going to have quick wins there. We are confident that we can also have quick wins in consumer lending because of all the digitization experience that we want to put in place in the -- on the bank on the basis of the current evolution, which is good already compared to the market. So again, this is about where we are doing better than the market and we expect to keep on doing so. And then our SMEs and corporates, I think we've taken a -- if you allow me, between brackets, kind of conservative approach because we are not aiming to outrun the market here. We are aiming to keep our market share. So to do as the market does. And this is the core of our business. And this is where we have our expertise and this is where we are very good at, as I think the franchise has shown in the past. So our growth expectations may be a little bit of a surprise for the market. But I think this is coming through the -- what we've seen in the evolution of the overall economy. So we are positive on the economy, and we're not being very aggressive on taking market share from others. We basically stay more or less the same, especially in SMEs and corporates, which are probably what's going to really move the needle there.

If I have to be completely honest, there's a lot of low-hanging fruit out there in delta terms. So with the quality of the franchise that we have and the things that we can do, we are not using any digital acquisition mechanism in this bank. Everything in retail is just the people who show up through the branches today, I mean the delta there, just with that example. Another element, we are not pushing fast enough on our consumer lending, which is one of the products that yields faster and the better results, although later, it has a cap. We are not pushing further because we need to improve our risk model system, and that's not so complicated to do. So it's low-hanging fruit. And had we added all the elements of positive -- potential positive evolution that we see as potential of improvement of this franchise, we will have given you the figure that would have created even more skepticism. But that's why we are confident that this plan is implementable. It's full of realism in all the elements, in income, in cost, in cost of risk. And I think we have set ourselves to deliver.

The next question comes from Mario Ropero from Bestinver Securities.

I have several questions on costs. The first one is on the cost base of TSB. If I take the cost base of the first quarter 2021, I guess to something like over GBP 800 million, GBP 830 million. So if I also add the 70 million you are saying towards year-end, I get something like 760 GBP million, and this is without considering underlying inflation. So what am I missing relative to the GBP 730 million target you gave in 2023? Then a couple of quick questions on costs in Spain. I know you're not giving details on the plan, on the EUR 100 million cost-cutting plan. Could you at least tell us the approximate payback you're expecting there? And then also, you said that the retail banking franchise in Spain needs radical transformation and digitalization will be an enabler. So that means, I guess, that significant investments will be required. So could you tell us how much investment do you think the bank will need on digitalization in the next 3 years? And how much could go through the P&L?

Could you start with the digital topic?

I'll start with the digital topic, okay. So I think banks have been overplaying the investments of digitalization. And to be truly honest, the front-end solutions plus the core process redesigns that are required are a fraction of the total cost of running a bank from an IT perspective. And in that sense, I think the amount is perfectly absorbable. And I'm not going to give you a specific figure, but we have run the numbers. Each division has planned exactly what are their needs for that digitalization on a per product basis, and it's already plugged in the numbers. And it's not a significant amount. And it's not a significant amount for 2 very clear reasons. The first one, a lot of it had been done already. The question is that it has not been plugged together, and the whole process redesign and the execution have not been executed, but a lot of it was in play, and that is going to help us also in the time to market. And the second one is that we already have systems that allow us to plug in through APIs and a number of things. So the infrastructure for that is basically in place. And the cost of those front-end transitions are very simple. Let me give you an example that I think illustrates very well. When you see web pages, web pages are done everywhere all the time, even for very small business. How is it that the bank will have such a trouble in reviewing? And this is just a minor example, how is it that it will be so expensive to do the digital transformation of the front end of a bank. So it's only in the numbers. It's feasible. The number is not significant, and we are not disclosing with that level of detail.

As per the numbers on the costs on TSB, you're absolutely right, but those are stand-alone numbers, the GBP 730 million. So when you translate that into the contribution to the group, you have to add the amortization of deposits and brands that we have on top on the -- of the individual or stand-alone numbers. And that's how you reach the, what, GBP 760 million that you mentioned. So both numbers are good. One is a stand-alone situation for TSB. Second one is the numbers at the group level.

Sorry, on the payback of the Spanish plan. Could you talk about it?

No surprises there. No, no surprises there. You won't see major shifts up or down.

The next question comes from Marta Romero from Bank of America.

The first one is for the CEO, is a mid-single-digit ROTE adequate to be running a bank with a balance sheet of Sabadell's profile? And the second question is related to this, why have you not been more ambitious on cost in Spain and TSB? A 5% cost savings plan doesn't seem too transformational. Has capital been constrained? And why are you not doing more on TSB costs? Is that because a disposal is still the way forward? And here, what would be the minimum acceptable price in terms of capital generation that you would accept for TSB? And sorry, a couple of clarifications on net interest income. How much of the yield curve you've embedded in your plan, adding to NII in 2023? What is the contribution in absolute terms in euro terms of the ALCO portfolio in Spain in 2023? And here, if you just could update us on the outstanding capital gains in your bond portfolio today because of the move -- the recent move being in the second quarter, I would assume it would have come down versus the EUR 1.1 billion at the end of Q1.

Thank you very much, Marta. Of course not. Of course, a return on tangible equity of 6% is below par. And again, we debated ad nauseam. Should we give them a plan to '24 and '25 with a very attractive return on tangible equity? Or should we stick to our guns, make the time delivery frame of 2.5 years and be absolutely transformational and set the base for then even grow clearly further. We are starting at 1-plus return on tangible equity for first quarter 2021, and we are moving it to 6. And we think that this is feasible, ambitious, but it's certainly not the end of the journey. How could it be? How could it be? I think on the contrary. I think many of the elements of this plan are not reflected in the numbers because the transformation that we are undertaking will, of course, have impact beyond that period. In terms of costs, I think we have been -- what we have put in the table is what we have at hand and what we are going to deliver in the short term. Will there be more opportunities for the future? There could be. We will certainly be relentless about them. But this is a realistic, is a realistic plan, and we have been strict on that. In the capital gains and the NII, I will leave it to Leo, but certainly, I think it's relevant to say, and this provides also some certainty of execution, that we have already taken the capital gains because we have done a forward transaction to September on the sale of our ALCO book. And that we have taken as much as we thought was needed at this point in time and what was executable in terms of addressing the cost reductions that we have planned, especially for Spain and for TSB. I think we covered before, the cost reduction has been very high. We are going to go into the development of the franchise play in the short term. Thank you, Marta.

Sure. And just on your questions regarding NII. So basically, on the yield curve, nothing, 0 because basically the average of Euribor, 12-month Euribor in 2020 was in the mid-30s. And the number that we are putting in our models for 2023 is minus 0.34. So it's basically no upside there. What I mentioned is that if Euribor gets better, then we would have an upside, which is not included in our NII. Second issue, the contribution from ALCO books, as I said, it's going to be around EUR 50 million lower than the one that we have in 2020. So the overall contribution would be in the region of EUR 200 million by 2023, obviously, based on the fact that we will replace the bonds that are to be sold in order to fund this efficiency plan on 2023 -- sorry, 2022 after the planning is [ gets going ]. And as per the different EBITDA impacts on the bank contribution through 2021, well, we're going to see this in basically only in fourth quarter because what we've done is forward sales of these bonds by the end of third quarter. So the impact will be in Q4. And in any case, let me stress that we are expecting to see NII growth, total NII growth already in 2021 despite the disposal of these bonds taking place in 2021 and not being replaced until 2022.

Sorry, just a clarification on TSB NII. You've got the base rate up 50 bps. Based on your own sensitivity, that would be 4% of NII growth. Is that the right number?

Let me come back to you, Marta. I don't have that on the top of my mind right now.

The next question comes from Andrea Filtri from Mediobanca.

Yes. A bit of a follow-up from Marta. If you could give us the NII growth split between Spain and PSP net of the color you have given us already. On Basel IV, if you can tell us what you're assuming in terms of impact within your guidance of over 12% for CET1. And then I have a question on Mexico, Miami, the other international business, which are targeting to deleverage strongly. So why the change of heart of not selling those businesses? And just 2 very quick clarifications. The first is on TSB. If I understand correctly, you're deciding to keeping it as a mortgage bank to surf the momentum. And you have it reaching the same royalty of the group, while if it were attributed to other hands, it would benefit from larger scale and product offer. So why not sell it to fund faster cost cutting in Spain? And just a very final one, are you then abandoning for good the M&A alternative for Sabadell?

Okay. Let me go to this, and Leo, if you want to jump in, feel free. Mexico and Miami. It's -- there's also an underpinning element of regulation here. So we have to improve the capital returns of these franchises because on local terms, they yield more than on European terms. And what we are trying to do is to improve that by selecting the assets and selecting the activities that would also have a higher return on equity on our European books. On everything, Mexico, Miami, TSB, I think we are very, very clear on what is the elements for our decision of keeping them and not starting any process in the short term. And that is that we think that there is, to begin with, a clear underlying improvement in what is going to be the delivery of those businesses that is going to be discounted if we were considering any type of transaction at this point in time. But furthermore, there is no requirement of capital at this point in time. The reductions that have been done in Spain and in the U.K. have been very substantial. And I understand that from an analytical financial perspective, there's no limit to this. But you have to understand that, for example, we exited 1,108 people -- 1,800 people in the first quarter of this year from our activities in Spain. That's 10% of the workforce. You have to run a bank because those people were doing things. And we did it with an impeccable execution which yielded in the month of March an even higher growth than was before happening. So there's also an element of execution. And after the significant efforts done in both in the U.K. and in Spain, we think that the franchise needs a rest and needs to focus on delivery on growth. The abandoning of M&A activities, I don't think there's anything in the cards. But that's not -- that's more of a Board and shareholders' decision than a management decision. The reality is that for the time being, we are satisfied with our stand-alone journey. And we think it has a very significant way forward in terms of positive development. So it's not in our play, but certainly, it's not something that we see happening. I think stability of the franchise of all the business units, reassurance that we are focused on performance and delivery, based also on the fact that we could not deploy the capital further and that we are at ratios that make us very comfortable, make the solution from a strategic perspective, very simple. In the medium term, of course, options will open, and they will be then considered.

Yes. Per the details that you were asking, Andrea, you're going to have to understand that we don't want to get completely naked on all the details. But giving you some rough numbers, I'd say NII ex-TSB should be reasonably flat, perhaps slight growth in the period. And then obviously, TSB going up for the reasons I mentioned before. And I'm including within the ex-TSB part, obviously, the headwinds, both the ALCO lower contribution and the TLTRO III impact. And as for Basel IV, please allow us not to -- we're not going to disclose the number because as I said, the impacts are not finished. So we have our numbers -- inside numbers. But those are based on the current assumptions, which we don't know yet whether we're going to be final or not. In any case, let me assure you again that the numbers that we have included in our projections are conservative in terms of capital impacts, again, as with the rest of the plan. And we are fairly -- no, we're confident, absolutely confident that we will be above 12%, including Basel IV impacts.

The next question comes from Ignacio Ulargui from Exane BNP Paribas.

So I just have 2 questions and a quick follow-up. So the first one is, how do you see a competitive landscape in the U.K. and Spain? I mean we are seeing more and more aggressive offers in the mortgage market in Spain. I mean how do you -- I mean you have given us a guidance of flat margins. But I mean how does that interplay with the trends that everyone wants to focus on growth. The second one is, I mean what's the negative impact of deposit growth in your NII. I mean I would expect deposits not to grow much once economic recovery starts to crystallize, and a lot of that deposit is being used. And a very small follow-up on Alvaro's question. I mean what is the contribution of the NII of the international banking business? I mean how big was that in 2020, let's say?

I'll take -- let me take the mortgage competitive environment in the U.K. The return on equity of the bank book and the new production of mortgages, I know that everybody is talking about how competitive the market is, is very attractive, very, very attractive. They sit now at an interest of above 2.20%. With the risk weighting that they consume from a capital perspective, a return on capital perspective, they're very attractive, and they don't seem to be weakening there. One of the questions that you always have is when you grow market share as we are doing, yes, because we are growing, as Leo said, that 50% higher than our market share, you always have the risk if you're going to move the market. And that was also an intensive discussion with the team at TSB and so forth. But when you have a 2% market share, you don't move the market. So very attractive, very attractive business line. We know how to do it. We have the favor of the intermediaries, which are delighted with our service. We are competitive in terms of pricing, but we are not raging and breaking the market. The margins are great. Our market share allows for marginal aggressiveness without needing to break the market and without affecting our margins. So that's on TSB. Now the -- on to Leo.

Sure. I think it's also worth mentioning that this growth that we are expecting in the coming years, it's taking into account that the market is going to grow. And this is a completely different environment to what we saw in the last 10 years, where all banks were competing against a shrinking pool of loans, if you wish, and where we all got very aggressive on competitiveness in prices. On top of that, during that period, we saw that banks benefited also from the lower yielding on deposits coming from close to 4% back in 2012 to 0 today. So we didn't do it right because we gave away most of that reduction in the cost of funding. But we had a source to fund the reduction on the asset prices. I think going forward, we should see, I believe, some more stabilization on that front. On the one hand because there's nothing more to give away in terms of reducing the yielding on deposits. And on the second hand and more importantly, because the pie should be growing. So it's not that we're going to compete to get market share from someone else, but it's that we can compete to get a part of the new market share that is to be generated. At least, that's what's what we have assumed. Now as I said before, or I tried to explain, we're not aiming to increase our market share in SMEs and corporates in Spain, for example, we're just aiming to be along with the markets. So well, we need to see what comes and how it goes, no, but I believe the scenario is a little bit different to the one that were living in the period 2010 to 2020. As per deposits growth, it's a good question, Ignacio. But the fact is that in the last few years, the savings from deposit has been way higher than what we have forecasted, at least what I forecasted, both here and in my previous role. So I am -- I think we're going to see quite a lot of liquidity in the economy, and I think we're going to still see quite a lot of savings, not only from individuals, but also from SMEs and corporates, especially with the kickoff of this European fund. In any case, our plan is not very dependent on the evolution of deposits, as you can imagine. We are just aiming to keep our loan to depo flat. So that's not a huge growth. And I believe it's absolutely manageable from a cost standing point, which should be close to 0. And as per the contribution coming from the international -- sorry, part of the business in 2020, it was not very high. It was around, I would say, 2% to 2.5% of NII, something like that.

The next question comes from Gonzalo Lopez from Redburn.

Just a few follow-ups on the last 2 questions of Ignacio. The first one is on fees and implication of this deposit growth and the potential transformation to savings. And I was wondering if you could share with us some assumptions of the amount of household deposits that could be converted in more traditional saving products, and if possible, any sense of the economic implications of that? And the second one is a more qualitative question on your consumer lending growth. I would like to know what your view on the competitive dynamics in the market in terms of pricing and the way that banks are serving these customers.

So let me take the qualitative one on consumer lending. I think consumer lending is a segment that has attracted a lot of interest in the market and that -- because it's growing faster and because with the low interest rates, it's proven to be one of the most profitable ones. And there are several ways of attacking it. One is to attack your own customer base, which you understand very well, to do it with a very low risk cost and to do it with prices of around 6%, 7% on average, although through price discrimination. And that is very attractive. And that's the one that we haven't tapped fully, as I was covering before, because we haven't had the means neither for the proper distribution from a purely digital way, which is the way the customers want it because that's an impulse consumption that it's done very often at the point of sale or at the moment of an acquisition. And neither did we have the state-of-the-art risk assessment tools to do it to the extent that we would like. And therefore, there are room for growth. It's one of the many examples of the, as I said before, the relatively low-hanging fruits. Of course, then you have to execute and you have to perform. But it's one of the key options that we have for growth of NII in the future, one of many. The rest of the sector, then you have the cards. There, the prices are going down under tremendous pressure from the market. We were seeing interest rates not so long ago of 24%, even 28%, even above 30% charging to customers. This is having a tremendous reaction and it's going to fall back. And the third big element is point of sale to noncustomers. And there, you have to also have much higher rates than the 6%, 7% that I was talking about before on average. They have to go to higher rates to assume the cost of risk that is entailed with it. I don't know if this was the significance of your question, Gonzalo. And I don't know if it helps, but if not, I'll try to clarify it further if I didn't understand your question correctly.

That was fine.

Okay. And regarding the funds contribution or the AUMs fees contribution to our mid-single-digit growth target on fees and commissions, it's basically not dependent on AUM. We have not been very aggressive on the assumptions behind it. As a matter of fact, if I recall correctly, the overall fees coming from funds in 2023 don't even match the numbers that we had in 2020, taking into account that in 2020, we did the transaction with Amundi and therefore, we lose some fees going forward. So we have not been very aggressive on that regard.

The next question comes from Fernando Gil de Santivañes from Barclays.

Two questions, please. One is a follow-up on fees. I mean this updated and increased guidance on fees, I'd like to touch on pricing. I mean I think you mentioned, Leo, but I didn't catch it very well, are you having any pricing changes in terms of maintenance fees that you're introducing? This is one question. And how much does this weight in this budget or increase guidance that you have provided? The other one is on costs. So if I run the numbers with this EUR 100 million more or less, on Spain stand-alone basis, the 2023 number, we still rank fully compared to the Spain peers, the other banks. Implying that going forward, since I was saying there's still homework to do, but I was wondering if there are not much -- or further cost actions in 2022 and 2023, what would come next because probably there will have to be additional cost actions just to improve this efficiency ratio. Just if you can comment on that it would be great.

Shall I take the first one?

Sure.

Okay. So on the first one, what I mentioned is that we're revising the strategy with regard to our non-loyal customers. But we did this from the beginning of the year. So there is a change between 2020 and '21, '22, '23. And certainly, this is already kicking in and will keep on kicking in, in the future because we are, as we are speaking, also revising the potential strategy. In any case, it's not that we want to increase the charge of the maintenance cost, which may be something that we -- all banks have to do. But we want to do it to get more vinculated or convert clients into more vinculated clients so that we can increase the fees and commissions that we can get from value-added products. So basically, we will try to engage them. We are revisiting, for example, the amount of clients that we have that have funds in general, not only with us but with the markets because there's certainly a possibility that some of them are -- have just not seen Sabadell as a provider for this product. So these are the kind of initiatives that we're taking into account. And what I said, I mentioned the cost of deposits that we are charging as an average to SMEs and corporates, which is in the region of 40 basis points, sorry. And this is also new from 2020 numbers. So basically 2020 numbers included very little of this, if anything, and this is also obviously as long as interest rates are negative, going to be within our numbers for the coming years.

On the EUR 100 million, I think, as I think we are trying to portray as clearly as possible, this plan is about feasibility and visibility, and we are putting in the plan the things that we trust we can execute. And within that context, beyond, there might be opportunities for further cost reduction, of course. But you also have to take into account that from a strategic perspective, we will be the smaller of the 4 large banks in Spain. And I think we will be in play. So you can look at it, and I know that it is a bit provocative. But you can look at it with another perspective, which is that we have, by far, the lowest cost base of the 4 big players. Are we going to play in that league? That's our intention. If we play in that league and therefore, our ability to deliver becomes significant, our cost will play at our advantage in relative terms. I know that this is a bit provocative. And maybe Leo will tell me that this is not the type of this current discourse that you'd like to hear. But it's optionality, it's optionality there. And -- but to come back for sure, we will keep our eyes open and the EUR 100 million are what we see clearly as executable, and we know how to do and we know how to deliver, and we have visibility over.

The next question comes from Carlos Peixoto from CaixaBank.

I'm sorry if I repeat some of the questions. I was struggling a bit with the sound in some of the questions. But the first one would actually be on NII. I was wondering if you could share an NII bridge, let's call it that way. So basically, if you look at all the moving parts, what type of impact are you expecting from volumes and volume growth to have an NII? What will be the role played by interest rates? What type of contribution it could have, because basically even though you're being less aggressive than what is implied in the forward rates, you do have an improvement in interest rates throughout the time frame of the business plan? And then, of course, the wholesale funding impact, excess of liquidity in the lost stock income that you'll be having from the ALCO portfolio. I was actually wondering if you could share how much you -- how much will be low -- how much lower will be the contribution from 2023 versus 2020? And of course, the TLTRO, which we can extrapolate on our own. And then on the second question, and again, I'm sorry if I'm repeating it a bit. I was wondering, in terms of the levers that you see for the fee income growth, what will be the main drivers? Is it asset under management, pricing revisions and overall pickup in transactionality that could allow us to drive growth? Just some color on that. And finally, there was -- at the beginning of the presentation, I believe that you mentioned that at the end of this program, you'll have several strategic options open. Could you clarify a bit what you mean by it? You're referring towards additional cost savings programs? You're talking about M&A scenarios, the possibility of the bank itself being involved in M&A? If you could give some color, I would appreciate it.

Let me start with the last one, Carlos, and say, without repeating them, not to be quoted, all of the above in terms of the strategic options and others. So 2.5 years from now, this bank will be in a completely different position. It will be transformed. I think it would be a bank that will have regained the respect of the market, of its clients even further, although from its clients, it has never lost it. And I think many opportunities will arise of the kind that you were described and as I mentioned, others. But out of caution, I would like not to repeat them myself. In terms of levers for the for the fees, for example, 40% of our income in SMEs already comes from other sources of income that are not NII. I think that's going to be a major source of growth. And the elements have been described already in the plan. If you look at several of the levers of really using our middle market capabilities, our 40% market share to really increase the penetration of more value-added products of the corporate and investment banking environment. And as I said, that's already today, 40%. The international aspect, that is very much driven by services and by fees. Mortgages we plan to grow, and we are already doing it without including yet all the drive that can bring more digital demand and better transformation. It's already contributing with its fees and with the fees that also come from the insurance side. And we plan to accelerate on that. There are multiple levers. They have been considered individually. I don't think we want to give guidance to that level of detail because that will entail a straightjacket that it's not what we think we should have. I think we should have more degrees of freedom in order to execute. But as I say, there are many levers. And that's why we have given a guidance that is more ambitious on the fees front than it is on the NII front because we clearly see the elements in which we can execute and deliver.

Okay. Shall I move to the NII bridge that you asked for, Carlos? I think I'm going to go through different elements that I've gone through in the webcast. So first, interest rates, it has no impact because basically, we're forecasting a minus 34 basis points of Euribor back in -- or in 2023, which is basically the same average that we had in 2020. Second, volumes is going to have a positive contribution. That's for certain. Wholesale funding reduction in costs should be in the region of EUR 40 million to EUR 50 million, taking into account both Spain and TSB. ALCO contribution should be down EUR 50 million, roughly speaking, [ '23 to '20 ]. And the TLTRO [ input ] should be about EUR 90 million in 2023. And other positive impacts are obviously, for example, the increase of TSB, the contribution from TSB, which will certainly be higher in 2023.

The next question comes from Benjie Creelan from Jefferies.

perhaps one on asset [indiscernible] just around mechanized change of the sort of the...

Can you -- sorry, Benjie, the line is very faint. We can't really hear you. Could you try to dial in again or something?

[indiscernible] now? Can you hear me now?

Okay, let's try it.

[indiscernible]

I'm sorry, but it keeps one cutting. Could you please try to dial in again?

That's fine. We can follow up later.

Sorry about that.

The next question comes from Britta Schmidt from Autonomous Research.

Yes. I've got 2. The first one, I'm so sorry to come back to the net interest income bridge, but maybe we could just tick off a few numbers here. So you said TLTRO is going to reduce by EUR 90 million, the ALCO portfolio by another EUR 50 million. Also funding cost savings are EUR 50 million positive contribution. And then if I annualize the Q1 TSB NII, is the current run rate that adds another EUR 60 million. The growth of the portfolio is 2%. I think perhaps add another EUR 80 million to that. We're still a bit short of a low single-digit growth rate. The [indiscernible] you mentioned it before that rates are not included, but the Banco Sabadell base rate assumption is at 50 basis points, which could add another EUR 60 million to that. Can you just confirm that, that is included or not and whether there's any numbers that I've missed in this. And then the second question is just a more overarching one in terms of what you're trying to achieve for the plan. Do you consider this to be overall a net de-risking of the bank to be more boring but stable? And if so, I struggle to see how that fits with the potential increase in margin pursued at the lower cost of risk. Maybe you've cocked a little bit on margin.

Let me start with the second. I think there are several elements in which the bank will become -- I don't like very much the word boring, but I understand where you're coming from. And yes, marginally, yes. I think the deleveraging on the international franchises is one element of that, the relative growth of mortgages, both in Spain and the U.K. And in the U.K., I think we are going to see an improvement in all lines, and that's also due to the mix. The part of risk costs that has come historically in the U.K. from mortgages is very, very, very low. And by focusing also in mortgages in TSB, we will also make it -- it will be more derisked. I think the methodologies that we are following in SMEs will also enhance the risk quality. As I mentioned during my qualitative presentation, we are coming from 2 sides. SMEs is a very, very difficult market to tap from a risk perspective because you don't have the information that you have for the retail products, particular mortgages, for example, when you have the loan-to-value and you have the ability to pay, or you don't have like you have in the large corporate a set of financials with a historical trend that allow you to assess very clearly the risk. In SMEs, it's about being close to the ground. And there, I think the measures that were already very strong and that have given us historical good results are being enhanced. So overall, yes, I see -- I think we are derisking the overall profile of the bank.

As per the bridge to NII that I mentioned, Britta, I think your thinking is correct, including, yes, the Bank of England rates are much more similar to the forward curve, as you can see on Slide 36. So what I was talking about before is that there's no contribution coming from a change on view on Euribor. Euribor is at the plan at minus 0.34% in 2023, while the forward curve is right now pretty flat at minus 0.03%, but the Bank of England rate is very much similar to the forward curve.

The next question comes from Ignacio Cerezo from UBS.

Yes. I've got 4. The first one is on TSB. I mean it has been mentioned many times in the past, the ambition from the bank to grow more on the SME and corporate and expand into that segment from mortgages. But most of what I hear today looks like kind of the mortgage buy has been even more accentuated. And so it's just a question of time until the bank actually can expand more clearly into the corporate segment, or you have given up on that ambition? Second question is on asset quality in Spain. I mean you have reasonably moderate NPL deterioration in this cycle. Can you tell us qualitatively the percentage of the NPL increase which is coming from the guaranteed loans, the ECO loans you have granted? The third one is on the noncredit impairments. There's a 15 basis points gap between total cost of risk and loan losses. If you do the numbers, we're probably talking about EUR 250 million more or less, which in the context of the PBT of the bank is still a very large number. So if you can tell us what is in there, and why is that number not going down more clearly? And the fourth one is if you can update us basically on the carrying value of TSB within the balance sheet of the group.

I will take the first one and then leave all the easy questions for Mr. Alvear. TSB, I think there has been a refocus on the strategy because when looking at the numbers, looking at the execution, management and the Board and ourselves, we have concluded that our best place to focus our efforts is in mortgages. The cost risk is extremely low. The return on equity is very attractive. Our ability to grow there is proven. Our capacity to grow even further is proven. And therefore, it is the place to focus. The other products, SME, consumer and others, have proven to be riskier and have proven to be less, in the end, attractive from a return perspective and from the ability of creating a franchise with a differentiating element at the core. So yes, I would acknowledge, Ignacio, that there has been a shift in the focus and the priorities of TSB, although many remain at the core. So the digitalization, the cost efficiency, putting the customer at the center of the activities and so forth remains. But what has changed is the focus in the priority of the products, and you observe that correctly.

As per the NPL question that you mentioned, I think it's worth remembering that about 50% of the ECO book -- ECO guaranteed book materials north of 2024. So I mean for us and for the system, it is not new, if you wish, no. What we're seeing currently, it's basically fairly similar to what I tried to explain in Q1 results. So on the one hand, We now have, at the end of April, around 55% of the moratorias that have expired, moratorias on mortgages and consumer lending. The Stage 3 numbers are even lower -- I mean, lower as a whole, if you wish, than we had in Q1, which they were at 16%, now they're at 13%, 90% still being subjective. So basically, we have been classified as Stage 3 due to the fact that they were restructured loans, not that they have been unable to pay for over 90 days. This is also well in line with what I tried to disclose in Q1, which is that I thought that the worst part of the book was probably the one that expired at the beginning because those were the moratorias that were granted in March last year, so fairly close to the beginning of this crisis. So those were probably for clients who had a little bit more problems than the end and also because it included most of the consumer lending book. So as more moratorias are coming in, we've seen that the overall Stage 3 ratio goes down, which is, well, in line with what we expected. And again, this number is much better than what I thought at least 12 months down the road. We will need to wait a little bit more because, as I said, in the second quarter, we have a very big -- a very large number of our remaining moratorias to expire. So obviously, around 50% of the remaining moratorias will expire in this Q2, and we will need to see how this evolves in the coming 2 quarters. But overall, the underlying that we've seen is very much in line with what we talked about in Q1. For ECO loans is a little harder to see because basically, they still are most of them on the payment holiday period. So Stage 3 is still very, very low, very much in line with what we had in Q1. It's in the region of 2%, and there's no further info that we can give you at this stage. And then coming to your question on the difference between 16 basis points for the overall difference between profit before -- pre-provision profit, sorry, and profit before taxes. On top of the credit risk, what we have there, it's the cost of risk of the foreclosed assets plus the maintenance of the NPAs, which we disclosed in Q1, and that's in the region of EUR 200 million, the EUR 200 million that you mentioned. Since we are considering that our NPAs are to remain reasonably stable, throughout the period because of the increase of NPAs in 2022 that I mentioned before, we are assuming that we're going to keep more or less the same cost of maintaining those NPAs. And that's basically that, together with the provisions on foreclosed assets, should amount to around EUR 200 million that you mentioned. And finally, on the book value of TSB, it's public. It's in the region of EUR 2 billion.

I believe we've not managed to get Benjie back online, so that shall do with the Q&A session. With that, we wrap up the Investor Day. Thank you, Cesar. Thank you, Leo. Thank you all for your questions. As always, the IR team is available to you for any further questions that you may have. And thank you all for joining. Have a great day.

Thank you very much.

Thank you very much.