Banco Bilbao Vizcaya Argentaria (BBVA) Q1 2022 Earnings Call Transcript

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Banco Bilbao Vizcaya Argentaria (BBVA 3.18%)
Q1 2022 Earnings Call
Apr 29, 2022, 3:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Patricia Bueno

Good morning, and welcome, everyone, to BBVA first quarter 2022 results presentation. Thank you very much for your interest. I’m joined today by Onur Genc, BBVA chief executive officer; and Rafael Salinas, group’s chief financial officer. As in previous quarters, Onur will start reviewing the group figures followed by Rafa, who will go through the business IRR results.

Then, we will move straight to the live Q&A session. Now, I will turn it over to Onur.

Onur GencChief Executive Officer

Thank you, Patricia. Good morning to everyone. Welcome, and thank you for joining BBVA’s first quarter ’22 results audio webcast. Let’s jump into it.

Starting with Slide No. 3. Outstanding evolution in our view of our results this quarter. On the left-hand side of the slide, you can see our net attributable profit evolution, the highest quarterly recurrent profits ever, reaching EUR 1.651 billion.

This is 60% above the results of the same quarter of last year and 23% higher than the results of the fourth quarter of 2021. And as you can see with — or you will be seeing, one of the highlights of this quarter is the fact that this is across the board, so we are seeing a positive evolution in all business units. And our earnings per share at the bottom of the page on the right hand — on the left-hand side, these excellent results, they bring our earnings per share up to EUR 0.24. Let me note, also, on this page that on the right-hand side of the slide, our strong capital ratio at 12.70%, well above our target range, as you all know, and well above our regulatory requirements.

It has decreased 5 basis points in the quarter, absorbing 10 basis points from the stake increase in Neon in Brazil and also, considering the very strong quarterly loan growth of 4%, as we will be discussing in the next slides. Just one quick note on this. For comparison purposes, the figures. 2021, first half, in terms of comparison, it excludes nonrecurring impacts, more specifically, the U.S.

business sold to PNC, and also the restructuring program in Spain. Moving now to Page No. 4. Our tangible book value per share plus dividends closed at EUR 6.93, a 12.6% increase year over year and 4.1% in the quarter.

And regarding profitability, we have strongly improved on our profitability metrics, reaching, in my view, an excellent 15.1% in ROE and 15.9% in return on tangible equity, ranking first in both metrics as far as we can see among our European peers, if you compare their year-end results, this is the best in Europe. Then, Slide No. 5, what stands out in terms of the key messages for the first quarter, very quickly. First, in my view, to highlight excellent core revenue evolution, 23.3% versus the first quarter of last year, supported by very strong loan growth in all countries and in all segments, 10.6% activity growth, loan balance growth at the group level versus the same period last year.

Second, our leading efficiency metric, significantly improving to 40.7%, with positive jaws, again, at the group level and across the board in all the countries. Third, we are also reporting the highest operating income in our history, growing an impressive 31.9% versus the first quarter of last year. Fourth, cost of risk evolving better than expectations at 82 basis points. Fifth, as mentioned, our strong capital position.

And last, the outstanding progress in key areas of our strategy, reaching new record figures here as well, with 2.4 million customers acquired in just one quarter and EUR 11 billion channeled in sustainable finance. Given all this, we are on the right path, in our view, to achieve the ambitious long-term targets that we set for ourselves, and we announced back in November in our Investor Day. Moving to Slide No. 6.

I’m not going to dwell too much on this page, but you see the summarized P&L here. Focusing on the year-over-year comparison with the first quarter of last year, the second column from the left, you can clearly identify the very positive evolution in all the P&L lines. I would highlight again the outstanding 31.9% increase in operating income, which, coupled with the positive performance of the underlying risk parameters, it leads to an excellent net attributable profit in constant euros, 68% growth in profits. In terms of the quarterly evolution versus the fourth quarter of 2021, the second column from the right, also an excellent performance with operating income growing 25%.

All in all, first quarter ’22 reported net actual profit, just to repeat, EUR 1.651 billion at the bottom. Moving to the next page, Slide No. 7, some light into the quarterly revenues breakdown. Once again, one of the clear highlights of the quarter.

Our net interest income increased strongly, 26.3% versus last year and 6.9% compared to last quarter, especially boosted by the strong activity growth, which we will be discussing in a second. Next, the positive evolution of net fees and commissions, there is some seasonality here, but still very positive evolution across the board, increasing 14.1% year on year and almost aligned with last quarter’s record figure. It was the record figure last quarter. Also, excellent performance of the net trading income in the quarter growing 46.3%, a figure even higher than the exceptional quarter that we had a year ago.

All in all, again, very strong performance in gross income, 21.3% growth versus the same period last year and double-digit growth, 11% versus last quarter. Slide No. 8. I mentioned this very briefly verbally before, but this page, it illustrates how the continued new loan production recovery, how it is translating into strong loan balance growth across all the countries of our footprint and also, in all the segments, both retail and wholesale.

In total, activity growth has been accelerating quarter over quarter, reaching a 10.6% growth versus the same period last year, with very positive implications, obviously, in NII, in fee income. And with very positive implications also going forward, we will be benefiting from this in the coming quarters. And in the country pages, one of the key highlights also is that you will also see that this growth is concentrated in the most profitable, highest return segments. Again, we’ll talk about them when we talk about the countries.

Slide No. 9, a forward-looking perspective also on margins. very positive news here as well. As you can see on the left-hand side of the page, we have witnessed, as you all know, a sizable increase in our main reference rates, with the EURIBOR reaching positive levels and the TIIE 28 in Mexico, very important for us as well, increasing by more than 100 basis points year to date.

The right-hand side, it illustrates the very positive implications of this new environment, with the percentage impact on NII. And this is calculated in the sense that in the following 12 months after a step function, 100 basis points increase, what happens. And as you can see, very positive implications on the NII due to these rate rises. Slide No.

10. We continue showing positive jaws this quarter, again, not only at the group level, but also, across the board in all the geographies. Obviously, thanks to our strong gross income growth and also with costs growing below the blended inflation of our footprint. In the middle of the page, you can see how our efficiency ratio is evolving, already the best compared with our European peers at the end of 2021, and it now has improved even further to 40.7%.

Again, this figure is the best figures over the past 10 years for us as well, independent of the benchmarking. Slide No. 11, risk indicators, they are evolving better than expectations. Good performance of total impairments in the quarter, mainly explained by the underlying very positive evolution of the underlying risk performance, lower NPL entries, and higher recoveries.

Cost of risk closes at 82 basis points compares positively with the 93 basis points recorded in 2021. Under this heading, maybe, I should also — I would highlight that regarding the Russia-Ukraine war, our direct exposure to Russia and Ukraine is very limited and immaterial. But obviously, we will be monitoring closely all the indirect impacts, especially through the commodity prices through the confidence chain and everything. So in this uncertain environment, though, we still maintain our 2022 cost of risk guidance of around 100 basis points.

In terms of the rest of the asset quality indicators, very positive picture there as well. NPL is decreasing to 3.9% and our coverage ratio, improving to 76%. On capital, our CET1 fully loaded as of March 12, ’22 stands at 12.70% — 12.70%, on Slide 12. On a quarterly basis, the ratio has slightly decreased by five basis points, but we have absorbed the capital consumption associated with our investment in the Brazilian Neon, the 10 basis points, but the waterfall, if I go through the details, the breakdown of the change.

First, our results generation that contributes 52 basis points to the ratio. Second, the dividend accrual at 50% payout. There’s a change here as compared to last year, as you can imagine, because we have improved our payout ratio. And according to the ECB mechanism, which you have to be taking the upper part of our internal policy to be adjusted with the final payout at the end of the year, obviously, but we are taking 50% payout here in this calculation.

And coupled with the AT1 coupon payments, they are detracting 29 basis points. Third, in the waterfall, 17 basis points from the RWAs bucket in the context of the strong credit dynamism as we discussed before. Let me note here that approximately, 25 basis points are coming from activity increase. This has been partially offset by the release of the impact from the market risk-related RWA increase we experienced in the fourth quarter ’21 as a consequence of the volatility increase in Turkey, something that we have already anticipated and talked to you about in the last quarterly presentation.

So 17 basis points from RWAs. And then lastly, the bucket of others of 1 basis point, which includes seven basis points market-related impacts, mainly due to the mark-to-market of health to collect and sale portfolios, almost compensated by the minority interests. Slide No. 13, new customer acquisition.

I always love this page. The most healthy way in our view of growing our balance sheet is through growing our franchise. And I’m very happy to see that we continue to beat new records each quarter on this. So our focus, our relentless focus on franchise growth.

It has allowed us to acquire 2.4 million new clients in the first quarter. The share of those acquired through digital channels, which, we believe, is a competitive advantage for BBVA, is also consistently increasing. As you can see in the graph, we have increased the digital acquisition percentage from 6% in the first quarter ’17 to a noteworthy 57% in the first quarter of 2022. Slide No.

14. As we have mentioned on multiple locations, we have discussed this in our Investor Day as part of our strategy, we are investing in innovation and disruption as enablers for our growth. On the one-hand side, if you look into the left-hand side of the page, entering new and attractive markets through digital. Through digital is important to us.

Our investments in the U.K., in Europe, our last investment in Brazil, as we just discussed, together with our organic initiatives, like in Italy, it forms a component of this strategy. We are also investing in disruption through venture capital. We have been very successful in this with Propel and Sinovation. And now, we are extending our scope beyond fintech to other strategic verticals, such as decarbonization, high-growth companies in footprint, and DeFi digital assets.

We believe that these investments, they bring better capabilities to the group, and they create strategic value beyond the pure financial investment. Turning to Slide No. 15. We continue to outpace our sustainable financing pledge per path.

We have already mobilized EUR 97 billion in sustainable financing as part of our revised pledge of EUR 200 billion to be achieved by 2025. And in this first quarter only, EUR 11 billion, and again, an all-time record here as well. On the right-hand side of the slide, you can also see how sustainability is a key growth lever, a business lever that we are already pulling. For example, through the sustainability-linked products.

In the sense, just in one year, we have increased mobility financing by 2.5 times and energy efficiency financing by four times. And finally, Slide No. 16 on our long-term targets announced in the Investor Day. To save time, I’m not going to go into each one of them, but I can say that we are very well positioned to achieve them all, as you can see on this slide, Slide No.

16. And now, for the business areas update, Rafa?

Rafa SalinasGlobal Head of Finance

Thank you, Onur, and good morning, everyone. This quarter, we are glad to share with you very good results in all geographies, strong growth in activity, accelerating customer acquisition, and growing results, thanks to the effort of our teams across the board. Very positive returns above our expectation, reaching record results in Spain and Mexico led us to a positive guidance review in both countries, and we will see in the following slides. Number 19.

Let me begin with Spain. In Spain, we have been received a quarter with very positive business dynamics combined with an efficient management of the customer spread. The loan book is growing at 3.4% year on year, an encouraging signal after a long period of deleverage in this country. We continue focusing on the most profitable segments.

Consumer lending portfolio is again, delivering an almost double-digit growth, 9.6% year on year. And we are also seeing very good performance in commercial segments, despite the typical seasonality of the first quarter. In those two segments, consumer and commercial, we continue gaining market share, digital capabilities together with the evolution of the SME business model are probably behind the good performance. In mortgages, new production remained very dynamic, almost offsetting the runoff of the portfolio.

This makes us confident with our guidance for 2022. Of slight loan growth in Spain, with consumer lending to continue growing at high single digits. In line with activity, the profit and loss account evolved very nicely. NII is almost flat in the year, affected by the downward repricing of the arrival of 2021.

However, regarding the heading, I’d like to highlight the improvement in forward-looking expectations. The increase in rates will be a tailwind for NII, something that we will start seeing in the third quarter. In this sense, we have updated our NII guidance for 2022 to a slight growth, more than compensating the negative impact from the TLTRO. For 2023, the perspectives are even better.

Also, very sound fee income despite asset management fees being impacted in the first quarter from negative market evolution. In addition to revenues, expenses are also progressing very positively, minus 5.6% year on year, fully in line with our expectations benefiting from savings arising from last year restructuring process. Therefore, we can see widening jaws and a significant improvement in the efficiency ratio this quarter, reaching 42.9%, a very sound figure. We maintain our guidance for ’22.

Expenses are expected to decrease at mid-single-digit, with efficiency improving aligned with our long-term target. Finally, when we look at the impairments line, positive underlying trends in asset quality are enabling us to show a cost of risk of 17 basis points in the quarter. For 2022, we maintain our guidance of cost of risk around 30 basis points, awaiting for some more visibility in a still quite uncertain economic environment. All in all, Record profits in Spain reached EUR 600 million, a level we haven’t seen since 2010 and which represent 32% of the group total earnings.

Our conclusion, very pleased with progress in Spain. Slide 20, move to Mexico, one additional quarter, very strong set of results in Mexico. We are seeing dynamism in activity and some loan growth across all segments. The loan book is growing at 8.9% on a year-on-year basis.

I’d like to remark on the outstanding performance in the quarter in consumer lending, supported by our strong position in payroll runs. Additionally, our growth strategy in SMEs is clearly paying off, plus 20% year-on-year growth in the portfolio, a differential value proposition with specialized sales force teams, and upgraded the app are probably the main pillars of this strategy. Finally, wholesale portfolios are continuing to recover, showing growth of 0.42% growth on the quarterly basis. These trends have led us to improve our guidance.

For 2022, we now expect the loan portfolio in Mexico to grow at high single digits. Moving to the P&L. Net profit reached a record level of EUR 777 million, supported by a strong core revenue growth close to 20%. Net interest income growing at 20% year on year, driven by activity growth and by the improvement on the customer spreads.

Based on those dynamics, we have reviewed upwards our guidance for 2022. We are now expecting NII to grow at double digits. Also, strong performance in fee income, growing at 14% year on year and 6% on a quarterly basis. This is mainly explained by the recovery of activity, especially in credit cards and payment business, where, as you all know, our market share is very high, above 30%.

Expenses grew at 12.9% year on year, below gross income growth, due to some base effects as activity was subdued in the first part of 2021, and also, impact coming from inflationary pressures. This said, jaws are very positive in Mexico, where we are currently operating an outstanding 33.7% cost-to-income ratio. Looking ahead, we maintain our guidance for expenses to grow at mid-single digit with positive jaws. In terms of asset quality, the NPL ratio dropped below 3% in the quarter, supported by good underlying trends.

Low entrance and very sound level of recoveries. The cost of risk stands at 284 basis points, in line with our guidance that remains in place. For ’22, we expect the cost of risk to stand below 300 basis points. Slide No.

21, focusing now on Turkey. As you all know, we are currently involved in the voluntary takeover bid process of a guaranteed minority interest. We have recently announced on Monday an increase in the takeover bid price to 15 Turkish lira per share. As of today, we have reached 60% ownership, breaching the 50% threshold, which provide us with further optionality on managing our stake.

Moving to the P&L. As you can see in the slide, quarterly results are very strong in Turkey. Main highlights are the following: NII evolution is supported by Turkish lira loan growth in all segments, customer spread improvement, and a higher contribution from CPI linkers portfolio. Increased excellent performance favored by our leadership in payments and credit cards.

Also, very positive net trading income in the quarter with a strong result coming from our global markets unit. Expenses affected by a salary revision and inflationary pressures. Having said that, efficiency remains at very good levels, improving almost 10 percentile points to 22.4% in the first quarter of 2022, thanks to our strong revenues. And finally, sound credit risk metrics, with the cost of risk at 100 basis points in the first quarter, supported by limited underlying provision needs.

All in, we are achieving in Turkey a net profit of EUR 249 million in the quarter. And finally, Slide 22, South America. This region is also showing very positive trends in terms of activity and results contribution. Briefly, main highlights are the following: First, healthy loan growth across segments and countries, 11% average in the region year on year; second, very strong core revenues supported again by activity dynamics, strict pricing policies and efficient excess liquidity management in a higher rate environment; third, expenses are growing in a context of increasing inflation, however, the efficiency improves in the region supported by gross income growth, showing positive jaws year on year; and finally, contained impairments are also supportive for the P&L, showing off healthy underlying trends in asset quality, with the cost of risk standing at 117 basis points.

As a whole, net income reached EUR 158 million in the region. In short, outstanding results in all of our franchise levered on higher activity, more customers, core revenue growth, together with very positive trends on the asset quality. And now, back to Onur who is going to highlight the main takeaways.

Onur GencChief Executive Officer

I mean, you already summarized it very well, Rafa. But very quickly, on the last page, we have reported the highest quarterly results ever, driven by strong operating income and solid underlying risk performance. It’s also noteworthy, once again to highlight the strong acceleration of activity growth, profitable activity growth. Second, we have improved our 2022 guidance in Spain and Mexico, as Rafa has mentioned in his speech, in the light of better-than-expected operating trends in the revenue lines, which is very positive in my view.

Third, we continue with our commitment to accelerate profitable growth and value creation for our stakeholders. Our tangible book value per share plus dividends growing at double digit, and we are achieving the highest profitability metrics among our European peers. Fourth, we have made significant progress in the execution of our strategy, reaching record figures in sustainable finance and in customer acquisition and investing in disruption as part of our growth strategy. And finally, and lastly, we are on track to achieve our ambitious midterm goals.

With this, we are also achieving another metric of ours. I’ve had to finish this — our speech in less than half an hour, so back to Patricia for the Q&A.

Patricia Bueno

Thank you, Onur. We are ready now to move to the Q&A live session. So the first question, please.

Questions & Answers:

Operator

Of course. I will take our first question from Andrea Filtri of Mediobanca. Andrea, over to you.

Andrea FiltriMediobanca — Analyst

While you’re posting very strong results, we’re having a potential change in the macro scenario with high inflation and high energy prices at steady levels. What would you need to see on this front in your view to be forced to revise your growth prospects in a meaningful way? And then — if you could elaborate, please, on the positive one-offs in Spanish provisions and how you plan to use remaining COVID overlay provisions? How does that work? And finally, just a quick update on the Turkish CPI linkers, where are they, and are you expecting Turkey to be a hyperinflation accounting country by this year?

Onur GencChief Executive Officer

Perfect, Andrea. Maybe, on the CPI linkers. I already have the numbers in front of me, but maybe, comment on that on how much the contribution was, Rafa. But very quickly, the growth prospects in this high inflation environment.

The growth prospects are quite positive. I mean, you see it in the country pages, Andrea. If you go to the country pages, you see the breakdown of the growth — year-over-year growth. And we are seeing that growth, and we have not seen that timidity sinking into the markets yet in terms of some caution in terms of loans and so on.

And on that one, I would highlight a few numbers. For example, Mexico, one of our very important portfolios for us, in terms of size, maybe it’s small. But in terms of contribution, it’s very important. Mexican credit card business, we are growing 17.6% year over year, 17.6%.

Another geography, Spain consumers. If you look into the consumer portfolio, it’s growing 9.6% in Spain. So we are growing. And in this new environment, we have to be a bit cautious, obviously, and we have to be monitoring the situation very closely.

But if you grow, as we said in the presentation, with new customers, with growing the franchise, it’s a healthy growth in our view. And we are also obviously, monitoring the risk parameters very closely, and we are not seeing any deterioration whatsoever in the risk parameters at the moment. To cut long story short, I think in the portfolio that you want to grow. My humble message is this, in the portfolios that we want to grow, we are growing very nicely, and we are doing that with new customers by growing the franchise.

And as such, in the coming months, I expect that growth to continue. That’s why, for example, in Mexico, we have upgraded our loan growth guidance and our NII guidance in both. Spanish provisions, was there a one-off and so on? And how do we evaluate this? In the number that we have this quarter, there is not a one-off at all. The 17 bps that you are seeing is there because the underlying risk parameters is behaving much better than what we have been guiding you with.

So 17 basis points in the quarter. And when you look into it, lower NPL entries and better recoveries. And that’s — we like. But we will see on how the next quarters come along.

I mean, as you said, there is a big uncertainty out there. We want to be cautious. That’s why we are not revising our cost of risk guidance yet. There are these eco loans.

As you know, the state-guaranteed loans in Spain. We have to look into the evolution of those loans in the coming quarters. And as you know, we are a very conservative bank on these things. So we are maintaining our guidance as it is, but we are seeing very positive dynamics in the underlying risk parameters.

Actually, after this Russia-Ukraine war situation, we were — hopefully, we were expecting that there could be some releases from our models. On the contrary, in this quarter, we have actually put more into the macro adjustment. So we have not only not released, but we have added to our buffer for prudential reasons. In that context, our numbers, coming as such, in my view, is very positive.

On the CPI linkers, and then I will talk about hyperinflation, maybe. Rafa.

Rafa SalinasGlobal Head of Finance

CPI linkers, I mean, the size of the portfolio in Turkey is TRY 40 billion, around EUR 2.5 billion. The contribution this quarter has been EUR 218 million, EUR 60 billion more than the last quarter ’21. And we are accruing those bonds at 40% inflation rate.

Onur GencChief Executive Officer

Regarding the hyperinflation. In Turkey, as you know, the inflation in Turkey has increased recently. The latest print, as you all know, I’m sure, as of March, is 61% inflation rate. And the war situation in Ukraine, obviously, adds to the uncertainty.

It increases pressures on food and energy, especially relevant for Turkey. As a result, the inflation has increased recently, and the expectation is it will remain high for some time. In this scenario, it is very likely that we will be applying hyperinflation accounting as early as the second quarter of 2022. It is very early, very early to determine the potential initial impact.

The number is a very dynamic number. Obviously, it depends on the inflation evolution, but it also depends on the evolution of different balance sheet items. Because you apply an inflation on the net monetary position, as we say, and that is a dynamic figure, that has to be changing in the coming. So we are going to be spending the second quarter to see the moving parts and hopefully, come up with a number, so we can guide you in the next quarterly call.

But in the countries that we had experienced this, and as you know, we have two countries where we apply, already, as BBVA, hyperinflationary accounting. What we typically see is this, you see a positive — actually, a positive impact on capital and tangible book value coming from the reevaluation of the nonmonetary assets, so a positive impact on capital and tangible value, and a very limited contribution. In the first year of implementation of hyperinflationary accounting, very limited contribution of that geography to the group P&L in the first year. That’s what we have seen in other geographies.

As I said, it’s a very dynamic figure. We have to be watching the situation and how and whether it will be applied in the second quarter. Our expectation is that it might be applied, again, as early as the second quarter. So we are in this process of understanding and there are accounting authorities involved in this decision.

We will see how it comes out. But once again, I will say that positive impact on capital and tangible book value if it’s applied and when it’s applied, and a limited contribution for the first year of implementation in the P&L. So it’s a bit, as the reexpression of financial statements, the value of the franchise is still accounted is still there in capital intangible book value, but the P&L numbers might throw a different picture, obviously.

Andrea FiltriMediobanca — Analyst

Sorry, just on the release, you said you have added to macro overlays. How much?

Onur GencChief Executive Officer

It’s around EUR 200 million for the group.

Rafa SalinasGlobal Head of Finance

To be precise, EUR 190 million.

Onur GencChief Executive Officer

EUR 190 million, to be precise, as Rafa says.

Patricia Bueno

Thank you. Next question, please.

Operator

We’ll take our next question from Max Mishyn of JB Capital. Max, over to you.

Max MishynJB Capital Markets — Analyst

I have two. The first one is on Spain. And I was wondering if you could explain the growth in corporate loan segment. You’ve done better than the sector and I was wondering what’s the reason for this? And also, just a small follow-up on eco loans.

Do you already have any of the grace period eco loans maturing? And what are the trends you see there? And the second is on capital. If we assume a full pickup of guarantee minorities in the tender offer, you will still have close to 35 basis points of excess over the higher end of the range. How could we think of potential deployment? And could you please update us on headwinds for 2022 that you expect for capital?

Onur GencChief Executive Officer

OK. So corporate loans in Spain, growing better than others. That’s what you mean. I had some trouble in the line.

But if that’s the question, corporate loans. We are — In our view, gaining market share and growing very nicely, as you might have seen in the presentation, 13.9% growth in commercial loans. We love this figure, 14% growth in Spain is — it might be an impressive figure. And you’re saying, why is it happening? I tend to believe that we are working harder in general.

But we do have this opportunity of certain clients that we didn’t have a wallet share. So we did come up with this program, very detailed and very targeted program of different names, because this is a commercial segment. You can come one by one, name by name on what you want to achieve with each client and so on. We did come up with that program about a year ago, and since then, we have been executing on that program of which clients that we wanted to grow, and we have actually processed early on our risk appetite for those clients, with that revised new risk appetite, we went after very good clients that we wanted to bank more with.

And I think we are seeing the results in the numbers that you see, the 13.9%. The eco loans, what do we see in terms of dynamics. You might remember this, I shared it in the previous quarterly calls, our total eco extension of credit, including lines, including lines that might not be used was around EUR 21 billion, around EUR 13 billion was the number that was used from those lines that we granted because not all of them turned into balance sheet lending. From that EUR 13 billion, most of them are basically returned to regular process and everything.

So the thing that we see on that portfolio that are still in this category of what we call currency period, which is the nonpayment period, is around EUR 4 billion to EUR 5 billion in that range. And in that portfolio that we watch very, very closely, Max, we are seeing very positive dynamics there as well. We are seeing those clients — We are seeing those clients coming back to life after COVID, and we are seeing their revenues performing very well. So we don’t see major risks in that portfolio.

There were two tests done on that portfolio, basically. One, over the summer. In the summer, basically, there was this Codigo de buenas practicas, a new code to be able to help those clients. They were given an opportunity to ask for basic revisions in the loan details, participative loans or even what we call principal deductions.

So they have that right to ask for this. And in that period of summer, basically, nobody asked for it, which was a great signal that what we were seeing in the numbers is true. We didn’t see a pressure on the portfolio because nobody did ask for this additional kind of flexibilization of the long terms. There is another new flexibility given by the government to that portfolio, basically, a month ago, which is, they can ask for additional extension for the nonpayment period.

They can ask for an additional 6 months. And then in that new change that the flexibility that the government has extended to these clients, we are again, seeing very limited demand to basically go beyond the original terms of those loans and ask for additional flexibility. To cut the long story short, that portfolio is something that we have been managing, monitoring very, very closely. And so far, the signals are positive.

So far, we are not seeing any pressure of cost of risk in that portfolio. You asked about the 34 basis points after — if the 100% take-up is happening in Turkey, 34 basis points. We still have excess 36 basis points. What do we do with it.

The same answer that I give every quarter, we do see capital as our scarce resource. There are many initiatives who compete for that scarce resource. It can be an M&A, it can be growth in your existing geographies. Every single loan that you give, it consumes capital.

It can be payout back to the shareholders, there are different initiatives. And all these initiatives, they are stack-ranked, they are compared based on the value that they create for the shareholders. If we can come up with great initiatives, we deliver great returns, we do them. If not, our reference is the additional share buyback, additional dividend that we might be doing, which again, is a return back the shareholder.

We compare all of them on the return that they generate and we go from there. I would repeat the same principle. This quarter or any other quarter, we will look into all the initiatives, compare them, whichever creates the best return, we’ll get that capital. Then you’re asking 2022 additional headwinds or additional forecasts on capital.

On that one, the thing that I would highlight is the supervisory impacts, the regulatory impacts that we might be seeing, especially in the second quarter or in the rest of 2022. You might remember this, we did guide you in the last quarterly presentation that we might be receiving 35 basis points from supervisory impacts this year. it’s called return to compliance. This EBA guidelines, return to compliance program, every single bank out there is dealing with it in these days.

It’s very tough to precise, make it precise these numbers because there are too many moving parts in the calculation. It’s a process, we are in it. The final numbers that I’m seeing is going to be somewhat higher than 35 basis points. What we are also seeing is that some of the impact in the Basel IV in 2025 is not a lot, but a piece of this is anticipated to these programs of return to compliance and so on.

In that context, we will keep updating you that 35 basis points might turn out to be a bit higher, but that’s the supervisory headwind that we would be seeing. But as I also guided you in the previous calls, we are expecting EUR 1 billion to EUR 1.5 billion of organic capital generation every year. The results are coming much better than that curve, but that EUR 1 billion to EUR 1.5 billion, excluding M&A and excluding supervisory impact, because you cannot judge them, you cannot know them. And we are on a path of delivering a bit better, maybe, from that typical curve of EUR 1 billion to EUR 1.5 billion organic capital generation in the year and in the coming years, hopefully.

Patricia Bueno

Thank you, Max. Next question, please.

Operator

Of course. Our next question is from Alvaro Serrano of Morgan Stanley. Alvaro, over to you.

Alvaro SerranoMorgan Stanley — Analyst

I’ve got two questions on some of the comments on the call. First one in Mexico, obviously, a very strong performance and a sort of a blowout, sort of NII fees. And with that performance, the question is around the guidance — the updated guidance. You’re guiding to double-digit NII growth, which, I mean, you basically achieved that in Q1 already.

If I sort of annualize Q1, your — I think it’s annualizing — sorry if I mixed up my excels, but clearly, stronger than that, if I just multiply the Q1 by four, I get to plus 15%, I think it is. So just wondering what double what you mean by double digit? And is there one-offs? And what sequential performance might be in Mexico? And the second point is on Turkey. Onur, you mentioned in the outer years, the impact would be lower of hyperinflation impact. And I’m just curious to understand is that because inflation typically comes down? Or is there anything mechanic? Because obviously, this is, as I’m sure you’re aware, one of the — sort of things that sort of putting off investors the potential for added volatility in the P&L.

So if it’s going to come down in outer years, I think it’s important to understand it.

Onur GencChief Executive Officer

Very good. Alvaro, thanks for the questions. On the double digit, I leave it to your imagination on what that double-digit means. I mean, we are — we take this guidance document obviously, as always, as others, very seriously.

As you say, I’m seeing very positive dynamics in Mexico, very positive dynamics. And the growth that you have seen in the page of Mexico in, again, 17.6% credit cards, 8.5% in consumer, 19.7% in SMEs. These are very good return, high return portfolios. We are going to see the benefit of this in the coming quarters.

We have not seen it yet in the first quarter. And the first quarter numbers, we are seeing a piece of it and which is very positive. But more, in my view, more good news to come. That’s why we are upgrading our guidance.

But double digit, again, I leave it to you. You did a very, in my view, a sensible calculation in the call. I mean, I leave it to you, but double digit is what we are committing to. Regarding Turkey, I — When I said the P&L, the P&L dynamics are also quite positive in Turkey.

There is no — maybe, I misguided you. I didn’t mean it in that way. What I was saying was, if we apply hyperinflationary accounting, and as I mentioned before, this is — this can come as early as the second quarter, so we are — again, the accounting authorities has to be a bit involved in this. It’s our decision also, but we have to see what’s going on.

But if we apply it, in that scenario, the dynamics of the accounts change a bit. And as you know, we are applying hyperinflation accounting already in two countries of our footprint. What typically happens is you get a positive impact on capital and the positive impact on tangible book value. But you do reexpress the P&L.

And the P&L., again, in the first year of the implementations that we did in those two countries, you typically see a relatively minimal contribution from that unit, respective country to the group P&L. But it’s the expression and it’s — I don’t want to call it that way, but it’s a bit static in that sense, meaning the value is still there. Capital contribution is still there. But on the P&L, you might show a lower figure than otherwise, than what you would have been doing without hyperinflationary accounting.

What would that mean? We will have to see it. We will have there — again, too many moving parts on this one also. We have to see whether it will be applied, when it will be applied. We would have to see the evolution of the balance sheet because it’s calculated on the balance sheet components.

With all that included, then we will see the impact and we will update you, obviously, in the coming quarters on what it means. But if it’s a bit of a static thing on P&L with basically positive impact actually on capital intangible book value, as you know, we do have this payout ratio of 40% to 50%. Obviously, it’s the board’s decision on what to do with the payout. But depending on the P&L dynamics, there is that possibility of a different payout within the range that we have already expressed.

So when you said I guided worse figures for the coming years for Turkey, I didn’t mean that. But what I was trying to say is that with hyperinflationary accounting, the dynamics of the accounts change a bit. And as a result of that, there might be a reduction. Otherwise, the underlying fundamentals of that business in our view, is very robust.

Patricia Bueno

Thank you, Alvaro. Next question, please.

Operator

We’ll be taking our next question from Ignacio Ulargui of BNP Paribas. Ignacio, over to you.

Ignacio UlarguiExane BNP Paribas — Analyst

I just have two questions. I mean, one is on Mexico. Coming back a bit on the success of the bank in these high earning portfolios like credit cards, SMEs or consumer. I mean, is there a limit there for you to gain market? I mean, every time we see Mexico, we’re delivering.

So do you see any kind of limit in that context? And linked to that, my second question is — I mean, don’t you see — I mean, is there any potential restriction for growth out of Mexico? I mean, could be capital be a constraint for growth in Mexico, South America or Turkey at a given point? Or you don’t see that as a revenue?

Onur GencChief Executive Officer

I will start right away with the second one. Could there be a constraint due to capital on growth in Mexico? No, not at all. And Ignacio, as you know, all of these growths that we do — I did mention it to you in the previous calls, we do have this micro capital planning approach. Every single loan that we extend, in any segment, in corporate and in commercial, we do it client by client.

In the rest, we do it portfolio by portfolio. They have to pass a certain threshold for pricing to be creating organic capital, which means, if you are growing in those portfolios, it means that in the future, you will be creating enough more organic capital than justified so that you can finance that growth, organically. In that context, given these portfolios are high-return portfolios, I can very clearly tell you that they will create their own capital in any case, and we will always find capital for them. And in the context that we are in, I don’t see that scenario at all.

Is there a limit to growth in Mexico? Not at all. I did mention it to you, again, multiple times, to some of you before. We do have an amazing franchise, in my view, in Mexico. Amazing franchise.

When I go there and I was there recently, I come back always impressed. The amount of talent that we have, the quality of talent, the franchise that we have built is amazing. In that context, the topic of Mexico is not market share growth, and this and that. The topic of Mexico is how banks can help the growth of the country and how banks can help the bankarization of the country.

Banking debt over GDP is 29% in Mexico. It’s the lowest in Latin America. It’s 70% in Brazil, that same number. It’s 55% in Colombia.

It’s even higher in Guatemala. So it should be that us and others, we should be all growing our books and we should be bankarizing the country. That’s a better way to grow Mexico than otherwise. And then market share within the — beyond the market growth, would we be constrained by market share? I don’t see that at all.

I mean, we are doing an amazing job. Our NPS, customer satisfaction, is around 60s in Mexico. The second best is around 30s. If customer is happy, if we have this wonderful franchise, if the country needs to bankarize, I don’t see any limit to overall growth and to our growth within that, because we are having our customers happy.

Patricia Bueno

Thank you, Ignacio. Next question, please.

Operator

Our next question comes from the line of Benjamin Toms of RBC. Benjamin. Over to you.

Benjamin TomsRBC Capital Markets — Analyst

Firstly, on Spain. You announced earlier this month the buying back of your Spanish branches. Can you just talk through some of the benefits this gives you straightaway once the transaction completes? Also, any longer-term strategic advantages that you might expect to be realized from this? And then, just on Mexico. Again, is part of the story on the loan growth in the country, the fact that you’re winning more market share in the region as a result of the Citibanamex situation? And can you give us some more color on any potential interest on that asset?

Onur GencChief Executive Officer

The — Benjamin, again, there’s a problem with the line. The first question, I think, was around the share buyback, I understand. So on that one, Rafa, I’ll leave it to you on the —

Rafa SalinasGlobal Head of Finance

No, I think it was about the —

Benjamin TomsRBC Capital Markets — Analyst

It was not —

Rafa SalinasGlobal Head of Finance

Transaction [Inaudible].

Benjamin TomsRBC Capital Markets — Analyst

It was on the branch buyback.

Onur GencChief Executive Officer

Sale and leaseback. OK. And the question, sorry, Benjamin is?

Benjamin TomsRBC Capital Markets — Analyst

Just longer-term strategic advantages that gives you over and above what you’ve already announced as the day one benefits.

Onur GencChief Executive Officer

Strategic benefits, in general, in the future. First of all, that’s a positive NPV project. As I mentioned just a moment ago, we look into the value creation. If it’s a positive NPV project, we execute on those.

This one — this was one of those. So financially, it made sense to us, and it was mostly a financial transaction. The strategic benefits are such that it gives you more optionality on what you do if you don’t use that branch, because if you are owning it, you can sell it. And having that sell option beyond just subletting option, is a good option to have.

Meaning, if you were only sell and leaseback, you can choose to not use that location, but then, you can only sublet it. You cannot sell it because it’s somebody else’s. In the case of owning those branches, you can not only sublet, but you also potentially sell the location. To cut the long story short, it keeps you operationally more flexibility on optimizing the value of that franchise.

But the transaction itself, it’s mostly a financial transaction to be fair. I mean, it was a positive NPV project. The original contract that we had, it was signed many years ago, as you know well, had this 1.5 times inflation as the yearly increase. But you can calculate all of that into the NPV.

It made sense for us to do it. But the strategic optionality is also positive, as I mentioned. The second question — Do you want to take this Rafa? It’s Mexico, Citibanamex, and how do you see the dynamics?

Rafa SalinasGlobal Head of Finance

I think it’s quite early. I mean, Banamex already started the process with a lot of interest for different participants. But the reality is that from our perspective, is clearly an opportunity. I think the market is going to be one very important competitor.

It’s going to be more or less distracted in the next two years in the selling process and also in the integration process. So from our perspective, I think it’s good. In terms of the demand from the clients — and on the other hand, I think, is also always good to reduce the number of competitors. So positive news.

Onur GencChief Executive Officer

Very good.

Patricia Bueno

Thank you, Benjamin. Next question, please.

Operator

Our next question is from Sofie Peterzens of J.P. Morgan.

Sofie PeterzensJ.P. Morgan — Analyst

It’s Sofie from JPMorgan. I was just wondering if you could kind of talk a little bit about the NII or the assumptions that you have in your new rate sensitivity guidance for Spain, 15% to 20%, what kind of deposit data and pass-through have you assumed here? And also, for your kind of revised guidance for say, slight NII growth in 2022. Could you just remind us on your TLTRO assumptions? Do you still expect that TLTRO fall off in the third quarter? So that would be my first question. And then, the second question, just around your kind of growth opportunities.

Last year, you launched your digital bank in Italy. Now, you have that Neon bank in Brazil. If you could just talk about the opportunities and how these businesses are performing.

Onur GencChief Executive Officer

Perfect. On the rate sensitivity, I take it, maybe, on TLTRO and the NII dynamics. So, Rafa, you take the second question, and then I will comment back on digital bank. Or maybe, let’s start with the third one, the digital bank dynamics in Italy.

As we discussed it in the last quarterly call — or maybe, the one before, I forget it now. I’m getting old, Sofie. Italy, it’s a clear initiative. We do believe that digital, not for all the segments, but for certain segments, pure digital is the way to go because it comes with a much better cost structure to serve clients than the traditional banking model.

That’s why in the Investor Day, you might remember this, we put forward very clear two convictions on the table. One, if we are going for a traditional banking model, meaning, all segments, all channels, branches and everything, we believe that we have to be large in any country that we are in. That local scale — that global scale, but also, local scale is very important. Be big.

You can — We don’t want to be, with the traditional banking model, 0.6%, 1% of market share in a certain country because we do think that you need scale. That is also the reason why we did sell the U.S. business because our market share was 0.6% in the U.S. The second thing that we have as a conviction is that for certain segments, again, I’m underlining it once again, not for all, but for certain segments, and that segment is growing and growing.

The best way to serve them is the digital way. As such, we are getting into new countries with that model, with a better cost structure than incumbents and growing our franchise. These projects, they are not short-term projects. It takes time.

That is why you need players like us, in my view, who do have convictions on these, who do have the existing infrastructure and the capabilities to do this, and who can stand, for many years, to get to the profitability in these ventures. But they do deliver value. When you look into the value, they do deliver value. With these ideas, we have these — Brazil, U.K., Atom Bank, Brazil Neon Bank, which is basically, we are investors.

But we are investors in some things that we believe in. And in the case of Italy, we are doing it with our own existing infrastructure and systems, which is basically the Spanish systems being deployed to Italy. The numbers are very good. I did share with you a figure at that time that we were going very well.

That same velocity of customer acquisition is being maintained, which, in my view, is a very good signal. Because it comes up with a high — then in our case, it continues with the same velocity. We are acquiring very good number of clients in Italy. But more importantly, as I said, especially in the first year of this venture, we have to create a difference in terms of customer satisfaction, which is, you have to create a differentiation versus the incumbent for new customers to come to you.

And on that one, we are — in the NPS ratings, in app store rankings, you can easily check it yourself as well. We are cleared better than incumbents. So we are also creating a differentiation and quality in terms of the service offering that we have on the table. So quite positive on those ventures and especially on Italy.

Then on the rate sensitivity, as you have seen it, you put the numbers already in there. The deposit betas is basically until the rates — so in the first 100 basis points, the first 50, 75, you have very limited impact on deposit. I mean, you see it also in the Spain page, Sofie, I’m sure. Most of our deposit base is demand deposits.

So we have EUR 190 billion in the euro balance sheet of demand deposits and only EUR 16 billion in time deposits. So how much of the demand will start trickling down to time deposits. Obviously, we have modeled all of this. And all of those numbers are reflected in that 15% to 20% NII increase, with a 100 basis points step-function increase in the curve.

Rafa, on NII and TLTRO.

Rafa SalinasGlobal Head of Finance

On the NII, on our projections, I think the assumptions are, on the one hand, is the evolution rates at the end of the day, the market is signaling us. So it’s what the markets are discounting in terms of the projection future increase in rates. And in terms of the TLTRO, I think we are taking the basic assumption that is not going to be renewed, and therefore, we will face the maturities of the TLTRO program that we have in December this year, EUR 7 billion; in March next year, another EUR 7 billion; and EUR 21 billion in June ’23. So we are assuming that we have to absorb a little bit more than EUR 100 million when we compare the TLTRO contribution — when we compare ’22 with 2021.

Patricia Bueno

Thank you, Sofie. Next question, please.

Operator

We take our next question from Carlos Peixoto of CaixaBank Carlos, over to you.

Carlos PeixotoCaixaBank — Analyst

So my first question will actually be on capital, namely, on the capital bridge. So I was thinking in the previous quarter, I believe you had mentioned that there were roughly 10 to 15 basis points of market positions that you expected to revert or a negative impact that you expected to revert this quarter. I was wondering if that is the reason behind the fact that the market-related impact in the quarter and that being quite small. On the second question, on Turkey.

Do you stick — just talking in local currency? Do you stick to the guidance provided at the previous earnings presentation, particularly going on cost of risk despite now, the war in Ukraine and the impact the recession in Russia could have on tourism for Turkey? And finally, just a third question, if I may. Just on fees in Spain. Do you keep the flattish guidance that you’re providing before? And I’m sorry if I didn’t hear a guidance on this.

Onur GencChief Executive Officer

Probably, it’s us. Because there is a breakage in the line from time to time. So apologies if you cannot get it. So I will reply as I understood it.

And if I miss anything, Carlos, please tell us at the end. So first of all, the impact that we said we would revert back in the last quarter, that, I guess, you’re asking about that, the 15 basis points of some recovery from some of the things that we have seen in the fourth quarter. That has actually recovered. In the presentation, I mentioned it as I was explaining the capital page, which is, if you leave it completely to the activity growth, the RWAs would have — they did go up by 25 basis points.

But you see in the waterfall, in the capital page that it’s 17 basis points coming from RWAs. The difference, the 8 basis points is actually the reversal of the market risk-related RWAs due to Turkey, the volatility. We did guide you 10 — if I remember well, it was 10 to 15 basis points. But the 8 basis points is purely reverted.

We can clearly identify what that unique thing is. The rest came in the credit RWA. So it’s very tough to isolate it, but to cut the long story short, whatever we told you last time is actually happened, and that’s why despite 4% growth in activity, 4% growth, you don’t see as much growth in RWAs in the capital page. The guarantee cost of risk and implications of Russia, Ukraine and so on, we do maintain our guidance.

We are not changing it. We do see relatively positive dynamics so far. When we look into it — because as you can imagine, I mean, the two geographies that would be affected more from the Russia-Ukraine situation is Turkey and Spain. I just came from Latin America.

In Latin America, again, it’s a terrible tragedy. In my view, it’s a war and so on. But in terms of financial — pure economic impact in Latin America, they don’t think that there is a war or they don’t feel that in terms of the dynamics of the businesses. So we are advantaged in the sense that a good part of our countries, they don’t feel the impact yet.

Obviously, it goes through the commodities channel, it goes through oil price, food prices, and so on. But some countries in our footprint, for example, Colombia is actually going to grow more than this after the war because it’s an oil exporter and so on. To cut the long story short. In the case of Turkey, we do see these negative implications, but we don’t negatively or worsen our guidance on cost of risk because we are not seeing it in the numbers.

And why is that? It’s because Turkey, in my view, is kind of in a very delicate situation, let me not call it more, but in a delicate situation since 2018. I remember it very well. August 2018, there was a big sudden sharp increase in currency. I mean, a lot of volatility.

Since 2018, we have been provisioning and getting out our clients, trying to manage our loan portfolio, and so on. I remind you once again that in Turkey, our USD, dollar, foreign exchange loan book was around $22 billion five years ago. Now, it’s more than half of that number. More than half of that number.

So we have been managing this portfolio because we have been stress tested since 2018, every single quarter, every single year. In that sense, we have to be cautious. We still need to see that pure implications because the short-term dynamics, macro dynamics in Turkey is a worry, obviously, for all of us. But we are not seeing it in the cost of risk numbers as such, we are sticking with our guidance.

Then the flattish NII — sorry, net fee income, commission income in Spain, it’s mainly because of asset management. Asset management in the fourth quarter. In the base number, there was a success fee for the year of 2021. And that success fee is obviously not there.

And in this quarter, as you can imagine, given the markets, there were still positive net inflows into the funds, positive net inflows, even in March, where there was a lot of volatility. So we grew our book on — independent of the market impact, but the market impact was EUR 2.8 billion. The portfolios have come down just because of the market, equity portfolios have come down. And as a result of that, you would be making less money.

That’s the reason why we have this flattish curve. But the underlying fundamentals, if the markets improve a little bit, it’s quite positive. And we are actually growing on, again, payment systems, on banking accounts, and so on. So the fee part is growing in other parts, except asset management and CIB was a bit soft in the first quarter.

But overall, good dynamics, I would say.

Patricia Bueno

Thank you, Carlos. Next question, please.

Operator

We’ll now move over to Stefan Nedialkov of Citigroup. Stefan, over to you.

Stefan NedialkovCiti — Analyst

I have two type of questions. The first one is on Turkey, and the second one is on costs. On Turkey, Onur, just trying to think through your NPV framework that you guys apply to all of your divestments and acquisitions. And I hear you on the accounting — on the hyperinflation accounting dimension.

But what is kind of quite unclear to me is, we have seen very favorable FX, all considers, in Turkey year-to-date since the government basically put in place some unorthodox policies. So the FX has hardly moved. Inflation is 60% plus. So theoretically speaking, if your profits grow at 60% with inflation, as a simplifying assumption, and your FX is constant, Turkey should be over earning very, very, very meaningfully.

But at some point, reality should be catching up. And I just wanted to understand, when it comes to your NPV calculation, how that — the interaction between FX and inflation come into play? And I guess, as a supporting question here. Do you hedge any of the book value of guarantee apart from excess capital? So that’s on guarantee. And quickly, on cost at the group level.

Last quarter, you guys guided to costs growing less than inflation. I think you pointed to the footprint inflation being 11% plus. Has that 11% changed in your budget? And has your guidance the same in terms of costs growing less than inflation?

Onur GencChief Executive Officer

Very good, Stefan. Very good questions. On the cost numbers, maybe Rafa, you take that one. On Turkey, Stefan, I’m sure you’re aware.

But if you go to the European banks out there — and it’s fair that we have it and they don’t, but we are one of the very few banks, very few banks, who did put tangible book value per share plus dividends into our strategic goals, and we committed to a certain figure in our Investor Day. That number, obviously, not only takes into account the P&L and — it takes into account everything, including the FX devaluation. If you look into the tangible book value per share evolution of our bank, given we are an emerging market heavy bank, there are a lot of deteriorations happening year over year on FX, and we are taking them into account, obviously, in the OCs and in the tangible book value per share. What I can tell you is that given the franchise that we have in Turkey, our expectation, and I would need to highlight this, obviously, there are risks in Turkey.

Obviously, in the short term, there are clear risks, we see them. But our expectation is, whatever we committed to the market in terms of tangible book value per share plus dividends. And if you remember, we committed 9%. That 9% is very tough to commit to, because you have many moving parts there.

You have many things like FX, like the interest rates and the impact on the securities book that you have. There are things beyond your control of it, but we wanted to, just purely, because of this reason that you are asking, we wanted to commit to a value creation goal, and that 9% is much higher than anyone else out there, as we have seen their past track record. It’s a very good number, in our view, and we are committed and dedicated, with everything that I mentioned about the deal and so on, to deliver that figure to our shareholders. That’s what I would say on that one.

But you were also asking whether we take into account the NPVs, the — of course, we do. Of course. You should see the foreign currency scenarios that we have in those figures and the foreign currency scenarios can be quite dramatic. And despite that, we do think that the long-term potential of that country.

The fact that we do have, in our view, the best bank in the country creates a difference in economy, the banks have to survive and they have to live. And if you do have the best bank, you typically create value over time. And that’s what we are seeing in the numbers that we see. On costs —

Rafa SalinasGlobal Head of Finance

On cost, the guidance for the year is just cost growing less than inflation, being flat at the comparing sector. Referring to the first quarter, the – such figures are the inflation rates on average when our footprint has been 10.3% year on year, and the increase in cost has been 8.5%. If we take into account the base effect on the variable compensation of the — 2021, in fact, the growth of the — the growth on the cost base deducting the bar of compensation has been 6%.

Patricia Bueno

OK. Thank you, Stefan. Next question, please.

Operator

We’ll take our next question from Britta Schmidt of Autonomous Research.

Britta SchmidtAutonomous Research — Analyst

Two quick questions. On the Mexican net interest income, could you give us a bit of a breakdown in the Q-on-Q move between volumes, mix and rates? And then, on the trading income in this quarter, could you comment a little bit on what’s driven that and give us a little bit more color on what the outlook is, where the market impacts versus customer business?

Onur GencChief Executive Officer

Thank you, Britta. The second question, I’ll leave it to you, Rafa. On the Mexican NII growth, we did mention it very briefly, but we are saying that we are upgrading our NII guidance for two reasons. First of all, we are upgrading our loan growth.

We are seeing high single-digit growth now rather than the previous guidance of mid-single digit. So it will be high single-digit growth in loans, and then NII will be growing at double digits. The gap, obviously, the fact that we are growing more in NII than loan growth, is coming from the margins. We do have the breakdown, but it’s based on all of our assumptions.

You can come up with your own assumptions, Britta on this, but both of them are improving, basically. On the second question, Rafa.

Rafa SalinasGlobal Head of Finance

On net trading income, mainly — I mean, it’s coming from the very good results generated at the global market activities in relation with the trading with clients. And at the corporate level is — we have mainly, the negative impact of the hedging of the FX exposure that given the good performance of the — most of the currency in which we generate results has been negative this quarter with a negative impact of minus EUR 49 million in the quarter.

Patricia Bueno

Thank you, Britta. Next question, please.

Operator

We’ll now move over to Carlos Cobo of Societe Generale. Carlos, over to you.

Carlos CoboSociete Generale — Analyst

Hello. Thank you very much for the presentation. A couple of questions from me. Sorry, one second.

Yes. One is just a clarification. This is very quick follow-up on the previous one about the capital release of the negative impact. You help us understand what was the driver? Because if we look at the CDS in Turkey, it has remained at high levels.

So how could you manage to release the negative impact on capital? It would be helpful to understand. Second is another one on — what is the bid on Metrovacesa. I don’t want you to comment on that, but it will be interesting to help us understand how do you think about this stake. And how that details are not with the regulator.

Do you see something of a potential derisking process of the legacy assets that you had in the past or this is now purely managed from a financial point of view, meaning, that it’s not seen as legacy assets in the books? And is that the same approach from the regulator or not? And lastly, a very quick question on Turkey, a follow-up on the asset quality debate. In the past, I think you made very good point about how you’ve been derisking the balance sheet since a long time ago, and that makes a lot of sense, and we are seeing that in the cost of risk. But you’ve also been guiding on the currency of the biggest catalyst for asset quality and cost of risk. And despite the increases, we haven’t [Inaudible].

It’d be nice to see your thoughts on that as well.

Onur GencChief Executive Officer

Perfect. Metrovacesa, you manage the equity portfolio, Rafa you take Metrovacesa. The first one, the capital release of the negative impact. Carlos, I’m not sure that we shared that detail the last time.

I don’t — I don’t remember now. But there is this threshold of a certain CDS level, when it passes that CBS level, these market risk, RWAs, gets triggered. And that level is around 600. And at the end of March, that number was lower than 600, that’s the key difference between the two.

So the CDS levels obviously didn’t change much, but there are these triggers that kick in, in those financing deals, as you can imagine. And that trigger, basically, was lower than the number that we had back in the fourth quarter. Then on Turkey, I did say, and I still say the same thing. The key risk in — the cost of risk for Turkey is going to be, obviously, absent of other major macro events and so on is going to be currency.

Because the currency — the FX portfolio is still big for the Turkish banks. We deliberately, as I mentioned before, we have been coming down and down. They are great clients, but we exited a lot of them, and now, it’s less than 50% of what we had five years ago. And we do trust in this portfolio, but it’s one of the areas that we kept losing market share year over year.

In the private banking space, excluding the state banks, we typically have around 20% market share in Turkey in different products. In this, we have 14% market share. So we have been decreasing our market share quarter after quarter. So I still say that if there is one vulnerability, it’s the FX and the implications on the FX portfolio that we have.

You might see that in this quarter, you might see an increase in our FX book. It’s not because of — it’s not because of the strategy that we were not applying this quarter. If you remember, it’s public. So there was a sale of the Turkish telecom stake that we have.

As a result of that transaction, there is a bit of an increase in the FX portfolio, but our strategy is very clear. We don’t want to grow in FX book. We only want to grow in clients that we really have a clear understanding of their portfolio, of their revenue base, and so on. And we still stick with that guidance that we were giving to you before.

On Metrovacesa.

Rafa SalinasGlobal Head of Finance

On Metrovacesa, as you said — I mean, the origin of the stake clearly comes from our recovery process from the global financial crisis. But we maintain our position there and we manage as any other part of our equity portfolio. As of today, we maintained a little bit less than 21% stake in Metrovacesa, with a book value of EUR 259 million. And of course, as we do always, we will analyze the offer that finally, FCC will put on the market and decide what is best for our shareholders.

But what we have to say that so far, I think, clearly, Metrovacesa is a company that is with a very good ability or capacity to generate cash. And therefore, I mean, the strategy, so far, has been clearly to remunerate the main shareholders, all the shareholders, but mainly decided by the main shareholder, to continue increasing the dividend pace of that company.

Carlos CoboSociete Generale — Analyst

Perfect.

Patricia Bueno

Thank you, Carlos. Next question, please.

Operator

We’ll take our next question from Benjie Creelan-Sandford of Jefferies. Benjie, over to you.

Benjie Creelan-SandfordJefferies — Analyst

A couple of quick follow-ups for me. The first one was just on the last point around capital. I mean, it’s — given the volatility that we’ve seen in the past around some of the mark-to-market, the market risk impacts, is there anything that you are doing or can do to try and reduce that volatility going forward? And I guess, just in the context of the Garanti minority buyout offer, the regulatory headwinds that you’ve pointed to, is the expectation that capital should trend toward your target range by the end of the year? Or do you still think that organic generation will be more than enough to offset? The second question was just a quick follow-up on Mexico. On the upgraded loan growth guidance for the year, I just wondered whether there is any particular slip that was driving that better guidance between mortgage, consumer or corporate, or are all sectors performing better than expected?

Onur GencChief Executive Officer

Very good. Just to save on time, Benjie, very good questions as always. Very quickly, on the capital topic. We are — As we discussed before, I’m not sure that you followed it fully, but what we are saying is that on the organic capital generation, excluding the M&As, excluding the supervisory impacts, our guidance or our approximation in the previous meetings were that we will generate EUR 1 billion to EUR 1.5 billion organic capital every year.

We do have a positive bias on that one. And then, as we discussed at the beginning of the call, the supervisory impact, there are so many moving parts there, but there might be some negative impact coming from that. And we did guide you to 35 basis points before and it might be somewhat higher than that number, but we have to see it. It’s something that we are working with our supervisor.

So when we combine them all, what the number would be? We need to provide you more transparency in the coming quarters because, especially on the supervisory topic, we have to keep working on it. Then on the Mexican — and you also said, is there anything that we are doing to manage the sensitivity? Sorry. On that one, you do have it in the presentation in the appendix, but at 10%, the 100 basis points movement in the Spanish sovereign bond is 15 basis points on capital. And in terms of currency, a 10% currency depreciation in Mexican peso is minus five and 10% currency depreciation in Turkey is minus one.

And 10% in U.S. dollar has actually a 19 basis points on the other way around impact. You have it in the appendix. And you said, are we doing things to alleviate this? Obviously.

If we were not doing the things that we were doing, the sensitivities would be much higher. So as — Also, I guess I forgot in Carlos’ question, we do hedge 60% to 80% of our excess capital in all the currencies, 60% to 80%. We don’t go beyond that — or maybe, it was before. It was before, I think — No, it was Stefan asking for it.

We do hedge excess capital, 60% to 80%. You don’t do beyond that. But given all these, the sensitivities are, as you see in the appendix. Then the last one that you were asking about Mexican loan portfolio.

Very quickly, it’s across the board, but especially in high-return portfolios, we have a good appetite to grow, and we will continue to do that. Credit cards, consumer SMEs, small and/or commercial, especially in those areas, we will grow, in our view, better than the market and we deliver nice growth.

Patricia Bueno

Thank you, Benjie. Next question, please.

Operator

We’ll now move over to Fernando Gil de Santivanes of Barclays. Fernando over to you.

Fernando Gil de SantivanesBarclays — Analyst

One question on the ALCO portfolio and how should we be thinking about going forward. So we’ve seen a small increase in the euro part and the yield has ticked up 40 basis points. What is the strategy and the size that you can get on the euro part? And if you can comment on the Mexican part of the ALCO, would be great.

Onur GencChief Executive Officer

Rafa, I will give it to you. You are the ALCO guy, but maybe, one topic — one quick comment on this one, which is, we did also show it to you before. We have been holding up, holding up, holding up for the last two years for the yields to go up. You might have realized that our HQLA, the liquid portfolio that we have, was around EUR 22 million, EUR 23 billion a year ago.

We have been keeping our money in very short-term securities until we see the yields on the periphery, which is basically, Spain for us, until the yields go up a bit. So that liquidity that we have been holding up, we will see how the yield situation continues, but can be used a bit in increasing our ALCO portfolio. That’s the broader strategy. But anything to add, especially also, in Mexico, Rafa?

Rafa SalinasGlobal Head of Finance

No, you said — I mean, the reality is that this is the first quarter that we increased the ALCO portfolio in the last two years. So we increased EUR 3 billion the ALCO portfolio, starting to taking some opportunities in the increasing rate that we see on the market. This is mainly in Europe. Because in Mexico, we maintain flat the size of the portfolio with a significant portion of the portfolio in the CPI link index format of those instruments.

Patricia Bueno

Thank you, Fernando. The last question, please.

Operator

We’ll take our last question from Ignacio Cerezo of UBS. Ignacio, over to you.

Ignacio CerezoUBS — Analyst

Probably a follow-up or a different way of asking, to better understand, I think, asked on Turkey. I mean, given deterioration of local conditions, FX, global conditions with the Ukraine war, now, looking into hyperinflation accounting. I mean, how can you explain raising the offer for Garanti, right now, for example, considering withdrawing the offer, basically. I’m not thinking on a tactical basis, I think we all understand the medium-term value of Garanti or guarantee at these levels, but what pushes you basically to raise the offer and pursue the transaction given the general deterioration of conditions?

Onur GencChief Executive Officer

Very good, Ignacio. It goes back to the same answer that I gave before. Value. Our expectation is that there will be fluctuations and negative news coming from Turkey in the short term.

But we do think that the NPV of that additional investment makes sense. And in that context, it also beats other capital deployment initiatives. We do think that some of the negative news is already priced in. But in the long term, this investment gives us a good opportunity for value creation.

Very simple.

Patricia Bueno

So thank you very much, Ignacio. Thank you for all your questions. We have to end it here. So let me remind you that the entire IR team is available to answer any further questions you may have, and thank you very much for participating in this audio webcast.

Duration: 85 minutes

Call participants:

Patricia Bueno

Onur GencChief Executive Officer

Rafa SalinasGlobal Head of Finance

Andrea FiltriMediobanca — Analyst

Max MishynJB Capital Markets — Analyst

Alvaro SerranoMorgan Stanley — Analyst

Ignacio UlarguiExane BNP Paribas — Analyst

Benjamin TomsRBC Capital Markets — Analyst

Sofie PeterzensJ.P. Morgan — Analyst

Carlos PeixotoCaixaBank — Analyst

Stefan NedialkovCiti — Analyst

Britta SchmidtAutonomous Research — Analyst

Carlos CoboSociete Generale — Analyst

Benjie Creelan-SandfordJefferies — Analyst

Fernando Gil de SantivanesBarclays — Analyst

Ignacio CerezoUBS — Analyst

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